<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NO. 333-89815
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
eMerge INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3698 65-0534535
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
</TABLE>
10315 102ND TERRACE
SEBASTIAN, FL 32958
561/589-5310
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES L. ABRAHAM
CHIEF EXECUTIVE OFFICER
eMerge INTERACTIVE, INC.
10315 102ND TERRACE
SEBASTIAN, FL 32958
561/589-5310
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
JAMES A. OUNSWORTH, ESQUIRE N. JEFFREY KLAUDER, ESQUIRE PHILIP P. ROSSETTI, ESQUIRE
SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP HALE AND DORR LLP
800 THE SAFEGUARD BUILDING 1701 MARKET STREET 60 STATE STREET
435 DEVON PARK DRIVE PHILADELPHIA, PA 19103-2921 BOSTON, MA 02109
WAYNE, PA 19087 215/963-5694 617/526-6000
610/293-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
UNDERWRITERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE IN WHICH THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 28, 2000
8,000,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------------
This is an initial public offering of class A common stock of eMerge
Interactive, Inc. We are offering 6,500,000 shares of class A common stock in
this offering and several stockholders identified in this prospectus are selling
an additional 1,500,000 shares. As part of this offering, we are offering
2,806,000 shares of our class A common stock at the public offering price to
shareholders of Safeguard Scientifics, Inc., one of our principal stockholders,
that owned at least 100 shares of common stock of Safeguard as of October 20,
1999 and Safeguard is offering up to 694,000 shares to its shareholders.
Safeguard or its designees will purchase any shares of class A common stock that
are not purchased by Safeguard shareholders under the Safeguard Subscription
Program. See the section entitled Plan of Distribution -- Safeguard Subscription
Program. We expect the initial public offering price will be between $10.00 and
$12.00 per share.
SAFEGUARD IS AN UNDERWRITER WITH RESPECT TO THE SHARES OFFERED TO THE
SHAREHOLDERS OF SAFEGUARD. SAFEGUARD IS NOT AN UNDERWRITER WITH RESPECT TO ANY
OTHER SHARES OFFERED AND IS NOT INCLUDED IN THE TERM UNDERWRITER AS USED
ELSEWHERE IN THIS PROSPECTUS.
Prior to this offering, there has been no public market for the class A
common stock. We have applied to list the class A common stock on the Nasdaq
National Market under the symbol EMRG.
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
PLEASE SEE THE SECTION ENTITLED RISK FACTORS STARTING ON PAGE 10 TO READ ABOUT
RISKS THAT YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR CLASS A
COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
Underwritten Public Offering --------- -----------
<S> <C> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts................................. $ $
Proceeds to eMerge Interactive......................... $ $
Proceeds to Selling Stockholders....................... $ $
</TABLE>
<TABLE>
<CAPTION>
PER SHARE TOTAL
Safeguard Subscription Program --------- -----------
<S> <C> <C> <C>
Public Offering Price....................................... $ $
Management Fee......................................... $ $
Proceeds to eMerge Interactive......................... $ $
Maximum proceeds, before expenses, to Safeguard
Scientifics, Inc...................................... $ $
</TABLE>
<TABLE>
<CAPTION>
TOTAL
Aggregate Offering Proceeds -----------
<S> <C> <C> <C>
Proceeds to eMerge Interactive from Underwritten Public
Offering and Safeguard Subscription Program................. $
</TABLE>
At our request, the underwriters have reserved 1,000,000 shares of our
class A common stock for sale at the public offering price to two potential
investors identified on page 77. The potential investors have not committed to
purchasing these shares. In addition, at our request, the underwriters have
reserved 350,000 shares of our class A common stock for sale at the public
offering price to our employees, directors and other persons with relationships
with us. See the section entitled Plan of Distribution for more information. The
underwriters have an option to purchase 675,000 additional shares of class A
common stock from us at the initial public offering price to cover any
over-allotments of shares.
------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
PROSPECTUS DATED , 2000
<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>
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PAGE
----
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Prospectus Summary.......................................... 4
Risk Factors................................................ 10
Forward-Looking Statements.................................. 23
Use of Proceeds............................................. 24
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 27
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 37
Management.................................................. 54
Related Party Transactions.................................. 61
Principal and Selling Stockholders.......................... 64
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 72
Plan of Distribution........................................ 74
Legal Matters............................................... 79
Experts..................................................... 79
Additional Information...................................... 80
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.cattleinfonet.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.
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[This Page Intentionally Left Blank]
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PROSPECTUS SUMMARY
eMERGE INTERACTIVE, INC.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our products and services to cattle industry
participants through our family of integrated Web sites, our proprietary
information management application and our direct sales force. Our products and
services are designed to create an efficient market for the purchase and sale of
cattle and to improve quality and productivity in the cattle industry. Our
current products and services include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement products.
THE ONLINE LIVESTOCK OPPORTUNITY
We believe that the production chain of the cattle industry, which includes
cattle producers, feedlots, packers and suppliers, contains inefficiencies that
reduce animal health and value. These inefficiencies, which include excessive
animal transportation and handling, result in additional transaction costs and
reduced beef quality. Further, we believe that inadequate access to current and
accurate data and a lack of integrated information management tools have limited
the ability of industry participants to optimize their operating results and
performance.
Due to its functionality, scalability and accessibility, the Internet is
emerging as a single destination for commerce and information related to the
livestock industry. Many of the variables that affect beef quality can be
addressed by using the Internet's open architecture, universal accessibility and
ability to provide more timely and comprehensive information. According to
Forrester Research, business-to-business electronic commerce in the United
States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003.
THE eMERGE INTERACTIVE EXPERIENCE
We offer commerce, information and technology to cattle industry
participants. Our complementary products and services are designed to reduce
inefficiencies throughout the cattle production chain, improve cattle quality
and improve overall productivity in the cattle industry. Our current products
and services include the following:
- Cyberstockyard.com, our online cattle sales and auction services Web
site, allows our customers to participate in our live cattle sales and
auctions, thereby providing efficient and effective access to an
inventory of cattle by directly connecting buyers and sellers of cattle.
We believe a less fragmented market for cattle sales may reduce the
excessive handling of cattle that results from transportation and
commingling during transactions, thereby reducing animal stress, which
can lead to improved cattle quality. In addition, by reducing the need
for multiple transactions, we seek to lower overall transaction costs
associated with cattle sales.
4
<PAGE> 6
- The Feedlot Information System, our cattle information management
product, is designed to assist in the effective daily management of our
customers' cattle operations. Using our proprietary information
management application, subscribing feedlot customers transmit raw
operating data to us on a daily basis over the Internet. We then use each
subscribing customer's raw data to compile customer-specific information
and performance data and analyses, such as feed consumption data, feed-
to-gain ratios and a comprehensive summary of health results, which we
disseminate daily to that customer over the Internet.
- PCC-online.com, our Professional Cattle Consultants service, is designed
to provide our customers with national, regional and customer-specific
industry analysis services that are derived from our proprietary
centralized database of cattle industry information. This information has
been compiled from over 90 different feedlots over the last 26 years.
These services include feed performance benchmarking services and monthly
market analysis that we provide to subscribing customers on a periodic
basis. PCC-online.com enables our feedlot customers to compare the
performance of their feedlot to the average performance of other feedlots
in our database.
- NutriCharge, our therapeutic product for livestock, is a restorative feed
supplement designed to reduce the effects of stress on the animals caused
by transportation, handling and commingling. We sell our NutriCharge
product over our Web sites and through our direct sales force.
Our customers can access our family of integrated Web sites through our
platform site, CattleInfoNet.com. This industry-specific Web site features
general industry information, such as current industry news, links to
commodities pricing and weather updates, as well as personalized information
based upon customers' individual preferences and geographic location.
CattleInfoNet.com also provides customers with an online community to facilitate
the exchange of information among livestock producers, feedlots and packers and
to provide access to our in-house cattle industry experts.
FINANCIAL INFORMATION
We currently derive our revenue from:
- Purchasing and selling cattle through our online cattle sales and auction
services;
- Subscription fees for our PCC-online information management services,
which we provide over the Internet and through our periodic marketing
reports and newsletters; and
- Sales of our proprietary products.
You should be aware that we incurred net losses of approximately $7.8
million for the year ended December 31, 1998 and approximately $10.7 million for
the nine months ended September 30, 1999, resulting in an accumulated deficit of
approximately $27.5 million at September 30, 1999. We expect to continue to
incur substantial losses in the future related to expanding our network,
expanding our product and service offerings, establishing brand recognition and
upgrading and enhancing our technology.
------------------------
We are a Delaware corporation originally incorporated on September 12, 1994
under the name Enhanced Vision Systems, Inc. On June 11, 1999, we changed our
name to eMerge Interactive, Inc. Our principal executive offices are located at
10315 102nd Terrace, Sebastian, Florida 32958 and our telephone number is
561-589-5310.
5
<PAGE> 7
THE OFFERING
Class A common stock offered by:
eMerge Interactive.......................... 6,500,000 shares
The Selling Stockholders.................... 1,500,000 shares
Common stock to be outstanding after the
offering......................................... 31,732,902 shares
Use of proceeds.................................. For repayment of debt,
working capital and general
corporate purposes,
including sales and
marketing expenditures,
research and development
expenditures and capital
expenditures. See the
section entitled Use of
Proceeds.
Proposed Nasdaq National Market symbol........... EMRG
In addition to the 31,732,902 shares of common stock to be outstanding
after this offering, there are:
- 2,769,116 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
December 31, 1999 at a weighted average exercise price of $2.93 per
share, of which options to purchase 761,045 shares of class A common
stock were exercisable at a weighted average exercise price of $1.68 per
share;
- 1,597,875 additional shares of class A common stock available for
issuance under our 1996 and 1999 equity compensation plans as of December
31, 1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
For a description of our equity compensation plans, please see the section
entitled Management -- Equity Compensation.
6
<PAGE> 8
SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares of our class A common
stock to shareholders of Safeguard Scientifics, Inc. that owned at least 100
shares of Safeguard common stock on October 20, 1999 in the Safeguard
Subscription Program. The program is described in greater detail in the section
of this prospectus entitled Plan of Distribution -- Safeguard Subscription
Program.
------------------------
Unless otherwise noted, the information in this prospectus takes into
account the conversion of preferred stock into shares of common stock, which
will automatically occur immediately before this offering is completed. Each
outstanding share of series A preferred stock, series B preferred stock and
series C preferred stock will convert into 1.25 shares of class A common stock
and each outstanding shares of series D preferred stock will convert into 1.25
shares of class B common stock. All shares offered by this prospectus are shares
of class A common stock. The holders of class A common stock are entitled to one
vote per share. Holders of our class B common stock are entitled to two and
one-half votes per share. Unless otherwise indicated, the references to common
stock in this prospectus refer to both our class A and class B common stock.
The information in this prospectus also takes into account a 5-for-4 common
stock split which was authorized by the Company's Board of Directors on December
6, 1999 and was effective on December 23, 1999.
The references to Safeguard in this prospectus refer to Safeguard
Scientifics, Inc. and its affiliates. The information throughout this prospectus
also assumes that all of the shares offered in the Safeguard Subscription
Program are purchased by shareholders of Safeguard Scientifics, Inc. and, as a
result, no shares are shown as purchased by Safeguard under the Standby Stock
Purchase Agreement. In addition, the information in this prospectus assumes that
the underwriters will not exercise their over-allotment option.
Please see the section entitled Capitalization for more information
regarding the outstanding shares of our common stock and options to purchase our
common stock.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes consolidated statements of operations data
for our business. The pro forma consolidated statements of operations data gives
effect to our acquisition of CIN, LLC and Professional Cattle Consultants,
L.L.C. as if we had consummated these acquisitions at the beginning of each
period. Cyberstockyard, Inc. is not included because the pro forma effects are
not significant. We acquired CIN, LLC in February 1999 for an aggregate purchase
price of approximately $2.3 million, which consisted of cash, shares of our
class A common stock, assumption of liabilities, future contingent payments
relating to sales of products over the CIN Web site and transaction costs. We
acquired Professional Cattle Consultants, L.L.C. in May 1999 for an aggregate
purchase price of approximately $1.8 million, which consisted of cash, the
assumption of liabilities and transaction costs. We acquired Cyberstockyard,
Inc. in March 1999 for an aggregate purchase price of approximately $542,000,
which consisted of shares of our class A common stock and transaction costs.
Business activities related to our continuing operations began on January 1,
1997. From our inception in 1994 until January 1997, our business activities
related to the development and commercialization of infrared products focused on
the transportation industry, primarily the maritime transportation industry. The
historical data for the nine months ended September 30, 1998 and the pro forma
data for the year ended December 31, 1998 and the nine months ended September
30, 1999 are unaudited.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED NINE MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
----------------- ------------------ 1998 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- ------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue............................ $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................... -- 2,623 1,629 18,283 2,801 18,354
Operating expenses................. 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income,
net.............................. 141 332 231 443 315 454
------- ------- ------- -------- ------- --------
Profit (loss) from continuing
operations....................... $(1,497) $(5,932) $(3,941) $(10,683) $(7,099) $(11,087)
======= ======= ======= ======== ======= ========
Profit (loss) from continuing
operations per common share --
basic and diluted................ $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======= ======== ======= ========
Weighted average number of common
shares outstanding -- basic and
diluted.......................... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======= ======== ======= ========
</TABLE>
8
<PAGE> 10
The following table summarizes our balance sheet data as of September 30,
1999.
The unaudited pro forma consolidated balance sheet data give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock at an
exercise price equal to the initial public offering price, for $38.8
million ($18.0 million of cash and a $20.8 million note receivable) under
a securities purchase agreement dated October 27, 1999, and the
application of a portion of the proceeds from that agreement which repaid
indebtedness to XL Vision of approximately $4.5 million;
- The automatic conversion of all outstanding shares of series A, series B,
series C and series D preferred stock into shares of our common stock,
which will occur immediately prior to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc., which is due upon the completion of this offering.
The unaudited pro forma as adjusted consolidated balance sheet data below
give effect to:
- The events described in the four preceding paragraphs; and
- The sale of 6,500,000 shares of class A common stock in this offering and
our application of the estimated net proceeds from the sale of these
shares, as described in the section entitled Use of Proceeds.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................... $ 1,650 $13,750 $71,421
Total assets................................... 16,229 28,329 85,658
Total indebtedness............................. 15,133 9,233 --
Total stockholders' equity..................... (3,907) 14,499 81,061
</TABLE>
Total indebtedness as of September 30, 1999 includes amounts due to XL
Vision totaling $6.1 million and to Safeguard totaling $7.3 million. We intend
to use a portion of the net proceeds from this offering to pay in full amounts
due to XL Vision and Safeguard. As of December 31, 1999, approximately $1.6
million was owed to XL Vision after repayment of $4.5 million with the net
proceeds from the sale of series D preferred stock and a warrant to purchase
1,138,889 shares of class B common stock to Internet Capital Group, Inc.; the
remaining $1.5 million will be paid with a portion of the net proceeds from this
offering. The amount owed to Safeguard as of December 31, 1999 was approximately
$10.3 million, and is to be repaid with the net proceeds of this offering.
Safeguard owns approximately 14% of the outstanding common stock of Internet
Capital Group, Inc., and owns approximately 55% of the outstanding capital stock
of XL Vision.
9
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RISK FACTORS
You should carefully consider the risks described below before investing in
our class A common stock. The factors discussed below may harm our business,
financial condition and results of operations and could result in a complete
loss of your investment.
RISKS RELATED TO OUR BUSINESS
WE BEGAN OPERATIONS IN OUR CURRENT LINE OF BUSINESS IN JANUARY 1997 AND FACE
SIGNIFICANT RISKS TYPICAL OF EARLY STAGE COMPANIES, WHICH COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which you can evaluate our business. In addition, our business strategy and
revenue model have changed significantly during the past year. Prior to this
change, we generated revenue primarily from the sale and licensing of our AMIRIS
product, a maritime navigational thermal imaging system, which we no longer
sell, and our equine imaging system, an infrared product used to detect injuries
in horses, which we continue to sell. 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 our initial target market, the cattle industry, in August 1999. Our
limited operating history, combined with our recent shift in business strategy,
makes predicting our future results of operations difficult. Our new business
model has not been tested and, accordingly, we cannot be certain that our
business strategy will be successful.
Specific uncertainties relating to our new business model include our
ability to:
- Achieve acceptance of our Web site as a marketplace for electronic
commerce;
- Expand the number of cattle producers, feedlots and packers that utilize
our services;
- Develop and upgrade our products and technologies more effectively and
rapidly than our competitors; and
- Successfully implement our sales and marketing strategy.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE. IF WE CONTINUE TO INCUR LOSSES, OUR BUSINESS MAY NOT
ULTIMATELY BE FINANCIALLY VIABLE.
We have incurred significant net losses since inception. We reported a net
loss of approximately $7.8 million for the year ended December 31, 1998, or 437%
of total revenue, and approximately $10.7 million for the nine months ended
September 30, 1999, or 58% of total revenue. We expect to continue to incur
significant losses for the foreseeable future. As of September 30, 1999, we had
accumulated net losses totaling approximately $27.5 million and a stockholders'
deficit of $3.9 million. Our operating expenses have increased significantly in
each year of our operation, and we anticipate that such expenses will continue
to increase over the next several years as we expand our operations. Our revenue
may not grow or may not even continue at its current level and, as a result, our
financial condition and results of our operations may be harmed and our business
may not be
10
<PAGE> 12
financially viable in the future. To achieve profitability, we must successfully
address the following risks:
- Lack of commercial acceptance of our online cattle sales and auction
services;
- Failure to expand the number of livestock industry participants using our
network;
- Failure to obtain access to data from feedlots to adequately address the
information needs of our customers;
- Inability to respond to competitive developments;
- Failure to achieve brand recognition;
- Failure to introduce new products and services; and
- Failure to upgrade and enhance our technologies to accommodate expanded
product and service offerings and increased customer traffic.
If we are unable to successfully address any of these risks, our business
may be harmed.
THE INTERNET LIVESTOCK PRODUCTS AND SERVICES MARKET, INCLUDING, IN PARTICULAR,
THE ONLINE CATTLE SALES AND AUCTION MARKET, IS NEW AND UNCERTAIN AND OUR
BUSINESS MAY NOT DEVELOP AS WE ANTICIPATE.
The Internet market for livestock products and services, including, in
particular, the online cattle sales and auction market, has only recently
developed, and its continued development is subject to substantial uncertainty.
To date, we have not realized adequate revenues from this market to achieve
profitability. We cannot assure you that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based products and services. We do not know if our target customers
will use the Internet as a means of purchasing products and services. Even if
potential customers choose to purchase livestock products and services over the
Internet, they may not choose our online services to do so. If the market for
livestock products and services over the Internet does not develop as we
anticipate, our business and the results of our operations will be harmed.
For the nine months ended September 30, 1999, we relied on online cattle
sales and auction services for over 90% of our revenue and we expect to rely on
the success of our online cattle sales and auction services for a significant
majority of our revenue for the foreseeable future. As a result, our ability to
achieve commercial acceptance of our cattle sales and auction services is
critical to our ability to obtain future revenue. To date, we have not achieved
revenues from cattle sales and auction services over the Internet that are
sufficient for us to determine whether these services will achieve commercial
acceptance. Any failure to successfully gain commercial acceptance of these
services would harm our business and the results of our operations.
WE RECENTLY COMPLETED SIGNIFICANT ACQUISITIONS OF BUSINESSES AND TECHNOLOGIES
AND WE MAY MAKE OTHER BUSINESS ACQUISITIONS IN THE FUTURE, WHICH MAY BE
DIFFICULT TO INTEGRATE INTO OUR BUSINESS AND MAY DISRUPT OR NEGATIVELY IMPACT
OUR BUSINESS.
We recently made, and will continue to make, investments in and
acquisitions of complementary companies, technologies and assets that constitute
critical aspects of our current and future business operations. If we fail to
successfully integrate the operations of these companies, technologies or assets
into our business, we may not be able to successfully execute our business
strategy. We acquired substantially all of the assets of CIN,
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LLC in February 1999, and Professional Cattle Consultants, L.L.C. in May 1999.
In connection with our acquisition of CIN, we hired Scott Crain, one of our key
employees. We also acquired all of the issued and outstanding stock of
Cyberstockyard, Inc. in March 1999. Each of these acquired businesses is
critical to our current business operations and growth strategy.
These and any future acquisitions may result in:
- Difficulties in assimilating technologies, products, personnel and
operations;
- Diversion of our management's attention;
- Entering markets in which we have no or limited prior experience;
- Loss of key employees of acquired organizations; and
- Capital requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also require
us to make cash payments, assume debt, incur large write-offs related to
intangible assets and issue equity, which will dilute ownership interest.
IF WE FAIL TO GENERATE SUFFICIENT CASH FLOWS IN THE FUTURE, WE MAY BE UNABLE TO
RECOVER THE CARRYING AMOUNT OF OUR INTANGIBLE ASSETS, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
As a result of our recent acquisitions of companies, technologies and
assets, we have recorded $6.3 million of intangible assets on our balance sheet
as of September 30, 1999. If we are unable to generate sufficient cash flows
that are attributable to these intangible assets, we may be unable to recover
all or a portion of the carrying amount of such assets. Therefore, we may be
required to reduce the value of these assets as recorded on our balance sheet.
This would require us to record an expense in our statement of operations. This
would also reduce our net assets and increase our losses, or reduce our profits,
as the case may be. Any negative impact on our results of operations or balance
sheet could reduce the price of your common stock.
A DECLINE IN THE DEMAND FOR BEEF COULD HARM OUR RESULTS OF OPERATIONS.
For the nine months ended September 30, 1999, we derived over 90% of our
revenue from products and services relating to the sale of cattle. If the demand
for beef declines, the demand for our products and services would likely
decline, and our results of operations would be harmed.
In addition, because the economic benefit to a customer of using
NutriCharge is based on receiving a substantial premium for higher quality beef
over lower grade beef, if the price of prime beef declines relative to that of
choice or select beef, the lower grades of beef as determined by the U.S.
Department of Agriculture, our sales of NutriCharge could decline and our
results of operations could be harmed. Generally, the difference between the
value of prime grade beef, the most desirable grade, and choice grade beef, the
next highest grade, represents a loss of value of approximately 80%, with an
additional loss of value of 10-15% between choice and select beef.
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IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
We cannot assure you that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. In particular, we are currently seeking to hire a Vice President of
Human Relations and additional order buyers for our cattle auction and sales
services. Our growth is likely to place a significant strain on our resources
and systems. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business
strategy successfully and we will need to implement new and improve existing
systems, procedures and controls. We will also need to expand, train and manage
our workforce.
WE CURRENTLY DO NOT HAVE AN ADEQUATE CORPORATE INFRASTRUCTURE TO SUPPORT OUR
OPERATIONS AND WE DEPEND UPON XL VISION AND SAFEGUARD TO PROVIDE SUCH SERVICES.
We depend upon XL Vision and Safeguard for accounting, management and
administrative resources. We are currently in the process of establishing our
own corporate infrastructure. If our management team fails to manage this growth
effectively, successfully establish our corporate infrastructure or if there are
unanticipated costs or delays in the improvement and implementation of new and
existing systems, procedures and controls, our business and financial condition
may be harmed.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
COMPETITIVE POSITION WILL BE HARMED.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We currently have three pending U.S. patent applications, which
relate to (i) the early detection of inflammation using our infrared imaging
camera, (ii) feedlot information systems and methods and (iii) the cattle
transaction process. We also have 31 pending U.S. trademark applications
relating to our corporate identity, products and services. We cannot guarantee
that any of our pending patent or trademark applications will be approved. Even
if they are approved, the patents or trademarks may be challenged by other
parties or invalidated. Because brand recognition is an important component of
our business strategy, the protection of our trademarks is critical to our
success. We also depend upon patents licensed to us by the Canadian government
and trade secret law to protect the proprietary nature of our NutriCharge
products. In addition, we depend upon our proprietary database of industry and
client information to provide our clients with our information services. Despite
our efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and technology or obtain access to our confidential
proprietary database. Other parties may also breach confidentiality agreements
and other protective contracts. We may not become aware of these breaches or
have adequate remedies available. In addition, effective copyright, patent and
trademark protection may be unavailable in certain countries to which we might
expand our operations.
In technology markets generally, there is frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
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employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
WE TYPICALLY ASSUME THE OWNERSHIP OF CATTLE SOLD THROUGH OUR INTERNET CATTLE
MARKETPLACE AND ARE SUBJECT TO THE RISK OF LOSS WHILE WE HOLD TITLE AND MARKET
RISK.
In the sales transactions conducted through our Internet cattle sales and
auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume the risk of
liability, loss and deterioration in value of the cattle during that period.
Although we review the background and credit history of our customers, we cannot
assure you that we will receive full and timely payment in each instance. If the
buyer does not accept the cattle, we may not be able to sell the cattle to other
buyers on the same terms, and our profitability may be harmed. If the cattle
suffer from health deterioration or weight loss while in our ownership, the
purchasers may assert claims against us. Our business and financial condition
may be harmed if we have to defend any claims or pay any refunds. If the cattle
are destroyed while we have ownership, we may be held responsible for the loss
or may be obligated to purchase additional cattle to fulfill our delivery
commitments. As a result, our business may be harmed.
WE RELY ON TECHNOLOGY LICENSED FROM THE CANADIAN GOVERNMENT, THE LOSS OF WHICH
MAY HARM OUR ABILITY TO SELL OUR NUTRICHARGE PRODUCT.
We incorporate technology licensed exclusively from the Canadian government
under a portfolio of patents relating to animal food science technology into our
NutriCharge product. If we are unable to maintain this license on commercially
favorable terms or need to replace the technology upon termination of the
license, our ability to sell our NutriCharge product may be harmed. The license
agreement expires in July 2018. The Canadian government can terminate the
license agreement prior to its expiration if we breach a material term of the
license agreement and fail to cure such breach, commence bankruptcy or
insolvency proceedings or assign the license agreement without the Canadian
government's prior written consent. If the license is terminated, we must return
all acquired confidential information, including all licensed technologies, to
the Canadian government and pay all costs due under the agreement. In such
event, it may be impossible to develop or otherwise obtain rights to equivalent
noninfringing technology.
WE HAVE SELECTED ARCHER-DANIELS-MIDLAND COMPANY AS OUR CURRENT SINGLE SOURCE OF
SUPPLY FOR THE BASE COMPONENTS OF NUTRICHARGE. IF THIS RELATIONSHIP IS
TERMINATED OR IF ARCHER-DANIELS-MIDLAND COMPANY IS UNABLE TO MEET OUR NEEDS ON A
TIMELY BASIS, WE MAY INCUR SIGNIFICANT COSTS WHILE SEEKING AN ALTERNATIVE SOURCE
OF SUPPLY AND MAY SUFFER DELAYS IN DELIVERING OUR PRODUCTS, WHICH COULD HARM OUR
BUSINESS AND THE RESULTS OF OUR OPERATIONS.
We currently have an agreement with a division of Archer-Daniels-Midland
Company, or ADM, to provide us with the base components for NutriCharge. The
agreement expires in August 2000, and will be automatically renewed for
successive 12-month periods. If ADM fails to meet its obligations under the
agreement and does not supply us in a timely fashion,
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we will be delayed in shipping products to our customers. ADM may terminate the
agreement with 90 days' notice before the end of a term. If ADM terminates our
relationship, we could experience a significant delay in providing NutriCharge
as we seek other suppliers. As a result, we may realize reduced revenue during
this period and may lose NutriCharge customers. In addition, we may incur
significant costs while seeking an alternative source of supply. If we are
delayed in delivering or are unable to deliver products to our customers, our
business, financial condition and operating results would be adversely affected.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR SUCCESS. THE LOSS OF ANY OF THESE PERSONS
COULD HARM OUR ABILITY TO COMPETE.
Our success depends on the continued services of the following executive
officers and key employees:
- Charles L. Abraham;
- T. Michael Janney;
- Scott L. Mathews;
- Marvin L. Slosman;
- Arvind Subramanian;
- J. Tom Brink;
- Scott Crain, D.V.M.; and
- Jim Gibb, Ph.D.
The loss of the services of any of these persons could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
WE MAY FACE COSTLY PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
AWARDS AGAINST US OR IMPAIR OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND
SERVICES.
A successful product liability claim brought against us could harm our
financial condition and reputation in the industry. We may face product
liability claims in connection with our cattle sales and auction services,
feedlot operations analysis, comparative cattle industry analysis and
benchmarking studies, cattle inventory management tools and NutriCharge, as well
as future products and services. Even if unsuccessful, a product liability claim
could result in costly litigation and divert management's attention and
resources. We do not maintain product liability insurance.
WE EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF WE FAIL TO MEET THE
EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE.
We expect that our revenue and operating results will vary in the future as
a result of a number of factors. Our quarterly results of operations may not
meet the expectations of securities analysts and investors, which could cause
the price of our common stock to decline. Our operating results in the future
may not follow any prior trends. You should not
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rely on our historical results as an indication of future results. The factors
that affect our quarterly operating results include:
- Our ability to retain existing customers and attract new customers;
- Our ability to develop and market new and enhanced products and services
on a timely basis;
- The introduction of new or enhanced Web sites, products and services by
us;
- Continued purchases by our existing customers; and
- Future revenues from our equine imaging system, a decline in which may
result in disproportionate fluctuations in our results of operations,
since related manufacturing costs to a large extent remain fixed
regardless of the number of units sold.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- Demand for our products and services;
- Product and price competition;
- The introduction of new or enhanced Web sites, products and services by
our competitors; and
- Significant downturns in our targeted markets.
OUR QUARTERLY RESULTS COULD FLUCTUATE AS A RESULT OF SEASONAL FLUCTUATIONS IN
THE CATTLE INDUSTRY.
The cattle industry has historically experienced, and may continue to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. In particular, a disproportionate number
of cattle are sold to feedlots during the third and fourth quarters of each
calendar year. Therefore, a greater number of sales transactions occur during
these two calendar quarters. Due to our limited operating history and the recent
changes in our business as a result of acquisitions, it is difficult to predict
the effect that this seasonal pattern will have on our revenue and quarterly
operating results.
OUR BACK-UP MECHANISMS ARE UNPROVEN, AND THEREFORE ARE VULNERABLE TO DAMAGE OR
INTERRUPTION WHICH WOULD HARM OUR ABILITY TO RELIABLY SERVICE OUR CUSTOMERS.
Our network server, satellites, computers and facilities are vulnerable to
damage or interruption from a number of sources, including fire, flood, power
loss, earthquakes, telecommunications failures, system failures, Internet
brownouts, computer viruses, electronic break-ins and similar disruptions. We
depend on these systems to provide our customers with online cattle sales and
auction services, feedlot and cattle industry analyses, cattle inventory
management tools and the sale of NutriCharge. During the past year, we
experienced a system interruption caused by adverse weather conditions, which
resulted in our system shutting down for approximately 24 hours. We may
experience such an interruption in the future. Any substantial interruptions
could result in the loss of data and could impair our ability to provide our
products and services to customers and to generate revenues. Presently, we do
not have a formal disaster recovery plan in effect. Moreover, our business
interruption insurance may not be sufficient to compensate us for losses that
may occur if any of our Internet-based services are interrupted.
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WE INTEND TO EXPAND OUR BUSINESS TO INTERNATIONAL MARKETS. THE ADDITIONAL
EXPENSES AND RISKS RELATING TO OUR INTERNATIONAL EXPANSION MAY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
As part of our business strategy, we intend to expand internationally by
offering our products and services in markets within North and South America,
Asia/Pacific and Europe, although we have not yet completed the development of
our plan for international expansion. International expansion may require
significant management attention, which could negatively impact our business. We
may also incur significant costs in order to enter new international markets,
which could harm our results of operations. Our business would be harmed if:
- We experience difficulty expanding as a result of foreign laws and
regulations, including export and import regulations applicable to
commerce conducted across borders within regions;
- We experience difficulty in tailoring our products and services to
international markets; and
- We experience difficulty in enforcing contractual obligations and
intellectual property rights in foreign countries.
If we successfully expand into foreign markets, our international business
and our results of operations could be harmed as the result of:
- Fluctuations in foreign exchange rates or rates of inflation;
- Recessions in foreign countries;
- Adverse U.S. and foreign tax laws; and
- Political and economic instability.
RISKS RELATED TO THE INTERNET
IF ELECTRONIC COMMERCE DOES NOT CONTINUE TO GROW AS EXPECTED, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Our long-term success depends on widespread market acceptance of the
Internet and online commercial services as a medium for commerce. If the
Internet commerce market does not grow or grows more slowly than anticipated,
our business, financial condition and results of operations will be harmed. A
number of factors could prevent such acceptance, including:
- The early stage of the Internet;
- The lack of continued development of the Internet's technological
infrastructure; and
- Consumer concern about the security of electronic commerce transactions.
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IF THE INTERNET OR OUR WEB SITES AND SYSTEMS CANNOT SUPPORT THE GROWTH IN
ELECTRONIC COMMERCE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WILL BE HARMED.
If the Internet fails to evolve to support growth in electronic commerce,
our business, financial condition and results of operations will be harmed.
Specifically, we would be harmed if:
- The infrastructure of the Internet does not evolve to sufficiently
support the substantial growth in usage of the Internet and therefore
cannot process a growing number of transactions; and
- The availability of telecommunication services is insufficient or
telecommunication services do not evolve promptly to support real-time
interactions with customers.
If we do not continue to develop our Web sites and systems to sufficiently
support growth in the demand for our services, our business will also be harmed.
Specifically, we would be harmed if:
- We fail to expand our infrastructure, including our Web sites, internet
software and servers to accommodate an increased number of users; and
- We fail to adapt our products and services to be compatible with new
technology, and are therefore unable to provide our services to users of
the new technology.
We may also need to devote substantial resources to updating our Web sites
and online services to support the growth of online commerce.
RISKS ASSOCIATED WITH THE SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT OUR ELECTRONIC COMMERCE
BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet, such as credit card numbers and proprietary data,
may prevent many potential customers from engaging in online transactions and
may harm our business. We intend to use authentication technology, which
requires passwords and other information to prevent unauthorized persons from
accessing a customer's information, or encryption, which transforms information
into a code designed to be unreadable by third parties, to protect confidential
information. In addition, despite the measures we intend to take, our
infrastructure is potentially vulnerable to physical or electronic break-ins,
viruses or similar problems. If our security measures are circumvented,
proprietary information could be misappropriated or our operations could be
interrupted. Security breaches that result in access to confidential information
could expose us to a risk of loss or liability. If we do not adequately address
these concerns or face any claims in connection with a breach of security, our
business, financial condition and operating results could be harmed.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED THROUGH
OUR WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we
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carry general liability insurance, our insurance may not cover claims of these
types or may not be adequate to cover us for all liability that may be imposed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL BURDENS
TO DOING BUSINESS ON THE INTERNET.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional cost on conducting business over the Internet or impose
additional restrictions on our ability to conduct our business operations.
In 1998, the Internet Tax Freedom Act placed a three-year moratorium on
state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes which discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
Laws and regulations that apply to Internet communications, commerce and
advertising could increase the costs of communicating on the Web and adversely
affect the demand for our products and services and thereby harm our business,
results of operations and financial conditions. In addition, as a general
matter, laws and regulations may also be adopted in the future covering
e-commerce issues such as user privacy, pricing, content, copyrights,
distribution, antitrust matters, taxation and quality of products and services
that may increase the cost of e-commerce. Several telecommunications carriers
have asked the Federal Communications Commission to regulate telecommunications
connections to the Internet, which could result in higher costs of doing
business over the Internet. Legislation of these kinds could hinder growth in
the use of the Internet generally and decrease the acceptance of the Internet as
a communications and commercial medium.
Due to the global nature of the Internet, it is possible that governments
of foreign countries might attempt to regulate our transmissions or levy sales
or other taxes relating to our activities and we may incur significant costs to
comply with foreign laws. Furthermore, the European Union recently adopted a
directive addressing data privacy that may result in limits on the collection
and use of user information. In addition, the growth and development of the
market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet.
THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES, WHICH COULD
REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE.
Competition for Internet products and services and electronic commerce is
intense. We expect that competition will continue to intensify. Barriers to
entry are minimal, and competitors can launch new Web sites at a relatively low
cost. Our competitors, such as traditional cattle auction services, video cattle
auction providers, online cattle auction services, cattle and livestock
information services and cattle industry product manufacturers, may develop
Internet products or services that are superior to, or have greater market
acceptance, than our products and services. If we are unable to compete
successfully against our competitors, our business, financial condition and
operating results will be harmed.
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RISKS RELATED TO THE OFFERING
INTERNET CAPITAL GROUP, SAFEGUARD AND XL VISION WILL BE ABLE TO CONTROL MATTERS
REQUIRING STOCKHOLDER APPROVAL AND MAY VOTE AGAINST MATTERS THAT YOU VOTE IN
FAVOR OF OR MAY VOTE IN FAVOR OF MATTERS THAT YOU VOTE AGAINST.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities and Safeguard and XL Vision are affiliated entities.
Following the closing of this offering, Internet Capital Group, Safeguard and XL
Vision together will have the power to vote approximately 79.4% of the aggregate
number of votes to which the holders of our common stock are entitled. In
addition, Safeguard and Internet Capital Group are parties to a joint venture
agreement under which they have agreed to use their best efforts to vote
together on matters submitted to stockholders for approval. As a result, these
stockholders will be able to control all matters requiring stockholder approval.
These stockholders may have interests that differ from yours. Matters that
typically require stockholder approval include:
- Election of directors;
- Approval of a merger or consolidation; and
- Approval of a sale of all or substantially all of our assets.
Of the seven members of our board of directors, the following four
directors also serve as directors and/or officers of Internet Capital Group,
Safeguard or XL Vision:
- John S. Scott, Chairman of our board of directors, is the Chief Executive
Officer and the Chairman of the board of directors of XL Vision;
- Douglas A. Alexander, a member of our board of directors, is the Managing
Director of Internet Capital Group;
- E. Michael Forgash, a member of our board of directors, is a Vice
President of Safeguard, a member of the board of directors of Internet
Capital Group and a member of the board of directors of XL Vision; and
- John W. Poduska, Sr., Ph.D., a member of our board of directors, is a
member of the board of directors of Safeguard and a member of the board
of directors of XL Vision.
In addition, Internet Capital Group has the right to elect two directors to
our board, one of which has not yet been designated. Under the joint venture
agreement, Safeguard and Internet Capital Group have agreed to vote for two
designees of Safeguard and two designees of Internet Capital Group in all future
elections of directors. Safeguard, XL Vision and Internet Capital Group will
therefore have the ability to significantly influence our management.
SINCE WE HAVE NO PLANS FOR THE USE OF THE MOST OF THE PROCEEDS OF THIS OFFERING,
WE WILL HAVE BROAD DISCRETION IN THE USE OF THESE PROCEEDS AND MAY USE THE
PROCEEDS FOR PURPOSES NOT CURRENTLY CONTEMPLATED BY US AND FOR WHICH YOU DO NOT
AGREE, SUCH AS ACQUISITIONS.
Our primary purpose for this offering is to create a public market for our
common stock. We will have broad discretion in how we use the proceeds of this
offering and you will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions on how to use the
proceeds. We plan to use the proceeds from this offering to repay outstanding
debt relating to a recent acquisition and for working
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capital and general corporate purposes. We may also use the proceeds in future
strategic acquisitions of, or investments in, businesses that offer products,
services and technologies that further our ability to provide products and
services to businesses or increase our ability to sell our products and offer
services to new markets. Until the need arises to use the proceeds from this
offering, we plan to invest the net proceeds in investment grade, interest-
bearing securities.
THE SALE OF OUTSTANDING SHARES IN THE MARKET BY OUR EXISTING STOCKHOLDERS IN THE
FUTURE MAY ADVERSELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Based upon the number of shares outstanding as of December 31, 1999,
of the 31,732,902 shares that will be outstanding after the consummation of this
offering:
- 8,000,000 shares offered through this prospectus will be freely tradeable
in the public market;
- 23,507,080 shares may be sold subject to compliance with Rule 144, of
which 11,312,633 shares may be sold without restriction under Rule 144(k)
if they are not held by our affiliates; and
- 225,822 shares may be sold 90 days following the date of this prospectus
subject to compliance with Rule 701.
Although 23,131,956 of the shares described above are subject to lock-up
agreements, such shares may become tradeable, subject to compliance with Rule
144 or Rule 701, beginning 180 days after the date of this prospectus. In
addition, after the consummation of this offering, there will be options to
purchase 2,769,116 shares of class A common stock outstanding that were granted
under our equity compensation plans. We intend to file a registration statement
on Form S-8 to register the shares issued pursuant to the exercise of options
granted under our equity compensation plans. There is also a warrant to purchase
1,138,889 shares of class B common stock outstanding.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD NEGATIVELY
IMPACT THE VALUE OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock. Accordingly, the market price of our common stock, like the market for
Internet-related and technology companies in general, could be highly volatile.
The initial public offering price for our shares will be determined by us and
the representatives of the underwriters and may not be indicative of the price
that will prevail in the public market after our shares begin trading. Any
significant fluctuations in the future might result in a material decline in the
market price of our common stock.
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;
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- Announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- Capital commitments;
- Additions or departures of key personnel; and
- Sales of common stock.
In addition, the U.S. stock markets have from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the common stock of technology companies, particularly Internet companies.
In the past, these broad market fluctuations have been unrelated or
disproportionate to the operating performance of these companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts the attention and resources of
management, which could harm our business and operating results.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing our common stock in
this offering will, therefore, incur immediate dilution of $8.64 in net tangible
book value per share of our common stock. This dilution figure deducts the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us from the initial public offering price. Investors will incur
additional dilution upon the exercise of outstanding stock options.
OUR UNDESIGNATED PREFERRED STOCK MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR
BUSINESS, INCLUDING BIDS THAT MAY BE BENEFICIAL TO YOU.
Our board of directors may issue up to 15,000,000 shares of preferred stock
in one or more series. The board of directors can fix the number of shares of
each class and the voting rights, preferences, limitations and special rights,
if any, without any further vote or action by our stockholders. The issuance of
shares of preferred stock without further action by our stockholders may delay
or prevent a change in control transaction. The issuance of shares of preferred
stock may adversely affect your relative voting and other rights relating to
your shares of common stock.
DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING
BIDS WHICH MAY BE BENEFICIAL TO YOU.
Delaware law may deter potential bids for our business. We are subject to
the anti-takeover provisions of the Delaware General Corporation Law, which
regulates corporate 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.
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<PAGE> 24
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.
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<PAGE> 25
USE OF PROCEEDS
We expect to receive approximately $66.7 million in net proceeds from the
sale of the 6,500,000 shares of class A common stock in this offering, assuming
an initial public offering price of $11.00 per share, underwriters' discount of
$3.7 million and our offering expenses of $1.3 million. We expect to receive
approximately $6.9 million in net proceeds if the underwriters' over-allotment
option is exercised in full. We will not receive any proceeds from the sale of
class A common stock by the selling stockholders.
The primary purpose of this offering is to obtain additional capital,
create a public market for the common stock and facilitate future access to
public markets.
We intend to use a portion of the net proceeds from this offering to pay
outstanding debt owed to XL Vision and Safeguard.
- We intend to repay approximately $1.6 million of principal and interest
owed to XL Vision as of December 31, 1999 with the net proceeds from this
offering. The debt owed to XL Vision is evidenced by a promissory note,
which bears interest at an annual rate of 7% and matures upon
consummation of our initial public offering or a sale of the company.
- We intend to repay approximately $10.3 million of principal and interest
owed to Safeguard as of December 31, 1999 with the proceeds of this
offering. The debt owed to Safeguard is evidenced by two promissory
notes, which bear interest at an annual rate equal to the prime lending
rate plus 1%. The note covering $3.0 million matures in January 2000 and
the note covering the remainder matures in October 2000.
In addition, we intend to use proceeds from this offering to repay any
additional debt that may be incurred by us prior to the completion of this
offering to XL Vision pursuant to our revolving promissory note, which bears
interest at an annual rate equal to the prime lending rate plus 1% and matures
upon consummation of our initial public offering or the sale of the company or
to Safeguard. The actual amount of the proceeds used for the repayment of debt
will depend upon the amount of interest accrued and any additional borrowings or
payments that are made prior to the completion of this offering.
In addition, we intend to use the net proceeds of this offering for payment
of $1.4 million representing a deferred payment of a portion of the purchase
price of a 19% investment in Turnkey Computer Systems, Inc. The payment is due
and payable upon the earlier of the consummation of this offering or in payments
of $500,000, which was due and paid on December 31, 1999, $500,000 due on
December 31, 2000 and $400,000 due on December 31, 2001. We also intend to use
the proceeds from this offering for working capital and other general corporate
purposes.
We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies or to establish joint ventures that we
believe will complement our current or future business. However, we have no
specific plans, agreements or commitments, oral or written, to do so. We are not
currently engaged in any negotiations for any acquisition or joint venture. The
amounts that we actually expend for working capital purposes will vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash we generate from operations and the progress of our
product development efforts. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will invest the net proceeds in short-term interest-bearing,
investment-grade securities.
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.
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<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
We present capitalization:
- On an actual basis;
- On a pro forma basis to give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock for
$38.8 million ($18.0 million of cash and a $20.8 million note
receivable) under a securities purchase agreement with Internet
Capital Group Inc. dated October 27, 1999 and the application of a
portion of the proceeds therefrom to repay indebtedness to XL Vision
of approximately $4.5 million; and
- The automatic conversion of all outstanding shares of series A,
series B and series C preferred stock into shares of class A common
stock and all outstanding shares of series D preferred stock into
shares of class B common stock, which will occur immediately prior
to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc. which is due upon the completion of this offering.
- On a pro forma as adjusted basis to give effect to:
- The events described in the four preceding paragraphs; and
- The sale of the 6,500,000 shares of class A common stock in this
offering and application of the estimated net proceeds from the sale
of these shares, as described in the section entitled Use of
Proceeds, at an assumed initial public offering price of $11.00 per
share, after deducting underwriting discounts and commissions and
our estimated offering expenses.
The table does not include the following:
- 2,488,494 shares of class A common stock issuable upon the
exercise of outstanding options granted under our equity
compensation plans as of September 30, 1999 at a weighted average
exercise price of $1.54 per share, of which options to purchase
716,369 shares of class A common stock were exercisable at a
weighted average exercise price of $1.06 per share;
- 747,250 additional shares of class A common stock available for
issuance under our 1996 and 1999 equity compensation plans as of
September 30, 1999; and
- 1,138,889 shares of class B common stock issuable on the exercise
of a warrant that will be exercisable upon consummation of this
offering at an exercise price equal to the initial public
offering price.
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<PAGE> 27
This table should be read in conjunction with the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total indebtedness.................................. $ 15,133 $ 9,233 $ --
Class A common stock, subject to redemption; 62,500
shares issued and outstanding actual; no shares
issued and outstanding pro forma or pro forma as
adjusted............................................ 406 -- --
-------- -------- ---------
Stockholders' equity:
Preferred stock, par value $0.01 per share,
15,000,000 shares authorized:
Series A preferred stock; 6,500,000 shares
designated; 6,443,606 shares issued and
outstanding actual and no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 64 -- --
Series B junior preferred stock; 2,400,000
shares designated; 2,400,000 shares issued
and outstanding actual and no shares issued
and outstanding pro forma or pro forma as
adjusted..................................... 24 -- --
Series C preferred stock; 1,300,000 shares
designated; 1,100,000 shares issued and
outstanding actual; no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 11 -- --
Series D preferred stock; 4,555,556 shares
designated; no shares issued and outstanding
actual, pro forma or pro forma as adjusted... -- -- --
Common stock, par value $.008 per share;
125,000,000 shares authorized:
Class A common stock; 115,888,887 shares
designated; 6,957,694 shares issued and
outstanding actual; 19,449,702 shares issued
and outstanding pro forma; 25,949,702 shares
issued and outstanding pro forma as
adjusted..................................... 56 156 208
Class B common stock; 9,111,113 shares
designated; no shares issued and outstanding
actual; 5,694,445 shares issued and
outstanding pro forma and pro forma as
adjusted..................................... -- 46 46
Additional paid-in capital........................ 23,454 62,628 129,138
Accumulated deficit............................... (27,453) (27,453) (27,453)
Note receivable from Internet Capital Group,
Inc. .......................................... -- (20,815) (20,815)
Unearned compensation............................. (63) (63) (63)
-------- -------- ---------
Total stockholders' equity................... (3,907) 14,499 81,061
-------- -------- ---------
Total capitalization...................... $ 11,632 $ 23,732 $ 81,061
======== ======== =========
</TABLE>
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<PAGE> 28
DILUTION
As of September 30, 1999, our net tangible book value on a pro forma basis
giving effect to the issuance of 4,555,556 shares of series D preferred stock
and a warrant to purchase 1,138,889 shares of class B common stock for an
aggregate of $18.0 million in cash and a note receivable on October 27, 1999 and
the conversion of our preferred stock into shares of our common stock, the
termination of the redemption right related to the 62,500 shares of class A
common stock, which will automatically occur immediately prior to the
consummation of this offering, was approximately $8.2 million or $0.33 per share
of common stock. Net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities. As of
September 30, 1999, our net tangible book value, on a pro forma basis as
adjusted for the sale of the 6,500,000 shares of our class A common stock, based
on an assumed initial public offering price of $11.00 per share, and after
deducting the underwriting discounts and commissions and our estimated offering
expenses, would have been approximately $2.36 per share. This represents an
immediate increase of $2.03 per share to existing stockholders and an immediate
dilution of $8.64 share to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $11.00
Pro forma net tangible book value per share at September
30, 1999................................................. $ 0.33
Increase in pro forma net tangible book value per share
attributable to new investors....................... 2.03
------
Pro forma net tangible book value per share after the
offering............................................... 2.36
------
Dilution per share to new investors...................... $ 8.64
======
</TABLE>
The following summarizes on a pro forma basis as of September 30, 1999 the
differences between the total consideration paid and the average price per share
paid by the existing stockholders and the new investors with respect to the
number of shares of common stock purchased from us based on an assumed initial
public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 25,144,147 79.5% $ 42,271,589 37.2% $ 1.68
New investors................ 6,500,000 20.5 71,500,000 62.8 11.00
---------- ----- ------------ -----
Total................... 31,644,147 100.0% $113,771,589 100.0%
========== ===== ============ =====
</TABLE>
The total consideration does not include the non-cash portion of the
consideration for the series D preferred stock or the proceeds allocated to the
warrant totaling $24.1 million described above.
The information set forth above does not include the following:
- 2,488,494 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
September 30, 1999 at a weighted average exercise price of $1.54 per
share, of which options to purchase 716,369 shares of class A common
stock were exercisable at a weighted average exercise price of $1.06 per
share;
- 747,250 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of September 30,
1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
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<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999
are derived from our consolidated financial statements which have been audited
by KPMG LLP, independent certified public accountants, and are included
elsewhere in this prospectus. All business activities from inception through
1996 related to the transportation business segment which was disposed of in
January 1999. As a result, we have not included operations data for the years
ended December 31, 1994, 1995 and 1996.
We prepared the unaudited pro forma consolidated financial information for
the year ended December 31, 1998 and for nine months ended September 30, 1999 by
combining the historical results of two of the three companies we acquired, CIN,
LLC and Professional Cattle Consultants, L.L.C., with our historical results
using the purchase method of accounting. Cyberstockyard, Inc. is not included
because the pro forma effects are not significant. We acquired CIN, LLC in
February 1999, Professional Cattle Consultants, L.L.C. in May 1999 and
Cyberstockyard, Inc. in March 1999. This is described in the notes accompanying
the pro forma consolidated financial information included elsewhere in this
prospectus. We have presented this information to give you a better picture of
what our business might have looked like if we had owned CIN, LLC and
Professional Cattle Consultants, L.L.C. during the periods presented. These
companies may have performed differently if they had actually been combined with
our operations. You should not rely on the unaudited pro forma information as
being indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions.
You should read the selected consolidated financial data together with our
historical and pro forma consolidated financial statements and notes thereto and
the section of the prospectus entitled Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ENDED
----------------- ------------------- 1998 SEPTEMBER 30, 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- -------- -------- ------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.......................................... $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................................. -- 2,623 1,629 18,283 2,801 18,354
Operating expenses:
Selling, general and administrative............ 628 3,660 2,428 7,540 4,815 7,992
Research and development....................... 728 1,109 759 2,756 1,451 2,792
------- ------- -------- -------- -------- --------
Total operating expenses..................... 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income, net............... 141 332 231 443 315 454
------- ------- -------- -------- -------- --------
Profit (loss) from continuing operations......... $(1,497) $(5,932) $ (3,941) $(10,683) $ (7,099) $(11,087)
======= ======= ======== ======== ======== ========
Profit (loss) from continuing operations per
common share -- basic and diluted.............. $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======== ======== ======== ========
Weighted average number of common shares
outstanding -- basic and diluted............... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
----- ------- ------- ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash........................................................ $ -- $ -- $ 2 $ -- $ -- $ 1,650
Total assets................................................ -- 6 260 2,165 6,602 16,229
Total indebtedness.......................................... 411 1,747 3,636 8,040 5,572 15,133
Total stockholders' equity (deficit)........................ (411) (1,742) (3,457) (6,875) 3 (3,907)
</TABLE>
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
information included elsewhere in this prospectus. The following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results contemplated by these
forward-looking statements as a result of many factors, including those
discussed below and elsewhere in this prospectus.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our comprehensive cattle products and services
through our integrated family of Web sites, our proprietary information
management application, and our direct sales force. Our products and services
are designed to create an efficient market for the purchase and sale of cattle
and to improve quality and productivity in the cattle industry. Our revenue is
derived from cattle sales through Cyberstockyard, subscriptions to our
information management products and services and sales of NutriCharge and equine
imaging systems.
We were incorporated in 1994 as a subsidiary of XL Vision, Inc. to develop
and commercialize infrared technology applications. XL Vision is a private
company that provides strategic, technical and business support to create
technology companies. Our initial focus was on the transportation market in
which we sold our navigational infrared imaging system, the AMIRIS system. The
AMIRIS system uses infrared technology to create an image based on small
differences in the temperatures of the objects being viewed, such as an iceberg
in water. In 1997, we expanded our infrared applications to the animal sciences
industry with the development of an equine imaging system to detect health
problems. The equine imaging system enables veterinarians to visualize small
differences in the surface temperature of horses, and therefore identify heat, a
common sign of inflammation associated with injury at early stages. In July
1997, we also completed our first round of private financing and began our
direct relationship with Safeguard Scientifics, Inc., which was the largest
single purchaser of our series A preferred stock. Safeguard beneficially owns
approximately 55% of the outstanding capital stock of XL Vision and
approximately 27% of our outstanding capital stock prior to this offering.
To expand our product base, in July 1998, we licensed a portfolio of
patents from a division of the Canadian government relating to the application
of infrared technology to the animal science field and a restorative feed
supplement called NutriCharge.
In order to focus on the cattle industry, we discontinued production of the
AMIRIS system. In January 1999, we entered into a license agreement with Sperry
Marine, Inc., a subsidiary of Litton Industries, Inc., which granted them the
right to become the sole producer of the AMIRIS system. In connection with this
license, we will receive a royalty of 8% of sales of the AMIRIS system up to a
maximum royalty of $4.3 million over a four year period or up to a maximum
royalty of $5.0 million if $4.3 million is not received within four years. Upon
receipt of the maximum amount, we will transfer all rights, title and interest
to the licensed intellectual property to Sperry. To date, we have not received
any royalties from this license. Results from this line of business and the
related loss on disposal have been segregated from continuing operations and
included in discontinued operations in our financial statements.
In November 1999, we sold 4,555,556 shares of our Series D preferred stock
to Internet Capital Group, as a result of which Internet Capital Group became
one of our principal
29
<PAGE> 31
stockholders. Internet Capital Group owns approximately 31% of our outstanding
capital stock and controls approximately 50% of the voting power of our
outstanding capital stock prior to this offering. Internet Capital Group is an
Internet holding company that invests in business-to-business electronic
commerce companies. Safeguard owns approximately 14% of the outstanding common
stock of Internet Capital Group.
REVENUE RECOGNITION
We recognize revenue in accordance with the terms of the sale or contract,
generally as products are shipped or services are provided. In cattle sales
transactions we act as principal when purchasing cattle from suppliers and
reselling them to customers. We take title when the supplier delivers the cattle
to us, arrange for shipment to our customer, and own as inventory until
delivered to and accepted by the buyer, typically a 24 to 48 hour period. We are
responsible for the resale of the cattle, bear all risk associated with the
cattle until resold, and bear the credit risk until full payment is received
from our customers. We recognize revenue when cattle are shipped to the customer
equal to the purchase price paid by the customer. Gross profit on cattle sale
transactions is determined by the mark-up that we add to the price that we pay
to purchase the cattle. Revenue from the sale of livestock health management and
quality enhancement products, equine imaging cameras and NutriCharge, is
recognized on shipment to the customer. Revenue from our information management
products is recognized in the period in which the information or analysis is
delivered to the customer, normally on a monthly basis.
ACQUISITIONS
In February 1999, we purchased substantially all of the tangible and
intangible assets of CIN, LLC for an aggregate purchase price of approximately
$2.3 million. These assets included the Feedlot Information System, a
proprietary, patent pending, information system for cattle feedlots. In
addition, we acquired tangible assets including computers and office equipment
and furnishings, which we are currently utilizing. The purchase price for the
assets consisted of 750,000 shares of our class A common stock valued at
$720,000, the assumption of $812,000 of liabilities, a cash payment due in
October 1999 of $358,000, and an agreement to pay the first $350,000 from
Internet sales of third-party products over the Web site and transaction costs
of $57,000.
In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc.
for approximately $542,000. The purchase price consisted of 200,000 shares of
our class A common stock valued at $450,000, the assumption of $90,000 of
liabilities and transaction costs of $2,000. Through this acquisition, we
obtained Cyberstockyard.com, our online cattle sales and auction services, and
related software applications. Cyberstockyard.com has been integrated into our
suite of products and services. During the three months ended June 30, 1999, we
began executing cattle sales utilizing Cyberstockyard.com.
In May 1999, we purchased substantially all of the tangible and intangible
assets of Professional Cattle Consultants, L.L.C., a leading cattle industry
information resource and database for approximately $1.8 million. The purchase
price consisted of $1.8 million in cash, the assumption of approximately $3,000
in liabilities and transaction costs of $25,000. In June 1999, we began selling
comparative analysis and market information for the feedlot industry with the
assets acquired from Professional Cattle Consultants, L.L.C.
We have presented pro forma results of operations as if the acquisition of
CIN, LLC and Professional Cattle Consultants, L.L.C. had occurred on January 1,
1998. Cyberstockyard, Inc. is not included because the pro forma effects are not
significant. The pro forma loss from continuing operations for the year ended
December 31, 1998 was $7.1 million compared to
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<PAGE> 32
the actual net loss of $5.9 million. The increase in the net loss results
primarily from the net losses of the acquired companies and the pro forma
amortization of the intangible assets associated with these acquisitions. The
pro forma loss from continuing operations for the nine months ended September
30, 1999 was $11.1 million compared to the actual loss from continuing
operations of $10.7 million. The increase in the loss is primarily related to
the losses of the companies acquired and the pro forma amortization of the
intangible assets associated with the acquisitions.
Because of the significance of these acquisitions and the resulting
additions to our products and services, the historical financial results are not
indicative of future performance.
We have incurred significant net losses since our inception. At September
30, 1999, we had an accumulated deficit of $27.5 million. The net losses and
accumulated deficit resulted from our lack of substantial revenues, the costs of
the significant personnel infrastructure and other costs incurred for the
development and marketing of our initial products. We may never achieve
significant revenue or profitability, or if we achieve significant revenue or
profitability they may not be sustained.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue increased from $1.1 million for the nine months ended September 30,
1998 to $18.3 million for the nine months ended September 30, 1999. Revenue from
our cattle sales segment increased to $17.0 million for the nine months ended
September 30, 1999. There was no revenue from the cattle sales segment in 1998.
Revenue from the animal sciences segment increased by 19% from $1.0 million for
the nine months ended September 30, 1998 to $1.3 million for the nine months
ended September 30, 1999. This growth is due primarily to the increased sales of
NutriCharge and the sale of subscriptions to our comparative feedlot analysis
and market information service. Revenue from sales of our equine imaging system
was flat, as increased average selling prices offset a decline in units sold.
Cost of revenue consists primarily of the direct cost to acquire cattle,
NutriCharge and equine imaging systems components and indirect manufacturing
overhead costs such as support personnel, facilities costs, supplies and
depreciation, which were primarily associated with the production of the equine
imaging system. Direct costs attributed to our cattle sales segment increased to
$16.9 million for the nine months ended September 30, 1999. There were no direct
costs from the cattle sales segment in 1998. Direct costs attributed to the
animal sciences segment decreased by 23% from $603,000 for the nine months ended
September 30, 1998 to $492,000 for the nine months ended September 30, 1999.
This decrease is due principally to the decline in unit sales of equine imaging
systems. We generated a gross loss of $522,000 for the nine months ended
September 30, 1998 and a gross profit of $56,000 for the nine months ended
September 30, 1999. The change from a gross loss to a gross profit is due
primarily to the increase in revenue, while cost of goods, principally
manufacturing overhead, did not increase in proportion to the increase in
revenue.
Selling, general and administrative expenses increased 211% from $2.4
million for the nine months ended September 30, 1998 to $7.5 million for the
nine months ended September 30, 1999.
Sales and marketing expenses consist primarily of salaries and related
costs, commissions for sales and marketing personnel, consulting fees, travel
and entertainment, advertising and trade shows. Sales and marketing expenses
increased 250% from $1.3 million
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<PAGE> 33
for the nine months ended September 30, 1998 to $4.6 million for the nine months
ended September 30, 1999. The increase is due primarily to expenses associated
with expanding the number of personnel from 11 people at September 30, 1998 to
38 people at September 30, 1999 and consulting, travel and advertising costs to
effect our business strategy. We expect these costs to continue to increase
significantly as we continue to pursue additional sales and marketing
opportunities.
Our general and administrative expenses consist primarily of salaries,
bonuses and related costs for executives, amortization of intangibles and
administrative and professional service fees, including administrative support
fees to XL Vision and Safeguard. We have contractual service agreements with XL
Vision and Safeguard Scientifics. Under an administrative services agreement
dated December 15, 1997, as amended on August 17, 1999, XL Vision and Safeguard
provide us with management consultation, investor relations, financial
management, human resource management, legal services, insurance programs, and
administrative services. We pay a fee calculated pursuant to a formula that is
based on a percentage of our revenue, not to exceed $300,000 annually. The fee
is not due until we achieve positive cash flow from operations. The agreement
extends through December 31, 2002 and continues unless terminated by either
party. To date, we have not paid any amounts due to XL Vision and Safeguard
under these agreements. As of September 30, 1999, we owed each of XL Vision and
Safeguard approximately $40,000 under these agreements. In addition, under a
direct charge administrative services agreement dated April 14, 1997, XL Vision
also provides us with management services on a time and materials basis. This
agreement continues on a month-to-month basis, and may be terminated at any time
by either party. As of September 30, 1999, we owed XL Vision $850,000 under this
agreement. The amounts due under these agreements will continue to accrue as we
use the services.
General and administrative expenses increased 99% from $1.1 million for the
nine months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. The increase was primarily due to increased amortization of
intangibles, increased expenses associated with expanding the number of
personnel from 5 people at September 30, 1998 to 9 people at September 30, 1999
and increased legal and travel expenses required to support and grow our
business. We expect these expenses to continue to increase as additional
personnel are hired and additional expenses are incurred to support future
growth.
Our research and development expenses consist of salaries and related
costs, payments to outside consultants, material costs for prototype imaging
systems and, to a lesser extent, depreciation on equipment used for development.
Our expenses increased 263% from $759,000 for the nine months ended September
30, 1998 to $2.8 million for the nine months ended September 30, 1999. This
increase in expenses was primarily due to increased consulting costs, increased
expenses associated with expanding the number of personnel from 14 people at
September 30, 1998 to 33 people at September 30, 1999, and increased spending
for materials and supplies. The increase in expenses was required to integrate
and expand our product lines such as our online cattle sales and auction
software, Feedlot Information System software, and continued development efforts
on imaging systems. We expect these costs to increase significantly as we plan
to invest heavily to develop and commercialize new products, expand our
offerings and adapt our technologies to new markets.
Interest expense/other income, net increased 92% from $231,000 for the nine
months ended September 30, 1998 to $443,000 for the nine months ended September
30, 1999. This increase was primarily due to a higher average level of
borrowing.
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<PAGE> 34
Due to the losses incurred, we did not have any income tax expense in the
first nine months of 1998 or the first nine months of 1999. As of September 30,
1999, we had approximately $21.0 million of federal income tax loss carry
forwards that can be used to offset future taxable income. Our tax loss carry
forwards begin to expire in 2010 and we are not currently aware of any
limitation on our ability to offset future taxable income.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Substantially all of our 1998 revenue of $1.8 million was from the sale of
equine imaging systems that we began selling in March of 1998. There was no
revenue from equine imaging systems sales in 1997.
Our gross loss of $831,000 in 1998 was due primarily to a substantial
increase in manufacturing overhead as we built our manufacturing infrastructure.
There was no manufacturing activity related to the production of equine imaging
systems in 1997.
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
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<PAGE> 35
equine imaging system operations. Additionally we initiated spending for costs
such as advertising, travel, trade shows and consulting fees.
General and administrative expenses of $284,000 in 1997 were principally
for salaries and related costs for executives and administrative and
professional service fees including administrative support fees to XL Vision
shifted from the transportation operations to support the equine imaging system
operations.
Research and development expenses of $728,000 in 1997 were principally for
salaries and related costs of personnel shifted from the transportation business
segment to support the equine imaging system development. Additionally, we
initiated spending costs to develop prototype equine imaging systems.
Interest expense/other income, net was $141,000 in 1997.
Due to the losses incurred, we did not have any income tax expense in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the quarters ended March 31, 1998, June 30, 1998, September
30, 1998, December 31, 1998, March 31, 1999, June 30, 1999 and September 30,
1999. The information for each quarter has been prepared on substantially the
same basis as the audited statements included in other parts of this prospectus
and, in the opinion of management, include all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and the results of the interim
periods are not indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Revenue...................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 $15,761
Cost of revenue.............. 459 578 649 937 540 2,228 15,514
Operating expenses........... 930 948 1,237 1,654 1,962 3,557 4,777
Interest expense/other
income, net................ 77 85 85 85 127 162 155
------- ------- ------- ------- ------- ------- -------
Profit (loss) from continuing
operations................. $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974) $(4,685)
======= ======= ======= ======= ======= ======= =======
Profit (loss) from continuing
operations per common
share -- basic and
diluted.................... $ (0.35) $ (0.39) $ (0.30) $ (0.34) $ (0.33) $ (0.58) $ (0.67)
======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operating and investing cash requirements
principally through private equity financings and through borrowings from XL
Vision and Safeguard Scientifics. As of December 31, 1999, we have raised
approximately $45.6 million from the sale of our common stock and preferred
stock. On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock to
Internet Capital Group for aggregate consideration of $38.8 million. We
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<PAGE> 36
received $18.0 million of this amount in cash on November 16, 1999 and $20.8
million in the form of a non-interest bearing note, which is due on November 16,
2000. Interest on the promissory note was imputed at 9.5%, or $2.2 million over
the life of the note. At September 30, 1999, we had approximately $1.7 million
in cash and indebtedness to XL Vision and its affiliates of $13.4 million. We
repaid $4.5 million of this outstanding debt balance on November 16, 1999 from
the cash proceeds of the sale of our series D preferred stock and warrant.
We have had significant negative cash flows from operating activities for
each fiscal and quarterly period to date. Net cash used in operating activities
was $1.7 million in 1996, $6.0 million in 1997, $8.9 million in 1998 and $10.5
million for the nine months ended September 30, 1999. Cash used in operating
activities from inception through September 30, 1999 consisted mostly of net
operating losses offset by increases in accrued liabilities.
Net cash used in investing activities was $157,000 in 1996, $507,000 in
1997, $892,000 in 1998, and $1.2 million for the nine months ended September 30,
1999. Net cash used in investing activities in these periods consisted mostly of
business acquisitions and capital expenditures.
Net cash provided by financing activities was $1.9 million in 1996, $6.5
million in 1997, $9.8 million in 1998 and $13.4 million for the nine months
ended September 30, 1999. Cash provided by financing activities consisted
primarily of the sale of our stock and borrowings from XL Vision and Safeguard.
In December 1998, XL Vision agreed to cancel $7.5 million of indebtedness,
and convert $4.8 million of indebtedness into 2,400,000 shares of our series B
preferred stock.
In May 1999, we raised $5.5 million through the issuance of 1,000,000
shares of our series C preferred stock to Safeguard and 100,000 shares of series
C preferred stock to individuals.
In July 1999, we obtained a revolving credit line from Safeguard evidenced
by a promissory note for working capital advances associated with our cattle
sales operations of up to $3.0 million. Amounts borrowed under the promissory
note, as amended, bear interest at the prime lending rate plus 1%, or 9.5% on
December 31, 1999, and are payable on January 31, 2000.
In August 1999, we entered into an agreement to acquire a 19% interest in
the common stock of Turnkey Computer Systems, Inc. for a purchase price of
62,500 shares of our common stock valued at $400,000 and additional cash
payments totaling $1.4 million. The cash payments are due in full upon the
completion of our initial public offering or in periodic payments of $500,000 at
December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31,
2001, whichever occurs first.
In August 1999, we signed a demand note with Safeguard in the principal
amount of $2.5 million. The note bears interest at the prime rate plus 1%, or
9.5% on December 31, 1999, and is payable on demand. In September 1999, we
signed a demand note with Safeguard in the principal amount of $2.0 million. The
note bears interest at the prime rate plus 1% and is payable on demand. In
October 1999, we signed a demand note with Safeguard in the principal amount of
$2.5 million. The note bears interest at the prime rate plus 1%, or 9.5% on
December 31, 1999, and is payable on demand. In October 1999, we cancelled these
outstanding notes in exchange for a note in the amount of $7.1 million. The note
bears interest at the prime rate plus 1%, or 9.5% on December 31, 1999, and is
payable in full in October 2000, when we complete an initial public offering or
when the note issued to us in connection with the series D preferred stock is
repaid, whichever occurs earlier.
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<PAGE> 37
We believe that our existing cash balances, together with the proceeds from
the sale of series D preferred stock and the warrant to purchase class B common
stock, the revolving line of credit provide adequate liquidity and capital
resources to support operations for the next twelve months. Additionally, we
believe that these sources of liquidity and capital combined with the net
proceeds from this offering will be sufficient to meet our working capital and
capital expenditures needs for at least the next 24 months under our current
business plan, which may change. To the extent we are required to raise
additional capital, we may need to issue additional equity securities or incur
additional debt.
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 held no derivative securities as of September 30, 1999. We are exposed
to changes in interest rates as a result of our borrowings from XL Vision and
Safeguard, which are based on the prime lending rate.
A 10% increase in interest rates related to our borrowings would not have a
material effect on our results of operations over the next fiscal year or the
fair value of our borrowings.
RECENT UNAUDITED FINANCIAL DATA
Our revenue for the three months ended December 31, 1999 was approximately
$25.4 million, including approximately $25.2 million in revenue resulting from
cattle sales. Our revenue for the year ended December 31, 1999 was approximately
$43.8 million, including approximately $42.2 million in revenue resulting from
cattle sales. Our net loss for the three months ended December 31, 1999 was
approximately $4.9 million, resulting in a net loss of approximately $1.47 per
share. Our net loss for the year ended December 31, 1999 was approximately $15.5
million, resulting in a net loss of approximately $3.10 per share. The financial
data for such periods are unaudited. The preparation of these financial data
requires management to make estimates and assumptions that affect the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
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<PAGE> 38
BUSINESS
OVERVIEW
eMerge Interactive, Inc. is a business-to-business electronic commerce
company combining content, community and transaction services to create an
online marketplace for the cattle industry. We offer our products and services
through our family of integrated Web sites, our proprietary information
management application and our direct sales force. Our products and services are
designed to create an efficient market for the purchase and sale of cattle and
to improve quality and productivity in the cattle industry. Our current products
and services for the cattle industry include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement product, NutriCharge.
INDUSTRY BACKGROUND
BEEF INDUSTRY
According to the National Cattlemen's Beef Association, or NCBA, the cattle
industry is the largest single segment of the American agricultural economy. The
U.S. Department of Agriculture reports that sales of cattle accounted for
approximately $34 billion in 1998. On an annual basis, the U.S. beef production
industry spends over $6 billion for feed and, based on our estimates,
approximately $600 million for medication. At the retail level, the cattle
industry generates over $51 billion in sales of beef. Furthermore, the NCBA
estimates that worldwide cattle production is three times greater than U.S.
production.
INDUSTRY PARTICIPANTS
The U.S. beef production chain can be classified into three primary
segments: producers, feedlots, and packers.
Producers
According to the NCBA, there are approximately one million producers
comprised of ranchers and small farm owners who breed and raise cattle. Most of
the producers are independently owned and are dispersed throughout the United
States. Each year these producers market approximately 35 million head of cattle
that are eventually harvested for food, of which approximately 27 million are
processed through feedlots. These cattle, raised for 12-18 months in an average
herd size of approximately 35 head, are often located in different geographic
regions, aggregated into larger herds and then sold to centralized feedlots to
increase their weight and value.
Feedlots
Feedlots typically purchase cattle weighing 300 to 900 pounds and manage
the health and growth of the cattle for a period of 110 to 250 days. We estimate
that during this time, each animal is fed on average 20-30 lbs. of grain per
day. There are approximately 700 major feedlot operations concentrated in 10
Midwestern states. These feedlots can manage
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from 4,000 to 115,000 head of cattle at any given time. After reaching a weight
of approximately 900 to 1,400 pounds, the animal is typically sold to a packer
for harvesting.
Packers
Packers usually hold the cattle for 2 to 24 hours before harvesting and
fabricating them for sale and eventual consumption. In addition to processing
beef, packers inspect beef for cleanliness in preparation for quality grading.
There are currently 64 major beef packing operations in the United States, which
in total process approximately 35 million head of cattle into roughly 25 billion
pounds of beef annually. Approximately 82% of the beef processed in the United
States is processed by beef packing operations owned by IBP, Inc., Cargill,
ConAgra, Inc., and Farmland Industries, Inc.
LIMITATIONS OF THE CURRENT SYSTEM
The current cattle production chain contains a number of inefficiencies
that reduce livestock quality and increase cost. These inefficiencies include
multiple transaction costs, exposure to stress and disease, and the loss of
important feeding and medication information.
INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS
As cattle move through the beef production chain, from an individual
producer's ranch to a feedlot to a meat packing facility, the cattle may be
bought, sold and transported three or four times. Due to the highly fragmented
nature of the cattle producer segment, the majority of cattle are sold through
traditional livestock sales and auctions, which bring together regional buyers
and sellers. The cattle are then sold either directly to feedlots or sold once
again to larger buyers and then onto feedlots. Typically, cattle sales and
auctions are hosted at sale barns, where livestock brokers act as agents in the
buying and selling of animals. The livestock broker is paid a fee or commission
each time an individual lot of cattle is bought or sold. As a result of the
geographic dispersion of producers and sale barns, buyers often purchase cattle
from livestock brokers without having the opportunity to visually survey the
cattle. In addition, this current method of exchange does not facilitate easy
access to real-time price information or a geographically broad marketplace for
the product.
REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND
PROFITABILITY
The combination of the method of exchange used in traditional cattle sales
and auctions and the fragmentation of the producer segment of the industry
results in the repetitive transportation and handling of cattle. As cattle are
moved from one environment to another throughout the production chain, they are
commingled multiple times and can be exposed to contagious diseases. In
addition, the transportation, handling and commingling of cattle often results
in a predictable stress response, which may cause significant health
deterioration. However, because there is currently no convenient or
cost-effective method available to measure an animal's stress level, stress is
not assessed today as a meaningful measure of health. Stress and exposure to
disease often result in sub-optimal performance at the feedlot and reduced beef
quality. A study conducted by researchers at Texas A&M University estimated that
sick animals yield approximately $80 per head less than comparable healthy
animals, which represents a significant loss based on the average value cited by
the U.S. Department or Agriculture of $600 per head.
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THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
We believe that industry participants generally collect and analyze
information on cattle that go through the beef production process inconsistently
and in a manual and time-consuming manner. Due to the nature of data collection
and dissemination, cattle industry participants are unable to exchange critical
information in an efficient and timely manner to optimize performance and beef
quality. We believe that businesses in the cattle industry have not maximized
the use of information to effectively address health, quality and performance
issues.
Producers
Cattle producers typically do not receive data related to the weight of
their animals upon arrival to and departure from feedlots or the quality grades
of their animals, making herd management difficult. Animal-specific health and
medication information is generally not passed on to subsequent buyers at or
prior to the feedlot, which may result in unnecessary additional medication.
Feedlots
Feedlots are the primary source of information currently used in livestock
management. As a general practice, information is collected manually on a daily
basis and subsequently entered into multiple information systems that are
typically not integrated. Given the time-intensive nature of aggregating data
under the current process, it is difficult to collect, analyze and interpret
this data in a meaningful way. Historically, feedlots collect and share
industry-wide information for benchmarking and performance purposes by
submitting reports to data warehouse services that aggregate and disseminate the
combined results in monthly reports. Although these data warehouse services are
valuable as general strategic and analytical tools, because of the delay in
disseminating the information, they are less effective for daily cattle
management decisions, such as decisions relating to feed and medication.
Packers
Packers, at the end of the cattle production chain, collect critical
carcass and quality information such as weight, dimension, yield and meat
quality grade after the animal is harvested. However, in 1997, only 47.5% of
cattle harvested were purchased based on these measures. Therefore, feedlots
receive carcass and quality data on less than half of harvested cattle. The
remaining harvested cattle are sold to packers based strictly on live weight,
and consequently very little health and quality data is provided to feedlots or
producers on these cattle.
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U.S. BEEF PRODUCTION CHAIN
[PRODUCERS, FEEDLOTS, PACKERS GRAPHIC]
We believe improved information flow between and within the three main
groups of industry participants can significantly enhance product quality. There
is currently no network or method for compiling and communicating information
rapidly throughout all stages of the cattle production chain. Product
performance information gathered by packers and feedlots will help refine and
improve handling practices earlier in the production chain. Information relating
to an animal's medical history will minimize redundant medication. In addition,
we believe that information about an animal's genealogy disseminated by
producers and feedlots will enable more accurate differentiation among breeds of
cattle at the packer level and a more easily implemented quality branding
strategy at the retail level. Finally, information linking handling, feeding and
medication techniques and the ensuing performance results, gathered and
disseminated on a daily basis by feedlots, can help the entire segment rapidly
adopt best practices.
THE ONLINE CATTLE MANAGEMENT OPPORTUNITY
We believe that the cattle industry is well-suited for Internet commerce
and information sharing due to the industry's size and fragmentation and the
inefficiencies associated with the current cattle production chain. The
Internet's widespread and growing acceptance make it an optimal foundation for
business-to-business interaction. Many of the variables that affect cattle
performance can be addressed by the Internet's open architecture, universal
accessibility and ability to provide more timely and comprehensive information.
We believe the Internet can create a more efficient marketplace for the exchange
of cattle by directly connecting buyers and sellers and providing information
related to the cattle for sale. A report by the National Association of Farm
Broadcasters showed that as of February 1999,
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45.5% of producers and 53.4% of feedlots used a personal computer for farm
business, and 19.7% of producers and 29.1% of feedlots accessed Web sites for
farm-related topics. According to a Gallup and Agricultural Publisher's Survey,
it is estimated that by 2001 over 55% of large producers in the beef industry
will use the Internet for primary information in the conduct of their daily
business.
THE eMERGE INTERACTIVE EXPERIENCE
We combine content, community and commerce to create an online marketplace
for the cattle industry. We offer our comprehensive cattle products and services
through our integrated Web sites, our proprietary information management
application, and our direct sales force. Our products and services are designed
to create an efficient market for the purchase and sale of cattle and to improve
quality and productivity in the cattle industry. We believe our solution
provides the following benefits throughout the cattle production chain.
BENEFITS TO CATTLE INDUSTRY PARTICIPANTS
<TABLE>
<CAPTION>
PRODUCERS FEEDLOTS PACKERS
--------- -------- -------
<S> <C> <C> <C>
ONLINE CATTLE SALES AND AUCTION MARKETPLACE
- -----------------------------------------------
Broader Access to Buyers and Sellers........... -- --
Reduced Transportation and Transaction Costs... -- --
Convenience and Ease of Use.................... -- --
Healthier Cattle............................... -- -- --
Cattle Source Information...................... -- --
Access to Additional Products and Services..... -- --
Quality Certification.......................... -- -- --
PROPRIETARY INFORMATION SERVICES AND MANAGEMENT
TOOLS
- -----------------------------------------------
Performance Information........................ -- --
Detailed Operational Comparisons............... --
Historical Best Practices...................... -- -- --
Analytical and Consulting Feedback............. -- -- --
Comprehensive Content.......................... -- --
</TABLE>
THE eMERGE ONLINE CATTLE MARKETPLACE
Through our Cyberstockyard.com Web site, we enable cattle producers and
feedlot operators to participate in daily online sales and auctions of cattle.
We believe that because online procurement results in fewer cattle shipments and
less handling, transaction costs are reduced and animals arrive at their
destination healthier and less stressed, thereby increasing the value of the
animals. We also believe that online cattle procurement creates a powerful
medium for obtaining access to market pricing from various buyers and sellers
located throughout the United States. We believe that this may eventually reduce
the amount of commission fees paid by the cattle industry as a whole, and
thereby reduce the cost to produce cattle. Through this comprehensive online
marketplace, we also have the ability to
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<PAGE> 43
sell products and services that are designed to improve productivity within the
livestock industry. We currently offer NutriCharge through our online
marketplace to help our customers reduce the effects of pre-harvest stress in
their cattle.
PROPRIETARY INFORMATION MANAGEMENT PRODUCTS AND SERVICES
We provide cattle producers, feedlots and packers with information
management products and services designed for the more efficient and profitable
production of cattle. Through our integrated Web sites, users can access a broad
range of database services and information related to the cattle industry,
including general industry news, regional weather, commodity prices and industry
analyses and proprietary data. We provide our customers with monthly detailed
pricing, operations and benchmarking data on the cattle industry. In addition,
through our proprietary information application, which is installed on our
customers' systems, we collect cattle data, such as feeding and medication
history, from each customer's disparate systems over the Internet. We then
analyze the data and compile daily reports, which customers subscribing to our
feedlot information systems receive over the Internet and use to improve their
daily management decisions.
We also provide an online community for the cattle industry where users can
actively communicate with our staff of industry experts through e-mails, which
our staff generally respond to within 24 hours. We believe this proactive
approach can improve overall meat quality and reduce health-related losses of
cattle.
OUR BUSINESS STRATEGY
Our objective is to expand our position as a provider of
business-to-business electronic commerce products and services for the livestock
industry. Our business strategy includes the following key elements:
LEVERAGE OUR MARKET POSITION TO BUILD BRAND AWARENESS AND FURTHER ESTABLISH OUR
ONLINE MARKETPLACE
We seek to combine our industry expertise with the first Internet-based
cattle information and commerce network to attract industry participants to our
growing online marketplace. By offering industry participants tools to make
better informed purchasing decisions, improve cattle health, and operate more
efficiently, we believe that we will be able to bring users to our Web sites and
build loyalty and future demand for our products, services and solutions. We
seek to increase the supply of cattle offered through our online marketplace by
continuing to build relationships with cattle producers and to stimulate demand
for our marketplace and information services by nurturing relationships with
feedlots. We believe that by attracting additional industry participants to our
marketplace, we will enhance the value of our online community.
DRIVE COMMUNITY LOYALTY THROUGH THE USE OF MANAGEMENT INFORMATION TOOLS AND
PROPRIETARY CONTENT
By providing an online, comprehensive source of cattle-related news,
industry data and management tools, we intend to increase our customers' daily
usage of the eMerge Interactive marketplace. Our electronic commerce marketplace
is prominently featured throughout our integrated Web sites that provide
information management products and services to our customers. We believe our
May 1999 acquisition of Professional Cattle 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
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Information System, which is designed to be the principal management system for
daily feedlot operations, will continuously expose feedlot managers to our
online marketplace.
LEVERAGE OUR STRONG CUSTOMER RELATIONSHIPS AND INDUSTRY EXPERTISE TO EXPAND OUR
ONLINE COMMUNITY
Historically, relationships among industry participants have played a key
role in conducting business within the cattle industry. We believe that we have
strong existing customer relationships with key cattle producers, feedlots and
packers. Through our acquisition strategy and human resources strategy, we have
acquired companies and hired individuals with long-standing expertise and
relationships in the cattle industry. Our industry experts and advisers consist
of veterinarians, cattle buyers, nutritionalists, data analysts, cattle
producers and former feedlot managers. We seek to leverage our current customer
base, existing relationships and industry expertise to attract additional
industry participants. We also seek to market and sell additional products and
services to our existing customers.
DEVELOP NEW PRODUCTS AND SERVICES
We intend to increase revenue through offering additional products and
services that complement our existing offerings. We seek to obtain new products
and services through strategic acquisitions of technologies or businesses,
internal development and research and development relationships. We currently
have research relationships for the development of proprietary technologies
relating to the cattle and livestock industry with the U.S. Department of
Agriculture, Iowa State University, and the Canadian government. We also intend
to invest in the research and development of new data collection systems to
increase our proprietary electronic commerce offerings to the livestock
industry. For example, we are developing infrared imaging solutions for use in
identification of stress in live animals and fluorescence imaging for use in
improving food safety through the detection of fecal contamination on beef. Our
lead infrared product candidate is still in the development phase and we do not
anticipate that it will be released for commercial use in the foreseeable
future.
EXPAND INTO NEW MARKET SEGMENTS
Expand Internationally
We believe the international appeal of the Internet and the global demand
for cattle products and services present opportunities to expand our
comprehensive cattle solution globally. Although we have not completed the
development of our plan for international expansion, we believe opportunities
exist to offer our products and services, including our cattle sales and auction
services, within other regions of North America, and within South America,
Asia/Pacific and Europe. We intend to expand beyond the United States through
strategic acquisitions or by expanding our capabilities and sales personnel into
the international market.
Extend Our Products and Services to Beef Retailers
As part of our comprehensive products and services, we are developing the
capability to track and manage health and performance information related to
individual animals from birth to harvest. We believe that industry participants
may purchase these services because the ability to trace the progress of
individual cattle from the producer through the feedlot, and through grading at
the packer may enable industry participants to improve health and feed
management practices, lower costs and ultimately improve product quality. In
addition, this capacity to track individual cattle from producer through packer
will allow beef retailers to verify the source, history and quality of their
beef, thereby enabling them to develop high quality brands of beef for sale to
consumers at a premium price.
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Expand into other Markets Within the Livestock Industry
We intend to expand our products and services into other market segments
within the livestock industry. In particular, we believe that opportunities may
exist to apply our integrated electronic commerce and information products and
services to the swine and dairy markets.
OUR PRODUCTS AND SERVICES
We offer our customers a comprehensive set of Internet-based business
products and services designed to address the needs of the livestock industry.
Our products and services can be accessed through our integrated Web sites.
These sites include:
- CattleInfoNet.com, the platform from which our customers can access our
comprehensive product and services offerings;
- Cyberstockyard.com, our online cattle sales and auction site; and
- PCC-online.com, our cattle industry-specific information Web site.
In addition, through our Feedlot Information System, we provide our feedlot
customers with daily analyses of their feedlot operations as well as information
management products and services.
THE eMERGE MARKETPLACE
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
CATTLEINFONET.COM
- Industry news
- Regional weather
- Links to commodity pricing
- Expert corner
- Reports online
- Links to industry information
----------------------------------------------------------------------------------
ONLINE MARKETPLACE MANAGEMENT INFORMATION SOLUTIONS
Cyberstockyard.com Feedlot Information System
- Cattle sales - Feedlot specific content
- Cattle auctions - Daily performance data
- Order fulfillment - Web-enabled with graphical user
eMerge Online Store interface
- eMerge branded products - Analytical services
- Health products * Professional Cattle Consultants
- General store * - Regional feedlot benchmarking data
Specialized Database Services
Advanced Commodities Content *
Advanced Weather Services *
----------------------------------------------------------------------------------
</TABLE>
* Expected to be offered in the first quarter of 2000
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CATTLEINFONET.COM
CattleInfoNet.com is our industry-specific Web site that serves as the
platform from which participants in the cattle industry can access our
comprehensive product and service offerings. This site features content to
facilitate cattle management, including industry news, weather and links to
commodities pricing. Also, through this site, our customers can access
Cyberstockyard.com to purchase or sell cattle, and PCC-online.com, our
information resource and database. In addition, our customers can use this Web
site to purchase our NutriCharge product.
CYBERSTOCKYARD.COM
Cyberstockyard.com is our cattle sales and auction service Web site.
Through Cyberstockyard.com, our customers utilize our online listing of cattle
to obtain access to inventory and market pricing from various buyers and sellers
located throughout the United States in an efficient and effective manner. In
addition, our customers can access scheduled online video cattle auctions. We
transmit inventory lists with detailed product descriptions to our customers by
both e-mail and facsimile and periodically post schedules for live video
auctions on the Web site.
Cattle Sales
We have developed a detailed posting and transaction process to ensure that
adequate information is provided to the purchaser prior to the transaction. We
verify the identity of a purchaser through use of a secure password system and
verify credit-worthiness of each participant prior to enabling access to our
system. Our expert livestock brokers in the field certify all cattle offered for
sale through Cyberstockyard.com. We provide a detailed description of each lot
of cattle, which can be accessed by a purchaser online. We update our inventory
of cattle for sale daily and customers can review our full inventory listings.
In addition, customers can post descriptions, quantity and pricing criteria for
cattle they would like to purchase and our system will automatically search for
a match. If a match is found, the customer is notified immediately online. If no
match is found, the customer can choose to have our system perform a daily
search for a match as new inventory is added to our system. Notification of a
match is sent to the customer by email or facsimile. Our livestock brokers and
online producers also have access to these postings and may respond with
potential matches. After identifying particular cattle to purchase, our
customers complete the transaction through e-mail or the telephone. Once cattle
have been purchased, we manage the shipment logistics through our sales and
customer service organization.
Cattle Auctions
In addition to our online cattle sales, we offer cattle for sale through
our online video auctions. Although not necessary to facilitate cattle sales
transactions, video is available to customers who have installed our satellite
dish system. We offer a mock auction to help our customers get acquainted with
the auction process. We have developed a system that allows participants to
automatically bid in set increments up to a predetermined limit. Once a bid is
accepted, the purchaser is notified online. Our customer service team then
follows-up by telephone and e-mail with specific shipment logistics regarding
the cattle.
MANAGEMENT INFORMATION SOLUTIONS
The Feedlot Information System
The Feedlot Information System provides feedlot customers daily information
services. This secure proprietary information management application resides on
our customers'
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operating systems and interfaces with our centralized database over the
Internet. Our system integrates information contained in their disparate legacy
systems into our database daily to create relevant customer-specific analyses
and graphical presentations. Customers' information is automatically integrated
into our database, analyzed and available for use on the following day. The
analyses created include information and performance data designed to assist in
the effective daily management of a feedlot business. These analyses include:
- Feed consumption data;
- Feed-to-gain ratios; and
- A comprehensive summary of health results.
The Feedlot Information System also enables our customers to compare their
performance against other regional and national feedlot data and provides useful
proprietary content for business management decisions. Our customers can use our
system to manage their feedlot operations on a real-time basis using numerous
performance variables and individual parameters. Customers can also access data
and product performance results posted by practicing veterinarians to further
refine their business practices. All of our Internet applications are easily
accessible from our Feedlot Information System. In addition, our staff provides
valuable analysis and interpretation of the information contained in the
database.
Professional Cattle Consultants
Through PCC-online.com, our Professional Cattle Consultants service, we
provide our customers access to services that are based on our confidential and
proprietary database of cattle industry information. This database has been
compiled over the last 26 years from over 90 different feedlots representing
over 20% of the total cattle processed annually through U.S. feedlots. As part
of their subscription, our customers submit information to our analysts twice
per month to update our database. Each month these customers receive our Cattle
Gram, a marketing report that analyzes and reports cattle market related
information, and our newsletter, a feed performance report containing compiled
data relating to over 100 different feed performance parameters. In our
newsletter, we provide national, regional and customer-specific analyses.
Customers may use a password to view these reports online or receive them via
e-mail or mail.
Specialized Database Services
We offer specialized database management and Internet-based networking
services that target specific customer requirements, including individual animal
tracking through the entire production chain. We can also provide customized
data management and formatting services designed to enable suppliers to better
understand product performance in the field. Our analysts are available to
assist customers in understanding how to derive the most value from the
information being acquired.
STRESS MANAGEMENT PRODUCTS AND SERVICES
As part of our comprehensive solution, we offer our proprietary NutriCharge
restorative feed supplement for sale to our customers through our Web sites and
direct sales force. NutriCharge is designed to reduce the effects of stress on
the animals caused by transportation, handling and commingling, which can result
in a loss of product quality. In addition, we offer educational materials and
services to assist our customers to reduce handling of animals and therefore
reduce stress.
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EQUINE IMAGING SYSTEMS
We have developed our infrared imaging thermography system and image
management software for use in the equine industry. Infrared thermography is a
non-invasive diagnostic imaging technique that is used to detect surface
temperature differences. The camera is lightweight, portable and has a high
degree of resolution and sensitivity. Our infrared camera and software allow a
user to download thermal images to the user's computer to be viewed, catalogued,
annotated and measured. Our system is used by veterinarians to detect heat, one
of the first indicators of inflammation or injury, in horses and exotic animals.
PRODUCT DEVELOPMENT RELATIONSHIPS
We have entered into agreements for the development of technology with a
division of the Canadian government as represented by the Minister of
Agriculture and Agri-Food Canada. We license patents and technology related to
NutriCharge and our Animal Science Tracker infrared camera, which is currently
under development. This agreement also gives us and the Canadian government,
through the Lacombe Research Centre, the right to collaborate with the other on
any project which relates to the license. Any improvements will be owned by
Canada and licensed to us on an exclusive basis. Please see the section entitled
Intellectual Property for a description of the license.
We have entered into a Research Support Agreement with the Canadian
government, under which we provide the Lethbridge Research Centre with one of
our infrared imaging systems, analytical software, and technical support in
exchange for a right of first refusal to license any resulting technology. The
Canadian government may terminate this agreement at any time.
We have entered into a cooperative research and development agreement with
the USDA Agricultural Research Service and Iowa State University of Science and
Technology, in which we have been granted exclusive rights and responsibilities
for product development and commercialization of technology developed and
patented by them for the detection of small, diluted quantities of mammalian
fecal matter on animal carcasses. We will provide design and engineering
expertise. When commercialized, we believe that this technology may reduce
safety inspection and processing costs at packing plants while reducing e-coli
contamination risks. The parties to the agreement may only terminate in the
event of a breach by another party. In connection, with this agreement, we have
also entered into an exclusive license agreement with Iowa State for patent
rights relating to the research and development agreement. Under the license
agreement, we have the right to make or have made, use, sell, offer to sell and
import products using technical data and information owned by the Iowa State
University Research Foundation, or ISURF. The license agreement applies to all
present and future patents, patent applications and inventions relating to meat
and carcass inspection technology. In exchange for the license, we paid a
license fee in the amount of $10,000. We will also pay a royalty of six percent
of the net sales of any licensed products. If we sublicense the technology, we
will also pay ISURF 50% of any fees paid to us by the sublicensees. Currently,
there are no licensed products and we have not made any royalty payments to
date. The license will expire when the last of the patents covered by the
license expire, unless we terminate earlier.
BUSINESS ACQUISITIONS
CIN, LLC
In February 1999, we purchased substantially all of the assets of CIN, LLC,
a company which collected, analyzed and distributed information for use in
animal food sciences
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markets, for an aggregate purchase price of approximately $2.3 million. The
purchase price consisted of 750,000 shares of our class A common stock valued at
$720,000, the assumption of $812,000 of liabilities, a cash payment due in
October 1999 of $358,000, an agreement to pay the first $350,000 from Internet
sales of third-party products over the Web site and transaction costs of
$57,000.
CYBERSTOCKYARD, INC.
In March 1999, we purchased all of the outstanding stock of Cyberstockyard,
Inc., a company selling cattle and other products through auction software over
the Internet for approximately $542,000. The purchase price consisted of 250,000
shares of our class A common stock valued at $450,000, the assumption of $90,000
of liabilities and transaction costs of $2,000.
PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
In May 1999, we purchased substantially all of the assets of Professional
Cattle Consultants, L.L.C. for an aggregate purchase price of approximately $1.8
million. The purchase price consisted of $1.8 million of cash, the assumption of
$3,000 of liabilities and transaction costs of $25,000. The primary asset of
Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and
market information and analysis. For the past 26 years, Professional Cattle
Consultants, L.L.C. has collected a variety of performance and other data from
its subscribers' feedlot operations and provided subscribers with periodic
analyses of certain performance characteristics of their feedlot operations and
comparative analysis related to the performance of feedlots within their
regions.
INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
In August 1999, we entered into an agreement to acquire 19% of the common
stock of Turnkey Computer Systems, Inc., a provider of administrative/accounting
legacy systems to feedlots, for an aggregate purchase price of $1.8 million. The
purchase price consisted of 62,500 shares of our class A common stock, which is
subject to redemption, $1.4 million of cash and $23,000 of transaction costs. In
connection with this investment, we obtained the exclusive right to provide
cattle sales and auction services and feed sales services to customers of
Turnkey through Turnkey's system. This right will expire in August 2019. If we
reach a specified level of revenue per feedlot that is a customer of Turnkey, we
will pay a fee to Turnkey.
RESEARCH AND DEVELOPMENT
We intend to continue to devote significant time and resources to enhance
our current core technology to improve our existing products, expand our product
line and enter into other market segments. Approximately $1.1 million during the
period ended December 31, 1998 and approximately $2.7 million for the nine
months ended September 30, 1999 were related to research and development. As of
September 30, 1999, we had 36 employees dedicated to product development. We
intend to continue to invest in research and development and focus on the
recruitment of experienced scientists and engineers. Our current research and
development activities are primarily focused on the development of information
technologies to complement our products and services for the animal sciences
industry.
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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, we
sell our products and services to approximately 130 of those feedlots, which
account for approximately 30% of the total cattle harvested in the U.S. We also
offer our products and services to participants throughout the cattle production
chain.
CUSTOMER SERVICE
Our current customer service organization consists of four individuals who
are responsible for delivering service to our customers. Currently our order
entry, e-commerce transactions and hardware and software support functions are
conducted at our Sebastian, Florida facility. Our current field support
organization is based in Meade, Kansas. We have a dedicated toll free number for
customer calls, which is staffed from 8:00 a.m. to 8:00 p.m. EST.
INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS
SYSTEM ARCHITECTURE
Our Web sites use multiple front-end servers and a master database located
at our Sebastian, Florida facility. We have implemented scalable Web site
management, search, customer interaction, transaction processing and fulfillment
services and systems. Our Web site and extranet provide customization,
interactivity and performance required for business-to-business electronic
commerce. We utilize applications for:
- Accepting and validating customer orders;
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- Placing and managing orders with suppliers and manufacturers;
- Notifying and updating customer order status; and
- Management of shipment of products.
All data communication between remotely located computers uses secure
socket layer, or SSL, encryption technology. This allows the transfer of a local
database from a feedlot to our main database which uses a Sun Enterprise 4500
server.
DATA COLLECTION
The data collection system for our Feedlot Information System gathers
information from the accounting, feedbunk and hospital systems at the feedlot.
This information is compared to a local database, and the changes and additions
are encrypted and transmitted securely to our main database storage along with
any orders that are being processed in the off-line batch mode. Once received,
we add the data to our master database for statistical analysis and generate
reports for individual site locations. The results are encrypted and sent back
to the individual feedlots. All confirmations of placed orders are sent back to
the feedlot that generated the order. Professional Cattle Consultants data is
collected on a monthly basis using a variety of interfaces with feedlot software
vendors. Data is transmitted electronically or by hard copy. This information is
then imported into the Professional Cattle Consultants architecture where it is
stored and utilized as necessary.
DATA DISSEMINATION
The data that is sent back to the feedlots includes video data for
Cyberstockyard and daily content and statistical data for our information
management products and services. This information is then stored in our local
databases, which function as a backup for off-line operation. Professional
Cattle Consultants provides information back to feedlots on a monthly basis
either through electronic mail, a password-protected Internet site, or in hard
copy form. Surveys are available only in hard copy form.
DATA DISPLAY AT THE FEEDLOT
Our system uses a standard browser to connect to the CattleInfoNet.com Web
site. A secure login is required for full access to Cyberstockyard.com,
PCC-online.com and the Feedlot Information System. When logged on, the system
downloads display applets, written in Java, to the user's system to display
relevant information. The user can view auction videos and bid on cattle in
real-time.
INTELLECTUAL PROPERTY
Our ability to protect and utilize our intellectual property rights is
important to our continued success. We have filed applications to register
Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the U.S.
Patent and Trademark Office. We currently have three patent applications that
are pending before the U.S. Patent and Trademark Office relating to:
- Early detection of inflammation using our infrared imaging camera;
- Feedlot information systems and methods; and
- The cattle transaction process.
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The intellectual property rights to use several patents that are critical
to our products and services are licensed to us by third parties. The U.S.
patents and corresponding international patent applications related to our
NutriCharge products and infrared animal screening methods are licensed to us by
the Canadian government under a master license agreement dated July 29, 1998.
The master license provides us with an exclusive worldwide license to develop
and sell products and services that utilize the inventions contained in the
patents. The license continues until July 2018 and may be renewed after that
time unless the license is terminated by the Canadian government upon our breach
of and failure to cure a fundamental term of the license agreement, our
commencement of bankruptcy or insolvency proceedings, or the assignment of the
license agreement without Canada's prior written consent. In exchange for the
license, we must pay the Canadian government a royalty on a semi-annual basis
that is calculated as a percentage of the revenues we receive from the sale of
products and services related to the license. Our obligation to pay this royalty
begins July 29, 2000. Under the master license, we must achieve milestones in
order to maintain the master license. To date we are achieving all required
milestones.
The U.S. patents relating to technology for detecting fecal contamination
on meat carcasses during and after slaughter are licensed to us by the Iowa
State University Research Foundation and the USDA under a license agreement
entered into August 1999. The license provides us with an exclusive worldwide
license until the patents expire on a country by country basis to develop and
sell products and services that utilize the inventions contained in the patents.
In exchange for the license, we are obligated to pay Iowa State University a
royalty on revenues we receive from the sale of products and services related to
the license.
We believe our commercial success depends on our ability to protect our
proprietary technology and enforce our rights in the technology we license to
other parties. We currently rely on a combination of patents, copyrights and
trade secrets to protect our proprietary technology. We are not aware of any
patents held by others that would prevent us from manufacturing and
commercializing our technology in the United States and abroad.
PURCHASE AND LICENSE AGREEMENT
In January 1999, we granted a license to Sperry Marine, Inc., a subsidiary
of Litton Industries, Inc., to design, manufacture and assemble infrared marine
systems for worldwide sale. The license is exclusive and nontransferable and
applies to infrared technology that is unrelated to our products and markets.
Although we have not received any royalties to date, under the agreement, we
will receive a royalty of 8% of system sales up to a maximum royalty of $4.3
million over a four year period or up to a maximum royalty of $5.0 million if
$4.3 million is not received within four years. Upon receipt of the maximum
amount, we will transfer all rights, title and interests to the licensed
intellectual property. In connection with this license agreement, we also
entered into an asset purchase agreement with Sperry for the sale of assets
relating to the infrared systems for approximately $1.9 million.
COMPETITION
In the cattle sales and auction services market, we compete against
traditional cattle auction services, as well as video cattle auction providers
and other online cattle auction services. Currently, the majority of cattle and
calf sales transactions occur through auctions held at traditional sale barns.
These sale barn operations are highly fragmented and vary in size. We believe
that the primary competitive factors in the cattle sales and auction services
market include:
- Availability and quality of inventory;
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- Pricing;
- Reliability of service;
- Efficiency;
- Brand awareness;
- Customer service; and
- Convenience and ease of use.
We believe that we compete favorably based on these factors, particularly
due to our access to inventory, our focus on ensuring quality and reliability,
the brand awareness developed through our comprehensive solution and the
convenience and ease of use of our Web site.
We compete against other companies in the information services segment,
including established cattle and livestock information services. We also face
competition from cattle 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.
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FACILITIES
Our corporate facilities located in Sebastian, Florida, occupy
approximately 17,000 square feet. We lease our facilities from XL Vision, which
leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard. We
believe that the rent that we pay pursuant to our lease is consistent with the
market rent for similar space in the area. Our lease terminates on January 1,
2001, at which time we have the option to renew the lease for an additional one
year term. We believe that this space is adequate to support our needs for the
foreseeable future.
We also maintain offices in Meade, Kansas; Denver, Colorado; and
Weatherford, Oklahoma.
LEGAL PROCEEDINGS
We have been named as a defendant in a lawsuit filed on January 12, 2000 in
the Queen's Bench Judicial Centre of Regina, Province of Saskatchewan, Canada.
The complaint alleges that eMerge and a third party were each subject to
confidentiality agreements with the plaintiff, and subsequently engaged in
discussions concerning a potential business arrangement allegedly in violation
of these agreements. The complaint asserts damages, including punitive damages,
from the defendants in the aggregate amount of $18 million (Canadian dollars),
as well as injunctive relief. Although we have not yet completed our assessment
of these claims, we believe that there are a number of substantive and
procedural defenses that exist and intend to defend these claims vigorously.
Furthermore, based on our investigation to date, we are not aware of any facts
that support these allegations or the damages asserted.
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MANAGEMENT
This table sets forth information with respect to our executive officers,
directors and key employees with significant industry expertise as of December
31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham................... 44 Chief Executive Officer and Director
T. Michael Janney.................... 50 Chief Financial Officer and Treasurer
Scott L. Mathews..................... 42 President and Chief Operating Officer
Marvin L. Slosman.................... 35 Executive Vice President, Sales
Arvind Subramanian................... 38 Executive Vice President, Marketing and
E-Business
John S. Scott, Ph.D.................. 48 Chairman of the Board
Douglas A. Alexander................. 38 Director
E. Michael Forgash................... 41 Director
Thomas C. Lynch...................... 57 Director
Christopher Moller, Ph.D............. 46 Director
John W. Poduska, Sr., Ph.D........... 62 Director
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY
EXPERTISE
J. Tom Brink......................... 38 Director, Analytical Services
Scott Crain, D.V.M................... 41 Executive Vice President, Professional
Services
Jim Gibb, Ph.D....................... 47 Director, Advanced Technologies
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham has served as Chief Executive Officer and as a member of
the board of directors of eMerge Interactive since July 1998. From July 1997
until July 1998, Mr. Abraham was Vice President and General Manager with the
Home Care Division of Nellcor Puritan Bennett Incorporated. From 1994 until July
1997, Mr. Abraham was Manager of the Global Vascular Business of General
Electric Medical Systems, located in Paris, France.
T. Michael Janney has served as Chief Financial Officer and Treasurer of
eMerge Interactive since November 1998. From March 1993 until October 1998, Mr.
Janney was Senior Vice President and Chief Financial Officer of Datamax
Corporation, a privately held company that designs, develops, manufactures and
sells bar code printers worldwide.
Scott L. Mathews has served as President of eMerge Interactive since
November 1999, and as Chief Operating Officer of eMerge Interactive since April
1999. From May 1996 until April 1999, Mr. Mathews was Vice President and General
Manager for Key Technology, Inc., a manufacturer of machine vision and material
handling products for the food processing and pharmaceutical industries. From
January 1994 until May 1996, Mr. Mathews was Manager of the Global Positron
Emission Tomography business of General Electric Medical Systems, located in
Waukesha, Wisconsin and Uppsala, Sweden.
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Marvin L. Slosman has served as the Executive Vice President, Sales of
eMerge Interactive since August 1998. From May 1996 until July 1998, Mr. Slosman
was a Division Manager for Cordis, Johnson and Johnson. From April 1995 until
May 1996, Mr. Slosman was a Vice President at GE Capital Corporation. From 1993
until April 1995, he served as a Programs Manager at General Electric Medical
Systems. Mr. Slosman currently serves on the board of directors of ReMar, Inc.
Arvind Subramanian has served as Executive Vice President, Marketing and
E-business of eMerge Interactive since December 1999. From January 1997 until
December 1999, Mr. Subramanian was a General Manager for General Electric
Information Services. From September 1994 until December 1996, Mr. Subramanian
was a Global Product Line Manager for General Electric Medical Systems.
John S. Scott, Ph.D. has served as Chairman of the Board of eMerge
Interactive since September 1994 and has served as Chief Executive Officer and
Chairman of the Board of XL Vision, Inc. since its inception in May 1993. From
August 1991 until July 1993, Dr. Scott was President of Lenzar Electro-Optics,
Inc., a manufacturer of imaging devices. Dr. Scott also currently serves as
Chairman of the Board of ChromaVision Medical Systems, Inc., a public company,
and Who?Vision Systems, Inc., both of which are affiliated with Safeguard.
Douglas A. Alexander has served as a member of the board of directors of
eMerge Interactive since April 1999. Mr. Alexander is a managing director of
Internet Capital Group, Inc., an affiliate of Safeguard and is Chairman of the
Board of VerticalNet, Inc., a public company, and serves as a director of
Arbinet Communications, Inc., Blackboard Inc., ComputerJob.com, Inc., Deja.com,
Inc., LinkShare Corporation, SageMaker, Inc. and Star-Cite! Solutions, Inc., all
of which are privately held companies that are affiliated with Internet Capital
Group. Mr. Alexander co-founded Reality Online, Inc., a company that developed
financial planning tools and online services aimed at the individual investor,
and continued to serve as its President and Chief Executive Officer after its
acquisition by Reuters Group PLC until September 1997.
E. Michael Forgash has served as a member of the board of directors of
eMerge Interactive since March 1999 and has held the position of Vice President,
Operations at Safeguard Scientifics, Inc. since January 1998. From August 1996
until October 1997, Mr. Forgash was President and Chief Executive Officer of
Creative Multimedia, an interactive marketing agency that consulted, designed
and delivered Web solutions for businesses. From November 1994 until July 1996,
Mr. Forgash served as President of Continental Healthcare Systems, Inc., a
leading supplier of departmental healthcare information systems and consulting
in the United States and England. Mr. Forgash currently serves as a director of
Internet Capital Group, Inc. and US Interactive, Inc., both public companies,
4anything.com, Inc., Who?Vision Systems, Inc. and XL Vision, Inc., all of which
are affiliated with Safeguard. Mr. Forgash is the Safeguard designee on our
board of directors under a stockholders' agreement dated July 17, 1997.
Thomas C. Lynch has served as a member of the board of directors of eMerge
Interactive since June 1997 and currently serves as the President, Chief
Operating Officer and a member of the board of directors of CompuCom, Inc., a
public company, which is affiliated with Safeguard. From November 1995 until
October 1998, Mr. Lynch held the position of Senior Vice President at Safeguard
Scientifics, Inc. From September 1994 until October 1995, Mr. Lynch was Director
of the Navy Staff, where he was responsible for coordinating Navy defense
issues. Prior to August 1994, Mr. Lynch held several positions in the United
States Navy, including Superintendent of the U.S. Naval Academy.
Christopher Moller, Ph.D. has served as a member of the board of directors
of eMerge Interactive since June 1997. Since 1990, he has served as Vice
President of TL Ventures, a
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company which manages a series of private equity funds and is affiliated with
Safeguard. Since 1994, Dr. Moller has served as a Managing Director of the
following funds managed by TL Ventures: Radnor Venture Partners, Technology
Leaders, Technology Leaders II, TL Ventures III and TL Ventures IV. He is also a
Managing Director of TL Leaders Management II L.P. Dr. Moller is a director of
Who?Vision Systems, Inc., an affiliate of Safeguard, Adolor Corporation and
OraPharma, Inc. Dr. Moller serves on the medical advisory board of Lankenau
Research Institute. Dr. Moller is the TL Ventures designated director on our
board of directors, under a stockholder agreement dated July 17, 1997.
John W. Poduska, Sr., Ph.D. has served as a member of the board of
directors of eMerge Interactive since January 1997. Since 1992, Dr. Poduska, Sr.
has served as the Chairman of Advanced Visual Systems Inc., a provider of
visualization software. From December 1989 until December 1991, Dr. Poduska was
President and Chief Executive Officer of Stardent Computer Inc., a computer
manufacturer. Dr. Poduska is also a member of the board of directors of
Safeguard Scientifics, Inc., Cambridge Technology Partners, Inc., an affiliate
of Safeguard, and Union Pacific Resources Group Inc., all public companies, and
XL Vision, Inc., an affiliate of Safeguard.
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERTISE
J. Tom Brink has served as the Director, Analytical Services of eMerge
Interactive since April 1999. Mr Brink focuses on marketing methods, feedlot and
grid value and cow production costs, and has conducted extensive research on
cattle markets and price cycles. His articles have been featured in many key
industry publications. From December 1996 to April 1999, Mr. Brink served as the
Executive Director of the American Gelbvieh Association, a leading breed
value-based marketer of fed cattle and the largest breed-coordinated alliance in
the United States. From July 1992 until December 1996, Mr. Brink was the
Director of Market Research of Cattle-Fax.
Scott Crain, D.V.M. has served as the Executive Vice President,
Professional Services of eMerge Interactive since March 1999. Since 1990, Dr.
Crain has also maintained a veterinary feedlot practice. In 1995, Dr. Crain
founded CIN, LLC, a company that established an information system for the beef
industry, and served as its President and Chief Executive Officer until that
company was acquired by eMerge Interactive in 1999.
Jim Gibb, Ph.D. has served as the Director, Advanced Technologies for
eMerge Interactive since June 1999. Dr. Gibb identifies opportunities to
implement and integrate new technology into eMerge Interactive's informations
system. From May 1996 until June 1999, he served as the Vice President at the
Center for Quality of the National Cattlemen's Beef Association. From 1991 until
May 1996, Dr. Gibb served as the Executive Director of the American Gelbvieh
Association.
BOARD OF DIRECTORS
Our board of directors is composed of seven members. All of our directors
are elected to serve for one-year terms and are elected at each annual meeting
of our stockholders.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. Our
audit committee consists of three independent directors. Currently our audit
committee consists of Douglas A. Alexander, Christopher Moller, Ph.D. and John
W. Poduska, Sr., Ph.D. The audit committee reviews the scope and result of the
audit and other services provided by our independent auditors and reviews and
evaluates our internal control functions.
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<PAGE> 58
Our compensation committee consists of at least three disinterested
directors who are non-employee directors. Currently, our compensation committee
consists of John S. Scott, Ph.D., E. Michael Forgash and Thomas C. Lynch. The
compensation committee evaluates and approves the compensation and benefits for
our executive officers and administers our equity compensation plans and makes
recommendations to the board of directors regarding such matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of eMerge Interactive and administering various incentive compensation
and benefit plans. During the 1998 fiscal year, our compensation committee
consisted of Dr. Scott and Messrs. E. Scott Blackwell and Lynch. Dr. Scott is
the Chief Executive Officer and Chairman of the Board of XL Vision. Mr.
Blackwell is an executive officer of XL Vision. At the end of fiscal 1998, we
owed XL Vision $8.0 million.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We do not pay our
directors cash compensation for attending meetings of the board of directors and
committee meetings. Directors are eligible to receive options to purchase common
stock under our equity compensation plan. All options granted to directors have
been approved by unanimous vote of the board of directors. In each of October
1997 and March 1999, we granted Dr. Poduska options to purchase 31,250 shares of
our common stock under our 1996 Equity Compensation Plan at an exercise price of
$0.80 and $1.60 per share, respectively. In April 1999, we granted Mr. Alexander
options to purchase 100,000 shares of our common stock under our 1996 Equity
Compensation Plan at an exercise price of $2.40 per share.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the compensation we paid
to our chief executive officer and each executive officer who was paid
compensation greater than $100,000 in 1999. In 1999, we did not pay any of our
other executive officers salary and bonus exceeding $100,000. The amount
appearing in the All Other Compensation column for Mr. Abraham for 1999 consists
of $13,714 for reimbursement of relocation expenses, $11,050 for car allowance
and $5,484 for 401(k) employer contributions and term life insurance and for
1998 consists of $34,663 for reimbursement of relocation expenses, $5,525 for
car allowance and $1,690 for 401(k) employer contributions. The $3,771 for Mr.
Janney consists of 401(k) employer contributions and term life insurance. For
Mr. Mathews, the $65,935 consists of $63,435 for relocation expenses and $2,500
for 401(k) employer contributions and term life insurance. For Mr. Slosman the
$48,309 consists of $46,586 for relocation expenses and $1,723 for 401(k)
employer contributions and term life insurance. Mr. Abraham joined eMerge
Interactive in April 1998.
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<PAGE> 59
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- --------------------------- ------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles L. Abraham......... 1999 $175,791 $35,000 -- $30,248
Chief Executive Officer 1998 84,469 -- 750,000 41,878
T. Michael Janney.......... 1999 136,744 5,625 31,250 3,771
Chief Financial Officer
and Treasurer
Scott L. Mathews........... 1999 113,136 50,000 225,000 65,935
President and Chief
Operating Officer
Marvin L. Slosman.......... 1999 144,517 18,670 31,250 48,309
Executive Vice President,
Sales
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Summary Compensation Table above.
Charles L. Abraham was not granted any options during fiscal 1999. Amounts
represent the hypothetical gains that could be achieved from the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date based upon the
grant price.
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES APPRECIATED FOR
UNDERLYING PERCENTAGE OF OPTION TERM
OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION ---------------------
NAME GRANTED GRANTED PRICE ($/SHARE) DATE 5% 10%
- ---- ---------- ------------- --------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
T. Michael Janney.... 31,250 2.2% $2.40 4/21/09 $ 47,167 $119,531
Scott L. Mathews..... 166,665 11.8 2.40 4/21/09 251,555 637,491
58,335 4.1 2.40 4/21/09 88,048 223,130
Marvin L. Slosman.... 31,250 2.2 2.40 4/21/09 47,167 119,531
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on an assumed value equal to an assumed initial public offering
price of $11.00 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles L. Abraham...... 37,500 $60,000 150,000 562,500 $1,530,000 $5,737,500
T. Michael Janney....... 3,313 33,788 82,625 101,563 830,275 998,438
Scott L. Mathews........ -- -- 56,250 168,750 483,750 1,451,250
Marvin L. Slosman....... -- -- 85,938 101,563 864,063 998,438
</TABLE>
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<PAGE> 60
EMPLOYMENT, CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Charles L. Abraham holds the position of Chief Executive Officer and
receives an annual salary of $175,000 per year, and a bonus of up to $70,000 per
year based on performance objectives established by the board of directors. Mr.
Abraham will receive continued salary and benefits for a period of six months if
we terminate his employment without cause. Mr. Abraham also holds options to
purchase 750,000 shares of common stock at $0.80 per share, of which 25% or
187,500 shares, vest at the grant date with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
Marvin L. Slosman holds the position of Executive Vice President, Sales and
receives an annual salary of $150,000 and a bonus of up to $60,000 based on the
achievement of annual objectives. Mr. Slosman will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Slosman also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
T. Michael Janney holds the position of Chief Financial Officer and
receives an annual salary of $150,000 and a bonus of up to $45,000 based on the
achievement of annual objectives. Mr. Janney will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Janney also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
Scott L. Mathews holds the position of President and Chief Operating
Officer and receives an annual salary of $160,000 and a bonus of up to $64,000
based on the achievement of annual objectives. Mr. Mathews will receive
continued salary and benefits for a period of six months if we terminate his
employment without cause. Mr. Mathews also holds options to purchase 225,000
shares of our common stock at $2.40 per share. These options vested 25% on the
day of grant with the remaining options vesting in three annual installments of
25% each. If we experience a change of control, 100% of the options will
automatically vest.
Arvind Subramanian holds the position of Executive Vice President, Sales
and E-Business and receives an annual salary of $150,000 and a bonus of up to
$52,500 based on the achievement of annual objectives. Mr. Subramanian will
receive continued salary and benefits for a period of twelve months if we
terminate his employment without cause. Mr. Subramanian also holds options to
purchase 187,500 shares of our common stock at $11.20 per share. These options
vested 25% on the day of grant with the remaining options vesting in three
annual installments of 25% each. If we experience a change of control, 100% of
the options will automatically vest.
EQUITY COMPENSATION
AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN
Our Amended and Restated 1996 Equity Compensation Plan was approved by our
stockholders on January 26, 1996. The aggregate number of shares of common stock
available for awards under the 1996 plan was 2,168,750 shares. No more than
625,000 shares in the aggregate may be granted to any individual in any calendar
year. As of December 31,
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<PAGE> 61
1999, there were 1,866,991 shares issuable upon the exercise of outstanding
options granted under the 1996 plan.
1999 EQUITY COMPENSATION PLAN
Our 1999 Equity Compensation Plan was approved by our stockholders on May
10, 1999. The aggregate number of shares of common stock available for awards
under the 1999 plan is 2,500,000 shares. No more than 625,000 shares in the
aggregate may be granted to any individual in any calendar year. As of December
31, 1999, there were 902,125 shares issuable upon the exercise of outstanding
options granted under the 1999 plan.
GENERAL
The 1996 and 1999 equity compensation plans provide for grants of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock and performance units to our designated employees, advisors and
consultants, and to non-employee directors. The compensation committee of the
board of directors administers and interprets the plans. The compensation
committee consists of two or more persons appointed by the board of directors
from among its members, each of whom must be a non-employee director as defined
by Rule 16b-3 under the Securities Exchange Act of 1934, and an outside director
as defined by section 162(m) of the Internal Revenue Code of 1986 and related
Treasury Regulations.
ELIGIBILITY FOR PARTICIPATION
Grants may be made to any of our employees or to employees of any of our
subsidiaries, to any non-employee member of the board of directors or, under the
1999 plan, to individuals to whom an offer of employment has been extended. Key
consultants and advisers who perform services for us or any of our subsidiaries
are eligible if they render bona fide services, not as part of the offer or sale
of securities in a capital-raising transaction.
401(k) PLAN
We have adopted a tax qualified employee savings and retirement plan, the
401(k) plan, for eligible employees. We make matching contributions on behalf of
all participants who have elected to make deferrals to the 401(k) plan. Any
contributions to the 401(k) plan by us or by the participants are paid to a
trustee. The 401(k) plan, and the accompanying trust, is intended to qualify
under Section 401(k) of the Internal Revenue Code, so that contributions and
income earned, if any, are not taxable to employees until withdrawn. The
contributions made by us vest in increments according to a vesting schedule. At
the direction of each participant, the trustee invests the contributions made to
the 401(k) plan in any number of investment options.
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<PAGE> 62
RELATED PARTY TRANSACTIONS
EQUITY AND DEBT FINANCING AGREEMENTS WITH XL VISION
We were incorporated in September 1994 as a subsidiary of XL Vision, Inc.,
a private company that provides strategic, technical and business support to
create imaging-related technology companies. From our inception through June
1999, we have funded our operating and investing cash requirements principally
through private placements of common stock and preferred stock and from
borrowings from XL Vision. As of the date of this prospectus, XL Vision owns
24.0% of our outstanding capital stock.
In July 1997, we signed a subordinated purchase money note with XL Vision
for $4.4 million related to the transfer of infrared technology to eMerge. 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. Approximately
$1.4 million was outstanding under the note as of December 31, 1999, all of
which will be paid with a portion of the proceeds of this offering.
In December 1998, we issued 2,400,000 shares of series B junior preferred
stock to XL Vision, one of our significant stockholders, at a purchase price of
$2.00 per share. As payment for the shares, XL Vision cancelled our debt of $4.8
million owed to XL Vision related to working capital expenditures, which were
incurred on our behalf by XL Vision. As a result of that transaction, XL
Vision's ownership of our capital stock increased from 22.0% to 35.8% as of
December 1998. XL Vision also canceled $7.5 million of debt related to working
capital expenditures, which were incurred on our behalf by XL Vision as a
contribution of debt to equity. The shares of series B junior preferred stock
are also subject to the registration rights agreement executed in connection
with the series A preferred stock. See the section entitled Description of
Capital Stock for a description of the registration rights agreement. The shares
of series A and series B preferred stock convert into shares of class A common
stock immediately prior to completion of this offering.
In January 1999, we signed a revolving promissory note with XL Vision for
up to $3.0 million, of which approximately $232,000 was outstanding as of
December 31, 1999. The revolving promissory note bears interest at the prime
lending rate plus 1% and is due in full when we complete an initial public
offering or sell all of our assets or stock.
EQUITY AND DEBT FINANCING AGREEMENTS WITH AFFILIATES OF SAFEGUARD SCIENTIFICS,
INC.
In April 1999, we signed two promissory notes, totaling $1.1 million with
Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics,
Inc. and the sole general partner of Safeguard XL Capital and Safeguard 99
Capital L.P., two of our significant stockholders. Safeguard Scientifics, Inc.
beneficially owns approximately 55% of the outstanding shares of capital 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 shares of series C preferred stock are also
subject to the registration rights agreement executed in connection with the
series A preferred stock. The shares of series C preferred stock convert into
shares of class A common stock immediately prior to completion of this offering.
In July 1999, we signed a revolving promissory note with Safeguard
Delaware, Inc. for up to $3.0 million. At September 30, 1999, $3.0 million had
been advanced by Safeguard. The revolving promissory note bears interest at the
prime lending rate plus 1%. In December 1999, we amended the note to extend the
maturity date until January 31, 2000.
In August 1999, we signed a demand note with Safeguard Delaware, Inc. in
the principal amount of $2.5 million. The note bears interest at the prime rate
plus 1% and is
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<PAGE> 63
payable on demand. In September 1999, we signed a demand note with Safeguard
Delaware, Inc. in the principal amount of $2.0 million. The note bears interest
at the prime rate plus 1% and is payable on demand. In October 1999, we signed a
demand note with Safeguard Delaware, Inc. in the principal amount of $2.5
million. The note bears interest at the prime rate plus 1% and is payable on
demand. In October 1999, we cancelled these outstanding notes in exchange for a
note in the amount of $7.1 million. The note bears interest at the prime rate
plus 1% and is due in full in one year, when we complete an initial public
offering or when Internet Capital Group repays its note to us, whichever occurs
earlier. As of December 31, 1999, we owed a total of approximately $10.3 million
to Safeguard.
ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC.
On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock for the
aggregate consideration of $38.8 million to Internet Capital Group, Inc.
We received $18.0 million of the total purchase price in cash and $23.0
million in the form of a promissory note. The note will be due and payable one
year after its issue and does not bear interest. The note is secured by
2,555,556 shares of series D preferred stock. Interest on the promissory note
was imputed at 9.5% and amounts to $2.2 million over the life of the note. In
connection with the issuance of the stock and the warrant, we granted Internet
Capital Group registration rights that are substantially the same as those that
apply to our series A preferred stock.
The series D preferred stock will automatically convert into shares of
class B common stock immediately prior to completion of this offering. Class B
common stock is entitled to two and one-half votes per share. The warrant
expires three years from the date of issuance, and is exercisable at the initial
public offering price of the class A common stock. The class B common stock
automatically converts into class A common stock upon transfer by Internet
Capital Group to a non-affiliated party.
Douglas A. Alexander, one of our directors, is an executive officer of
Internet Capital Group. E. Michael Forgash, one of our directors, is also a
member of the board of directors of Internet Capital Group. Additionally,
Safeguard Scientifics, Inc. beneficially owns approximately 14.3% of the
outstanding shares of common stock of Internet Capital Group.
Internet Capital Group and Safeguard are parties to a joint venture
agreement under which each has agreed to:
- Use best efforts to agree and vote on a course of action that is in the
best interest of both parties in all matters submitted to the
stockholders for approval;
- Vote its shares for the election of two designees of Safeguard and two
designees of Internet Capital Group in any election of directors of
eMerge Interactive;
- Offer shares of eMerge Interactive stock to the other party at the fair
market price of the shares before offering the shares to any unaffiliated
party, other than in a sale of all of its shares; and
- Discuss its intentions with the other party before selling all of its
shares to an unaffiliated party and use its best efforts to provide the
other party with the opportunity to purchase or participate in the
purchase of the shares.
Together, Internet Capital Group and Safeguard own approximately 58% of our
outstanding capital stock and control approximately 71% of the voting power of
our outstanding capital stock prior to this offering. After this offering,
Internet Capital Group and
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Safeguard together will own approximately 44% of our outstanding capital stock
and will control approximately 58% of the voting power of our outstanding
capital stock.
SERVICE AGREEMENTS WITH XL VISION AND SAFEGUARD SCIENTIFICS
We have contractual service agreements with XL Vision and Safeguard
Scientifics. Under an administrative services agreement dated December 15, 1997,
as amended on August 17, 1999, XL Vision and Safeguard provide us with
management consultation, investor relations, financial management, human
resource management, legal services, insurance programs, and administrative
services. We pay a fee pursuant to a formula that is based on a percentage of
our revenue, not to exceed $300,000 annually. The fee is not due until we
achieve positive cash flow from operations. We owe XL Vision and Safeguard each
$18,600 under this agreement for fiscal 1998, and $21,750 for the nine months
ended September 30, 1999. The agreement extends through December 31, 2002 and
continues unless terminated by either party.
Under a direct charge administrative services agreement dated April 14,
1997, XL Vision also provides us with management services on a time and
materials basis. We owe XL Vision $460,000 under this agreement for fiscal 1998,
and $390,000 for the nine months ended September 30, 1999. This agreement
continues on a month-to-month basis, and may be terminated at any time by either
party.
REAL ESTATE LEASE WITH XL VISION
We currently lease our facilities in Sebastian, Florida from XL Vision,
Inc., which leases the entire facility from XL Realty, Inc., a subsidiary of
Safeguard Scientifics, Inc. We believe that the rent that we say pursuant to our
lease is consistent with the market rent for similar space in the area. Our
lease terminates on January 1, 2001 and we will have the option to renew the
lease for an additional one year term.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of eMerge Interactive's common stock as of December 31, 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 December
31, 1999 and shares acquirable upon conversion of our preferred stock.
Applicable percentage ownership in the following table is based on 25,232,902
shares of common stock outstanding as of December 31, 1999. To the extent that
any shares are issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding, granted in the future
or reserved for future issuance under our equity plans, there will be further
dilution to new public investors. Because of the disparate voting rights between
the class A and class B common stock, we have also presented beneficial
ownership as a percent of total voting power in the table below.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol * means that the percentage is
less than one percent.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER THE OFFERING
------------------------------------- CLASS A --------------------------------------
PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF
NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER
------------------------ --------- ---------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Internet Capital Group,
Inc.(1)(10)...................... 8,083,334 30.7% 50.1% -- 8,083,334 24.6% 42.5%
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
XL Vision, Inc.(2)(3)............ 6,058,125 24.0 17.9 500,000 5,558,125 17.5 13.8
10315 102nd Terrace Sebastian,
FL 32958
Safeguard XL Capital
L.P.(4)(10).................... 5,226,644 20.7 15.5 694,000 4,532,644 14.3 11.3
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
XL Partners, L.P.(3)............. 3,058,125 12.1 9.1 -- 3,058,125 9.6 7.6
10315 102nd Terrace Sebastian,
FL 32958
</TABLE>
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<PAGE> 66
<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>
Safeguard 99 Capital
L.P.(4)(5)(10)................... 1,675,000 6.5% 4.9% -- 1,675,000 5.2% 4.1%
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
The Biegert Family Trust(6)...... 1,250,000 5.0 3.7 -- 1,250,000 3.9 3.1
c/o Judith Ackland P.O. Box 197
Shickley, NE 68436
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
Charles L. Abraham(9)............ 375,000 1.5 1.1 -- 375,000 1.2 *
T. Michael Janney (9)............ 78,125 * * -- 78,125 * *
Scott L. Mathews (9)............. 56,250 * * -- 56,250 * *
Marvin L. Slosman (9)............ 78,125 * * -- 78,125 * *
John S. Scott, Ph.D.(11)......... 25,000 * * -- 25,000 * *
Douglas A. Alexander............. -- * * -- -- * *
E. Michael Forgash............... -- * * -- -- * *
Thomas C. Lynch.................. -- * * -- -- * *
Christopher Moller, Ph.D......... -- * * -- -- * *
John W. Poduska, Ph.D............ 65,938 * * -- 65,938 * *
OTHER EXECUTIVE OFFICER:
Arvind Subramanian (9)........... 46,875 * * -- 46,875 * *
All directors and executive
officers as a group (11
persons)....................... 725,313 2.8 2.1 -- 725,313 2.2 1.8
OTHER SELLING STOCKHOLDERS:
Technology Leaders II(7)......... 1,070,000 4.2 3.2 150,000 920,000 2.9 2.3
Technology Leaders I(8).......... 1,004,062 4.0 3.0 150,000 854,062 2.7 2.1
Richard Stanley, D.V.M.(9)(12)... 46,413 * * 6,000 40,413 * *
</TABLE>
- -------------------------
(1) The share numbers for Internet Capital Group represent 5,694,445 shares of
class B common stock and a warrant to purchase 1,138,889 shares of class B
common stock. There are no other shares of class B common stock
outstanding. Holders of class B common stock are entitled to two and
one-half votes per share. These numbers also include 1,250,000 shares of
class A common stock.
(2) The share numbers for XL Vision, Inc. include 625,000 shares that are
subject to an option to holders of its 6% convertible subordinated notes.
The options become exercisable when we complete an initial public offering,
subject to restrictions.
(3) XL Vision, Inc. is the sole general partner of XL Partners, L.P. Therefore,
the share numbers for XL Vision include 3,058,125 shares owned by XL
Partners, L.P.
(4) Safeguard Delaware, Inc. holds approximately a 91.6% general partnership
interest in Safeguard XL Capital L.P. and an 89.8% general partnership
interest in Safeguard 99 Capital L.P. Safeguard Delaware, Inc., a
wholly-owned subsidiary of Safeguard Scientifics, Inc., is the sole general
partner of Safeguard XL Capital L.P. and Safeguard 99 Capital L.P.
Safeguard
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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 Safeguard Subscription Program.
(5) The share numbers for Safeguard 99 Capital L.P. include options to acquire
425,000 shares of our stock that are currently owned by XL Vision. These
options become exercisable when we complete an initial public offering,
subject to restrictions.
(6) We have a proxy to vote the 1,250,000 shares owned by the Biegert Trust
until the completion of the series D preferred stock and warrant purchase
by Internet Capital Group.
(7) Technology Leaders II Management L.P., a limited partnership, is the sole
general partner of Technology Leaders II L.P. and a co-general partner of
Technology Leaders II Offshore C.V. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are venture capital partnerships that
are required by their governing documents to make all investment, voting
and disposition actions in tandem. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are referred to as Technology Leaders
II. Technology Leaders II Management L.P. has sole authority and
responsibility for all investment, voting and disposition decisions for
Technology Leaders II. The general partner of Technology Leaders II
Management, L.P. is Technology Leaders Management, Inc., a wholly-owned
subsidiary of Safeguard. Robert E. Keith, Jr., Gary J. Anderson, M.D., Mark
J. DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive,
are the officers of Technology Leaders Management, Inc. Technology Leaders
II Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, which consists of nine voting
members including (i) Warren V. Musser, who is a designee of Technology
Leaders Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. DeNino, Dr.
Moller, individually, and (iii) one designee of each of four other
corporations (the TLA Corporations) and (as a non-voting member) Clayton S.
Rose. Technology Leaders Management, Inc. is the administrative manager of
Technology Leaders II, subject to the control and direction of the
executive committee of Technology Leaders II Management L.P. Mr. Keith is
Vice Chairman of Safeguard.
(8) Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are venture capital partnerships that are required by
their governing documents to make all investment, voting and disposition
actions in tandem. Technology Leaders MI Corp. is wholly-owned by
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are referred to collectively as Technology Leaders I.
Technology Leaders Management L.P. has sole responsibility for all
investment, voting and disposition decisions for Technology Leaders I. The
general partners of Technology Leaders Management L.P. are (i) Technology
Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii)
Technology Leaders Partners I, a partnership among Technology Leaders
Management, Inc. and the Managing Directors of Technology Leaders
Management, Inc., other than Mark J. DeNino, and four other corporations
(the TLA Corporations) owned by individuals, one of whom serves as a
director of Safeguard, and three of whom are not currently otherwise
affiliated with Safeguard or eMerge Interactive. Technology Leaders
Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, that consists of seven voting
members including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J.
Anderson, M.D., each of whom are designees of Technology Leaders
Management, Inc., and (ii) one designee of each of the TLA Corporations.
Clayton S. Rose is a non-voting member of that executive committee.
Technology Leaders Management, Inc. is the administrative manager of
Technology Leaders, subject to the control and direction of the
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<PAGE> 68
executive committee of Technology Leaders Management L.P. Mr. Musser is the
chairman and Mr. Keith is president and chief executive officer of
Technology Leaders Management, Inc. and Mr. Keith, Dr. Anderson, Mr. DeNino
and Christopher Moller, Ph.D., a director of eMerge Interactive, are the
managing directors of Technology Leaders Management, Inc. Mr. Keith and Dr.
Anderson are former officers of Safeguard and Mr. Keith is Vice Chairman of
Safeguard.
(9) Includes options to purchase the following shares of class A common stock:
- 337,500 shares by Mr. Abraham;
- 74,812 shares by Mr. Janney;
- 56,250 shares by Mr. Mathews
- 78,125 shares by Mr. Slosman;
- 6,250 shares by Mr. Stanley; and
- 46,875 shares by Mr. Subramanian.
(10) Internet Capital Group and Safeguard are parties to a joint venture
agreement under which they have agreed to use best efforts to agree to vote
together on matters submitted to the stockholders for approval and for two
designees of Safeguard and two designees of Internet Capital Group in any
elections of directors.
(11) John S. Scott, Ph.D. is Chief Executive Officer and Chairman of the Board
of XL Vision, and disclaims beneficial ownership of the 6,058,125 shares
held by XL Vision.
(12) Richard Stanley was President and a stockholder of STS Agriventures, Ltd.,
which was acquired by eMerge Interactive in July 1998. Mr. Stanley
currently serves as a consultant to eMerge Interactive. Mr. Stanley
disclaims beneficial ownership of 30,713 shares of our class A common stock
owned by his wife, Sylvia Doerksen.
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<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
125,000,000 shares of common stock, $.008 par value per share, consisting of
115,888,887 shares of class A common stock and 9,111,113 shares of class B
common stock, and 15,000,000 shares of preferred stock, $.01 par value per
share. All outstanding shares of preferred stock will automatically convert into
common stock immediately prior to the closing of this offering as follows:
- Shares of series A, series B and series C preferred stock will convert
into shares of class A common stock; and
- Shares of series D preferred stock will convert into shares of class B
common stock.
COMMON STOCK
As of December 31, 1999, there were 25,232,902 shares of common stock
outstanding, assuming the conversion of the shares of preferred stock then
outstanding. After giving effect to the sale of the 6,500,000 shares of our
class A common stock in this offering, there will be 31,732,902 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
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<PAGE> 70
purposes, could make it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock. Following this offering, after the conversion of all outstanding shares
of series A, series B and series C preferred stock into class A common stock,
and the conversion of all outstanding shares of series D preferred stock into
class B common stock, there will be no shares of preferred stock outstanding. We
have no plans to issue any additional shares of preferred stock.
REGISTRATION RIGHTS
Some holders of our class A common stock and all holders of preferred stock
have been granted registration rights. Under a registration rights agreement, as
amended, beginning six months after an initial public offering, the holders of
series A, series B, series C and series D preferred stock can, on two occasions,
demand that we register their shares, so long as the shares covered by each
registration have an aggregate market value of more than $5.0 million.
The holders of series A, series B, series C and series D preferred stock
are also entitled to piggyback registration rights, which may be reduced at the
discretion of an underwriter. Piggyback registration rights entitle stockholders
to include shares in a registered public offering initiated by us. We intend to
obtain a waiver of the piggyback registration rights from all of the holders of
series A, series B, series C and series D preferred stock in connection with
this offering, except from those participating as selling stockholders in this
offering.
In a stockholders' agreement, we granted the former stockholders of STS
Agriventures, Ltd. and the partners of NutriCharge piggyback registration rights
for their shares of our common stock. In a stockholders' and registration rights
agreement, we granted CIN, LLC (now Lost Pelican, LLC) piggyback registration
rights for its shares of our class A common stock. In a joinder and correction
to the stockholders' and registration rights agreement, we granted the former
stockholders of Cyberstockyard, Inc. piggyback registration rights for their
shares of our common stock. In a common stock purchase agreement, we granted
Turnkey Computer Systems, Inc. piggyback registration rights for its shares of
our class A common stock, except for in an initial public offering. We intend to
obtain waivers of the piggyback registration rights from these holders of class
A common stock, except from those participating as selling stockholders in this
offering.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our second amended and restated certificate of incorporation
and bylaws could make the acquisition of eMerge Interactive and the removal of
incumbent officers and directors more difficult. These provisions are expected
to discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of eMerge Interactive to negotiate
with us first.
Our board of directors has the authority to issue and to establish the
rights of substantial amounts of preferred stock without stockholder approval,
upon such terms and conditions, and having such rights, privileges and
preferences, as our board of directors may determine. This authority may be used
to create voting impediments, hinder changes in control or to dilute the stock
ownership of holders of common stock seeking to obtain control of eMerge
Interactive. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions, financings and other
corporate transactions, may have the effect of discouraging, delaying or
preventing a change in control.
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<PAGE> 71
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 prohibits business combinations between a
publicly held Delaware corporation and an interested stockholder.
- An interested stockholder is a person who, together with any affiliates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a corporation.
- A business combination includes mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation.
Section 203 prohibits any business combination that results in a financial
benefit to an interested stockholder for three years following the date the
person became an interested stockholder.
WARRANT
In November 1999, we issued a warrant to Internet Capital Group to purchase
up to 1,138,889 shares of class B common stock. The warrant is exercisable upon
the earlier of:
- The consummation of this offering;
- The closing date of a round of equity financing of at least $20.0
million; and
- The one year anniversary of the issue date of the warrant.
In the event that the warrant becomes exercisable as a result of this
offering or as a result of a private equity offering, the exercise price will be
equal to the offering price per share. If the warrant becomes exercisable as a
result of the one year anniversary of its issue, the exercise price will be
$9.00 per share. The warrant terminates on the third anniversary of its issue.
The warrant is transferable, but once transferred, it will be exercisable for
shares of class A common stock.
LIMITATION ON LIABILITY
Our second amended and restated certificate of incorporation and bylaws
contain provisions relating to the limitation of liability and indemnification
of directors and officers. Our amended and restated certificate of incorporation
specifies that none of our directors shall be personally liable to us or our
shareholders for monetary damages for a breach of fiduciary duty, except for
liability:
- For any breach of the duty of loyalty;
- For acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- For the payment of unlawful dividends and other actions prohibited by
Delaware General Corporation Law; and
- For any transaction resulting in receipt of an improper personal benefit
by the director.
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Our bylaws require us to indemnify our directors and officers, so long as
their actions are in good faith, are in the best interests of the corporation,
and are not unlawful. Our bylaws also permit us to purchase and maintain
insurance on behalf of our directors, officers and agents. We intend to obtain
directors' and officers' liability insurance to provide our directors and
officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park,
New Jersey 07660.
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<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 31,732,902 shares of our
common stock outstanding based upon the number of shares that were outstanding
as of December 31, 1999. Immediately after the offering, the 8,000,000 shares
sold in this offering will be freely tradeable and 23,732,902 shares will be
eligible for resale subject to compliance with Rule 144 or Rule 701, as the case
may be. Of these shares, 23,131,956 shares are subject to 180-day lock-up
agreements with the underwriters.
RULE 144
In general, 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 can be sold under Rule 144(k) without
regard to the volume limitations, manner of sale provisions or other limitations
of Rule 144. As of the date of this prospectus, immediately after consummation
of the offering, 11,312,423 shares will be eligible for resale in the public
market without restriction under Rule 144(k) if they are not held by our
affiliates.
In addition, under Rule 144, 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 317,000 shares immediately following the offering); and
- the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale.
As of the date of this prospectus, immediately after consummation of the
offering, 5,603,125 shares not eligible for resale under Rule 144(k) will be
eligible for resale in the public market subject to the volume, manner of sale
and other limitations of Rule 144.
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. Upon consummation of
this offering, 225,822 shares of common stock will be eligible for resale under
Rule 701.
LOCK-UP AGREEMENTS
In addition to the restrictions imposed by Rule 144 and Rule 701 as
described above, the holders of common stock and options who collectively
account for 23,131,956 shares of our common stock and options to purchase
1,906,250 shares of our common stock, including all of our officers and
directors, 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.
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<PAGE> 74
STOCK OPTIONS
As of December 31, 1999, there were outstanding options to purchase an
aggregate of 2,769,116 shares of our common stock, at a weighted average
exercise price of $2.93 per share, of which 761,045 were exercisable at a
weighted average of $1.68 per share. The holders of options to purchase a total
of 562,310 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 December 31, 1999, we had an additional 1,597,875 shares of common
stock available for future grant under the 1996 and 1999 equity compensation
plans. Prior to the expiration of the lock-up agreements, we intend to file a
registration statement on Form S-8 to register the shares of common stock that
may be issued pursuant to the options granted under the plans. Therefore, the
shares of common stock that are acquired and offered thereafter pursuant to that
registration statement may be resold in the public market without restriction or
limitation, except in the case of our affiliates, who may only resell such
shares in accordance with the provisions of Rule 144.
WARRANT
On November 16, 1999, we issued a warrant to Internet Capital Group to
purchase up to 1,138,889 shares of class B common stock upon completion of the
series D preferred stock purchase. This warrant is exercisable upon closing of
this offering and will expire on the third anniversary of its issuance. Internet
Capital Group has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any of its shares, the warrant, or the
shares acquired as a result of exercising the warrant, for 180 days after the
date of this prospectus, other than through a bona fide pledge of these
securities to its creditors.
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<PAGE> 75
PLAN OF DISTRIBUTION
Of the 8,000,000 shares offered by this prospectus, 4,500,000 shares are
being offered by means of an underwritten public offering and 3,500,000 shares
are being offered by means of the Safeguard Subscription Program to shareholders
of Safeguard Scientifics, Inc., one of our principal stockholders.
UNDERWRITTEN PUBLIC OFFERING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each underwriter named
below, for whom Adams, Harkness & Hill, Inc., First Union Securities, Inc. and
FAC/Equities, a division of First Albany Corporation are acting as
representatives, has agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CLASS A
UNDERWRITERS COMMON STOCK
- ------------ -----------------
<S> <C>
Adams, Harkness & Hill, Inc. ..............................
First Union Securities, Inc. ..............................
FAC/Equities, a division of First Albany Corporation.......
--------
Total.................................................
========
</TABLE>
Of the 4,500,000 shares to be purchased by the underwriters, 3,694,000
shares will be purchased from us and 806,000 shares will be purchased from the
selling stockholders. Of the 3,500,000 shares to be offered by means of the
Safeguard Subscription Program, 2,806,000 shares will be sold by us and 694,000
shares will be sold by Safeguard.
The underwriting agreement provides that the underwriters' obligation to
purchase shares of class A common stock depends on the satisfaction of the
conditions contained in the underwriting agreement and that, if any of the
shares of class A common stock are purchased by the underwriters under the
underwriting agreement, all of the shares of class A common stock that the
underwriters have agreed to purchase under the underwriting agreement must be
purchased. The conditions contained in the underwriting agreement include the
requirement that the representations and warranties made by us to the
underwriters are true, that all of the shares offered in the Safeguard
Subscription Program have been purchased, that there is no material change in
the financial markets and that we deliver to the underwriters customary closing
documents.
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<PAGE> 76
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of class A common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to dealers, who may include the underwriters, at the public
offering price less a selling concession not in excess of $ per share. The
underwriters may also allow, and dealers may reallow, a concession not in excess
of $ per share to brokers and dealers. After the offering, the underwriters
may change the offering price and other selling terms.
Adams, Harkness & Hill, Inc., First Union Securities, Inc. and FAC/Equities
have informed us that they do not intend to confirm sales of shares of common
stock offered by this prospectus to any accounts over which they exercise
discretionary authority. In addition, the other underwriters have informed us
that they do not intend to confirm sales to discretionary accounts that exceed
5% of the total number of shares of common stock offered by them.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us and the selling stockholders. This information is
presented assuming both no exercise and full exercise by the underwriters of
their overallotment option.
<TABLE>
<CAPTION>
TOTAL
--------------------------
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ----------- -----------
<S> <C> <C> <C>
Public offering price........................ $ $ $
Underwriting discount........................ $ $ $
Proceeds before expenses to eMerge
Interactive................................ $ $ $
Proceeds before expenses to the selling
stockholders............................... $ $ $
</TABLE>
The total proceeds before expenses to be received by us from both the
underwritten public offering and the Safeguard subscription program will be
approximately , assuming no exercise of the over-allotment option.
The expenses of the underwritten offering, exclusive of the underwriting
discount, are estimated at $703,000 and are payable by us. The following table
details these expenses. All amounts shown are estimates, with the exception of
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee......................... $ 13,566
NASD filing fee.............................. 6,137
Nasdaq filing fee............................ 53,400
Printing and engraving expenses.............. 112,500
Legal fees and expenses...................... 253,100
Accounting fees and expenses................. 196,900
Blue Sky fees and expenses (including legal
fees)...................................... 5,600
Transfer agent and registrar fees and
expenses................................... 8,400
Miscellaneous................................ 53,397
----------
Total................................... $ 703,000
==========
</TABLE>
The total expenses for the offering, including the expenses associated with
the Safeguard Subscription Program, are estimated at $1.3 million.
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We have granted to the underwriters an option to purchase up to 675,000
additional shares of class A common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of class A common stock
proportionate to the underwriters' initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of class A common stock to the underwriters.
We have agreed that, without the prior consent of Adams, Harkness & Hill,
Inc., we will not directly or indirectly, offer, sell or otherwise dispose of
any shares of common stock or any securities which may be converted into or
exchanged for any such shares of common stock for a period of 180 days from the
date of this prospectus. All of our executive officers and directors, Safeguard,
XL Vision, Technology Leaders and Internet Capital Group, have agreed under
lock-up agreements that, without the prior written consent of Adams, Harkness &
Hill, Inc., they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of common stock or any securities that may be converted
into or exchanged for any such share for the period ending 180 days after the
date of this prospectus. All other stockholders who beneficially own over 30,000
shares of common stock, including all of the key employees named in this
prospectus, have agreed under lock-up agreements that, without the prior consent
of Adams, Harkness & Hill, Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities that
may be converted into or exchanged for any such share for the period ending 180
days after the date of this prospectus. These restrictions will also apply to
any shares that Safeguard purchases under the Safeguard share subscription
program. See the section entitled Shares Eligible for Future Sale.
Prior to the offering, there has been no public market for the shares of
class A common stock. The initial public offering price and the underwriters'
compensation will be negotiated between the representatives and us. In
determining the initial public offering price of the common stock, we and the
representatives will consider, in addition to prevailing market conditions, our
historical performance and capital structure, estimates of our business
potential and earning prospects, an overall assessment of our management and the
consideration of the above factors in relation to the market valuation of
companies in related businesses.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EMRG."
We will indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover
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page of this prospectus. If the underwriters create a short position, then the
representatives may reduce that short position by purchasing common stock in the
open market. The representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, the representatives may reclaim the
amount of the selling concession from the underwriters and selling group members
who sold those shares as part of the offering. In addition, the representatives
reserve the right to reclaim selling concessions from underwriters and selling
group members if the representatives receive a report that clients of the
underwriters and selling group members have sold the stock they purchased in
this offering, generally within 30 days following this offering. The
representatives reserve this right even if the representatives do not purchase
shares in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it might discourage resales of the security by purchasers in an
offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase (outside of the United States), in addition to the
offering price listed on the cover of this prospectus.
At our request, the underwriters have reserved 1,000,000 shares of our
common stock for sale to Textron Inc. and IncuVest, LLC. These investors have
not committed to purchase these shares. In addition, the underwriters have
reserved up to 350,000 shares of the common stock offered by this prospectus for
sale to our officers, directors, employees and their family members and to our
business associates at the initial public offering price set forth on the cover
page of this prospectus. These persons must commit to purchase no later than the
close of business on the day following the date of this prospectus. The number
of shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares.
SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering 2,806,000 shares of our class A
common stock in the Safeguard Subscription Program to shareholders of Safeguard,
one of our principal stockholders, and Safeguard is offering 694,000 shares to
its shareholders. Safeguard's shareholders may subscribe for one share of class
A common stock for every ten shares of Safeguard common stock held by them, and
may not transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least 100 shares of
Safeguard common stock as of October 20, 1999 are eligible to purchase shares
from us under the program. Shareholders who own less than 100 shares of
Safeguard common stock will be ineligible to participate in the Safeguard
Subscription Program.
Under a standby stock purchase agreement, which is filed as an exhibit to
this registration statement relating to this prospectus, Safeguard will purchase
from us any of the shares offered by us under the program that are not purchased
by the shareholders of
77
<PAGE> 79
Safeguard. Distribution of share certificates purchased through the Safeguard
Subscription Program will be made to the purchasers as soon as practicable
following closing of the sale of the shares to the public. It is expected that
sales under the Safeguard Subscription Program will be reflected in purchasers'
book-entry accounts at the Depository Trust Company, if any, upon the closing of
these sales. After the closing of these sales, we will mail stock certificates
to all purchasers who do not maintain book-entry accounts at the Depository
Trust Company. Prior to this offering, Safeguard beneficially owned 27.2% of our
common stock. After this offering, Safeguard will beneficially own approximately
19.5% of our common stock, assuming that all 3,500,000 shares are purchased by
shareholders of Safeguard, and will beneficially own approximately 30.5% of our
common stock assuming that none of the 3,500,000 shares are purchased by the
shareholders of Safeguard. The purchase price under the program, whether paid by
Safeguard or its shareholders, will be the same price per share as set forth on
the cover page of this prospectus. All shares will be sold either to Safeguard
or to shareholders of Safeguard. The underwriters, as a group, will receive a
2.8% management fee on all shares offered through the Safeguard Subscription
Program, including any shares actually purchased by Safeguard. The management
fee represents compensation for the underwriters' role as it relates to due
diligence, participation in the drafting of this prospectus, and general
coordination of the overall offering. Safeguard will not receive any
compensation from eMerge Interactive or any other person, with respect to this
offering, including any underwriting discounts or commissions.
The following table shows the per share and total offering price,
management fee to be paid by us to the underwriters and the proceeds before
expenses to us.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price.............................. $ $
Management fee..................................... $ $
Proceeds before expenses to eMerge Interactive..... $ $
Proceeds before expenses to Safeguard.............. $ $
</TABLE>
The total proceeds before expenses to be received by eMerge Interactive
from both the underwritten public offering and the Safeguard Subscription
Program will be approximately , assuming no exercise of the
over-allotment option.
The expenses of the Safeguard Subscription Program, exclusive of the
management fee to be paid to the underwriters, are estimated at $547,000 and are
payable by us. The following table details these expenses. All amounts shown are
estimates, with the exception of the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 10,551
NASD filing fee............................................. 4,773
Nasdaq filing fee........................................... 41,600
Printing and engraving expenses............................. 87,500
Legal fees and expenses..................................... 196,900
Accounting fees and expenses................................ 153,100
Blue Sky fees and expenses (including legal fees)........... 4,400
Transfer agent and registrar fee and expenses............... 6,600
Miscellaneous............................................... 41,576
--------
Total....................................................... $547,000
========
</TABLE>
78
<PAGE> 80
The total expenses for the offering, including the expenses associated with
the underwritten public offering, are estimated at approximately $1.3 million.
Safeguard is an underwriter with respect to the shares included in the
Safeguard Subscription Program. Safeguard is not an underwriter with respect to
the other shares offered by this prospectus. Safeguard is not included in the
term "underwriter" as used in this prospectus. Safeguard's sole condition to
purchase any shares that are not purchased by its shareholders in the Safeguard
Subscription Program is that the conditions to the underwriter's obligations
have been met. This means that Safeguard will be required to purchase these
shares if, and only if, the underwriters are obligated to purchase shares.
Safeguard has not participated in any discussions or negotiations with the
Company and the underwriters regarding the initial public offering price.
Safeguard will not have any right to seek indemnification from eMerge
Interactive regarding its agreement to accept underwriter liability with respect
to the shares included in the Safeguard Subscription Program.
LEGAL MATTERS
An opinion as to the validity of the shares of class A common stock offered
hereby will be provided to us by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and September 30,
1999 and for each of the years in the three-year period ended December 31, 1998
and the nine months ended September 30, 1999 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Lost Pelican, L.L.C. (d/b/a Cattlemen's
Information Network) as of December 31, 1997 and 1998 and for each of the years
in the two-year period ended December 31, 1998 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of QDD Investment Company, L.L.C. (d/b/a
Professional Cattle Consultants, L.L.C.) as of December 31, 1998 and for the
year then ended have been included in this Prospectus and the Registration
Statement in reliance upon the report of KPMG LLP, independent certified public
accountants and upon the authority of said firm as experts in accounting and
auditing.
79
<PAGE> 81
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to eMerge
Interactive and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto. You may read and copy any
document we file at the SEC's public reference rooms located at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices in Chicago,
Illinois and New York, New York. Copies of these materials can be obtained from
the SEC at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov. Upon completion of
this offering, we will become subject to the information and periodic reporting
requirements of the Securities Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference rooms, and the Web site of
the SEC referred to above.
80
<PAGE> 82
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-25
Unaudited Pro Forma Condensed Combined Statement of
Operations for the nine months ended September 30, 1999... F-26
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-27
LOST PELICAN, L.L.C. (FORMERLY CIN, LLC) D/B/A CATTLEMEN'S
INFORMATION NETWORK
Independent Auditors' Report................................ F-29
Balance Sheets as of December 31, 1997 and 1998 and February
23, 1999.................................................. F-30
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-31
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-32
Statements of Cash Flows 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-33
Notes to Financial Statements............................... F-34
QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE
CONSULTANTS, L.L.C.
Independent Auditors' Report................................ F-38
Balance Sheets as of December 31, 1998 and May 19, 1999
(unaudited)............................................... F-39
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-40
Statements of Members' Equity for the year ended December
31, 1998 and for the period January 1, 1999 through May
19, 1999 (unaudited)...................................... F-41
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-42
Notes to Financial Statements............................... F-43
</TABLE>
F-1
<PAGE> 83
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> 84
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> 85
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> 86
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> 87
<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> 88
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> 89
<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> 90
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> 91
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
F-10
<PAGE> 92
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25") and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
(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
F-11
<PAGE> 93
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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
F-12
<PAGE> 94
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 62,500 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 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, 2,587,500 of the Company's Class A common shares valued at $0.80 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.
F-13
<PAGE> 95
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
$4,666,736, 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>
F-14
<PAGE> 96
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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
F-15
<PAGE> 97
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-16
<PAGE> 98
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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 1.60-7.20 2.58
Exercised......................... (112,069) 0.80 0.80
Canceled.......................... (42,187) 0.80-1.60 1.04
--------- ---------- ------
Balance outstanding, September 30,
1999.............................. 2,488,494 $0.80-7.20 $ 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.
F-17
<PAGE> 99
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The per share weighted-average fair value of stock options granted was $0
in 1996, $0 in 1997, $0.08 in 1998 and $0.84 in 1999 on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Volatility.................................... 0% 0% 0% 0%
Dividend paid................................. 0% 0% 0% 0%
Risk-free interest rate....................... 6.35% 6.11% 4.73% 4.99%
Expected life in years........................ 5.77 6.75 5.57 6.75
</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.
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 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss as reported...... $(1,719,492) $(5,483,623) $(7,832,128) $(10,672,185)
=========== =========== =========== ============
Pro forma net loss........ $(1,719,492) $(5,483,623) $(7,865,031) $(10,887,665)
=========== =========== =========== ============
Net loss per share, as
reported:
Basic and diluted....... $ (9.24) $ (14.34) $ (1.80) $ (1.59)
=========== =========== =========== ============
Pro forma net loss per
share:
Basic and diluted....... $ (9.24) $ (14.34) $ (1.81) $ (1.62)
=========== =========== =========== ============
</TABLE>
F-18
<PAGE> 100
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
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.
F-19
<PAGE> 101
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-20
<PAGE> 102
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases equipment under a capital lease, effective April 20,
1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments,
including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000,
$92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was
$23,594 in 1998 and $20,627 in 1999.
The Company rents its facility from XL Vision. Rent expense varies based on
space occupied by the Company and includes charges for base rent, repairs and
maintenance, telephone and networking expenses, real estate taxes and insurance.
Rent expense is approximately $68,000 in 1996, $354,000 in 1997, $1,129,000 in
1998, and $528,000 in 1999.
LICENSE AGREEMENT WITH XL VISION, INC.
In February 1999, the Company signed a license agreement with XL Vision,
granting XL Vision a license to use Company software for the limited purpose of
evaluating whether the software could provide the basis for a new company that
would operate in the agricultural industry. The license agreement terminated on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license agreement. In addition, XL Vision is obligated to give the
Company at least 25% of the new company. The Company is obligated to transfer
all amounts up to 25% of the company to Lost Pelican, LLC.
(11) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously 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.
F-21
<PAGE> 103
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) (929,763)
---------- ---------- -----------
Gross profit
(loss)......... $ (830,976) $ (522,305) $ 56,315
========== ========== ===========
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(12) DISCONTINUED OPERATIONS
In December 1998, the Company's Board of Directors decided to dispose of
its transportation segment. The Company's AMIRIS thermal imaging system, which
was the sole product sold in the transportation segment, was sold on January 15,
1999 to Sperry Marine, 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.
F-22
<PAGE> 104
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Accounts receivable................ $ 145,500 $ 381,435 $ 419,784
Inventory, net..................... 1,076,043 2,020,625 123,093
Property and equipment, net........ 22,650 134,098 --
Intangibles, net................... 94,444 61,108 36,106
Accounts payable................... (271,833) (80,510) (63,647)
Accrued liabilities including
provision for operating loss
during phase out period of
$72,667 in 1998 and $18,748 in
1999............................. -- (231,415) (125,000)
---------- ---------- ---------
Net assets....................... $1,066,804 $2,285,341 $ 390,336
========== ========== =========
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
VOLUNTARY EMPLOYEE SAVINGS 401(k) PLAN
The Company established a voluntary employee savings 401(k) plan in 1997
which is available to all full time employees 21 years or older. The plan
provides for a matching by the Company of the employee's contribution to the
plan for 50% of the first 6% of the employee's annual compensation. The
Company's matching contributions were $6,300 in 1996, $38,195 in 1997, $62,108
in 1998 and $54,229 in 1999.
ROYALTIES
In connection with the NutriCharge license, the Company is obligated to a
royalty of 5% of gross revenues from the sale of NutriCharge products and
infrared technology related to the Company's Canadian license agreement.
The Company is also obligated to a royalty of 6% of net revenues from
product or services related to technology patented by Iowa State University.
(14) SUBSEQUENT EVENTS
SALE OF SERIES D PREFERRED STOCK
On October 27, 1999, the Company agreed to issue 4,555,556 shares of Series
D preferred stock and a warrant to acquire 1,138,889 shares of Class B common
stock. Each share of Series D preferred stock is convertible into 1.25 shares of
Class B common stock at any time at the option of the holder or immediately upon
an IPO. The warrant is exercisable at the Company's IPO price. In the event the
Company does not complete an IPO, the warrant is exercisable at $9.00 after
November 16, 2000 or earlier if the Company has an equity financing of not less
that $20,000,000 from private investors. The warrant expires on November 16,
2002. In return for these instruments, the Company received $18,000,000 of cash
in November 1999 and a $23,000,000 non-interest, bearing note receivable due on
October 27, 2000. Imputed interest at 9.5% amounts to $2,185,000 over the life
of the note.
F-23
<PAGE> 105
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net consideration of $38,815,000 was allocated to the warrant and
preferred stock as follows. The warrant was 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. The remaining proceeds were allocated
to preferred stock and amounted to $7.79 per preferred share ($6.23 per common
share). The beneficial conversion feature was calculated as the difference
between the conversion price ($6.23) and the fair value of the common stock
($7.20) multiplied by the number of Class B common shares into which the
preferred stock is convertible (5,694,445) and amounts to $5,523,612.
The note receivable will be shown as a reduction of stockholders' equity,
net of imputed interest. Interest income will be accreted over the life of the
note using the effective interest method. The value of the warrant will be
credited to additional paid-in capital. The beneficial conversion feature will
be credited to preferred stock with a corresponding charge to additional paid-in
capital at issuance. The beneficial conversion feature will reduce net income
available to common shareholders.
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.
LEGAL PROCEEDING (UNAUDITED)
The Company has been named as a defendant in a lawsuit filed on January 12,
2000 in the Queen's Bench Judicial Centre of Regina, Province of Saskatchewan,
Canada. The complaint alleges that eMerge and a third party were each subject to
confidentiality agreements with the plaintiff, and subsequently engaged in
discussions concerning a potential business arrangement in violation of such
agreements. The complaint asserts damages, including punitive damages, from the
defendants in the aggregate amount of $18 million (Canadian dollars), as well as
injunctive relief. Although the Company has not yet completed its assessment of
these claims, the Company believes that there are a number of substantive and
procedural defenses that exist and intends to defend these claims vigorously.
Furthermore, based on the Company's investigation to date, the Company is not
aware of any facts that support these allegations or the damages asserted.
F-24
<PAGE> 106
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-25
<PAGE> 107
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-26
<PAGE> 108
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-27
<PAGE> 109
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-28
<PAGE> 110
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-29
<PAGE> 111
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-30
<PAGE> 112
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-31
<PAGE> 113
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-32
<PAGE> 114
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-33
<PAGE> 115
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
F-34
<PAGE> 116
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-35
<PAGE> 117
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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,
F-36
<PAGE> 118
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-37
<PAGE> 119
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-38
<PAGE> 120
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-39
<PAGE> 121
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-40
<PAGE> 122
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-41
<PAGE> 123
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-42
<PAGE> 124
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-43
<PAGE> 125
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-44
<PAGE> 126
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.
F-45
<PAGE> 127
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 (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-46
<PAGE> 128
8,000,000 SHARES
[MERGE INTERACTIVE GLOBE LOGO]
CLASS A COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
-------------------------
, 2000
<PAGE> 129
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discounts and commissions) payable in
connection with the sale of the Class A Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 24,117
NASD filing fee............................................. 10,910
Nasdaq filing fee........................................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 350,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... 94,973
----------
Total.................................................. $1,250,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation permits indemnification to
the fullest extent permitted by Delaware law. The Registrant's By-laws require
the Registrant to indemnify any person who was or is an authorized
representative of the Registrant, and who was or is a party or is threatened to
be made a party to any proceeding by reason of the fact that such person was or
is an authorized representative of the Registrant, against expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such third party proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Registrant and, with respect to any
criminal proceeding (including any action or investigation which could or does
lead to a criminal proceeding) had no reasonable cause to believe such conduct
was unlawful. The Registrant shall also indemnify any person who was or is an
authorized representative of the Registrant, and who was or is a party or is
threatened to be made a party to any proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Delaware Court
of Chancery or the court in which such proceeding was pending shall determine
that, despite the adjudication of liability but in view of all the circumstances
of the case, such authorized representative is fairly and reasonably entitled to
indemnity. Such indemnification is mandatory under the Registrant's By-laws as
to expenses actually and reasonably incurred to the extent that an authorized
representative of the Registrant has been successful on the merits or otherwise
in defense of any proceeding or in defense of any claim, issue or matter
therein. The determination of whether an individual is entitled to
indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or
II-1
<PAGE> 130
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 December 31, 1999, eMerge Interactive had sold to employees and
certain other persons an aggregate of 7,110,979 shares of class A common
stock, including class A common stock issued in connection with business
acquisitions, as follows:
In July 1998, eMerge Interactive issued 2,500,000 shares of class A
common stock in connection with the acquisition of 100% of the partnership
interests of NutriCharge, a South Dakota partnership, at a price of $.80
per share. In July 1998, eMerge Interactive issued 87,500 shares of its
class A common stock to the shareholders of STS Agriventures, Ltd., at a
price of $.80 per share. In February of 1999, eMerge Interactive issued
750,000 shares of class A common stock in connection with the acquisition
of assets, including CIN, LLC, at a price of $.96 per share. eMerge
Interactive issued 250,000 shares of class A common stock in connection
with the acquisition of 100% of the issued and outstanding stock of
Cyberstockyard, Inc. on March 29, 1999, at a price of $1.60 per share. In
August of 1999, eMerge Interactive issued 62,500 shares of class A common
stock at $6.40 per share, for 19% of the common stock of Turnkey Computer
Systems, Inc. All of such sales were made under the exemption from
registration provided under Section 4(2) of the Act. The issuance to the
stockholders of Cyberstockyard, Inc. was also made pursuant to Rule 504
under the Act.
As of December 31, 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., now Wheatley
Partners II, L.P., at a price of $5.00 per share. In November 1999, we
issued 4,555,556 shares of series D preferred stock to Internet Capital
Group, Inc. at a purchase price of $8.23 per share, payable in cash and a
promissory note. In connection with the sale of preferred stock, we also
agreed issued to Internet Capital Group a warrant to purchase up to
1,138,889 shares of class B common stock. All of such sales were made under
the exemption from registration provided under Section 4(2) of the Act.
II-2
<PAGE> 131
Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation Plans,
eMerge Interactive has granted options to purchase a total of 3,470,875 shares
of common stock to its employees and certain other persons through December 31,
1999 at a weighted average exercise price of $2.51 per share. For more detailed
descriptions of eMerge Interactive's Equity Compensation Plans, see the section
entitled Management -- Equity Compensation in this registration statement. In
granting the options and selling the underlying securities upon exercise of the
options, eMerge Interactive is relying upon exemptions from registration set
forth in Rule 701 and Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Standby Stock Purchase Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of
eMerge Interactive.
3.2 Amended and Restated Bylaws of eMerge Interactive.
4.1 Form of Stock Certificate.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
10.1 Amended and Restated 1996 Equity Compensation Plan.
10.2 1999 Equity Compensation Plan.
10.3 Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada.+*
10.4 Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999.
10.5 Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
10.6 Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain.
10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz.
10.8 Stockholders Agreement dated July 29, 1998 among eMerge
Interactive and individuals designated as the former
shareholders of STS Agriventures, Ltd,.
10.9 Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust.
10.10 Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc.
10.11 Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc.
10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
10.13 Letter of Agreement dated January 12, 2000 between eMerge
Interactive and Southern States.+
10.14 Subscription Agreement letter for purchase of Series B
Junior Preferred Stock.
</TABLE>
II-3
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.15 Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock).
10.16 Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc.
10.17 Registration Rights Agreement dated July 18, 1997.
10.18 Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999.
10.19 Stockholders' and Registration Rights Agreement dated
February 24, 1999.
10.20 Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1999.
10.21 (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999, (b) second Amended Revolving Note
dated October 25, 1999 and (c) Third Amended Revolving Note
dated December 6, 1999.
10.22 Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive.
10.23 Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled).
10.24 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard.
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled).
10.26 Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholders' Agreement.
10.27 Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997.
10.28 Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company.+*
10.29 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc.
10.30 Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc.
10.31 Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc.
10.32 Cooperative Research and Development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated
August 4, 1999.
10.33 Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Form letter from eMerge Interactive, Inc. to holders of more
than 100 shares of Safeguard Scientifics, Inc. describing
the Safeguard Subscription Program.
99.2 Form of letter from Adams, Harkness & Hill, Inc. to
Safeguard Scientifics, Inc. shareholders.
</TABLE>
II-4
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
99.3 Form of letter from eMerge Interactive, Inc. to Brokers
describing the Safeguard Subscription Program.
99.4 Form of Subscription Form for Safeguard Subscription
Program.
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We have requested confidential treatment of certain provisions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has
been filed separately with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the prospectus.
(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-5
<PAGE> 134
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration statement
as of the time it was declared effective; and (3) that for the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by Safeguard, and
the terms of any subsequent reoffering thereof. If any public offering by the
underwriters is to be made on terms differing from those set forth on the cover
page of the prospectus, a post-effective amendment will be filed to set forth
the terms of such offering.
II-6
<PAGE> 135
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 January 25,
2000.
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 January 25, 2000
- --------------------------------------------- and Director (Principal
Charles L. Abraham Executive Officer)
/s/ T. MICHAEL JANNEY Chief Financial Officer January 25, 2000
- --------------------------------------------- (Principal Financial and
T. Michael Janney Accounting Officer)
* Chairman of the Board January 25, 2000
- ---------------------------------------------
John S. Scott, Ph.D.
* Director January 25, 2000
- ---------------------------------------------
Douglas Alexander
* Director January 25, 2000
- ---------------------------------------------
E. Michael Forgash
* Director January 25, 2000
- ---------------------------------------------
Thomas C. Lynch
* Director January 25, 2000
- ---------------------------------------------
Christopher Moller, Ph.D.
* Director January 25, 2000
- ---------------------------------------------
John W. Poduska, Sr., Ph.D.
* /s/ CHARLES L. ABRAHAM January 25, 2000
- ---------------------------------------------
Charles L. Abraham
As Attorney-in-Fact
</TABLE>
II-7
<PAGE> 136
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Standby Stock Purchase Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of
eMerge Interactive.
3.2 Amended and Restated Bylaws of eMerge Interactive.
4.1 Form of Stock Certificate.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
10.1 Amended and Restated 1996 Equity Compensation Plan.
10.2 1999 Equity Compensation Plan.
10.3 Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada.+*
10.4 Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999.
10.5 Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
10.6 Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain.
10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz.
10.8 Stockholders Agreement dated July 29, 1998 among eMerge
Interactive, and individuals designated as the former
shareholders of STS Agriventures, Ltd.
10.9 Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust.
10.10 Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc.
10.11 Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc.
10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
10.13 Letter of Agreement dated January 12, 2000 between eMerge
Interactive and Southern States.+*
10.14 Subscription Agreement letter for purchase of Series B
Junior Preferred Stock.
10.15 Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock).
10.16 Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc.
10.17 Registration Rights Agreement dated July 18, 1997.
10.18 Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999.
10.19 Stockholders' and Registration Rights Agreement dated
February 24, 1999.
10.20 Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1999.
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.21 (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999, (b) second Amended Revolving Note
dated October 25, 1999 and (c) Third Amended Revolving Note
dated December 6, 1999.
10.22 Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive.
10.23 Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled)
10.24 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard.
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled)
10.26 Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholders' Agreement.
10.27 Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997.
10.28 Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company.+*
10.29 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc.
10.30 Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc.
10.31 Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc.
10.32 Cooperative Research and Development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated
August 4, 1999.
10.33 Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999.*
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Form letter from eMerge Interactive, Inc. to holders of more
than 100 shares of Safeguard Scientifics, Inc. describing
the Safeguard 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 Safeguard Subscription Program.
99.4 Form of Subscription Form for Safeguard Subscription
Program.
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We have requested confidential treatment of certain provisions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has
been filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 1.1
DRAFT 1/20/00
4,500,000 SHARES
eMERGE INTERACTIVE, INC.
CLASS A COMMON STOCK, PAR VALUE $.008 PER SHARE
UNDERWRITING AGREEMENT
DATED FEBRUARY __, 2000
<PAGE> 2
February __, 2000
Adams, Harkness & Hill, Inc.
First Union Capital Markets Corp.
FAC/Equities, a division of First Albany Corporation
As Representatives of the several Underwriters
c/o Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Ladies and Gentlemen:
Introduction. eMerge Interactive, Inc., a Delaware corporation (the
"COMPANY"), proposes to issue and sell to the several underwriters named in
Schedule A hereto (the "UNDERWRITERS"), and certain stockholders of the Company
(the "SELLING STOCKHOLDERS") named in Schedule B hereto severally propose to
sell to the several Underwriters, an aggregate of 4,500,000 shares of the class
A common stock, par value $.008 per share, of the Company (the "FIRM Shares"),
of which 3,694,000 shares are to be issued and sold by the Company and 806,000
shares are to be sold by the Selling Stockholders, with each Selling Stockholder
selling the number of shares set forth opposite such Selling Stockholder's name
in Schedule B hereto.
The Company also proposes to issue and sell to the several
Underwriters not more than an additional 675,000 shares of its class A common
stock, par value $.008 per share (the "ADDITIONAL SHARES"), if and to the extent
that you shall have determined to exercise, on behalf of the Underwriters, the
right to purchase such shares of common stock granted to the Underwriters in
Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "SHARES". The shares of class A common stock,
par value $.008 per share, of the Company to be outstanding after giving effect
to the sales contemplated hereby are hereinafter referred to as the "COMMON
STOCK". The Company and the Selling Stockholders are hereinafter sometimes
collectively referred to as the "SELLERS". Adams, Harkness & Hill, Inc., First
Union Capital Markets Corp., and FAC/Equities, a division of First Albany
Corporation have agreed to act as representatives of the several Underwriters
(in such capacity, the "REPRESENTATIVES") in connection with the offering and
sale of the Shares.
In addition to the Firm Shares, the Company proposes to issue
and sell, and a certain stockholder of the Company proposes to sell, an
aggregate of 3,500,000 shares (the "SSP SHARES") of Common Stock directly to
certain stockholders of Safeguard Scientifics, Inc. (or, if all such shares are
not so purchased, to Safeguard Scientifics, Inc.).
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement on Form S-1 (file no.
333-89815), including a prospectus, relating to the Shares. The registration
statement as amended at the time it becomes effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended
(the "SECURITIES ACT") is hereinafter referred to as the "REGISTRATION
STATEMENT"; the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed a
registration statement to register additional shares of Common Stock pursuant to
Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"),
then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed
to include such Rule 462 Registration Statement. All
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<PAGE> 3
references in this Agreement to the Registration Statement, the Rule 462
Registration Statement, a preliminary prospectus, the Prospectus, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
As part of the offering contemplated by this Agreement, Adams
Harkness & Hill, Inc. has agreed to reserve, out of the Shares set forth
opposite its name on Schedule A to this Agreement, up to 350,000 Shares, for
sale to the Company's employees, officers and directors and other parties
associated with the Company (collectively, "PARTICIPANTS"), as set forth in the
Prospectus under the heading "Plan of Distribution" (the "COMPANY FRIENDS
Program"). Adams Harkness & Hill, Inc. has also agreed to reserve, out of the
Shares set forth opposite its name on Schedule A to this Agreement, up to
700,000 Shares, for sale to certain identified investors (the "IDENTIFIED
INVESTORS"), as set forth in the Prospectus under the heading "Plan of
Distribution". The Shares to be sold by Adams, Harkness & Hill, Inc. pursuant to
the Company Friends Program (the "COMPANY FRIENDS SHARES") and the Shares to be
sold by Adams, Harkness & Hill, Inc. to the Identified Investors (the
"IDENTIFIED INVESTORS SHARES") will be sold by Adams, Harkness & Hill, Inc.
pursuant to this Agreement at the Public Offering Price (as defined below). Any
Company Friends Shares and Identified Investors Shares not orally confirmed for
purchase by any Participants or Identified Investors by the end of the first
business day after the date on which this Agreement is executed will be offered
to the public by Adams, Harkness & Hill, Inc. as set forth in the Prospectus.
The Company Friends Program and the sales of Identified Investors Shares are
separate and apart from the Safeguard Subscription Program (i.e., the program
used by the Company to issue and sell the SSP Shares) described in the
Prospectus under the heading "Plan of Distribution" and the sub-heading
"Safeguard Subscription Program".
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:
1.1. Effective Registration Statement. The Registration
Statement has become effective; no stop order suspending the effectiveness of
the Registration Statement is in effect, and no proceedings for such purpose are
pending before or threatened by the Commission.
1.2. Contents of Registration Statement. (i) The Registration
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions under the
heading "Plan of Distribution" in (i) the list of Underwriters and their
respective participation in the sale of Shares, (ii) the sentences related to
concessions and reallowances and (iii) the paragraphs related to stabilization,
syndicate covering transactions and penalty bids in the Registration Statement
or Prospectus.
1.3. Due Incorporation. The Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries.
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<PAGE> 4
1.4. Subsidiaries. Each subsidiary of the Company has been
duly incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries. All of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable, have been issued in
compliance with federal and state securities laws, and are owned directly by the
Company, free and clear of all liens, encumbrances, equities or claims.
1.5. No Prohibition on Subsidiaries Paying Dividends or Making
Other Distributions. No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus.
1.6. Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by the Company, and is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
1.7. Description of Capital Stock. The authorized capital
stock of the Company conforms to the description thereof contained in the
Prospectus. The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" (other than
for subsequent issuances, if any, pursuant to employee benefit plans described
in the Prospectus or upon exercise of outstanding options described in the
Prospectus). None of the outstanding Common Shares were issued in violation of
any preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no authorized or
outstanding options, warrants, preemptive rights, rights of first refusal or
other rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any of its
subsidiaries other than those described in the Prospectus. The description of
the Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted thereunder, set forth in the Prospectus
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
1.8. Authorized Stock. The shares of Common Stock (including
the Shares to be sold by the Selling Stockholders) outstanding prior to the
issuance of the Shares and the SSP Shares to be sold by the Company have been
duly authorized and are validly issued, fully paid and non-assessable and have
been issued in compliance with federal and state securities laws.
1.9. Validly Issued Shares. The Shares and the SSP Shares to
be sold by the Company have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and will be issued in compliance with federal and state
securities laws, and the issuance of such Shares will not be subject to any
preemptive or similar rights that have not been waived.
1.10. No Conflict. The execution and delivery by the Company
of, and the performance by the Company of its obligations under, this Agreement
will not conflict with, result in a breach or violation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its
4
<PAGE> 5
subsidiaries pursuant to any provision of applicable law or the charter or
by-laws of the Company or any of its subsidiaries or any agreement or other
instrument binding upon the Company or any of its subsidiaries, or any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over the Company or any subsidiary, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various states
in connection with the offer and sale of the Shares.
1.11. No Defaults or Violations. Neither the Company nor any
subsidiary is in violation or default of (i) any provision of its charter or
by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its property
is subject or (iii) any statute, law, rule, regulation, judgment, order or
decree of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or such
subsidiary or any of its properties, as applicable, except any such violation or
default which would not, singly or in the aggregate, result in a material
adverse change and except as otherwise disclosed in the Prospectus.
1.12. No Material Adverse Change. There has not occurred any
material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries from that set forth
in the Prospectus (exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement).
1.13. Independent Accountants. KPMG LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) and supporting schedules
filed with the Commission as a part of the Registration Statement and included
in the Prospectus, are independent public or certified public accountants as
required by the Securities Act.
1.14. Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company and its subsidiaries as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement present fairly the
information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Financial Data",
"Selected Consolidated Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
1.15. Legal Proceedings; Exhibits. There are no legal or
governmental proceedings pending or threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
1.16. Compliance with Securities Act. Each preliminary
prospectus filed as part of the registration statement as originally filed or as
part of any amendment thereto, or filed pursuant to Rule 424 under the
Securities Act, complied when so filed in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder.
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<PAGE> 6
1.17. Not an Investment Company. The Company is not and, after
giving effect to the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
1.18. Compliance with Laws. The Company and its subsidiaries
(i) are in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("ENVIRONMENTAL Laws"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, individually or in the
aggregate, have a material adverse effect on the Company and its subsidiaries.
1.19. No Environmental Costs. There are no costs or
liabilities associated with Environmental Laws (including, without limitation,
any capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) which would, individually or in the aggregate,
have a material adverse effect on the Company and its subsidiaries.
1.20. No Registration Rights. There are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company or to require
the Company to include such securities with the Shares registered pursuant to
the Registration Statement other than as described in the Registration Statement
and as have been waived in writing in connection with the offering contemplated
hereby.
1.21. Cuban Business Statute. The Company has complied with
all provisions of Section 517.075, Florida Statutes relating to doing business
with the Government of Cuba or with any person or affiliate located in Cuba.
1.22. Absence of Material Charges. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, (1) the Company and its subsidiaries have not incurred any
material liability or obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business; (2) the Company and
the subsidiaries have not repurchased or redeemed any of their outstanding
capital stock, nor declared, paid or otherwise made any dividend or distribution
of any kind on their capital stock, except for dividends paid to the Company;
and (3) there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its subsidiaries, except in each case
as described in the Prospectus.
1.23. Good Title to Properties. The Company and its
subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
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<PAGE> 7
1.24. Tax Law Compliance. The Company and its subsidiaries
have filed all necessary federal, state and foreign income and franchise tax
returns and have paid all taxes required to be paid by any of them and, if due
and payable, any related or similar assessment, fine or penalty levied against
any of them. The Company has made adequate charges, accruals and reserves in the
applicable financial statements referred to in Section 1.14 above in respect of
all federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries from that
set forth in the Prospectus.
1.25. Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights to or under all patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently in
connection with the business now operated by them or proposed to be operated by
them as described in the Prospectus, and neither the Company nor any of its
subsidiaries is infringing or is in conflict with, or has received any notice of
infringement of or conflict with, asserted rights of others with respect to any
of the foregoing. The Company has no knowledge of any infringement of or
conflict with asserted rights of the Company or its subsidiaries by others with
respect to any patents, patent rights, copyrights, know-how, trademarks, service
marks or trade names. There is no claim being made against the Company or any
subsidiary regarding patents, patent rights, licenses, inventions, copyrights,
know-how, trademarks, service marks or trade names. The Company and its
subsidiaries will not in the conduct the business proposed to be operated by
them as described in the Prospectus infringe or conflict with patents, patent
rights, licenses, inventions, copyrights, know-how, trademarks, service marks or
trade names of any other party.
1.26. No Labor Disputes. No material labor dispute with the
employees of the Company or any of its subsidiaries exists, or, to the knowledge
of the Company, is imminent; and the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could have a material
adverse effect on the Company and its subsidiaries.
1.27. Insurance. The Company and its subsidiaries are insured
by the insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the Company and its subsidiaries.
1.28. Governmental Permits. The Company and its subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective business, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company and its subsidiaries.
1.29. Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (1) transactions are executed in accordance
with management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability; (3) access to assets is permitted only in accordance with
management's
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<PAGE> 8
general or specific authorization; and (4) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
1.30. Year 2000 Compliance. The Company has reviewed its
operations and that of its subsidiaries and any third parties with which the
Company or any of its subsidiaries has a material relationship to evaluate the
extent to which the business or operations of the Company or its subsidiaries
will be affected by the Year 2000 Problem. As a result of such review, the
Company has no reason to believe, and does not believe, that the Year 2000
Problem will have a material adverse effect on the Company and its subsidiaries,
or result in any material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any significant risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
1.31. Lock-up Agreements. Each person listed on Schedule C
hereto has signed an agreement substantially in the form attached hereto as
Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for
the Underwriters a complete and accurate list of all securityholders of the
Company and the number and type of securities held by each securityholder. The
Company has provided to counsel for the Underwriters true, accurate and complete
copies of all of the Lock-up Agreements presently in effect or effected hereby.
The Company hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of Adams,
Harkness & Hill, Inc.
1.32. Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus that
have not been described as required.
1.33. Company Friends Program. The Company represents and
warrants to Adams, Harkness & Hill, Inc. that (i) the Registration Statement,
the Prospectus and any preliminary prospectus comply, and any further amendments
or supplements thereto will comply, with any applicable laws or regulations of
foreign jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with the
Company Friends Program, and that (ii) no authorization, approval, consent,
license, order, registration or qualification of or with any government,
governmental instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign jurisdictions in
which the Company Friends Shares are offered outside the United States.
1.34. Compliance with Certain Laws. To the Company's
knowledge, the Company and its subsidiaries are conducting their business in
compliance with the Fair Labor Standards Act, the rules and regulations of the
federal Food and Drug Administration, and all applicable federal, state and
local laws, rules and regulations of the jurisdictions in which it is conducting
business, including, without limitation, all applicable local, state and federal
laws and regulations governing health, sanitation, safety, the purchase and sale
of alcoholic beverages (including, but not limited to, liquor licenses, "tied
house" statutes and "dram shop" statutes), environmental matters, zoning and
land use, except where the failure to be so in compliance would not have a
material adverse effect on the Company and its subsidiaries.
2. Representations and Warranties of the Selling Stockholders.
Each of the Selling Stockholders represents and warrants to and agrees with each
of the Underwriters that:
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2.1. Due Authorization. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
2.2. Selling Stockholder Documents. The Custody Agreement and
the Power of Attorney have been duly authorized, executed and delivered by such
Selling Stockholder and are valid and binding agreements of such Selling
Stockholder enforceable in accordance with their respective terms, except as
rights to indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
2.3. No Conflict. The execution and delivery by such Selling
Stockholder of, and the performance by such Selling Stockholder of its
obligations under, this Agreement, the Custody Agreement signed by such Selling
Stockholder and ____________, as Custodian, relating to the deposit of the
Shares to be sold by such Selling Stockholder (the "CUSTODY AGREEMENT") and the
Power of Attorney appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "POWER OF ATTORNEY")
will not contravene any provision of applicable law, or the applicable charter
documents or by-laws of such Selling Stockholder (if such Selling Stockholder is
an entity), or any agreement or other instrument binding upon such Selling
Stockholder or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Stockholder, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by such Selling Stockholder of
its obligations under this Agreement or the Custody Agreement or Power of
Attorney of such Selling Stockholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares.
2.4. Validly Issued Shares. The Shares to be sold by such
Selling Stockholder pursuant to this Agreement have been duly authorized and are
validly issued, fully paid and non-assessable.
2.5. Good Title to Shares. Such Selling Stockholder has, and
on each Closing Date will have, valid title to the Shares to be sold by such
Selling Stockholder and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement, the Custody Agreement
and the Power of Attorney and to sell, transfer and deliver the Shares to be
sold by such Selling Stockholder.
2.6. Delivery of Common Shares. Delivery of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement will pass title to
such Shares free and clear of any security interests, claims, liens, equities
and other encumbrances.
2.7. No Registration Rights. Such Selling Stockholder does not
have any registration or other similar rights to have any equity or debt
securities registered for sale by the Company under the Registration Statement
or included in the offering contemplated by this Agreement, other than as
described in the Registration Statement and as have been waived in writing in
connection with the offering contemplated hereby.
2.8. No Price Stabilization or Manipulation. Such Selling
Stockholder has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
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2.9. Confirmation of Company Representations and Warranties.
Such Selling Stockholder has no reason to believe that the representations and
warranties of the Company contained in Section 1 hereof are not true and
correct, is familiar with the Registration Statement and the Prospectus and has
no knowledge of any material fact, condition or information not disclosed in the
Registration Statement or the Prospectus which has had or may have a material
adverse effect on the Company and its subsidiaries, and is not prompted to sell
any of the Shares by any information concerning the Company which is not set
forth in the Registration Statement and the Prospectus.
3. Purchase and Sale Agreements.
3.1. Firm Shares. Each Seller, severally and not jointly,
hereby agrees to sell to the several Underwriters, and each Underwriter, upon
the basis of the representations and warranties herein contained, but subject to
the conditions hereinafter stated, agrees, severally and not jointly, to
purchase from such Seller at $______ a share (the "PURCHASE PRICE") the number
of Firm Shares (subject to such adjustments to eliminate fractional shares as
you may determine) that bears the same proportion to the number of Firm Shares
to be sold by such Seller as the number of Firm Shares set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
3.2. Additional Shares. On the basis of the representations
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to sell to the Underwriters, and the Underwriters
shall have a one-time right to purchase, up to 675,000 Additional Shares at the
Purchase Price. If you, on behalf of the Underwriters, elect to exercise such
option, you shall so notify the Company in writing not later than thirty (30)
days after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the Underwriters and the date on which such
shares are to be purchased. Such date may be the same as the Closing Date (as
defined below) but not earlier than the Closing Date nor later than ten (10)
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule A hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
3.3. Market Standoff Provision. Each Seller hereby agrees
that, without the prior written consent of Adams, Harkness & Hill, Inc., it will
not, during the period ending 180 days after the date of the Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder or (B) the issuance by the Company of
shares of Common Stock upon the exercise of options or warrants or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing and which is described in the
Prospectus. In addition, each Selling Stockholder, agrees that, without the
prior written consent of Adams, Harkness & Hill, Inc., it will not, during the
period ending 180 days after the date of the Prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
3.4. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration
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Statement and this Agreement have become effective as in your judgment is
advisable. The Sellers are further advised by you that the Shares are to be
offered to the public initially at $_____________ a share (the "PUBLIC OFFERING
PRICE") and to certain dealers selected by you at a price that represents a
concession not in excess of $______ a share under the Public Offering Price, and
that any Underwriter may allow, and such dealers may reallow, a concession, not
in excess of $_____ a share, to any Underwriter or to certain other dealers.
3.5. Management Fee. On the Closing Date (as defined below),
the Company shall pay the Representatives a management fee (the "SSP MANAGEMENT
FEE") in respect of the Safeguard Subscription Program described in the
Prospectus equal to 2.8% of the product of (x) 3,500,000 and (y) $______.
4. Payment and Delivery.
4.1. Firm Shares. Payment for the Firm Shares to be sold by
each Seller shall be made to such Seller in immediately available funds against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ________, 2000, or at such
other time on the same or such other date, not later than _________, 2000, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE". The Representatives shall deduct
from the payment for the Firm Shares made to the Company the SSP Management Fee
specified in Section 3.5.
4.2. Additional Shares. Payment for any Additional Shares
shall be made to the Company in immediately available funds in New York City
against delivery of such Additional Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on the date specified in
the notice described in Section 3(b) or at such other time on the same or on
such other date, in any event not later than _______, 2000, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "OPTION CLOSING DATE".
4.3. Delivery of Certificates. Certificates for the Firm
Shares and Additional Shares shall be in definitive form and registered in such
names and in such denominations as you shall request in writing not later than
one (1) full business day prior to the Closing Date or the Option Closing Date,
as the case may be. The certificates evidencing the Firm Shares and Additional
Shares shall be delivered to you on the Closing Date or the Option Closing Date,
as the case may be, for the respective accounts of the several Underwriters,
with any transfer taxes payable in connection with the transfer of the Shares to
the Underwriters duly paid, against payment of the Purchase Price therefor.
5. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
5.1. Furnish Copies of Registration Statement and Prospectus.
To furnish to you, without charge, four signed copies of the Registration
Statement (including exhibits thereto) and for delivery to each other
Underwriter a conformed copy of the Registration Statement (without exhibits
thereto) and to furnish to you in New York City, without charge, prior to 10:00
a.m. New York City time on the business day next succeeding the date of this
Agreement and during the period mentioned in Section 5(c) below, as many copies
of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
5.2. Notification of Amendments or Supplements. Before
amending or supplementing the Registration Statement or the Prospectus, to
furnish to you a copy of each such proposed amendment or supplement and not to
file any such proposed amendment or supplement to which you reasonably object,
and
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to file with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed pursuant to
such rule.
5.3. Filings of Amendments or Supplements. If, during such
period after the first date of the public offering of the Shares as in the
opinion of counsel for the Underwriters the Prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer (the "PROSPECTUS
DELIVERY PERIOD"), any event shall occur or condition exist as a result of which
it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
5.4. Blue Sky Laws. To endeavor to qualify the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
you shall reasonably request.
5.5. Earnings Statement. To make generally available to its
securityholders as soon as practicable, but in any event not later than eighteen
(18) months after the effective date of the Registration Statement (as defined
in Rule 158(c) under the Securities Act), an earnings statement of the Company
and its subsidiaries (which need not be audited) complying with Section 11(a) of
the Securities Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158).
5.6. Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Shares sold by it substantially in the manner described
under the caption "Use of Proceeds" in the Prospectus.
5.7. Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
5.8. Periodic Reporting Obligations. During the Prospectus
Delivery Period, the Company shall file, on a timely basis, with the Commission
and the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall file with the Commission
such information on Form 10-Q or Form 10-K as may be required by Rule 463 under
the Securities Act.
5.9. Company Friends Program. That in connection with the
Company Friends Program, the Company will ensure that the Company Friends Shares
will be restricted to the extent required by the National Association of
Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three (3) months following
the date of the effectiveness of the Registration Statement. Adams, Harkness &
Hill, Inc. will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time. Furthermore, the
Company covenants with Adams, Harkness & Hill, Inc. that the Company will comply
with all applicable securities and other applicable laws, rules and regulations
in each foreign jurisdiction in which the Company Friends Shares are offered in
connection with the Company Friends Program.
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5.10. Exchange Act Compliance. During the Prospectus Delivery
Period, the Company will file all documents required to be filed with the
Commission pursuant to Section 13, 14 or 15 of the Exchange Age in the manner
and within the time periods required by the Exchange Act.
6. Conditions to the Underwriters' Obligations. The
obligations of the Sellers to sell the Shares to the several Underwriters and
the several obligations of the Underwriters to purchase and pay for the Shares
on the Closing Date are subject to the following conditions:
6.1. Effective Registration Statement. The Registration
Statement shall have become effective not later than 10:00 a.m. (New York City
time) on the date hereof.
6.2. Rule 462 Registration Statement. If the Company elects to
rely upon Rule 462(b), the Company shall file a Rule 462 Registration Statement
with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule 462 Registration
Statement or give irrevocable instructions for the payment of such fee pursuant
to Rule 111(b) under the Securities Act.
6.3. Prospectus Filed with Commission. The Company shall have
filed the Prospectus with the Commission (including the information required by
Rule 430A under the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company shall have
filed a post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment shall
have become effective.
6.4. No Stop Order. No stop order suspending the effectiveness
of the Registration Statement, any Rule 462 Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect and
no proceedings for such purpose shall have been instituted or threatened by the
Commission.
6.5. No NASD Objection. The NASD shall have raised no
objection to the fairness and reasonableness of the underwriting terms and
arrangements.
6.6. No Debt Downgrading. There shall not have occurred any
downgrading, nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating organization," as
such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
6.7. No Material Adverse Change. There shall not have occurred
any change, or any development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries from that set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this Agreement)
that, in your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
6.8. Officer's Certificate. The Underwriters shall have
received on the Closing Date a certificate, dated the Closing Date and signed by
the Chief Executive Officer or President of the Company, to the effect set forth
in Sections 6.4 and 6.7 above and to the effect that the representations and
warranties of the Company contained in this Agreement are true and correct as of
the Closing Date and that the Company has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
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6.9. Opinion of Company Counsel. The Underwriters shall have
received on the Closing Date an opinion of Morgan, Lewis & Bockius LLP, counsel
for the Company, dated the Closing Date, in a form acceptable to the
Representatives. The opinion shall be rendered to the Underwriters at the
request of the Company and shall so state therein.
6.10. Opinion of Selling Stockholders Counsel. The
Underwriters shall have received on the Closing Date an opinion of Morgan, Lewis
& Bockius LLP, counsel for the Selling Stockholders, dated the Closing Date, in
a form acceptable to the Representatives. The opinion shall be rendered to the
Underwriters at the request of the Selling Stockholders and shall so state
therein.
6.11. Opinion of Underwriters Counsel. The Underwriters shall
have received on the Closing Date an opinion of Hale and Dorr LLP, counsel for
the Underwriters, dated the Closing Date, in a form acceptable to the
Representatives.
6.12. Accountant's Comfort Letter. The Underwriters shall have
received, on each of the date hereof and the Closing Date, a letter dated the
date hereof or the Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from KPMG LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus; provided that the letter delivered on the Closing
Date shall use a "cut-off date" not earlier than the date hereof.
6.13. Lock-Up Agreements. The Lock-up Agreements shall be in
full force and effect on the Closing Date.
6.14. Selling Stockholders Certificate. The Underwriters shall
have received on the Closing Date a certificate, dated the Closing Date and
signed by the Attorney-in-Fact of each Selling Stockholder, to the effect that
the representations and warranties of such Selling Stockholders contained in
this Agreement are true and correct as of the Closing Date and that such Selling
Stockholders have complied with all of the agreements and satisfied all of the
conditions on their part to be performed or satisfied hereunder on or before the
Closing Date.
6.15. Selling Stockholder Documents. On the date hereof, the
Company and the Selling Stockholders shall have furnished for review by the
Representatives copies of the Powers of Attorney and Custody Agreements executed
by each of the Selling Stockholders and such further information, certificates
and documents as the Representatives may reasonably request.
6.16. Additional Documents. On the Closing Date, the
Representatives and counsel for the Underwriters shall have received such
information, documents and opinions as they may reasonably require for the
purposes of enabling them to pass upon the issuance and sale of the Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the conditions or
agreements, herein contained.
6.17. Payment for the SSP Shares. The Company shall have
received payment in full for the SSP Shares at the Public Offering Price prior
to the purchase of the Firm Stock.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction of each of the above
conditions on or prior to the Option Closing Date and to the delivery to you on
the Option Closing Date of such documents as you may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Additional Shares and other matters related to the issuance of the
Additional Shares.
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7. Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Sellers
agree to pay or cause to be paid all expenses incident to the performance of
their obligations under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel, the Company's accountants and counsel for
the Selling Stockholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or legal investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
contemplated by Section 5(d) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or legal investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the NASD, (v) all fees and
expenses in connection with the preparation and filing of the registration
statement on Form 8-A relating to the Common Stock and all costs and expenses
incident to listing the Shares on the Nasdaq National Market, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and charges of
any transfer agent, registrar or depositary, (viii) the costs and expenses of
the Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, (ix) all expenses in connection with any offer and sale of the Shares
outside of the United States, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with offers and
sales outside of the United States, (x) all reasonable fees and disbursements of
counsel incurred by the Underwriters in connection with the Company Friends
Program and stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Company Friends Program and
(xi) all other costs and expenses incident to the performance of the obligations
of the Company hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this Section,
Section 8 entitled "Indemnity and Contribution", and the last paragraph of
Section 11 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel and any advertising expenses
connected with any offers they may make.
The provisions of this Section shall not supersede or
otherwise affect any agreement that the Sellers may otherwise have for the
allocation of such expenses among themselves.
8. Indemnity and Contribution.
8.1. Indemnification of the Underwriters. The Company agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue
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statement or omission or alleged untrue statement or omission contained under
the heading "Plan of Distribution" in (i) the list of Underwriters and their
respective participation in the sale of Shares, (ii) the sentences related to
concessions and reallowances and (iii) the paragraphs related to stabilization,
syndicate covering transactions and penalty bids in such Registration Statement,
amendment, preliminary prospectus or Prospectus (as amended or supplemented, if
applicable).
8.2. Indemnification of Company by the Selling Stockholders.
Each Selling Stockholder agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
8.3. Indemnification of Underwriters by Selling Stockholders.
Each Selling Stockholder agrees, severally and not jointly, to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to information relating to such
Selling Stockholder furnished in writing by or on behalf of such Selling
Stockholder expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
8.4. Indemnification by the Underwriters. Each Underwriter
agrees, severally and not jointly, to indemnify and hold harmless the Company,
the Selling Stockholders, the directors of the Company, the officers of the
Company who sign the Registration Statement and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with reference
to information relating to such Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto. Each of the Company and the Selling Stockholders hereby acknowledge
that the only information that the Underwriters have furnished to the Company
and the Selling Stockholders expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto is the information under the heading "Plan of Distribution" in (i) the
list
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of Underwriters and their respective participation in the sale of Shares, (ii)
the sentences related to concessions and reallowances and (iii) the paragraphs
related to stabilization, syndicate covering transactions and penalty bids in
such Registration Statement, preliminary prospectus, Prospectus or amendments or
supplements thereto.
8.5. Indemnification Procedures. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to this Section 8,
such person (the "INDEMNIFIED PARTY") shall promptly notify the person against
whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (i) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all Selling Stockholders and all persons, if any, who control
any Selling Stockholder within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Adams, Harkness &
Hill, Inc. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Stockholders and such control persons of any Selling Stockholders,
such firm shall be designated in writing by the persons named as
attorneys-in-fact for the Selling Stockholders under the Powers of Attorney. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 8.7 hereof in respect of such action
or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not
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<PAGE> 18
more than one separate firm (in addition to any local counsel) for Adams,
Harkness & Hill, Inc. for the defense of any losses, claims, damages and
liabilities arising out of the Company Friends Program, and all persons, if any,
who control Adams, Harkness & Hill, Inc. within the meaning of either Section 15
of the Act or Section 20 of the Exchange Act.
8.6. Limitation of Selling Stockholder Liability. The
liability of each Selling Stockholder under the indemnity and contribution
provisions of this Section 8 shall be limited to an amount equal to the initial
Public Offering Price of the Shares sold by such Selling Stockholder, less the
underwriting discount, as set forth on the front cover page of the Prospectus.
The Company and the Selling Stockholders may agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
8.7. Indemnification for Company Friends Program. The Company
agrees to indemnify and hold harmless Adams, Harkness & Hill, Inc. and each
person, if any, who controls Adams, Harkness & Hill, Inc. within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("ADAMS, HARKNESS & HILL Entities"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Company Friends Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in conjunction with the
Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the shares
which, immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Company Friends Program, provided
that, the Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Adams, Harkness & Hill Entities.
8.8. Indemnification for Safeguard Subscription Program. The
Company agrees to indemnify and hold harmless the Underwriters and each person,
if any, who controls any Underwriter within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any written material
prepared by or with the consent of the Company or Safeguard Scientifics, Inc.
for distribution in connection with the Safeguard Subscription Program, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading or (ii) related to, arising out of, or in connection with the
Safeguard Subscription Program.
8.9. Contribution Agreement. To the extent the indemnification
provided for in this Section 8 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such Section, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause 8.7 above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8.7 above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions that
18
<PAGE> 19
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Sellers
on the one hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Shares (before deducting expenses)
received by each Seller and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Sellers on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 8 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
8.10. Contribution Amounts. The Sellers and the Underwriters
agree that it would not be just or equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8.7. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 8 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
8.11. Survival of Provisions. The indemnity and contribution
provisions contained in this Section 8 and the representations, warranties and
other statements of the Company and the Selling Stockholders contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, any Selling
Stockholder or any person controlling any Selling Stockholder, or the Company,
its officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Shares. A successor to any Underwriter,
or to the Company, its directors or officers, or any person controlling the
Company, shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
9. Effectiveness. This Agreement shall become effective upon
the execution and delivery hereof by the parties hereto.
10. Termination. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York, Delaware or California shall have
been declared by either federal or New York, Delaware or California state
authorities or (iv) there shall have occurred any outbreak or escalation of
hostilities or any change in financial markets or
19
<PAGE> 20
any calamity or crisis that, in your judgment, is material and adverse, or (v)
in the judgment of the Representatives, there shall have occurred any material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries and (b) in the case of any of the events specified in clauses
10(a)(i) through 10(a)(v), such event, individually or together with any other
such event, makes it, in your judgment, impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
11. Defaulting Underwriters. If, on the Closing Date or the
Option Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Shares that it has or they have agreed to
purchase hereunder on such date, and the aggregate number of Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of the Shares to be purchased
on such date, the other Underwriters shall be obligated severally in the
proportions that the number of Firm Shares set forth opposite their respective
names in Schedule A bears to the aggregate number of Firm Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as you may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Shares that any Underwriter
has agreed to purchase pursuant to this Agreement be increased pursuant to this
Section 11 by an amount in excess of one-ninth of such number of Shares without
the written consent of such Underwriter. If, on the Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you, the Company and the Selling Stockholders for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders. In any such
case either you or the relevant Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven (7) days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased, the non-defaulting Underwriters shall have
the option to (i) terminate their obligation hereunder to purchase Additional
Shares or (ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of any Seller to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason any Seller shall be unable to perform its obligations under
this Agreement, the Sellers will reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Headings; Table of Contents. The headings of the sections
of this Agreement and the table of contents have been inserted for convenience
of reference only and shall not be deemed a part of this Agreement.
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<PAGE> 21
14. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) -
Attention:
with a copy to:
Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
Facsimile: (617)
Attention: General Counsel
If to the Company:
eMerge Interactive, Inc.
10315 102nd Terrace
Sebastian Florida 32958
Facsimile: (561) 589-3779
Attention: Chief Executive Officer
If to the Selling Stockholders:
[Custodian]
[address]
Facsimile: [___________]
Attention: [___________]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
15. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 8, and in each case their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
16. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
21
<PAGE> 22
18. Consent to Jurisdiction. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("RELATED PROCEEDINGS") may be instituted in the federal
courts of the United States of America located in the City of Boston and County
of Suffolk or the courts of the Commonwealth of Massachusetts in each case
located in the City of Boston and County of Suffolk (collectively, the
"SPECIFIED COURTS"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the enforcement of
a judgment of any such court (a "RELATED JUDGMENT"), as to which such
jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such suit, action or other proceeding brought in any such court has been brought
in an inconvenient forum. Each party not located in the United States
irrevocably appoints CT Corporation System, which currently maintains a Boston
office at 2 Oliver Street, Boston, Massachusetts 02109, United States of
America, as its agent to receive service of process or other legal summons for
purposes of any such suit, action or proceeding that may be instituted in any
state or federal court in the City of Boston and County of Suffolk.
19. Waiver of Immunity. With respect to any Related
Proceeding, each party irrevocably waives, to the fullest extent permitted by
applicable law, all immunity (whether on the basis of sovereignty or otherwise)
from jurisdiction, service of process, attachment (both before and after
judgment) and execution to which it might otherwise be entitled in the Specified
Courts, and with respect to any Related Judgment, each party waives any such
immunity in the Specified Courts or any other court of competent jurisdiction,
and will not raise or claim or cause to be pleaded any such immunity at or in
respect of any such Related Proceeding or Related Judgement, including, without
limitation, any immunity pursuant to the United States Foreign Sovereign
Immunities Act of 1976, as amended.
20. Failure of the Selling Stockholders to Sell and Deliver
Shares. If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Shares to be sold and delivered by such Selling
Stockholders at the Closing Date pursuant to this Agreement, then the
Underwriters may at their option, by written notice from the Representatives to
the Company and the Selling Stockholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 7 and 8 hereof, the Company or the Selling Stockholders, or (ii)
purchase the shares which the Company and other Selling Stockholders have agreed
to sell and deliver in accordance with the terms hereof. If one or more of the
Selling Stockholders shall fail to sell and deliver to the Underwriters the
Shares to be sold and delivered by such Selling Stockholders pursuant to this
Agreement at the Closing Date or the Option Closing Date, then the Underwriters
shall have the right, by written notice from the Representatives to the Company
and the Selling Stockholders, to postpone the Closing Date or the Option Closing
Date, as the case may be, but in no event for longer than seven (7) days in
order that the required changes, if any, to the Registration Statement and the
Prospectus or any other documents or arrangements may be effected.
21. Entire Agreement. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof.
22. Amendments. This Agreement may only be amended or modified
in writing, signed by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition is meant to benefit.
23. Sophisticated Parties. Each of the parties hereto
acknowledges that it is a sophisticated business person who was adequately
represented by counsel during negotiations regarding the
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<PAGE> 23
provisions hereof, including, without limitation, the indemnification and
contribution provisions of Section 8, and is fully informed regarding said
provisions. Each of the parties hereto further acknowledges that the provisions
of Section 8 hereto fairly allocate the risks in light of the ability of the
parties to investigate the Company, its affairs and its business in order to
assure that adequate disclosure has been made in the Registration Statement, any
preliminary prospectus and the Prospectus (and any amendments and supplements
thereto), as required by the Securities Act and the Exchange Act.
[Remainder of page intentionally left blank]
23
<PAGE> 24
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
eMerge Interactive, Inc.
By:
Name:
Title:
The Selling Stockholders
named in Schedule B hereto,
acting severally
By:
Attorney-in-Fact
Accepted as of the date hereof
Adams, Harkness & Hill, Inc.
First Union Capital Markets Corp.
FAC/Equities, a division of First Albany Corporation
Acting severally on behalf
of themselves and the several
Underwriters named in
Schedule A hereto.
By: Adams, Harkness & Hill, Inc.
By:
Name:
Title:
24
<PAGE> 25
SCHEDULE A
UNDERWRITER NUMBER OF FIRM
SHARES
TO BE PURCHASED
Adams, Harkness & Hill, Inc.
First Union Capital Markets Corp.
FAC Equities, a division of First Albany Corporation
Total
25
<PAGE> 26
SCHEDULE B
SELLING STOCKHOLDER NUMBER OF FIRM SHARES
TO BE SOLD
XL Vision, Inc. 500,000
Technology Leaders II 150,000
Technology Leaders I 150,000
Richard Stanley 6,000
Total 806,000
26
<PAGE> 27
SCHEDULE C
[LIST OF PERSONS EXECUTING LOCK-UP AGREEMENTS]
27
<PAGE> 28
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
October __, 1999
Adams, Harkness & Hill, Inc.
First Union Capital Markets Corp.
FAC/Equities, a division of First Albany Corporation
As Representatives of the several Underwriters
c/o Adams, Harkness & Hill, Inc.
60 State Street
Boston, Massachusetts 02109
RE: LOCK-UP AGREEMENT (THE "AGREEMENT")
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of
certain shares of the common stock, $.01 par value per share (the "COMMON
STOCK"), of eMerge Interactive, Inc., a Delaware corporation (the "Company"), or
securities convertible into or exchangeable or exercisable for Common Stock. The
undersigned understands that you, as representatives (the "REPRESENTATIVES"),
propose to enter into an Underwriting Agreement, on behalf of the several
Underwriters named in Schedule A to such agreement (collectively, the
"UNDERWRITERS"), with the Company providing for a public offering of Common
Stock pursuant to a Registration Statement on Form S-1 to be filed with the
Securities and Exchange Commission (the "PUBLIC OFFERING"). The undersigned
recognizes that the Public Offering will be of benefit to the undersigned and
will benefit the Company by, among other things, raising additional capital for
its operations. The undersigned acknowledges that you and the other Underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Public Offering and in entering into
underwriting arrangements with the Company with respect to the Public Offering.
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Adams,
Harkness & Hill, Inc. (which consent may be withheld in its sole discretion), it
will not, during the period commencing on the date hereof and ending 180 days
after the date of the final prospectus relating to the Public Offering (the
"PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, or (2) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. In addition, the
undersigned agrees that, without the prior written consent of Adams, Harkness &
Hill, Inc. (which consent may be withheld in its sole discretion), it will not,
during the period commencing on the date hereof and ending 180 days after the
date of the Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock. With respect to the Public
Offering, the undersigned waives any registration rights relating to
registration under the Securities Act of any Common Stock owned either of record
or beneficially by the undersigned, including any rights to receive notice of
the Public Offering.
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<PAGE> 29
The foregoing restrictions are expressly agreed to preclude
the undersigned from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a sale or disposition
of the Common Stock even if such Common Stock would be disposed of by someone
other than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale or any purchase, sale or grant of any
right (including without limitation any put option or put equivalent position or
call option or call equivalent position) with respect to any of the Common Stock
or with respect to any security that includes, relates to, or derives any
significant part of its value from such Common Stock.
Notwithstanding the foregoing, the undersigned may transfer
shares of Common Stock (i) as a bona fide gift or gifts, provided that the donee
or donees thereof agree to be bound by the restrictions set forth herein, (ii)
to any trust for the direct or indirect benefit of the undersigned or the
immediate family of the undersigned, provided that the trustee of the trust
agrees to be bound by the restrictions set forth herein, and provided further
that any such transfer shall not involve a disposition for value or (iii) to the
Underwriters pursuant to the Underwriting Agreement. For purposes of this
Agreement, "immediate family" shall mean any relationship by blood, marriage or
adoption, not more remote than first cousin. In addition, notwithstanding the
foregoing, if the undersigned is a corporation, the corporation may transfer the
capital stock of the Company to any wholly owned subsidiary of such corporation;
provided, however, that in any such case it shall be a condition to the transfer
that the transferee execute an agreement stating that the transferee is
receiving and holding such capital stock subject to the provisions of this
Agreement and there shall be no further transfer of such capital stock except in
accordance with this Agreement, and provided further that any such transfer
shall not involve a disposition for value.
The undersigned understands that whether or not the Public
Offering actually occurs depends on a number of factors, including stock market
conditions. The Public Offering will only be made pursuant to an Underwriting
Agreement, the terms of which are subject to negotiation among the Company and
the Underwriters.
The undersigned agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the
undersigned and the respective successors, heirs, personal representatives, and
assigns of the undersigned.
Very truly yours,
_______________________________
(Name)
_______________________________
(Address)
29
<PAGE> 1
EXHIBIT 1.2
STANDBY STOCK PURCHASE AGREEMENT
BY AND BETWEEN
SAFEGUARD SCIENTIFICS, INC.
AND
EMERGE INTERACTIVE, INC.
DATED JANUARY ________, 2000
<PAGE> 2
STANDBY STOCK PURCHASE AGREEMENT
THIS STANDBY STOCK PURCHASE AGREEMENT (the "Agreement") is made and
entered into on this January _______, 2000 between SAFEGUARD SCIENTIFICS, INC.,
a Pennsylvania corporation ("Safeguard"), and eMERGE INTERACTIVE, INC., a
Delaware corporation (the "Company").
BACKGROUND
A. The Company is contemplating an initial public offering (the "Public
Offering") of its class A common stock, par value $.008 per share (the "Common
Stock"), through an underwritten public offering lead by Adams Harkness & Hill,
Inc. as the representative of the several underwriters (the "Underwriters").
B. In connection with the Public Offering the Company will offer
2,806,000 shares of its class A common stock (the "SSP Shares") directly to the
shareholders of Safeguard pursuant to a share subscription program (the "SSP").
C. If and to the extent any of the SSP Shares are not subscribed for
or, if subscribed for, are not purchased by the shareholders of Safeguard under
the SSP, Safeguard has agreed to purchase all such SSP Shares directly from the
Company for its own account for investment purposes only on the terms and
subject to the conditions set forth herein.
D. In the event that the shareholders of Safeguard subscribe for more
shares of Common Stock than the number of SSP Shares, Safeguard will make an
offer of up to 694,000 shares of Common Stock owned by it prior to the Public
Offering (the "Safeguard eMerge Stock"), and the Safeguard Stock shall be
included in the SSP.
E. Chase Mellon Shareholder Services, L.L.C. ("Chase") will act as the
offering agent for the SSP and as the Company's transfer agent. The offering
agent will determine the record date shareholders eligible to participate in the
SSP and will collect subscriptions and subscription payments from eligible
Safeguard shareholders until 6:00 p.m. on the third business day following the
date the Company determines the initial public offering price for the Common
Stock.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, intending to be legally bound hereby, the parties
hereto hereby agree as follows:
<PAGE> 3
ARTICLE 1
THE TRANSACTION
1.1. Purchase and Purchase Price.
(a) In the event that nay of the SSP shares are not subscribed for
or, if subscribed for are not purchased by the shareholders of
Safeguard under the SSP, Safeguard shall, or shall cause its
wholly owned subsidiary Safeguard Delaware, Inc. to, purchase
these remaining shares.
(b) The purchase price for the SSP Shares (the "Purchase Price")
shall be equal to the product of multiplying (i) the aggregate
number of SSP Shares, by (ii) the price per share of Common
Stock sold pursuant to the Public Offering (the "IPO Price").
(c) Safeguard shall transfer or Safeguard shall cause Safeguard
Delaware, Inc. to transfer or shall cause Chase to pay out of
subsription funds received on behalf of Safeguard's
shareholders participating in the SPP, to the Company, an
amount equal to the Purchase Price on the day of the closing
of the Public Offering by wire transfer.
(d) In the event that the shareholders of Safeguard subscribe for
more shares of Common Stock than the number of SSP Shares,
Safeguard shall make an offer of the shares of Safeguard
eMerge Stock, and the shares of Safeguard eMerge Stock shall
be included in the SSP.
1.2. Closing.
(a) Time and Place. The closing under this Agreement (the
"Closing") will take place at _________, EST time, at the time
of the closing of the Public Offering, at the offices of
Morgan, Lewis & Bockius LLP, or at such other time, date or
place as the parties shall mutually agree. The date on which
the Closing occurs is sometimes referred to herein as the
"Closing Date."
(b) Deliveries and Proceedings to Offering Agent. On the Closing
Date, the Company shall instruct Chase to accept instructions
from Deirdre Blackburn, or her designee at Safeguard, for:
(i) delivery of the subscription funds collected by the
Offering Agent to the extent not paid to the Company at the
Closing;
(c) Deliveries and Proceedings to Transfer Agent. On the Closing
Date, the Company shall instruct Chase to accept instructions
from Deirdre Blackburn, or her designee at Safeguard, for:
(i) delivery of the shares of SSP Shares purchased in the SSP;
<PAGE> 4
(ii) delivery to Safeguard of the SSP Shares not purchased
by Safeguard shareholders; and
(iii) the return to Safeguard of any shares of Safeguard
eMerge Stock that were not purchased in the SSP.
(iv) Safeguard and the Company shall cause to be delivered
to the transfer agent a list indicating the names,
addresses and denominations for which certificates
representing the SSP Shares are to be completed. Any
person other than Safeguard for whom certificates are
to be prepared is referred to herein as a "SSP
Purchaser." The Company will instruct its transfer
agent and registrar to accept instructions from
Deirdre Blackburn, or her designee at Safeguard, with
a copy of such instructions to the Company, to
prepare certificates in accordance with such
instructions and deliver to each SSP certificates
evidencing the SSP Shares purchased by such SSP
Purchaser and the SSP Shares to Safeguard, if any, as
soon as practical. The Company agrees to cooperate
with Safeguard, including providing instructions to
the transfer and offering agents, such that
certificates are released to the purchasers of the
SSP Shares.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Safeguard as follows:
2.1 Organization. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
2.2. Power and Authority. The Company has full corporate power and authority
to make, execute, deliver and perform this Agreement and the
transactions contemplated hereby.
2.3. Authorization and Enforceability. The execution, delivery and
performance of this Agreement by the Company have been duly authorized
by all necessary corporate action on the part of the Company, and this
Agreement constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
ARTICLE 3
REPRESENTATION AND WARRANTIES OF SAFEGUARD
Safeguard represents and warrants to the Company as follows:
<PAGE> 5
3.1 Organization. Safeguard is a corporation duly incorporated, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania.
3.2. Power and Authority. Safeguard has full corporate power and authority
to make, execute, deliver and perform this Agreement and the
transactions contemplated hereby.
3.3. Authorization and Enforceability. The execution, delivery and
performance of this agreement by Safeguard have been duly authorized by
all necessary corporate action on the part of Safeguard, and this
Agreement constitutes the legal, valid and binding obligation of
Safeguard, enforceable against Safeguard in accordance with its terms.
3.4 Authorization and Approvals. All consents, approvals, authorizations
and orders necessary for the execution and delivery of this Agreement
and the sale and delivery of the shares of Safeguard eMerge Stock have
been obtained; and Safeguard, or an affiliate have full rights, power
and authority to enter into this Agreement and to sell the shares of
Safeguard eMerge Stock as provided hereunder.
3.5 Investment Intent. Safeguard represents, warrants and covenants that it
is acquiring the SSP Shares for its own account, as a long-term
investment, and not with the view to resale or redistribution. To that
end, Safeguard agrees it will retain and not sell, pledge, hypothecate
or otherwise transfer, directly or indirectly, any interest (beneficial
or otherwise) in the SSP Shares for a period of one year from the date
of the Closing.
ARTICLE 4
CONDITIONS TO CLOSING; TERMINATION
4.1 Conditions Precedent to Obligations of Safeguard. The obligations of
Safeguard to proceed with the Closing are subject to the fulfillment
prior to or at Closing of the following conditions (any one or more of
which may be waived in whole or in part by Safeguard at Safeguard's
option):
(a) Bringdown of Representations and Warranties. The
representations and warranties of the Company contained in
this Agreement shall be true and correct on and as of the time
of Closing, with the same force and effect as though such
representations and warranties had been made on, as of and
with reference to such time, and Safeguard shall have received
a certificate, signed by an executive officer of the Company,
to such effect.
(b) Performance and Compliance. The Company shall have performed
all of the covenants and complied with all of the provisions
required by this
<PAGE> 6
Agreement to be performed or complied with by it on or before
the Closing, and Safeguard shall have received a certificate,
signed by any vice president of the Company, to such effect.
(c) Public Offering. The Closing of the Public Offering shall have
occurred.
4.2. Conditions Precedent to the Obligations of the Company. The obligations
of the Company to proceed with the Closing hereunder are subject to the
fulfillment prior to or at Closing of the following conditions (any one
or more of which may be waived in whole or in part by the Company at
the Company's option):
(a) Bringdown of Representations and Warranties. The
representations and warranties of Safeguard contained in this
Agreement shall be true and correct on and as of the time of
Closing, with the same force and effect as though such
representations and warranties had been made on, as of and
with reference to such time, and Safeguard shall have
delivered to the Company a certificate, signed by an executive
officer of Safeguard, to such effect.
(b) Performance and Compliance. Safeguard shall have performed all
of the covenants and complied with all the provisions required
by this Agreement to be performed or complied with by it on or
before the Closing and Safeguard shall have delivered to the
Company a certificate, signed by any vice president of
Safeguard, to such effect.
(c) Public Offering. The closing of the Public Offering shall have
occurred.
4.3. Termination.
(a) When Agreement May Be Terminated. This Agreement may be t
terminated at any time prior to Closing:
(i) by mutual consent of Safeguard and the Company; or
(ii) by Safeguard or the Company, if the Company shall have
withdrawn its Registration Statement on Form S-1 relating to
the Public Offering (Reg. No. 333-89815).
(b) Effect of Termination. In the event of termination of this
Agreement by either Safeguard or the Company, as provided
above, this Agreement shall forthwith terminate and there
shall be no liability on the part of either Safeguard or the
Company, except for liabilities arising from a breach of this
Agreement prior to such termination; provided, however, that
the obligations set forth in Article 5 hereof shall survive
such termination.
<PAGE> 7
ARTICLE 5
CERTAIN ADDITIONAL COVENANTS
5.1 Indemnification.
(a) Safeguard hereby agrees to indemnify the Company and its
underwriters, affiliates, officers, employees, representatives
and directors (the "Indemnified Persons") against, and hold
them harmless from, any loss, liability, claim, damage or
expense, joint or several ("Losses"), arising directly or
indirectly, out of or in connection with, the SSP, including,
without limitation, (i) costs and expenses associated with the
failure of any shareholders of Safeguard to consummate
purchases of SSP Shares for which they have subscribed, (ii)
any claims by shareholders of Safeguard or other persons
arising from the SSP, and (iii) other costs and expenses,
including printing costs and reasonable legal fees and
expenses, arising from the establishment, execution and
performance of the SSP. Notwithstanding the foregoing,
Safeguard shall not indemnify the Company against liabilities
arising from any untrue or allegedly untrue statement of a
material fact, or omission or alleged omission of a material
fact required to be stated to make the statements not
misleading, in the prospectus contained in the Company's
Registration Statement on Form S-1 (Reg. No. 333-89815 (the
"Prospectus"), except for statements or omissions regarding
the SSP and except for any materials related to the SSP
delivered to Safeguard's shareholders and not to other
recipients of the Prospectus generally. Safeguard agrees to
reimburse the Indemnified Persons, as incurred, for any
reasonable legal or other expenses reasonably incurred by them
in connection with investigating or defending any Losses.
(b) Promptly after receipt by an Indemnified Person of notice of
the commencement of any action for which indemnification or
contribution may be sought hereunder, such Indemnified Person
will notify Safeguard in writing of the commencement thereof.
The failure to so notify Safeguard will not relieve Safeguard
from liability under Section 5.1(a) above unless and to the
extent that Safeguard did not otherwise learn of such action
and such failure results in the forfeiture of substantial
rights and defenses. Safeguard shall be entitled to appoint
counsel at Safeguard's expense to represent the Indemnified
Person in any action for which indemnification is sought (in
which case Safeguard shall not thereafter be liable for the
fees and expenses of separate counsel retained by the
Indemnified Person except as set forth below); provided,
however, that such counsel shall be reasonably satisfactory to
the Indemnified Person. Notwithstanding Safeguard's election
to appoint counsel to represent the Indemnified Person in an
action, the Indemnified Person shall have the right to employ
separate counsel (including local counsel), and Safeguard
shall bear the reasonable fees, costs and expenses of such
counsel if (i) the
<PAGE> 8
use of counsel chosen by Safeguard to represent the
Indemnified Person would present such counsel with a conflict
of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both Safeguard and the
Indemnified Person and the Indemnified Person shall have
reasonably concluded that there may be legal defenses
available to it that are different from or in addition to
those available to Safeguard, (iii) Safeguard shall not have
employed counsel reasonably satisfactory to the Indemnified
Person within a reasonable time after notification of the
commencement of such action or (iv) Safeguard shall have
authorized the Indemnified Person to employ separate counsel
at the expense of Safeguard.
(c) Safeguard shall not, without the prior written consent of the
relevant Indemnified Person, settle or compromise or consent
to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder
unless such settlement, compromise or consent includes an
unconditional release of such Indemnified Person from all
liability arising from such claim, action, suit or proceeding.
An Indemnified Person may not settle or compromise or consent
to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder
without the consent of Safeguard, such consent not to be
unreasonably withheld.
(d) In the event that the indemnity provided for in this Article 5
is unavailable to or insufficient to hold harmless an
Indemnified Person for any reason, the Indemnified Persons and
Safeguard shall contribute to the Losses (including the legal
and other expenses attributable to investigating or defending
same) to which the Indemnified Person may be subject in such
proportion as is appropriate to reflect the relative fault of
the Indemnified Person and Safeguard in connection with the
statements or omissions that resulted in such Losses as well
as any other relevant equitable considerations, including that
the Company performed the DSSP as an accommodation to
Safeguard without any legal obligation to do so. Relative
fault shall be determined by reference to, among other things,
whether any untrue or allegedly untrue statement of a material
fact or the omission or alleged omission to state a material
fact relates to information provided by the Indemnified Person
or Safeguard, the intent of the Indemnified Person and
Safeguard, and their relative knowledge, access to information
and opportunity to correct or prevent such untrue statement or
omission. The parties agree that it would not be just and
equitable if contribution was determined by any method of
allocation that does not take into account the equitable
considerations discussed above.
<PAGE> 9
ARTICLE 6
MISCELLANEOUS
6.1. Nature and Survival of Representations. The representations,
warranties, covenants and agreements of Safeguard and the Company
contained in this Agreement, and all statements contained in this
Agreement or any exhibit hereto or any certificate or other document
delivered pursuant to this Agreement or in connection with the
transactions contemplated hereby, shall be deemed to constitute
representations, warranties, covenants and agreements of the respective
party delivering the same. All such representations, warranties,
covenants and agreements shall survive the Closing.
6.2. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or, if mailed, when mailed by United
States first-class, certified or registered mail, postage prepaid, to
the other party at the following addresses (or at such other address as
shall be given in writing by any party to the other):
(a) If to Safeguard, to:
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: James A. Ounsworth, Esq.
(b) If to the Company, to:
eMerge Interactive, Inc.
10315 102nd Terrace
Sebastian, FL 32958
Attention: T. Michael Janney
With a required copy to:
Morgan, Lewis & Bockius LLP
1701 Market St.
Philadelphia, PA 19103-2921
Attention: Michael Shim, Esquire
6.3. Third Party Beneficiaries. Safeguard acknowledges that each of the
Underwriters of the Public Offering shall be a third party beneficiary
entitled to exercise the rights and remedies provided for herein
directly against Safeguard. The Company
<PAGE> 10
shall cooperate with and assist each of the Underwriters of the Public
Offering with respect to any action such Underwriters take to exercise
such rights and remedies directly against Safeguard.
6.4. Successors and Assigns. This Agreement, and all rights and powers
granted hereby, will bind and inure to the benefit of the parties
hereto and their respective successors and permitted assigns but shall
not be assignable or delegable by any party without the prior written
consent of the other party.
6.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of Pennsylvania, without giving
effect to its principles of conflicts of laws or choice of forum.
6.6. Headings. The headings preceding the text of the sections and
subsections hereof are inserted solely for convenience of reference,
and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.
6.7. Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original, but which together shall
constitute one and the same instrument. Each such copy shall be deemed
an original and it shall not be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
6.8. Further Assurances. Each party shall cooperate and take such action as
may be reasonably requested by the other party in order to carry out
the provisions and purposes of this Agreement and the transactions
contemplated hereby.
6.9. Amendment and Waiver. The parties may by mutual agreement amend this
Agreement in any respect, and either party, as to such party, may (a)
extend the time for the performance of any of the obligations of the
other party, (b) waive any inaccuracies in representations by the other
party, (c) waive compliance by the other party with any of the
agreements contained herein and performance of any obligations by the
other party, and (d) waive the fulfillment of any condition that is
precedent to the performance by such party of any of its obligations
under this Agreement. To be effective, any such amendment or waiver
must be in writing and be signed by the party against whom enforcement
of the same is sought.
6.10. Entire Agreement. This Agreement sets forth all of the promises,
covenants, agreements, conditions and undertakings between the parties
hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written.
<PAGE> 11
6.11. Interpretations. No party to this Agreement shall be considered the
draftsman. This Agreement has been reviewed, negotiated and accepted by
all parties and their attorneys and shall be construed and interpreted
according to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of all parties hereto.
[Intentionally left blank]
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
SAFEGUARD SCIENTIFICS, INC.
By:
----------------------------------
Name:
Title:
eMERGE INTERACTIVE, INC.
By:
----------------------------------
Name:
Title:
-9-
<PAGE> 1
Exhibit 5.1
[Morgan, Lewis & Bockius LLP Letterhead]
January 27, 2000
eMerge Interactive, Inc.
10315 102nd Terrace
Sebastian, FL 32958
Re: eMerge Interactive, Inc. - Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for eMerge Interactive, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of the registration
statement on Form S-1 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Act of
1933, as amended (the "Act"), relating to the public offering (the "Offering")
of up to 8,675,000 shares (the "Shares") of the Company's class A common stock,
$.008 par value (the "Common Stock"), including 675,000 Shares purchasable by
the underwriters upon exercise of their over-allotment option. Of the 8,675,000
Shares, (i) up to 7,175,000 Shares will be newly issued and sold by the Company
(the "Company Shares") and (ii) up to 1,500,000 Shares will be sold by the
selling stockholders (the "Selling Stockholder Shares"). This opinion is being
furnished pursuant to Item 601(b)(5) of Regulation S-K under the Act.
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Certificate of
Incorporation, as amended to date; (c) the Company's Bylaws, as amended to date;
(d) certain records of the Company's corporate proceedings as reflected in its
minute books; and (e) such statutes, records and other documents as we have
deemed relevant. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
conformity with the originals of all documents submitted to us as copies
thereof. In addition, we have made such other examinations of law and fact as we
have deemed relevant in order to form a basis for the opinion hereinafter
expressed.
Based upon the foregoing, we are of the opinion that (i) the Company Shares,
upon issuance and sale by the Company in the manner and for the consideration
contemplated in the Registration Statement, will be validly issued, fully paid
and nonassessable and (ii) the Selling Stockholder
<PAGE> 2
[Morgan, Lewis & Bockius LLP Letterhead]
eMerge Interactive, Inc.
January 27, 2000
Page 2
Shares, upon sale by the selling stockholders in the manner and for the
consideration contemplated in the Registration Statement, will be validly
issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an Exhibit to the Registration
Statement and to all references to this Firm under the caption "Legal Matters"
in the Registration Statement. In giving such consent, we do not thereby admit
that we are acting within the category of persons whose consent is required
under Section 7 of the Act and rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
- -------------------------------
<PAGE> 1
Exhibit 10.3
* Certain portions of this exhibit have been omitted based
upon a request for confidential treatment that has been filed
with the Commission. The omitted portions have been filed
separately with the Commission.
MASTER LICENCE AGREEMENT
ELECTROLYTE THERAPY & INFRA-RED THERMOGRAPHY
BETWEEN:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
as represented by the Minister of Agriculture and Agri-Food Canada
(LICENCOR)
AND:
eMERGE VISION SYSTEMS INC.
a corporation incorporated under the laws of Delaware;
and having its head office at 10315 102nd Terrance
Sebastian, Florida, United States, 32958
(LICENCEE)
<PAGE> 2
PROTECTED - BUSINESS INFORMATION
TABLE OF CONTENTS
------------
MASTER LICENCE AGREEMENT
ELECTROLYTE THERAPY & INFRA-RED THERMOGRAPHY
INTRODUCTION..................................................................
1 DEFINITIONS...........................................................
2 SURRENDER & GRANT OF LICENCE..........................................
Surrender.............................................................
Grant.................................................................
Sub-licencing.........................................................
Canada's Consent......................................................
Sub-licence Conditions................................................
Termination...........................................................
Third Party Obligations - eVS.........................................
Third Party Obligations - Canada......................................
Use of Canadian Corporations..........................................
Disclosure Obligation - Canada........................................
Material Terms........................................................
3 TERM..................................................................
Initial Term..........................................................
Renewal Conditions....................................................
No Dispute...................................................
Dispute /Contingent Renewal Pending ADR......................
4 EXPLOITATION OF LICENCED TECHNOLOGIES.................................
Best Efforts to Commercialize.........................................
Royalty Holiday.......................................................
Start-Up Costs........................................................
Continuing Obligations During Holiday.................................
Patents......................................................
Collaborations...............................................
Research Support Payment.....................................
Fundamental Terms.....................................................
5 ROYALTIES.............................................................
Percentage Royalty of Gross Revenues..................................
Payments Semi-Annually................................................
2
<PAGE> 3
PROTECTED - BUSINESS INFORMATION
Payment Dates.........................................................
Payment Method........................................................
Cheque Requirements...................................................
Payments to Canada after Termination..................................
Attribution of Royalties..............................................
6 IP OWNERSHIP & REPRESENTATIONS........................................
Canada Owns Licenced Technologies.....................................
No Impeachment........................................................
Inimical Use of Confidential Information..............................
Regulatory Rights.....................................................
Inventors Rights......................................................
No Litigation.........................................................
Third Party Rights....................................................
Infringement..........................................................
Patent Coverage & Formula.............................................
US Federal Department of Agriculture (FDA) Regulatory.................
Manufacture..................................................
No Export....................................................
Disclosure by Canada.........................................
Product Claims...............................................
Animal Food..................................................
FDA Problems.................................................
No Misrepresentations........................................
Laboratory Practices.........................................
Material Terms........................................................
7 IMPROVEMENTS, R & D, COLLABORATIONS...................................
Carve Out.............................................................
Licencing of Improvements from Canada's R & D under Carve Out.........
No Competition........................................................
Collaborations Between eVS and Canada.................................
Licencing of Improvements from eVS / Canada Collaborations............
Licencing of Serendipitous Technologies from eVS / Canada
Collaborations...............................................
Third Party Licences Resulting Technology.............................
Improvements Part of Licenced Technologies............................
Discretion to Collaborate.............................................
Either Party Unable / Unwilling to Collaborate........................
Third Party Collaborations............................................
Ownership of Background Intellectual Property.........................
Material Terms........................................................
8 WARRANTIES OF QUALITY.................................................
No Warranties.........................................................
3
<PAGE> 4
PROTECTED - BUSINESS INFORMATION
Disclaimer of Implied Warranties......................................
Third Party Representations...........................................
Disclosure by Canada..................................................
Disclosure & Due Diligence............................................
Confidential Information Without Warranty / No Reliance...............
9 PATENTS...............................................................
Queen Owns All Patents................................................
eVS Discretion to Patent..............................................
eVS Responsibility for Patent Costs...................................
Canada Responsibility for Patent Costs................................
Material Terms........................................................
10 REGULATORY............................................................
Notice to Assist......................................................
Assistance............................................................
Canada's Advisory Board Positions.....................................
Costs of Canada's Advisory Board Members..............................
Regulatory Costs......................................................
Decision to Register..................................................
Registration Ownership................................................
Trademark Use.........................................................
Trademark and Quality Control.........................................
11 AUDITS & QUALITY CONTROL..............................................
Audit Rights and Purposes.............................................
Audit Timing / Process / Cost.........................................
Regulatory Quality Standards..........................................
Contractual Quality Standards.........................................
Spot Audits...........................................................
Material Terms........................................................
12 REPORTS...............................................................
Administrative Meetings...............................................
13 CORPORATE REPRESENTATIONS & WARRANTIES................................
eVS...................................................................
Ability......................................................
Authorization................................................
Enforceable..................................................
Litigation...................................................
Veracity of Statements.......................................
Third Party Representations..................................
Canada................................................................
Authorization................................................
Veracity of Statements.......................................
4
<PAGE> 5
PROTECTED - BUSINESS INFORMATION
Compliance of Laws...........................................
14 PATENT INFRINGEMENT...................................................
Notice ...............................................................
Core Countries........................................................
Canada Defends / Prosecutes...........................................
eVS Co-Counsel........................................................
eVS Assumes Control of Litigation............................
Costs when eVS Assumes Control of Litigation..........................
Canada Controls Payment of Damage / Settlement Terms..................
Canada's Damage Awards Distribution..........................
eVS Defends / Prosecutes..............................................
Non-Core Country Infringement Actions........................
Parties Jointly Police Infringement..........................
15 INDEMNIFICATION.......................................................
Reciprocal for Negligence / Contract Breach...........................
Procedures............................................................
Notice.......................................................
Indemnifying Party Defends...................................
Indemnified Party Defends....................................
Co-operation.................................................
Mutual Consent of Settlement.................................
16 TERMINATION...........................................................
By Canada for Cause...................................................
Trademark Rights Terminated...........................................
Procedure.............................................................
The Company's Duties on Termination...................................
Surviving Obligations.................................................
Surrender of Licence..................................................
17 CONFIDENTIALITY / FIDUCIARY & EQUITABLE REMEDIES......................
Confidentiality Obligations...........................................
Confidentiality Measures..............................................
Distribution by the Receiving Party...................................
Common Law Duty of Confidentiality....................................
Confidentiality Exceptions............................................
Public Domain................................................
Published....................................................
Already Known................................................
Third Party Discloses........................................
Independently Developed......................................
Judicial / Administrative Order..............................
Access to Information.................................................
5
<PAGE> 6
PROTECTED - BUSINESS INFORMATION
Access to Information Disclosure.............................
Fiduciary....................................................
Elements of Fiduciary Relationship...........................
Equitable Relief......................................................
Fundamental Terms.....................................................
18 ALTERNATE DISPUTE RESOLUTION (ADR)....................................
Negotiation...........................................................
Informal Negotiations........................................
Formal Negotiations..........................................
Mediation.............................................................
Direct to Arbitration........................................
Process .....................................................
Location.....................................................
Unsuccessful.................................................
Arbitration...........................................................
Procedure.............................................................
Law, Code & Rules............................................
Tribunal & Jurisdiction......................................
Final & Binding..............................................
Proceedings..................................................
Language.....................................................
Written Communications.......................................
Costs........................................................
Arbitrator's Written Decision................................
Power to Settle..............................................
Adjournment to Empower Representative........................
Deemed Abandonment...........................................
General ADR Conditions................................................
No Litigation................................................
Obligations During Alternate Dispute Resolution (ADR)........
Privilege....................................................
Confidentiality..............................................
ADR Disclosures Not Admissible in Subsequent Proceedings.....
Normally Admissible Evidence.................................
Material Breach..............................................
19 INTENT AND INTERPRETATION.............................................
Entire Agreement......................................................
Pre-Contractual Representations.......................................
Due Diligence Search..................................................
Independent Legal Advice..............................................
No Adverse Presumption in Case of Ambiguity...........................
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Severability..........................................................
Plurality and Gender..................................................
Not a Joint Venture...................................................
Minister Not Fettered.................................................
Federal Legislation...................................................
Right to Legislate....................................................
No Implied Obligations................................................
Access to Information.................................................
Governing Law.........................................................
Waiver................................................................
Contract Always Speaks................................................
Time is of the Essence................................................
Force Majeure.........................................................
Headings..............................................................
Appendices............................................................
20 LEGAL RIGHTS..........................................................
Amendments............................................................
Assignment by Canada..................................................
Sub-Contract Rights...................................................
Assignment............................................................
No Third Party Rights.................................................
Remedies Cumulative...................................................
Mutual Assistance.....................................................
Facsimile Counterparts................................................
21 CROWN GENERAL.........................................................
No Bribes.............................................................
No Share to Members of Parliament.....................................
Public Office Holders.................................................
Compliance with Law...................................................
Disclosure of Master Licence during Due Diligence Audit - eVS.........
Disclosure of Master Licence during Due Diligence Audit - Canada......
Material Terms........................................................
22 NOTICE................................................................
Addresses / Contacts..................................................
Deemed Delivery.......................................................
Change of Address.....................................................
APPENDIX......................................................................
LICENCED TECHNOLOGIES PATENTS.........................................
APPENDIX......................................................................
ARBITRATION RULES.....................................................
APPENDIX......................................................................
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PRE-MIX FORMULATION...................................................
APPENDIX......................................................................
RMS / AGRESEARCH AGREEMENTS...........................................
APPENDIX......................................................................
eVS INFRA RED TECHNOLOGIES............................................
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MASTER LICENCE AGREEMENT
ELECTROLYTE THERAPY & INFRA-RED THERMOGRAPHY
BETWEEN:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
as represented by the Minister of Agriculture and Agri-Food
("Canada")
AND:
eMERGE VISION SYSTEMS INC.,
a corporation incorporated under the laws of Delaware;
and having its head office at 10315 102nd Terrance
Sebastian, Florida
("eVS")
INTRODUCTION
A. A. Transport and handling stress can cause significant, metabolic and
physiological changes in livestock. Dehydration, low blood and tissue
sugar levels, electrolyte imbalance and thermoregulatory problems
associated with stress can result in live and carcass weight losses, as
well as degraded meat quality;
B. Live weight losses in 500 kg market-weight steers can vary from
approximately 5 kg (1% of body weight) for short-hauled (1-2 hours)
animals to upwards of 50kg (10% of body weight) in long-distance (24 to
48 hours) transported beef animals;
C. Stress during handling and transport can result in dark, firm, dry
(DFD) beef that results in significant discounts for these carcasses by
packers as the DFD meat is discriminated against by most consumers;
D. Stress also results in the loss of intramuscular fat as cattle quickly
mobilize this source of energy while under stress, thereby resulting in
a potential grade loss;
E. Canada has developed, patented and registered an electrolyte therapy
which significantly reduces live weight shrink associated with
transport and handling stress in cattle. This therapy together with all
directly related know-how and any
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directly related trade secrets is referred to herein as "ET". This
supplement has also been shown to significantly reduce the incidence of
DFD carcasses as well as reducing the incidence of grade loss;
F. Canada has also developed and patented a method, and the software
required, to identify cattle that are under physiological stress using
infra-red thermography. This software and method, together with all
directly related know-how and any directly related trades secrets is
referred to herein as "IR". This technology is effective in identifying
stressed animals which are pre-disposed to producing poor quality meat;
G. R and ET are complementary technologies in that IR detects stressed
cattle at various stages in the production cycle while ET is a
restorative which reduces weight and grade loss and the incidence of
poor quality, DFD, meat;
H. ET has been licenced and marketed based on a PRE-MIX and LICENCED
PRODUCT concept.
i) The PRE-MIX consists of the protected formulation of the
essential elements for the electrolyte therapy.
ii) The LICENCED PRODUCT is a mix of a specific quantity of
PRE-MIX and other feed base materials such as corn, barley,
alfalfa, or other carriers (dependent on the livestock and the
medium of delivery, for instance pellets).
In order to ensure maintenance of quality standards as well as protect
the confidentiality of the Pre-Mix formulation, the PRE-MIX is licenced
to a single supplier. Distributers who manufacture and sell the LICENCED
PRODUCT must purchase the PRE-MIX from this sole supplier;
I. Several formulations of the ET for beef cattle are registered in
Canada, and one is in the process of being registered in the U.S.
Formulations for other livestock, such as swine and poultry are being
developed;
J. Although the IR technology has been proven in a pilot setting, it is
recognized that it requires considerable engineering development to
scale-up to a commercial system;
K. Canada has previously licenced selected rights, selected versions and
different territories of the ET and IR and consented to sub-licences of
those licenced rights;
L. An abbreviated version of those licenced selected rights is shown in
the following
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table, fixed approximately at the point when the PARTIES were
negotiating the MASTER LICENCE;
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1 STS ET United States Exclusive LICENCED Sale & Beef
PRODUCT Distribution cattle
2 STS ET Canada Exclusive LICENCED Manufacture Beef
PRODUCT & Cattle
PRE-MIX
3 Nutri-Charge ET USA Sub-licence LICENCED Non-Excl. Beef
Exclusive PRODUCT & Manufacture, Cattle
Non-exclusive PRE-MIX Excl. Sale &
Distribute
4 RMS ET Canada Sub-licence LICENCED Manufacture Beef
PRODUCT Cattle
5 RMS ET Canada Exclusive LICENCED Manufacture, Beef
PRODUCT Sale & Distribute Cattle
6 AgResearch ET Australia & New Exclusive LICENCED Manufacture, Beef
Zealand PRODUCT Sale & Distribute Cattle
7 STS IR North America Exclusive n/a Manufacture, Beef &
Sale & Distribute Swine
8 Nutri-Charge IR USA Sub-licence n/a Manufacture, Beef &
Sale & Distribute Swine
</TABLE>
M. Discussions with STS Agriventures Ltd. ("STS") and RMS Research
Management Systems, Inc. ("RMS") concerning new licence rights resulted
in new arrangements implemented during the time the PARTIES were
negotiating the . This also resulted in the termination of a
sub-licence.
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N. The following table details the state of agreements prior to signing of
this MASTER LICENCE:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
New STS ET Worldwide Exclusive PRE-MIX Manufacture and All
sale animals
manufacturers of
LICENCED
PRODUCT
1 STS ET U.S. 1) Exclusive LICENCED 1) Sales and Beef
2) Non- PRODUCT & Distribution Cattle
exclusive PRE-MIX 2) Manufacture
LICENCED PRODUCT
3 Nutri-Charge ET U.S. Sub-licence LICENCED 1) Sales and Beef
1) Exclusive PRODUCT & Distribution Cattle
2) Non- PRE-MIX 2) Manufacture
Exclusive LICENCED PRODUCT
5 RMS ET Canada Exclusive LICENCED Manufacture, Sale & Beef
PRODUCT Distribute
6 AgResearch ET Australia & Exclusive LICENCED Manufacture, Sale & Beef
New PRODUCT Distribute
Zealand
New RMS ET Canada Exclusive LICENCED Manufacture Sales & Swine
Pend PRODUCT Distribution
- -ing
7 STS IR North Exclusive n/a Manufacture, Sale & Beef &
America Distribute Swine
8 Nutri-Charge IR USA Sub-licence n/a Manufacture, Sale & Beef &
Distribute Swine
</TABLE>
O. eVS is a company whose strength is in commercializing image
technologies, with emphasis on animal science applications. eVS's
affiliated company, Safeguard Scientifics Inc., has considerable
expertise in the development of spin-off companies which commercialize
new technologies;
P. Simultaneously with the execution of this Licence ("MASTER LICENCE"),
eVS is purchasing all of the shares of the capital stock of STS and all
of the partnership interests of Nutricharge, and will thereby take
ownership of the licences previously held by STS and Nutricharge but
not those held by New Zealand Pastoral Agriculture Research Institute
Limited ("AgResearch") and RMS;
Q. As a result of the share purchases identified in recital P, eVS has:
i) the North American rights to manufacture, sell and distribute
IR for beef &
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swine;
ii) the worldwide rights to manufacture, sell and distribute ET in
PRE-MIX format for kingdom animalia; and
iii) the U.S. rights to manufacture, sell, and distribute ET in
LICENCED PRODUCT format for beef cattle.
R. eVS and Canada agreed to a process under which concurrently with the
execution of the MASTER LICENCE:
i) eVS will cause the identified licencees and sub-licencees
assign, transfer and release all their rights, whether under
executed Licence / sub-licence or inchoate, to eVS;
ii) eVS surrenders those rights to Canada; and
iii) Canada and eVS execute the MASTER LICENCE that globally:
a incorporates the then extant rights and obligations;
and
b augments those rights and obligations;
S. Under the MASTER LICENCE, eVS has:
i) an exclusive Licence;
ii) to IR and ET;
iii) worldwide for IR for food animals, including but not limited
to beef & dairy cattle, sheep, swine, elk, bison, deer,
reindeer, ratites (i.e. emus) poultry, rabbit;
iv) worldwide for ET PRE-MIX for Kingdom Animalia; and
v) worldwide for ET sales, manufacture and distribution of the
LICENCED PRODUCT;
a except for Australia, New Zealand and Canada for beef;
and
b except for Canada for swine.
with no right to export the LICENCED PRODUCT into the
territories cited in T(v)(a)(b) above, in which eVS does not
have the right to sell or distribute such LICENCED PRODUCT.
T. The underlying principles of the MASTER LICENCE are that:
i) eVS has commercial freedom with the concomitant obligation to
make all commercially reasonable best efforts to COMMERCIALIZE
the ET and IR;
ii) Canada will receive a royalty from the COMMERCIALIZATION of ET
and IR or either of them or any technology sold or licenced
incorporating either or both of them;
iii) Canada and eVS collaborate on the enhancement of ET and IR;
iv) Canada provides scientific backing to eVS; and
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v) Canada has scientific freedom to continue to conduct research and
development concerning IR and ET with the concomitant obligation to
notify eVS to any IMPROVEMENTS.
NOW THEREFORE in consideration of the premises, the terms and conditions
hereinafter contained and other good and valuable consideration, the receipt of
which is hereby acknowledged by each PARTY, the PARTIES hereto covenant and
agree as follows:
1 DEFINITIONS
1.1 "AFFILIATE" means a subsidiary or corporation controlled (as
defined in the Income Tax of Act of Canada) by eVS, but does
not include a parent or upstream corporation or sister
corporation of eVS or Safeguard Scientifics Inc.
1.2 "COMMERCIALIZATION" or "COMMERCIALIZE" means:
1.2.1 the making, using and sale (and when sold, sold at the
SALES PRICE);
1.2.2 by eVS;
1.2.3 of the LICENCED TECHNOLOGIES;
1.2.4 within the LICENCED TERRITORIES;
1.2.5 within the FIELDS OF USE;
1.2.6 for the commercially reasonable best efforts return
to eVS and Canada in accordance with Article 4
(Exploitation of Licenced Technologies); and includes
1.2.7 eVS obtaining any authorizations or permits that may
be required in order for eVS to legally carry out all
of its activities under this MASTER LICENCE.
1.3 "CONFIDENTIAL INFORMATION" means:
1.3.1 without limitation:
1.3.1.1 all scientific (including INTELLECTUAL
PROPERTY), technical, business, financial,
legal or marketing information; and
1.3.1.2 information that is non-public,
confidential, privileged or proprietary in
nature;
1.3.2 disclosed orally, in writing or by any medium,
electronic or otherwise (and includes, without
limitation, samples, prototypes, specimens and
derivatives);
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1.3.3 during discussions, audits, spot audits, meetings,
tests, demonstrations, correspondence or otherwise;
or any part or portion thereof, related to activities pursuant
to the LICENCE AGREEMENT, irrespective of whether or not such
information is specifically marked confidential or identified
as confidential at the time of disclosure. Notwithstanding the
foregoing any oral disclosures that contain CONFIDENTIAL
INFORMATION may be identified either:
1.3.4 at the time of disclosure as confidential; or
1.3.5 reduced into writing and designated as confidential
within fifteen (15) days of disclosure.
1.4 "CORE COUNTRIES" means:
1.4.1 Canada;
1.4.2 USA;
1.4.3 France;
1.4.4 Denmark;
1.4.5 Germany;
1.4.6 Ireland;
1.4.7 United Kingdom;
1.4.8 Australia; and
1.4.9 New Zealand.
1.5 "DISCLOSING PARTY" or "RECEIVING PARTY" as applicable means
either of the PARTIES who is releasing CONFIDENTIAL
INFORMATION to the other PARTY or is acquiring CONFIDENTIAL
INFORMATION from the other PARTY.
1.6 "ET" means:
1.6.1 the use and formulation of electrolyte therapy (as
invented and practised by the Lacombe Research
Centre) to improve the general health, meat quality
and grading of meat and livestock and other
agricultural, zoological and nutraceutical
applications premised on such electrolyte therapy;
and
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1.6.2 the use and formulation of electrolyte therapy as
claimed in Canadian Patent #2,009,532; US Patent
#5,728,675" and the other patents listed in Appendix
A (LICENCED TECHNOLOGIES PATENTS);
1.6.3 including all directly related know-how and directly
related trade secrets in respect of the matter
identified in subparagraphs 1.6.2 and 1.6.2.
1.7 "ET PENDING PRODUCT" means the ET formula which is the subject
of the US Federal Department of Agriculture's (FDA) Notice of
Claimed Investigations Exemption for a New Animal Drug (INAD).
1.8 "FIELDS OF USE" means the family of agricultural, zoological
or nutraceutical products directly related to ET and IR, more
particularly:
1.8.1 ET as PRE-MIX and LICENCED PRODUCT, for the Kingdom
Animalia in any medium (including without limitation,
liquid, pelletized or cubed); and
1.8.2 IR for food animals, which includes without
limitation: beef and dairy cattle, swine, sheep, elk,
deer, bison, ratites (i.e. emus); reindeer (or
caribou), poultry and rabbit.
1.9 "GROSS REVENUES" means revenues received by eVS (or its
sub-licencees under paragraph 2.3 (Sub-licencing)) after the
two (2) year royalty holiday prescribed by paragraph 4.2
(Royalty Holiday) from the:
1.9.1 the COMMERCIALIZATION (including
without limitation, all transfers, sub-licences,
leases, transfers, distributorships or other
transactions) of the ET and IR or either of them if
only one is being COMMERCIALIZED; and
1.9.2 the COMMERCIALIZATION of any agricultural, zoological
or nutraceutal derivative of, or product that
incorporates in any percentage, ET or IR;
For greater clarity, whenever eVS sells a product
incorporating in any way ET or IR, in a bona fide commercial
transaction the GROSS REVENUES shall be the monies received as
the SALES PRICE in that transaction. Alternatively phrased, in
transactions which do not constitute sub-licences under
paragraph 2.3 (Sub-licencing), in which eVS sells product
derivatives of or incorporating ET or IR, to third parties for
a specified SALES PRICE, including a distributor or other
entity which intends to resell such product, GROSS REVENUES
shall means such SALES PRICE.
1.10 "IMPROVEMENT" means any modification to the LICENCED
TECHNOLOGIES which would infringe the PATENTS for either ET or
IR or otherwise directly modify or directly improve the
LICENCED TECHNOLOGIES:
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1.11 "INTELLECTUAL PROPERTY" means ET and IR; and all directly
related: copyrights, designs, methods and processes, show-how,
know-how, trade secrets; and other intellectual property
rights directly related to the LICENCED TECHNOLOGIES, and for
greater clarity, includes any IMPROVEMENTS.
1.12 "IR" means:
1.12.1 use of infra-red technology (as invented and
practised by the Lacombe Research Centre)
for the determination of general health,
meat quality and grading of meat and
livestock and other agricultural, zoological
and nutraceutical applications premised on
such infra-red technology; as claimed in
Canadian patent #2,099,529; US patent
#5,458,418 & 5,595,44 and the other relevant
patents listed in Appendix A (LICENCED
TECHNOLOGIES PATENTS); and
1.12.2 including all directly related know-how and
directly related trade secrets needed to
exercise the technology claimed in the
PATENTS
but excluding without limitation:
1.12.3 the infra red technology previously created
or owned by eVS and identified in Appendix E
(eVS Infra Red Technologies) and all
improvements thereto not directly derived
from the IR or IMPROVEMENTS;
1.12.4 any other infra red technology or
improvements thereto acquired by eVS or
independently developed by eVS after the
date hereof which is not directly derived
from the IR or IMPROVEMENTS; and
1.12.5 the visual grading system (known as "CVS")
previously created or owned by Canada
including subsequent improvements thereto
which is not directly derived from the IR or
IMPROVEMENTS;.
1.13 "LICENCED PRODUCT" means any livestock or animal ready form of
ET, more particularly
1.13.1 the appropriate mix of a specific quantity
of PRE-MIX and certain feed base materials,
1.3.1.1 which mix is dependent on both the
livestock or animal being treated
and the medium of delivery.
1.14 "LICENCED TERRITORIES" means:
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1.14.1 worldwide for IR;
1.14.2 worldwide for (ET) PRE-MIX;
1.14.3 worldwide for (ET) LICENCED PRODUCT except for:
1.14.3.1 Australia, New Zealand and Canada for
beef; and
1.14.3.2 Canada for swine.
1.5 "LICENCED TECHNOLOGIES " means ET and IR and any IMPROVEMENTS
that eVS elects to licence pursuant to Article 7
(Improvements, R & D, Collaborations).
1.6 "MASTER LICENCE" means this agreement that includes attached
appendices and refers to the whole of this agreement, not to
any particular section or portion thereof.
1.7 "NUTRI-CHARGE AGREEMENTS" means the following licences, as
those agreements stood, as of the date of execution of the
MASTER LICENCE
1.17.1 Sub-Licence Nutri-Charge Agreement dated December 1,
1993, between the parties S.T.S. Agriventures Ltd.
and Nutri-Charge; and
1.17.2 Sub-Licence Detection Technology Agreement dated
December 1, 1993, between the parties S.T.S.
Agriventures Ltd. and Nutri-Charge.
1.18 "PARTY" means any one of the signatories to the MASTER LICENCE
and PARTIES means both of them and their respective employees,
servants and agents.
1.19 "PATENT" means:
1.19.1 the patents listed Appendix A (LICENCED TECHNOLOGIES
PATENTS);
1.19.2 any continuations, divisions, reissues and any
subsequent patents whose priorities are derived from
any of the patents in Appendix A (LICENCED
TECHNOLOGIES PATENTS); and
1.19.3 subsequently patented improvements to the patents in
Appendix A (LICENCED TECHNOLOGIES PATENTS).
1.20 "PATENT OFFICE" means a PATENT OFFICE in any part of the
LICENCED TERRITORIES and PATENT Offices means all of them.
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1.21 "PERIOD ONE" means for each year during any subsisting term of
the MASTER LICENCE the period from 1 January through 30 June
inclusive.
1.22 "PERIOD TWO" means for each year during any subsisting term of
the MASTER LICENCE the period from 1 July through 31 December
inclusive.
1.23 "PRE- MIX" means the protected / confidential formulation of
the essential active ingredients of ET, which when combined
with carriers such as corn constitute the LICENCED PRODUCT as
specified and identified in Appendix "C" (PRE-MIX FORMULATION)
and as claimed in the US patents.
1.24 "SALES PRICE" means the gross price paid by an arms length
purchaser for any LICENCED TECHNOLOGIES sold by eVS or its
authorized sub-licencees. In an non-arms length transaction,
involving an AFFILIATE, Safeguard Scientifics Inc. or a sister
corporation, if the gross price is less than the fair market
value, then, for royalty calculation purposes, the gross price
shall then be deemed to be the fair market value as set by
Canada.
1.25 "SERENDIPITOUS TECHNOLOGIES" are technologies or improvements
that:
1.25.1 do not infringe the PATENTS; and
1.25.2 are created at the Agriculture Canada's Lacombe
Research Centre, Alberta, Canada.
1.26 "STS AGREEMENTS" means the following licences, as those
agreements stood, as of the date of execution of the MASTER
LICENCE:
1.26.1 Exclusive Licence Agreement - NUTRI-CHARGE(R) - dated
October 22, 1993, between Her Majesty the Queen in
Right of Canada, as represented by the Minister of
Agriculture and S.T.S. Agriventures Ltd.;
1.26.2 Amendment to the Exclusive Licence Agreement -
NUTRI-CHARGE(R) - STS dated March 21 1997, between
Her Majesty the Queen in Right of Canada, as
represented by the Minister of Agriculture and S.T.S.
Agriventures Ltd.;
1.26.3 Sub-licence - NUTRI-CHARGE(R) - Agreement dated
December 1, 1993, between S.T.S. Agriventures Ltd.
and Nutri-Charge;
1.26.4 Agreement - NUTRI-CHARGE(R) - dated March 21, 1997,
between Her Majesty the Queen in Right of Canada, as
represented by the Minister of Agriculture and S.T.S.
Agriventures Ltd.;
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1.26.5 Sole Licence Agreement - Detection Technology dated
December 1, 1993, between Her Majesty the Queen in
Right of Canada, as represented by the Minister of
Agriculture and S.T.S. Agriventures Ltd.;
1.26.6 Sub-licence Agreement - Detection Technology - dated
December 1, 1993, between S.T.S. Agriventures Ltd.
and Nutri-Charge; and
1.26.7 Exclusive Licence Agreement - NUTRICHARGE(R) -
between Her Majesty the Queen in Right of Canada, as
represented by the Minister of Agriculture and STS
Agriventures Ltd.
1.27 "TRADEMARK" means the trade name NUTRI-CHARGE(R) which is
owned by Canada for Canada, but does not include that trade
name as owned by:
1.27.1 AgResearch for New Zealand, Australia;
1.27.2 STS Agriventures for the UK & EEC; and
1.27.3 Nutri-charge Partnership for the United States
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2 SURRENDER & GRANT OF LICENCE
Surrender
2.1 eVS hereby surrenders its STS AGREEMENTS and NUTRI-CHARGE
AGREEMENTS to Canada, and Canada accepts the surrender of
those agreements. Thereafter the aforementioned agreements:
2.1.1 shall be of no further force and effect; and
2.1.2 neither PARTY shall have any further liabilities or
obligations under any such agreements
Grant
2.2 Subject to the provisions of this MASTER LICENCE, Canada
grants to eVS an exclusive, fixed term, terminable pursuant to
Article 16 (Termination), royalty bearing licence for:
2.2.1 the COMMERCIALIZATION of the LICENCED TECHNOLOGIES;
and
2.2.2 the TRADEMARK in any jurisdictions for which Canada
owns the TRADEMARK and Canada is free to licence it,
whether such ownership vests in Canada prior to or
subsequent to the execution of the MASTER LICENCE.
Sub-licencing
2.3 eVS is permitted to sub-licence on the same terms and
conditions as the MASTER LICENCE:
2.3.1 AFFILIATES without the consent of Canada; or
2.3.2 non-affiliated or non-controlled parties with the
prior written consent of Canada, which consent shall
not be unreasonably withheld;
granted that in either situation:
2.3.3 the sub-licencee is a reputable party capable of
meeting its obligations under the sub-licence; and
2.3.4 the sub-licence or sub-licencee is in no way
prejudicial to Canada's good faith commercial
interests concerning the COMMERCIALIZATION of the
LICENCED TECHNOLOGIES.
Canada's Consent
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2.4 Canada's consent is required in order to:
2.4.1 avoid any pronounced conflicts of interest with respect to
ongoing planned research or licenced activities by Canada;
2.4.2 avoid any contractual conflicts by Canada; or
2.4.3 allow Canada to know who has access to and are exploiting the
LICENCED TECHNOLOGIES for reasons of feedback to Canada to
allow improvements and development.
Sub-licence Conditions
2.5 Any sub-licence granted by eVS shall:
2.5.1 be royalty-bearing, revocable, without the right to
sub-licence, only within the LICENCED TERRITORIES or
any portion thereof, and only within the FIELDS OF USE
or a subset thereof;
2.5.2 prescribe a royalty against GROSS REVENUES of the
sub-licencee of not less than [ ** ];
2.5.3 the first [ ** ] of any undivided royalty shall be
payable directly to Canada so that Canada is receiving
the same monies as if eVS has conducted the
COMMERCIALIZATION of the LICENCED TECHNOLOGIES rather
than the sub-licencee;
2.5.4 give eVS all rights necessary to strictly monitor and
enforce quality control standards;
2.5.5 be subject to the same obligations and restrictions as
those required of eVS under the MASTER LICENCE;
2.5.6 be copied to Canada within thirty (30) days of
execution; and
2.5.7 not be a de facto assignment.
Termination
2.6 Termination of the MASTER LICENCE shall also terminate any
subsisting sub-licences.
Third Party Obligations - eVS
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2.7 eVS shall honour any obligations Canada has in its licences or
collaboration agreements with RMS and AgResearch including
without limitation
2.7.1 the supply and pricing of ET PRE-MIX;
2.7.2 use of the TRADEMARK; and
2.7.3 rights to improvements to the technologies licenced
under those agreements.
These eVS obligations only apply to the contracts listed in
Appendix D (RMS / AgResearch Agreements). For greater
certainty, the RMS contract for swine ET in Canada shall be
deemed to be an executed contract antecedent in time to the
MASTER LICENCE, notwithstanding its actual date of execution or
effective date.
Third Party Obligations - Canada
2.8 Canada shall not modify or extend the Appendix D Agreements
other than pursuant to the terms of those Appendix D
Agreements. Canada will not agree to renew any such agreement
without offering to eVS the prior right to enter into an
agreement on substantially the same terms and conditions unless
the other contracting party has the right to renew such
agreement.
Use of Canadian Corporations
2.9 eVS agrees that, when it deems such action to be commercially
prudent, it will use Canadian corporations to provide
outsourcing or subcontracting services in connection with the
COMMERCIALIZATION of ET and IR.
Disclosure Obligation - Canada
2.10 Canada shall have a continuing obligation to disclose in a
reasonable manner and time to eVS any new INTELLECTUAL
PROPERTY.
Material Terms
2.11 Paragraphs 2.3 (Sub-licencing) to 2.10 (Disclosure Obligation -
Canada) are material terms of the MASTER LICENCE.
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3 TERM
Initial Term
3.1 Subject to paragraph 3.2 (Renewal Conditions) and Article 16
(Termination) the term of the MASTER LICENCE shall be twenty
(20) years from the date of execution.
Renewal Conditions
3.2 eVS shall have the right to elect to renew after the initial
term for five (5) year terms, so long as:
No Dispute
3.2.1 eVS is not in breach of the extant MASTER LICENCE; or
Dispute /Contingent Renewal Pending ADR
3.2.2 if at the time of an automatic renewal, there is an
outstanding dispute or disputes between the PARTIES
that has been articulated and referred to negotiation,
paragraph 18.2 (Formal Negotiations) or in mediation,
paragraph 18.3 (Mediation) or in arbitration, paragraph
18.8 (Arbitration) as the case may be, then the MASTER
LICENCE shall contingently renew until the dispute is
resolved under the dispute resolution mechanisms
prescribed under Article 18 (Alternate Dispute
Resolution (ADR)).
3.2.2.1 If the resolution of the dispute determines
that eVS has committed an act of termination
as defined in Article 16 (Termination), then
Canada shall elect either to:
3.2.2.1.1 allow the renewal to vest; or
3.2.2.1.2 terminate the MASTER LICENCE,
subject to any cure periods.
3.2.2.2 If the resolution of the dispute determines
that eVS was not or is not in breach of the
MASTER LICENCE, then the renewal of the
MASTER LICENCE shall vest.
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4 EXPLOITATION OF LICENCED TECHNOLOGIES
Best Efforts to Commercialize
4.1 During the term (or the renewal) of the MASTER LICENCE, eVS
shall:
4.1.1 use its commercially reasonable best efforts to
COMMERCIALIZE the LICENCED TECHNOLOGIES; and
4.1.2 not do, or assist anyone to do, anything inimical to
the COMMERCIALIZATION of the LICENCED TECHNOLOGIES or
TRADEMARK.
Royalty Holiday
4.2 Notwithstanding paragraph 4.1 (Best Efforts to Commercialize),
because:
4.2.1 ET requires regulatory approvals for each of the
different products;
4.2.2 as of the date of the execution of the MASTER LICENCE,
IR is not sufficiently developed for COMMERCIALIZATION
due to software and hardware issues; and
4.2.3 acquisition, start-up, marketing, manufacturing costs
are substantial and well in excess of one million
dollars US ($1,000,000).
eVS shall have a two (2) year royalty holiday from the date of
execution of the MASTER LICENCE in order to obtain the
necessary regulatory approvals, mature the IR for market and
preserve capital for COMMERCIALIZATION purposes.
Start-Up Costs
4.3 If Canada requires broad details of the costs cited in
sub-paragraph 4.2.3 (Royalty Holiday), then eVS shall provide
those details sufficient to satisfy Canada's need and
motivation for such details. Such information is deemed to be
CONFIDENTIAL INFORMATION because of the highly sensitive
financial and marketing intelligence contained therein.
Continuing Obligations During Holiday
4.4 The royalty holiday under paragraph 4.2 (Royalty Holiday), does
not relieve eVS of its obligations to:
Patents
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4.4.1 apply for, register, prosecute, secure and maintain
PATENTS as further prescribed in Article 9 (Patents);
Collaborations
4.4.2 fund collaborations concerning ET and IR as prescribed
in Article 7 (Improvements, R & D, Collaborations); and
Research Support Payment
4.4.3 pay twenty thousand dollars US ($20,000) to Canada at
the first anniversary of the execution of MASTER
LICENCE towards a research support agreement for
research purposes designated solely by Canada which may
or may not involve the LICENCED TECHNOLOGIES.
Fundamental Terms
4.5 Paragraph 4.1 (Best Efforts to Commercialize) is a fundamental
term of the MASTER LICENCE.
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5 ROYALTIES
Percentage Royalty of Gross Revenues
5.1 eVS shall pay a royalty to Canada of [ ** ] of GROSS REVENUES.
Payments Semi-Annually
5.2 The royalties under paragraph 5.1 (Percentage Royalty of Gross
Revenues) shall be payable semi-annually to Canada.
Payment Dates
5.3 eVS shall calculate the royalties for PERIOD ONE and PERIOD TWO
each year.
5.3.1 The payment related to PERIOD ONE, which shall be
estimated and based upon unaudited financial
statements, shall be made on or about 31 July each
year.
5.3.2 The payment related to PERIOD TWO, which shall be based
upon audited year-end financial statements and
adjusted, if necessary, to reflect actual royalties
earned in PERIOD ONE, shall be made on or before 15
March each year.
Payment Method
5.4 Cheques for the payment of royalties shall be in US funds and
made payable to the "Receiver General for Canada". They shall
be sent to:
Director
Agriculture and Agri-Food Canada
Lacombe Research Centre
6000 C&E Trail
Lacombe, Alberta
T4L 1W1
Cheque Requirements
5.5 Each cheque shall be accompanied by a statement bearing the
Financial Coding of this MASTER LICENCE and the LICENCED
TECHNOLOGIES name/identification, and showing the period
covered, the total sales, the royalty applicable and the total
royalty paid.
Payments to Canada after Termination
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5.6 eVS shall pay to Canada any sums due and payable under the
MASTER LICENCE, whether incurred prior to termination or after,
in accordance with Article 16 (Termination).
Attribution of Royalties
5.7 eVS shall use its commercially reasonable best efforts to
identify how much of the aggregate annual royalties are
attributable to each of ET or IR. This information will be
disclosed to Canada at the same time the PERIOD TWO payment is
made.
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6 IP OWNERSHIP & REPRESENTATIONS
Canada Owns Licenced Technologies
6.1 eVS agrees and is estopped from alleging otherwise, that:
6.1.1 subject to the provisions of paragraph 7.12 (Ownership
of Background Intellectual Property) the LICENCED
TECHNOLOGIES, its creation, discovery, development and
every matter relating thereto, forming part thereof and
arising therefrom, are vested in and are the sole
property of Canada;
6.1.2 subject to the provisions of paragraph 7.12 (Ownership
of Background Intellectual Property) ownership and all
rights to, related to, connected with or arising out of
the foregoing, including without limitation, PATENTS,
INTELLECTUAL PROPERTY and copyright in and the right to
produce and publish or cause to be produced and
published all information material and documents, and
the right to issue a licence, are vested in and are the
sole property of Canada;
6.1.3 eVS shall have no rights in and to the foregoing except
as may be expressly granted in the MASTER LICENCE and
eVS shall not apply for any pertinent or other right
and shall not divulge or disclose, without the prior
written consent of Canada, any information, material or
documents concerning same or make available in any way
or use the LICENCED TECHNOLOGIES except as expressly
provided in this MASTER LICENCE;
6.1.4 Canada is the exclusive owner of the TRADEMARK and all
goodwill associated therewith, and any unauthorized use
of the TRADEMARK is an infringement of Canada's rights;
and
6.1.5 eVS acquires no right, title or interest in the
TRADEMARK, and eVS shall not in any manner represent
that it has any ownership interest in the TRADEMARK or
applications or registrations therefor.
No Impeachment
6.2 eVS shall neither impeach or otherwise attack, directly or
indirectly, the PATENTS the TRADEMARK or any INTELLECTUAL
PROPERTY rights held by Canada in the LICENCED TECHNOLOGIES nor
assist any third party to do the same, except where prohibited
by law.
Inimical Use of Confidential Information
6.3 Notwithstanding prohibition in paragraph 6.2 (No Impeachment),
eVS shall not use any CONFIDENTIAL INFORMATION obtained from
Canada in the negotiation of the
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MASTER LICENCE, under due diligence searches or otherwise
related to this MASTER LICENCE in any manner that violates eVS
rights and obligations under the MASTER LICENCE and is inimical
to the interests of Canada.
Regulatory Rights
6.4 Canada represents to the best of its knowledge that any
regulatory rights to the LICENCED TECHNOLOGIES are as follows:
6.4.1 STS Agriventures Ltd. owns the registration for Canada
for five ET products for beef cattle;
6.4.2 Nutricharge Partnership is in the final stages of the
process of getting ownership for one ET product for
beef cattle in the USA;
6.4.3 Canada is in the process getting ownership for one ET
product in Canada for swine; and
6.4.4 Agriventures STS Ltd. has obtained a registration for
one ET product beef cattle in UK and EEC, which
registration does not provide proprietary rights.
Inventors Rights
6.5 Canada has obtained an enforceable written assignment from each
named inventor, and the proper inventors have been identified
in the PATENTS. Canada has provided to eVS true and correct
copies of each such assignment.
6.6 To the best of Canada's knowledge the PATENTS both constitute a
valid and enforceable right of Canada and do not infringe or
conflict with the rights of any other person. To the best of
Canada's knowledge, Canada has no obligation to compensate any
non-governmental third parties in order to use the LICENCED
TECHNOLOGIES other than:
6.6.1 as prescribed under the Public Servants Inventions Act,
pursuant to which payments are carved from any
royalties received by Canada for the use of the
LICENCED TECHNOLOGIES;
6.6.2 a carve out of any royalty stream of Canada's
attributable to the use of technology arising out of a
collaboration with the Alberta Pork Producers
Development Corporation, which collaboration was
terminated on 1 July 1994, and which carve shall, as
between the PARTIES, be Canada's sole responsible.
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No Litigation
6.7 As of the date of execution of the MASTER LICENCE, to the best
of Canada's knowledge, there is no threatened suit, action,
claim, arbitration, grievance, litigation, administrative or
legal or other proceeding, or investigation, against Canada or
its licencees contesting the validity of, or Canada's rights to
use, any of the LICENCED TECHNOLOGIES.
Third Party Rights
6.8 Except for:
6.8.1 the licences listed in Appendix D ("RMS / AgResearch
Agreements);
6.8.2 the right to conduct research concerning the LICENCED
TECHNOLOGIES; and
6.8.3 the regulatory rights listed in paragraph 6.4
(Regulatory Rights);
as of the date of execution of the MASTER LICENCE, Canada has
not granted any commercial licence or other commercial right to
use, in any manner, any item of the LICENCED TECHNOLOGIES
whether or not requiring the payment of royalties.
Infringement
6.9 To the best of Canada's knowledge, as of the date of execution
of the MASTER LICENCE, no person or entity is infringing upon
any of Canada's rights to the PATENTS. To the best of Canada's
knowledge, Canada's use of the PATENTS prior to the date of
this MASTER LICENCE does not infringe, and has not infringed,
the rights of any third party. Canada has not received any
formal notice of infringement upon, misappropriation of any
asserted right of any third party, and to the best of Canada's
knowledge, there is no basis for any such notice.
Patent Coverage & Formula
6.10 Canada represents and warrants that:
6.10.1 the confidential formulation of the PRE-MIX as
identified in Appendix "C" in particular
NUTRI-CHARGE(R) MR (market-ready) and NUTRI-CHARGE(R)
ON (over- night), but excluding NUTRI-CHARGE(R) TM
(tank mixable) are within at least one claim on the US
patents;
6.10.2 this formulation, as adapted for a particular species
or medium of delivery, was disclosed under licence to
STS Agriventures Ltd. and Nutricharge (a limited
partnership) for regulatory registration.
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US Federal Department of Agriculture (FDA) Regulatory
Manufacture
6.11 As of the date of execution of the MASTER LICENCE, to the best
of Canada's knowledge, its licencee for the US territory,
Nutricharge, manufactured ET PENDING PRODUCT in full compliance
with FDA good manufacturing practice requirements.
No Export
6.12 As of the date of execution of the MASTER LICENCE, Canada has
not exported PRE-MIX or LICENCED PRODUCT to the USA, and to the
best of Canada's knowledge, none of Canada's licencees have
exported PRE-MIX or LICENCED PRODUCT to the USA.
Disclosure by Canada
6.13 As of the date of execution of the MASTER LICENCE, Canada has
made its best efforts to discuss, satisfy inquiries, locate and
disclose to eVS or its agents, all documents or other
information in Canada's possession concerning communications to
or from the FDA or prepared by the FDA, concerning the ET
PENDING PRODUCT, and the related FDA regulatory requirements
for new animal drugs.
Product Claims
6.14 As of the date of execution of the MASTER LICENCE, Canada has
agreed with the FDA as to a protocol to prove the following
claims concerning the ET PENDING PRODUCT:
6.14.1 increased dressing percentage;
6.14.2 reduced proportions of dark cutter which are animals
with low muscle glycogen and high pH;
6.14.3 reduced mobility of intra-muscular fat resulting in a
higher marbling score;
As evidenced by FDA memo dated 28 June 1996, an FDA letter 29
September 1997.
Animal Food
6.15 As of the date of the execution of the MASTER LICENCE, to the
best of Canada's knowledge, the ET PENDING PRODUCT meets all
FDA requirements for use as a
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non-human animal food. For greater clarity, Canada has not
assessed the ET PENDING PRODUCT with respect to the American
Association of Feed Control Officials (AAFCO).
FDA Problems
6.16 As of the date of execution of the MASTER LICENCE, Canada is
not currently aware of any issues or problems that would
significantly delay or prevent FDA approval of a new animal
drug application for the ET PENDING PRODUCT, with the exception
of clinical trial results which are the subject of the report
entitled "Investigator Final Study Report, INAD, 9267-0-0004".
No Misrepresentations
6.17 As of the date of execution of the MASTER LICENCE, Canada has
not, and to the best of Canada's knowledge, Her authorized
agents and licencees have not,
6.17.1 made any untrue statements of a material fact or
fraudulent statement to the FDA;
6.17.2 deliberately failed to disclose a fact requirement to
be disclosed to the FDA; and
6.17.3 paid any bribe or illegal gratuities or committed any
deceptive act to or upon the FDA.
Laboratory Practices
6.18 Canada has conducted itself with respect to ET and IR under
good laboratory practices, but Canada has not knowingly
conducted itself in accordance with any good laboratory
practices prescribed by a statute or regulation of another
nation.
Material Terms
6.19 Article 6 (IP Ownership & Representations) is a material term
of the MASTER LICENCE.
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7 IMPROVEMENTS, R & D, COLLABORATIONS
Carve Out
7.1 Notwithstanding any other provision of this MASTER LICENCE,
Canada shall retain from the MASTER LICENCE any and all rights
necessary for research and development both:
7.1.1 to improve ET and IR; and
7.1.2 to pursue research and development directly or
indirectly related to ET and IR.
Licencing of Improvements from Canada's R & D under Carve Out
7.2 If IMPROVEMENTS arise from research conducted by Canada at the
Lacombe Research Centre under paragraph 7.1 (Carve Out), and
7.2.1 those IMPROVEMENTS are exclusively owned by Canada; or
7.2.2 there are no pre-emptory or third party rights to those
IMPROVEMENTS under pre-existing agreements concerning
IR or ET;
then those IMPROVEMENTS shall be licenced exclusively to eVS
under the MASTER LICENCE upon notification by Canada of such
IMPROVEMENTS and acceptance of same by eVS in writing within
one hundred and eighty (180) days of the notification. Any
SERENDIPITOUS IMPROVEMENTS arising from research conducted by
Canada under paragraph 7.1 (Carve Out) shall not be covered by
the MASTER LICENCE.
No Competition
7.3 Canada shall not COMMERCIALIZE ET or IR or any IMPROVEMENTS,
but nothing in this obligation shall derogate or diminish
Canada's right to conduct research and development as
contemplated in paragraph 7.1 (Carve Out).
Collaborations Between eVS and Canada
7.4 eVS and Canada shall each have the option to be a collaborator
with the other in any projects concerning IR or ET. If the
PARTIES agree to such a collaboration, then eVS and Canada
(through the Lacombe Research Centre) shall support on a
case-by-case, mutually agreed upon basis, such collaborations
in cash or in kind, or both. Each PARTY shall thereafter
provide the other PARTY with periodic progress reports
regarding the status of the collaboration as provided for in
the applicable collaboration agreement.
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Licencing of Improvements from eVS / Canada Collaborations
7.5 Any IMPROVEMENTS produced in any collaboration between eVS and
Canada (Lacombe Research Centre) pursuant to paragraph 7.4
(Collaborations Between eVS and Canada) shall be licenced
exclusively to eVS under the MASTER LICENCE after notification
by Canada of such IMPROVEMENT and acceptance of same by eVS in
writing within one hundred and eighty (180) days from such
notification. The IMPROVEMENTS shall be owned by Canada unless
eVS brought technology into the collaboration which was crucial
to the collaboration in which case the resulting technology
shall be jointly owned in proportion to the values of the
technologies brought by the PARTIES.
Licencing of Serendipitous Technologies from eVS / Canada
Collaborations
7.6 After notification by Canada of any SERENDIPITOUS TECHNOLOGIES
produced in any collaboration between eVS and Canada pursuant
to paragraph 7.4 (Collaborations Between eVS and Canada), eVS
shall have an option (exercisable in writing within one hundred
and eighty (180) days from the aforementioned notification) to
exclusively licence those SERENDIPITOUS TECHNOLOGIES, on
reasonable commercial terms which terms shall include a
commercially reasonable best efforts to COMMERCIALIZE
obligations. The SERENDIPITOUS TECHNOLOGIES resulting from the
collaboration shall be owned by Canada unless eVS brought
technology into the collaboration which was crucial to the
collaboration in which case the resulting technology shall be
jointly owned in proportion to the values of the technology
brought by the PARTIES.
Third Party Licences Resulting Technology
7.7 If under paragraph 7.6, (Licencing Serendipitous Technologies
from eVS / Canada Collaborations)
7.7.1 eVS funds a collaboration but does not exercise any
rights to licence any technology resulting from that
collaboration; and
7.7.2 Canada commercializes that resulting technology with a
third party;
then eVS shall be entitled to a portion of any consideration
payable under the licence with the third party in an amount to
be agreed upon by the PARTIES, which may be determined in part
by considering each PARTY's contribution to the collaboration.
Improvements Part of Licenced Technologies
7.8 For greater clarity, if eVS elects to licence IMPROVEMENTS,
pursuant to any or all of:
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7.8.1 paragraph 7.2 (Canada's R & D under Carve Out);
7.8.2 paragraph 7.5 (eVS / Canada Collaborations); and
7.8.3 paragraph 7.6 (Serendipitous Technologies from eVS /
Canada Collaborations);
then such IMPROVEMENTS shall be deemed to be included in the
definition of LICENCED TECHNOLOGIES of ET or IR, as applicable.
Discretion to Collaborate
7.9 Collaborations pursuant to paragraph 7.4 (Collaborations
Between eVS and Canada) shall be conducted subject to the
discretion of Canada and eVS (as applicable), factoring in,
amongst other factors:
7.9.1 research planning priorities;
7.9.2 mandate;
7.9.3 pre-existing contractual obligations;
7.9.4 scarcity of resources & personnel;
7.9.5 Ministerial prerogative; and
7.9.6 commercial needs / priorities / time constraints.
Either Party Unable / Unwilling to Collaborate
7.10 If either PARTY is unable or unwilling to collaborate or
conduct a collaboration pursuant to paragraph 7.4
(Collaborations Between eVS and Canada) due to reasons
contemplated in paragraph 7.9 (Discretion to Collaborate) then
the other PARTY may enter into a collaboration with a third
party, subject to the applicable criteria in paragraph 7.11
(Third Party Collaborations).
Third Party Collaborations
7.11 When the PARTIES enter into third party collaboration, as
prescribed in paragraph 7.10 (Either Party Unable / Unwilling
to Collaborate), Canada and eVS shall:
7.11.1 disclose to the other the nature of the collaboration
prior to the start of the project;
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7.11.2 determine if the third party would collaborate with
Canada or eVS as the case may be;
7.11.3 ensure that if Canada or eVS (as applicable) do not
actively participate in collaborative project, then the
project shall be subject to any necessary
confidentiality restrictions and third party approvals
necessary to protect the CONFIDENTIAL INFORMATION of
either Canada or eVS;
7.11.4 supply candid, timely and complete disclosure of the
findings, results and their impact, potential or
otherwise, on ET or IR notwithstanding any
confidentiality strictures, to Canada or eVS (as
applicable);
7.11.5 ensure that eVS or Canada, as the case may be, are
signatories to any third party collaborations, even
though eVS or Canada are not actively participating in
the third party collaboration; and
7.11.6 if Canada is an active PARTY to a third party
collaboration and eVS is not, Canada will use its best
efforts to ensure that any IMPROVEMENTS resulting from
such third party collaborations are licenced to eVS
under the MASTER LICENCE.
For greater clarity, pursuant to subparagraph 7.11.5 (Third
Party Collaborations), the PARTIES agree that each must deliver
an executed signature page to any third party agreement within
thirty (30) days of the receipt of the execution copy of such
agreement.
Ownership of Background Intellectual Property
7.12 Any IMPROVEMENTS solely discovered, created, assigned to,
licenced or otherwise bought by Canada or eVS remain the
property of the PARTY that discovered, created or bought that
IMPROVEMENT. Any jointly discovered, created or bought
IMPROVEMENTS shall be jointly owned in the ratio which may be
determined by the collaboration, contribution or purchase.
Material Terms
7.13 eVS's obligations under this Article are material terms of the
MASTER LICENCE.
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8 WARRANTIES OF QUALITY
No Warranties
8.1 Other than as explicitly stated in the MASTER LICENCE, Canada
makes no warranties, express or implied, of any nature, for the
LICENCED TECHNOLOGIES including without limitation:
8.1.1 merchantability;
8.1.2 fitness for any or a particular purpose;
8.1.3 commercial utility;
8.1.4 latent or other defects;
8.1.5 infringement or non-infringement of PATENTS or other
third party rights;
8.1.6 conformity with the laws of any jurisdictions; or
8.1.7 fitness for eVS's corporate objectives.
Disclaimer of Implied Warranties
8.2 No legal or equitable warranties implied by law or convention
under any domestic, foreign or international legal regime shall
apply to the MASTER LICENCE. eVS acknowledges this disclaimer
and is estopped from relying on any such warranties against
Canada.
Third Party Representations
8.3 eVS shall not represent to any sub-licencee the existence of
any warranty concerning the LICENCED TECHNOLOGIES unless such
warranty is explicitly stated in the MASTER LICENCE.
Disclosure by Canada
8.4 As of the date of execution of the MASTER LICENCE, Canada has
made its best efforts to locate and disclose to eVS all
relevant information, studies, publications in Canada's
possession or control concerning:
8.4.1 any regulatory processes;
8.4.2 the use, safety and effectiveness of the PATENTS; and
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8.4.3 the safety for consumption by animals that have been
treated by the PATENTS;
for the purposes originally contemplated under the MASTER
LICENCE. To the best of Canada's knowledge all of the
aforementioned information, studies, and publications are true
and correct in all material respects and omit no material facts
the absence of which renders the studies misleading.
Disclosure & Due Diligence
8.5 eVS acknowledges that:
8.5.1 eVS has conducted a due diligence search of all matters
relevant to the LICENCED TECHNOLOGIES, the PATENTS and
the MASTER LICENCE;
8.5.2 eVS has had an opportunity to confer with Canada and
receive satisfactory answers from Canada; and
8.5.3 Canada makes no representation that all the
characteristics both favourable and unfavourable have
been identified.
Confidential Information Without Warranty / No Reliance
8.6 Except for the representations of Canada in the MASTER LICENCE,
8.6.1 eVS shall not rely in any way on the accuracy or
completeness of any CONFIDENTIAL INFORMATION or other
information provided by Canada under the MASTER
LICENCE;
8.6.2 any use of such CONFIDENTIAL INFORMATION shall be at
eVS sole risk and expense; and
8.6.3 any CONFIDENTIAL INFORMATION provided to eVS by Canada
is without any warranty or guarantee of any kind
whatsoever.
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9 PATENTS
Queen Owns All Patents
9.1 The PARTIES agree that all PATENTS shall be in the name of "Her
Majesty the Queen in Right of Canada as represented by the
Minister of Agriculture and Agri-Food Canada" except in those
instances of joint inventions as contemplated in Article 7
(Improvements, R & D, & Collaborations) in which case such
patents shall be in joint names.
eVS Discretion to Patent
9.2 eVS shall have discretion as to the jurisdictions in which it
seeks patent protection.
eVS Responsibility for Patent Costs
9.3 eVS shall be responsible for all future fees related to present
and future PATENT applications, registration, prosecution and
maintenance for:
9.3.1 all PATENTS in existence at the time of the execution
of the MASTER LICENCE, irrespective of whether or not
eVS deems those extant PATENTS necessary; and
9.3.2 patents deemed necessary by eVS and Canada, or by eVS
only.
Canada Responsibility for Patent Costs
9.4 Canada shall be responsible for all fees for patent
applications that:
9.4.1 are initiated after the execution of the MASTER
LICENCE; and
9.4.2 deemed necessary by Canada alone.
Material Terms
9.5 eVS's obligations under this Article are material terms of the
MASTER LICENCE.
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10 REGULATORY
Notice to Assist
10.1 Canada shall assist eVS to obtain any required regulatory
approvals in the CORE COUNTRIES and as necessary elsewhere, for
the COMMERCIALIZATION of ET and IR. Such assistance shall be
provided after receipt of advance notice by Canada from eVS.
eVS shall use its best efforts to provide advance notice to
Canada to enable resource planning and allocation, which notice
in any event shall be given not less than two (2) weeks prior
to the date on which Canada's assistance is needed.
Assistance
10.2 This assistance shall include without limitation:
10.2.1 educating eVS personnel or clients in the technology in
support of hearings or registration trials;
10.2.2 making scientists familiar with the technology
available for hearings or registration trials;
10.2.3 disclosing scientific reports (under appropriate
confidentiality strictures when applicable);
10.2.4 establishing / disclosing protocols; and
10.2.5 scientific support.
eVS acknowledges that when possible, third parties will be used
to provide the said assistance in order to preserve and best
utilize Canada's scientific resources. Such assistance will be
provided by Canada subject to:
10.2.6 scarcity of scientific resources and personnel;
10.2.7 pre-existing contractual obligations;
10.2.8 research and development priorities; and
10.2.9 time constraints.
In the event third parties cannot be utilized, Canada shall
render the necessary support to eVS within a reasonable period
of time as mutually agreed to by the parties taking into
account the foregoing after receipt of sufficient advance
notice pursuant to paragraph 10.1 (Notice to Assist).
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Canada's Advisory Board Positions
10.3 Canada shall have up to two positions on any scientific
advisory boards used by eVS regarding ET and IR
COMMERCIALIZATION. Canada shall ensure that, as applicable, the
Director of the Lacombe Research Centre (or the Director's
designate) and one of its scientists who is most conversant
with IR or ET shall be Canada's nominees. Canada's scientist
position on any advisory boards will be filled on a revolving
basis as required.
Costs of Canada's Advisory Board Members
10.4 eVS shall pay all travel, accommodation and victualing and
incidental costs for Canada's members to travel for regulatory
or advisory board purposes at rates:
10.4.1 not to exceed those prescribed by the Treasury Board of
Canada for civil servants where those costs are
incurred before notice or approval of the
aforementioned costs by eVS; or
10.4.2 at the rates in accordance with the policies and
procedures of eVS then in effect when the
aforementioned costs are approved in advance by eVS;
but salary and related expenses shall be borne by Canada.
Regulatory Costs
10.5 eVS shall be solely responsible for any and all regulatory
costs, applicable in any jurisdiction, including without
limitation: professional fees, consultant costs, trial costs,
government fees, levies and charges. For greater clarity and
without restricting the generality of the foregoing, eVS shall
not be responsible for infringement or litigation costs, other
than as prescribed under Article 14 (Patent Infringement).
Decision to Register
10.6 eVS shall be responsible, upon consultation with Canada, for
determining if a product is to be registered under any
regulatory regime, as well as the nature of the registration.
Should eVS decide not to register, with or without claims,
Canada may independently pursue registration at Canada's own
cost.
Registration Ownership
10.7 Registrations shall vest in the name of the PARTY that paid for
the registration. Any registrations in the name of eVS shall be
as soon as practicable assigned,
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transferred or licenced to Canada, for one dollar, upon the
expiration or termination of the MASTER LICENCE.
Trademark Use
10.8 eVS shall:
10.8.1 use the TRADEMARK only in the manner and form
prescribed by Canada in accordance with the reasonable
standards and specifications of Canada;
10.8.2 observe such reasonable requirements with respect to
trademark notices and other forms of marking as Canada
from time to time may, in its sole discretion, direct
and communicate to eVS; and
10.8.3 indicate clearly when using the TRADEMARK that the
TRADEMARK is owned by Canada and that the TRADEMARK is
being used by eVS under a licence from Canada.
Trademark and Quality Control
10.9 eVS shall only use the TRADEMARK in the territories for which
Canada is the owner and only in association with ET which
conforms in nature and quality and are produced or performed by
eVS in compliance with the contractual and regulatory standards
as prescribed in Article 11 (Audits & Quality Control).
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11 AUDITS & QUALITY CONTROL
Audit Rights and Purposes
11.1 Canada shall have the right to audit eVS and examine eVS's
records, documentation and data related to the
COMMERCIALIZATION of ET and IR in ensure compliance with all
terms of the MASTER LICENCE and protection of the TRADEMARK.
Audit Timing / Process / Cost
11.2 Such audits will be conducted during the 2nd quarter of any
fiscal year after the completion of the preceding years annual
audit. The audit will be conducted during normal business hours
following reasonable written notice. Canada shall have the
option to use the independent auditors of eVS to conduct the
forensic royalty audit. If there is a five percent (5%) or more
deficiency in royalty payment uncovered by the forensic arm of
the independent auditors of eVS, then in addition to
immediately paying the deficiency, eVS shall pay Canada's
costs, if any, in conducting the audit.
Regulatory Quality Standards
11.3 eVS shall use its best efforts to ensure that all ET and IR
processes or products meet or exceed any contractual (pursuant
to paragraph 11.4 - Contractual Quality Standards), regulatory
or statutory standards. eVS shall contractually require the
same compliance from its contractors, sub-contractors or
sub-licences.
Contractual Quality Standards
11.4 Canada and eVS shall clearly define in writing quality
standards with respect to both product and manufacturing
procedures, prior to the manufacture of each product.
Spot Audits
11.5 If:
11.5.1 eVS becomes insolvent;
11.5.2 eVS fails to pay royalties within thirty (30) days of
written notice of the arrears;
11.5.3 eVS is notified by a regulatory authority that eVS or
one of its contractors, sub-licencees has breached
statutory or regulatory standards in the production or
use of ET or IR;
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11.5.4 eVS fails to meet the contractual standards as
prescribed in the procedure in paragraph 11.4
(Contractual Quality Standards); or
11.5.5 Canada becomes aware of bona fide complaints about
the quality of PRE-MIX or LICENCED PRODUCT;
then irrespective of the quarter, Canada may ask eVS to conduct
spot audits of eVS production and sales sites anywhere in the
LICENCED TERRITORIES within fourteen (14) days from written
notification from Canada. eVS shall disclose those audit
results to Canada within thirty (30) days of each audit.
Material Terms
11.6 eVS's obligations under this Article are material terms of
the MASTER LICENCE.
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12 REPORTS
Administrative Meetings
12.1 The PARTIES agree to meet annually to review for the preceding
and upcoming year, both the progress of the COMMERCIALIZATION
of ET and IR, and related scientific research, in addition to
any other issues the PARTIES deem relevant. At the meeting the
PARTIES may address:
12.1.1 a description of the steps taken by eVS to
COMMERCIALIZE and sub-licence the LICENCED
TERRITORIES;
12.1.2 a description of the marketing conditions for the
LICENCED PRODUCT;
12.1.3 a report on the production, distribution and sales of
the LICENCED PRODUCT;
12.1.4 a statement of:
12.1.4.1 the names and addresses of all
sub-licences to whom the LICENCED
PRODUCT has been sub-licenced;
12.1.4.2 the latest period (PERIOD ONE or
TWO) reports, and if possible the
revenues from each sub-licencee;
12.1.5 a discussion of the business plan for the
COMMERCIALIZATION of the LICENCED TECHNOLOGIES both
on a strategic and short term basis;
12.1.6 a discussion of the research conducted by the PARTIES
relevant to the LICENCED TECHNOLOGIES; and
12.1.7 a discussion of the proposed research for the next
two (2) years both on a strategic and short term
basis.
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13 CORPORATE REPRESENTATIONS & WARRANTIES
eVS
13.1 eVS represents and warrants to Canada that as of the date of
execution of the MASTER LICENCE:
Ability
13.1.1 eVS can COMMERCIALIZE the LICENCED PRODUCTS, and eVS
has the necessary access to funds, resources and
personnel to perform its obligations under the MASTER
LICENCE subject to:
13.1.1.1 eVS demonstrating that it can produce
products or services or both based on
the LICENCED TECHNOLOGIES in a
financially profitable manner and
that a commercial market exists for
such sales at profitable prices; and
13.1.1.2 the receipt of the anticipated
applicable USDA regulatory approvals
for the LICENCED TECHNOLOGIES;
This representation and warranty is a fundamental
condition of the MASTER LICENCE but is not a guarantee
by eVS that there is commercial market for the LICENCED
TECHNOLOGIES or that the LICENCED TECHNOLOGIES can be
successfully COMMERCIALIZED.
Authorization
13.1.2 it has the corporate power and authority to negotiate,
execute and comply with the MASTER LICENCE;
Enforceable
13.1.3 it is bound by the MASTER AGREEMENT as a legal, valid
and enforceable contract upon execution, limited only
by applicable bankruptcy or creditor laws, and general
principles of equity;
Litigation
13.1.4 it has no knowledge of any no legal proceeding or
order pending against or, to the knowledge of eVS,
threatened against or affecting, eVS or any of its
properties or otherwise that could adversely affect or
restrict the ability of eVS to consummate fully the
transactions contemplated by this MASTER LICENCE,
(including without limitation the COMMERCIALIZATION of
the
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LICENCED TECHNOLOGIES) or that in any manner draws
into question the validity of this MASTER LICENCE.
Veracity of Statements
13.1.5 no representation or warranty by eVS contained in this
MASTER LICENCE and no statement contained in any
certificate, schedule or other instrument furnished to
Canada pursuant hereto or in connection with the
transactions contemplated hereby, contains any untrue
statement of a material fact or omits to state a
material fact.
Third Party Representations
13.1.6 it has not given any undertaking, express or implied, to
any third party which would:
13.1.6.1 preclude eVS from fulfilling eVS's
obligations under the MASTER LICENCE;
or
13.1.6.2 cause eVS to breach an agreement with
a third party.
Canada
13.2 Canada represents and warrants to eVS as of the date of execution
of the MASTER LICENCE.
Authorization
13.2.1 She has the power and authority to negotiate, execute
and comply with the MASTER LICENCE, subject to all
applicable laws and the royal prerogative and
13.2.1.1 no further action is required by or
in respect of any governmental or
regulatory authority;
13.2.1.2 to the best of Canada's knowledge the
MASTER LICENCE does not contravene,
violate or constitute a breach or
default under, any requirement of law
applicable to Canada or any contract
to which Canada is bound or subject;
and
13.2.1.3 the MASTER LICENCE is legal, binding
and enforceable in accordance with
its terms.
Veracity of Statements
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13.2.2 no representation or warranty by Canada contained in
this MASTER LICENCE and no statement contained in any
certificate, schedule or other instrument furnished to
eVS pursuant hereto or in connection with the
transactions contemplated hereby, contains any untrue
statement of a material fact or omits to state a
material fact.
Compliance of Laws
13.2.3 to the best of Canada's knowledge as of the date of
execution of the MASTER LICENCE there is:
13.2.3.1 no suit, action, claim, arbitration,
administrative or legal or other
proceeding, or governmental or other
investigation pending or threatened
against or affecting the PATENTS
other than
13.2.3.1.1 a grievance by a fee for
service contractor, Dick
Graham,(operating under the
corporate name of
sensIRscan) who assigned
his rights of inventorship
to Canada under IR patent
#5,458,418, and is now
claiming a share of any
royalties received by
Canada for that patent.
13.2.3.2 no failure to comply with, nor any
default under, any law, requirement,
regulation, or order affecting the
PATENTS;
13.2.3.3 no violation of or default with
respect to any order, or judgment of
any court, board, agency, or other
instrumentality with jurisdiction
issued or pending against Canada
which might have a material adverse
effect on the PATENTS or the
ownership or use thereof; and
13.2.3.4 no incident, events and claims of
product liability relating to the
PATENTS.
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14 PATENT INFRINGEMENT
Notice
14.1 In case of a PATENT infringement, or suspected PATENT
infringement eVS or Canada shall promptly notify the other in
writing of the alleged infringement of which a PARTY has
knowledge.
Core Countries
14.2 If the infringement occurs in the CORE COUNTRIES then Canada
shall have
14.2.1 in the case of a defence, fourteen (14) days from
service of a claim; or
14.2.2 in the case of a prosecution / enforcement, ninety
(90) days from notification the possible
infringement,
to determine if Canada will prosecute or defend the
infringement action, as the case may be.
Canada Defends / Prosecutes
14.3 If Canada elects to prosecute / enforce or defend an action in
a CORE COUNTRY, then eVS shall have the right to participate in
the litigation as co-counsel at eVS's sole cost. Any
prosecution / enforcement action will claim in addition to any
other applicable damages or costs, both the lost revenues to
the Canada and the lost revenues to eVS.
eVS Co-Counsel
14.4 All decisions related to the conduct and settlement of the
litigation shall be made jointly by the PARTIES except that
Canada may settle suits seeking damages for infringement
against third party patents without the consent of eVS so long
as:
14.4.1 such settlement is solely for monetary damages for
which Canada is solely responsible as owner of ET or
IR;
14.4.2 such settlement in no way derogates, diminishes or
restricts the rights granted to eVS in the MASTER
LICENCE.
For greater clarity, the prior written consent of eVS
shall be required in all cases where a settlement would
derogate, diminish or restrict the rights granted to eVS in
the MASTER LICENCE.
eVS Assumes Control of Litigation
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14.5 If there is a disagreement between the PARTIES as to a
significant strategic or tactical decision during the course
of litigation contemplated in paragraph 14.3 (Canada Defends /
Prosecutes), then eVS shall have the right to take over the
litigation pursuant to paragraph 14.9 (eVS Defends /
Prosecutes) and conduct the litigation in a commercially
responsible manner.
Costs when eVS Assumes Control of Litigation
14.6 eVS shall remain responsible for its costs up to the point the
transfer of the case under paragraph 14.5 (eVS Assumes Control
of Litigation).
Canada Controls Payment of Damage / Settlement Terms
14.7 Notwithstanding the foregoing, eVS shall not have the right
to:
14.7.1 compromise or otherwise settle damages that might be
payable by Canada; or
14.7.2 enter a settlement that might derogate, diminish or
restrict the rights granted to Canada in the Patents,
without Canada's written prior consent.
Canada's Damage Awards Distribution
14.8 If Canada is awarded damages or costs or both, then Canada
shall:
14.8.1 firstly, deduct its total litigation costs from the
amount of the award, if costs are not awarded;
14.8.2 secondly, if the court issues a judgment identifying
damages for the lost revenues of Canada and of eVS,
then the lost revenues damages of eVS shall be
forthwith paid to eVs upon receipt;
14.8.3 thirdly, if a global damage award is made which does
not identify the damage owing to Canada and eVS
respectively, then the remaining amount of the award
(excluding any punitive damages), shall be deemed to
be GROSS REVENUES, and subject to the royalty rate
under the MASTER LICENCE; and
14.8.4 any punitive damages shall be divided equally between
the PARTIES.
eVS Defends / Prosecutes
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14.9 If Canada declines to prosecute or defend in a CORE COUNTRY,
then eVS shall be free to take all action that is commercially
responsible to prosecute or defend the infringement action,
subject always to paragraph 14.7 (Canada Controls Payment of
Damage / Settlement Terms).
14.9.1 From the date the litigation is commenced, in the
case of a prosecution, or from the date of service,
in the case of a defence, eVS shall then be entitled
to defray from the subsequently generated royalties
Article 5 (Royalties) costs of the litigation
including without limitation legal fees, court costs,
disbursements, and expert fees.
14.9.2 If at the time of the PERIOD ONE and PERIOD TWO
royalty payments pursuant to paragraph 5.3 (Payment
Dates), litigation costs exceed accrued royalties,
then no royalties shall be paid, and the excess costs
shall be carried forward and set-off against future
royalties.
14.9.3 If the PARTIES determine that no future royalties are
possible, then from that time forward eVS shall bear
any additional litigation costs. In any case, Canada
shall not be liable for funds greater than the
royalty stream owing to Canada.
14.9.4 If eVS is awarded damages or costs or both, then
after deducting total litigation costs from the
amount of the award, if costs are not awarded, eVS
shall reimburse Canada:
14.9.4.1 firstly, for any amounts set-off
against royalties pertaining to any
litigation costs;
14.9.4.2 secondly, the remaining amount of
the award (excluding any punitive
damages) shall be deemed to be GROSS
REVENUES, and subject to the royalty
rate under the MASTER Licence; and
14.9.4.3 thirdly, any punitive damages shall
be divided equally between the
PARTIES.
Notwithstanding the foregoing, eVS shall not be
entitled to "double dip" or have its total litigation
costs reimbursed both by Canada and under any general
damages or costs award. It is the intention of the
PARTIES that for every dollar in costs recovered by
eVS, eVS shall reimburse Canada a dollar in set-off
royalties.
Non-Core Country Infringement Actions
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14.10 In non-CORE COUNTRIES, eVS alone shall be responsible for all
decisions, costs and obligations associated with any
infringement prosecutions / enforcements or defences and shall
indemnify Canada for the same. Notwithstanding the foregoing,
eVS shall brief Canada on not less than an annual basis as to
the status of such actions, unless requested by Canada on a
case specific basis.
Parties Jointly Police Infringement
14.11 The PARTIES agree that they will jointly police infringement
of the ET/IR PATENTS and will consult with the other with
respect thereto.
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15 INDEMNIFICATION
Reciprocal for Negligence / Contract Breach
15.1 Subject to any applicable federal laws, Canada and eVS shall
each defend, indemnify and hold the other harmless against:
15.1.1 any third party claims, costs, or suits arising out
of the negligence of the other; and
15.1.2 negligence damages related to breaches of material or
fundamental representations or covenants contained in
the MASTER LICENCE.
Procedures
Notice
15.2 Promptly after acquiring knowledge of any claims that fall
within the compass of paragraph 15.1 (Reciprocal for
Negligence / Contract Breach) Canada or eVS, as the case may
be, shall give to the other written notice of such claim.
Failure to give this notice shall not relieve the indemnifying
party of any liability it may have to the indemnified party if
such failure does not materially prejudice the indemnifying
party.
Indemnifying Party Defends
15.3 Subject to indemnifying party waiving its right to contest its
obligation to indemnify the indemnified party for any such
claims, the indemnifying party shall have the right to assume
the defense. The indemnifying party shall not be liable to the
indemnified party for any legal expenses of other counsel or
any other expenses subsequently incurred by such indemnified
party in connection with the defense.
Indemnified Party Defends
15.4 If the indemnifying party fails to assume such defense or
advises that there are issues which raise conflicts of
interest between the PARTIES, the indemnified party may retain
one counsel satisfactory to it, and the indemnifying party
shall pay all reasonable fees and expenses of such counsel
promptly as statements therefor are receive. If the conflict
of interest is the reason for such claims or the indemnified
party's action resulted in such claims, then the indemnifying
party shall be reimbursed by the indemnified party all monies
paid under paragraph 15.4.
Co-operation
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15.5 The indemnifying party shall receive from the indemnified
party all necessary and reasonable cooperation in said defense
including, but not limited to, the services of employees who
are familiar with the transactions out of which any such
claims may have arisen.
Mutual Consent of Settlement
15.6 The indemnifying party shall not be liable for any settlement
effectuated without its prior written consent.
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16 TERMINATION
By Canada for Cause
16.1 The MASTER LICENCE, at the option of Canada, may be terminated
forthwith by Canada without compensation to eVS if:
16.1.1 eVS fails to COMMERCIALIZE either one of ET or IR in
at least one of the CORE COUNTRIES within the earlier
of two (2) years from the USFDA regulatory approval
for ET as a New Animal Drug Application or four (4)
years from the execution of the MASTER LICENCE;
16.1.2 eVS fails to fund at least one collaboration or
research support agreement within two (2) years from
the date of the execution of the MASTER LICENCE;
16.1.3 eVS fails to make any required payment within forty
five (45) days of receipt of the written notice of
the arrears;
16.1.4 eVS continues to neglect, or fails to meet, a
contractual, regulatory, or statutory standard after
receipt of written notice of such deficiency and the
expiration of a reasonable period of time to cure the
deficiency, as defined in the paragraph 11.3
(Regulatory Quality Standards) or paragraph 11.4
(Contractual Quality Standards);
16.1.5 eVS commits or permits a breach of the identified
material or fundamental terms and conditions in the
MASTER LICENCE identified in paragraphs and Articles:
2.1, Surrender
2.2, Grant
2.3, Sub-licencing
2.4, Canada's Consent
2.5, Sub-licencing Conditions
2.6, Termination
2.7, Third Party Obligations - eVS
4.1, Best Efforts to Commercialize
6.2, No Impeachment
6.3, Inimical Use of Confidential Information
8.3, Third Party Representations
8.6, Confidential Information without Warranty /
No Reliance
9.3, eVS Responsibility for Patent Costs
10.4, Costs of Canada's Advisory Board Members
10.5, Regulatory Costs
10.6, Decision to Register
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10.7, Registration Ownership
10.8, Trademark Use
10.9, Trademark and Quality Control
11.1, Audit Rights and Purposes
11.2, Audit Timing / Process / Costs
11.5, Spot Audits
14.6, Costs when eVS Assumes Control of Litigation
14.7, Canada Controls Payment of Damage /
Settlement Terms
15.1, Reciprocal Indemnification for Negligence /
Contract Breach
17.1, Confidentiality Obligations
17.2, Confidentiality Measures
17.3, Distribution by the Receiving Party
17.4, Common Law Duty of Confidentiality
17.5, Confidentiality Exceptions
17.8, Fiduciary
17.9, Elements of Fiduciary Relationship
17.10, Equitable Relief
21.1, No Bribes
21.4, Compliance with Law; and
Article 7, Improvements, R & D Collaborations.
and fails to remedy such breach within ninety (90)
days after being required in writing to do so by
Canada;
16.1.6 eVS breaches a representation or warranty in
paragraph 13.1 ( eVS) made to Canada hereunder and
such breach has a material adverse effect on the
benefits to Canada or eVS's ability to perform its
obligations hereunder;
16.1.7 eVS commences bankruptcy or insolvency proceedings,
or has a receiving order made against it or has a
receiver appointed to continue its operations, or has
its assets seized or otherwise attached for the
benefit of creditors, or passes a resolution for
winding up, or takes the benefit of any statute for
the time being in force, relating to bankrupt or
insolvent debtors or the orderly payment of debts;
16.1.8 eVS assigns the MASTER LICENCE without the prior
written consent of Canada; or
Trademark Rights Terminated
16.2 Canada may terminate the trademark rights and permissions
granted under the MASTER LICENCE if eVS breaches any of its
obligations with respect to the
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TRADEMARK including without limitation eVS's obligations to
maintain the quality and character of the LICENCED
TECHNOLOGIES or the quality control standards as prescribed in
the MASTER LICENCE and such breach is not remedied within 30
days of written notice thereof or sooner as circumstances
dictate. For greater certainty the termination of the
TRADEMARK rights / licence shall not mean or result in the
termination of the MASTER LICENCE and the rights granted
thereunder to ET and IR.
Procedure
16.3 Termination shall be effected by a notice, that shall be
effective as of the date stated therein, but subject to
paragraph 16.4 (The Company's Duties on Termination), to
terminate the MASTER LICENCE, together with all rights of eVS
hereunder, without prejudice:
16.3.1 to the right of Canada to sue for and recover any
royalties or other sums due Canada; and
16.3.2 to the remedy of either PARTY in respect of any
previous breach of the MASTER LICENCE.
The Company's Duties on Termination
16.4 Upon termination or expiration of the MASTER LICENCE, eVS
shall, at its own cost:
16.4.1 return immediately to Canada all CONFIDENTIAL
INFORMATION and LICENCED TECHNOLOGIES, including
copies thereof;
16.4.2 certify in writing to Canada, within thirty (30)
days, that to the best of eVS's knowledge all of the
CONFIDENTIAL INFORMATION (including copies) has been
returned;
16.4.3 deliver a detailed statement to Canada of the
inventory of the LICENCED TECHNOLOGIES, then
existing, but not sold by eVS, as of the date of
expiration or termination;
16.4.4 provide Canada the right of first refusal to purchase
from eVS any LICENCED TECHNOLOGIES stocks at fair
market value;
16.4.5 dispose of any remaining LICENCED TECHNOLOGIES stocks
as specified by Canada;
16.4.6 pay all costs due under the MASTER LICENCE, up to and
including the termination date, within thirty (30)
days of the termination;
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16.4.7 pay all costs due under the MASTER LICENCE,
subsequent to the termination, for any LICENCED
TECHNOLOGIES sold after termination, within seven (7)
days of the liability being incurred; and
16.4.8 transfer to Canada at no cost, all rights, permits,
authorizations, registrations concerning the LICENCED
TECHNOLOGIES not already in Canada's name.
Surviving Obligations
16.5 All obligations of the PARTIES which expressly or by their
nature survive termination or expiration, shall continue in
full force and effect subsequent to and notwithstanding such
termination or expiration, until they are satisfied or by
their nature expire. For greater clarity, and without
restricting the generality of the foregoing, the following
provisions survive termination or expiration: Articles 5
(Royalties), 17 (Confidentiality / Fiduciary & Equitable
Remedies), 15 (Indemnification) and 14 (Patent Infringement)
shall survive early termination or expiration of the MASTER
LICENCE.
Surrender of Licence
16.6 If eVS does not pay any royalty to Canada within seven (7)
years from the execution of the MASTER LICENCE, then eVS shall
surrender the MASTER LICENCE to Canada at Canada's election.
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17 CONFIDENTIALITY / FIDUCIARY & EQUITABLE REMEDIES
Confidentiality Obligations
17.1 The CONFIDENTIAL INFORMATION disclosed to the RECEIVING PARTY
shall be:
17.1.1 used by the RECEIVING PARTY solely for purposes
authorized under the MASTER LICENCE;
17.1.2 held in confidence, safeguarded and not disclosed by
the RECEIVING PARTY; and
17.1.3 held in trust and dealt with only as authorized under
the MASTER LICENCE.
Confidentiality Measures
17.2 The RECEIVING PARTY shall require that all persons who receive
any CONFIDENTIAL INFORMATION:
17.2.1 have a need to know;
17.2.2 are properly instructed to maintain the CONFIDENTIAL
INFORMATION in confidence; and
17.2.3 sign a confidentiality agreement that binds the
person to the same terms and conditions as outlined
herein.
Distribution by the Receiving Party
17.3 Distribution of documents beyond the RECEIVING PARTY'S staff
shall be conducted on a need to know basis and only with the
written permission of the DISCLOSING PARTY.
Common Law Duty of Confidentiality
17.4 Nothing contained in the MASTER LICENCE derogates, displaces
or otherwise diminishes the common law duty of confidentiality
vested in the RECEIVING PARTY concerning the CONFIDENTIAL
INFORMATION. For greater certainty, the RECEIVING PARTY
acknowledges and is estopped from alleging otherwise that:
17.4.1 the CONFIDENTIAL INFORMATION is inaccessible
(non-public) and identifiable;
17.4.2 the CONFIDENTIAL INFORMATION was imparted in
circumstances importing an obligation of confidence;
and
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17.4.3 any use or disclosure of the CONFIDENTIAL
INFORMATION, except as authorized in the MASTER
LICENCE, prejudices and is detrimental to the
DISCLOSING PARTY'S commercial and scientific
interests.
Confidentiality Exceptions
17.5 The contractual and common law duties of confidentially
shall not apply to the RECEIVING PARTY, if the RECEIVING PARTY
can demonstrate that:
Public Domain
17.5.1 the information was legally and legitimately in the
public domain through no act or omission of the
RECEIVING PARTY at the time of disclosure;
Published
17.5.2 the information was legally and legitimately
published or otherwise becomes part of the public
domain after the time of disclosure of the
CONFIDENTIAL INFORMATION to the RECEIVING PARTY,
through no act or omission of the RECEIVING PARTY;
Already Known
17.5.3 the information was already in the possession of the
RECEIVING PARTY at the time of disclosure and was not
acquired by the RECEIVING PARTY directly or
indirectly from the DISCLOSING PARTY, (as shown by
documentation sufficient to establish the time of
such possession), and the RECEIVING PARTY is free to
disclose the information to others without breaching
any contractual obligations or common law duties;
Third Party Discloses
17.5.4 the information become available from an outside
source who has a lawful and legitimate right to
disclose the information to others, and the RECEIVING
PARTY is free to disclose the information to others
without breach of any contractual obligations or
common law duties;
Independently Developed
17.5.5 The information was independently developed by the
RECEIVING PARTY without the RECEIVING PARTY reviewing
or accessing any of the
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CONFIDENTIAL INFORMATION (as shown by documentation
sufficient to establish the timing of such
development); or
Judicial / Administrative Order
17.5.6 the information was released due to a compulsory
disclosure order under a judicial process or under a
compulsory regulatory requirement, none of which was
invited by or consented to by the RECEIVING PARTY,
and if the RECEIVING PARTY is Canada, the invitation
or consent did not emanate from the Western Region of
Agriculture and Agr-Food Canada's Research Branch.
Access to Information
17.6 The PARTIES agree that any document containing the following
information shall be treated by the PARTIES as "confidential
third party" information pursuant to section 20 of the Access
to Information Act:
17.6.1 trade secrets of eVS;
17.6.2 financial, commercial, scientific or technical
information that is consistently treated in a
confidential manner by eVS;
17.6.3 information, the disclosure of which could reasonably
be expected to result in material financial loss or
gain to, or could reasonably be expected to prejudice
the competitive position of eVS; and
17.6.4 information, the disclosure of which could reasonably
be expected to interfere with contractual or other
negotiations of eVS.
Access to Information Disclosure
17.7 Notwithstanding paragraph 17.6 (Access to Information), eVS
acknowledges that:
17.7.1 a court of competent jurisdiction could order the
release of information, considered hereunder as
confidential third party information; and
17.7.2 the Access to Information Act, s. 27, requires that
both Canada and eVS be notified of any such release
and eVS be allowed to make representations against
such release.
Fiduciary
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17.8 eVS acknowledges that in the event eVS breaches its
obligations under the confidentiality provisions of paragraph
17.1 (Confidentiality Obligations) to 17.7 (Access to
Information Disclosure) inclusive, then:
17.8.1 eVS shall be deemed a fiduciary of Canada concerning
the CONFIDENTIAL INFORMATION disclosed by Canada;
17.8.2 eVS shall be deemed to hold in trust for Canada, the
CONFIDENTIAL INFORMATION and any benefits arising
from eVS improper or unauthorized use of the
CONFIDENTIAL INFORMATION
Elements of Fiduciary Relationship
17.9 eVS agrees that under the MASTER LICENCE in the event eVS
breaches its obligations under the confidentiality provisions
of paragraph 17.1 (Confidentiality Obligations) to 17.7
(Access to Information Disclosure) inclusive, then:
17.9.1 eVS has power and discretion affecting Canada's
interests arising from the disclosure of the
CONFIDENTIAL INFORMATION and the licencing of the
LICENCED TECHNOLOGIES;
17.9.2 eVS can unilaterally exercise that power and
discretion so as to affect Canada's commercial and
other interests;
17.9.3 Canada is vulnerable to the power and discretion
vested in eVS; and
17.9.4 eVS's primary obligations are to COMMERCIALIZE the
LICENCED TECHNOLOGIES and safeguard the CONFIDENTIAL
INFORMATION.
Equitable Relief
17.10 eVS acknowledges, and is estopped from alleging otherwise,
that:
17.10.1 any unauthorized use of the LICENCED TECHNOLOGIES or
unauthorized disclosure of the CONFIDENTIAL
INFORMATION would cause irreparable harm to Canada;
17.10.2 Canada has spent significant money and dedicated
significant human, capital and financial resources
(some of which are no longer available) in order to
create, assemble, or integrate the CONFIDENTIAL
INFORMATION or the LICENCED TECHNOLOGIES, as the case
may be; and
17.10.3 Canada shall be entitled to any and all legal and
equitable relief, including, without limitation,
injunctive relief, without the need for posting a
bond or
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security, as well as the equitable remedy of
disgorgement (being the ejection of all benefits
gained by eVS traceable to the material breach).
Fundamental Terms
17.11 eVS's obligations of confidentiality as prescribed in this
Article are fundamental terms of the MASTER LICENCE.
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18 ALTERNATE DISPUTE RESOLUTION (ADR)
Negotiation
Informal Negotiations
18.1 If a dispute arises between the PARTIES concerning the
construction, interpretation, compliance with or breach of
this MASTER LICENCE, then the PARTIES shall:
18.1.1 reduce the dispute to writing, and if the PARTIES
cannot agree on the wording of the dispute, both
PARTIES may submit to each other their written
version of the dispute;
18.1.2 make bona fide efforts to resolve the dispute by
amicable negotiations; and
18.1.3 provide full, frank and timely disclosure of all
relevant facts, information and documents to
facilitate those negotiations.
Formal Negotiations
18.2 If the PARTIES are unable to resolve the dispute within
fourteen (14) calendar days from the date of the dispute being
reduced to writing by the first PARTY to do so, then within
the following thirty (30) days the dispute shall be referred
to the Director General Western Region (or the Director of the
Lacombe Centre), on behalf of Canada, and to the CEO (or a
directly reporting designate) on behalf of eVS to negotiate a
resolution.
18.2.1 These individuals may not delegate, substitute or
direct surrogates for them at these negotiations.
18.2.2 These individuals shall meet in person to negotiate
and the PARTIES shall bear their own costs.
18.2.3 Unless otherwise agreed, the meeting shall alternate
between the Edmonton, Alberta, Canada and Orlando,
Florida, USA, commencing in Orlando for the first
dispute. There shall only be one meeting per dispute,
which meeting shall not exceed one business day in
length.
18.2.4 The meeting shall be held within sixty (60) days from
the expiration of the thirty (30) day period in
paragraph 18.2 (Formal Negotiations); and
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18.2.5 The PARTIES may bring no more than two consultants to
a meeting. The two consultants shall not have a right
of audience or otherwise to negotiate the dispute.
Mediation
18.3 If, within thirty (30) days following the close of the meeting
under paragraph 18.2 (Formal Negotiations), the PARTIES have
not succeeded in negotiating a resolution, then the PARTIES
may jointly submit the dispute to mediation.
Direct to Arbitration
18.4 If the PARTIES cannot agree to jointly submit the dispute to
mediation, then either PARTY may submit the dispute to binding
arbitration.
Process
18.5 The PARTIES shall:
18.5.1 appoint a mutually acceptable mediator with sixty
(60) days from the close of the formal negotiation
meeting under subparagraph;
18.5.2 participate in good faith in the mediation and
negotiations related thereto;
18.5.3 send representatives to the mediation shall be
empowered or have sufficient delegated authority to
resolve, compromise, negotiate or settle the dispute
submitted to arbitration, without seeking further
instructions or approvals from any superiors or
committees / corporate structures, unless the nature
of the dispute by law or corporate policies or
practices requires approval from the respective
corporate structure. In such event, such approval
shall be obtained within five (5) business days of
the proffer of any settlement offer;
18.5.4 bear the costs of the mediation equally, except that
each PARTY shall bear its own personal costs of the
mediation; and
18.5.5 disclose in a full, frank and timely manner all
relevant facts, information and documents to
facilitate the mediation.
Location
18.6 The mediation shall take place in the city that was not the
site of the formal negotiations for the dispute.
Unsuccessful
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18.7 The dispute shall be referred to binding arbitration if the
PARTIES are not successful in resolving the dispute through
mediation.
Arbitration
18.8 After negotiation (and if applicable, mediation), any
subsisting dispute between the PARTIES, shall be referred to
arbitration by a written submission signed by either Canada or
eVS.
Procedure
Law, Code & Rules
18.9 The arbitration tribunal shall be governed by the UN
Commercial Arbitration Code, incorporated into the Commercial
Arbitration Act, R.S.C. 1985, c. C-34.6 and the Rules in
Appendix (Rules). Unless the PARTIES otherwise agree in
writing, where there is an inconsistency between the Code and
the Rules, the Rules shall prevail to the extent of any such
inconsistency.
Tribunal & Jurisdiction
18.10 The arbitration tribunal shall consist of one arbitrator
chosen by the PARTIES.
18.11 The scope of the arbitration shall be limited to the
resolution of the dispute submitted to arbitration.
18.12 The arbitration tribunal shall decide the dispute or
difference in accordance with the laws in force in the
Province of Ontario and any applicable federal laws. The
arbitration tribunal shall not be authorized to decide ex
aequo et bono or as amiable compositeur.
Final & Binding
18.13 Subject to the Code, the PARTIES agree that the award and
determination of the arbitration tribunal shall be final and
binding on both PARTIES.
Proceedings
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18.14 The proceedings shall take place in the city that was not the
site of the mediation (or if there was no mediation, in the
city that was not the site of the negotiation meeting), unless
the PARTIES agree otherwise.
Language
18.15 The language to be used in the proceedings is English, unless
the PARTIES hereto agree otherwise.
Written Communications
18.16 All written communication shall be delivered to the PARTIES
hereto in the manner provided for in Article 22 (Notice).
Costs
18.17 The costs of the tribunal's fees and expenses shall be shared
equally by the PARTIES. The PARTIES shall bear their own
costs.
Arbitrator's Written Decision
18.18 The arbitrator shall render a written decision with reasons
within thirty (30) days from the close of the hearing or
submission of written argument. The decision of the arbitrator
shall be final and binding, and not subject to judicial
review.
Power to Settle
18.19 The PARTIES' representatives at any arbitration shall be
empowered or have sufficient delegated authority to resolve,
compromise, negotiate or settle the dispute submitted to
arbitration, without seeking further instructions or approvals
from any superiors or committees / corporate structures,
unless the nature of the dispute by law or corporate policies
or practices requires approval from the respective corporate
structure. In such event, such approval shall be obtained
within five (5) business days of the proffer of any settlement
offer.
Adjournment to Empower Representative
18.20 Breach of this provision shall entitle the other PARTY to seek
an adjournment of the arbitration proceedings, to give the
breaching PARTY time to appoint a duly empowered
representative within the thirty (30) days. All costs of the
such delay, including tribunal costs and the non-breaching
PARTY's costs, shall be paid forthwith by the breaching PARTY.
Deemed Abandonment
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18.21 Failure of the breaching PARTY to appoint such a
representative within the thirty (30) day period shall be
deemed a withdrawal or abandonment of the dispute by the
breaching PARTY and the arbitrator shall render a formal
decision, finding in favour of the non-breaching PARTY.
General ADR Conditions
No Litigation
18.22 If either PARTY has submitted the dispute to court, then the
court filing PARTY shall discontinue the court proceedings
forthwith, upon notice from the other PARTY, and both PARTIES
shall remit the dispute to alternate dispute resolution as
prescribed hereunder.
Obligations During Alternate Dispute Resolution (ADR)
18.23 During the progress of ADR, the PARTIES shall continue to
perform their obligations under the MASTER LICENCE.
Privilege
18.24 Neither PARTY shall be required to disclose documents that are
privileged or created in contemplation of litigation. If a
PARTY does disclose such a document during ADR, that
disclosure shall not be construed as a waiver of any privilege
unless the DISCLOSING PARTY so elects in writing.
Confidentiality
18.25 The ADR procedure under this Article is confidential and all
conduct, statements, promises, offers, views and opinions,
whether oral or written, made in the course of the ADR by
either PARTY, or the mediator, or the arbitrator, are
confidential.
ADR Disclosures Not Admissible in Subsequent
Proceedings
18.26 Subject to the paragraph 18.23 (Obligations During
Alternative Dispute Resolution (ADR)), all conduct,
statements, promises, offers, views and opinions, whether oral
or written, made in the course of the ADR by either PARTY, or
the mediator, or the arbitrator, are not discoverable or
admissible for any purposes, including impeachment, in any
litigation or other proceedings involving the PARTIES.
Normally Admissible Evidence
18.27 Evidence that would otherwise be discoverable or admissible is
not excluded from use in subsequent civil or administrative
proceedings merely as a result of its use in the ADR.
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Material Breach
18.28 The failure, neglect or unwillingness of a PARTY to use or
diligently participate in and prosecute a dispute through ADR
is a material breach of the MASTER LICENCE.
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19 INTENT AND INTERPRETATION
Entire Agreement
19.1 The MASTER LICENCE constitutes the entire agreement between
the PARTIES. The MASTER LICENCE sets forth all representations
forming part of, or in any way affecting or relating to the
MASTER LICENCE. The PARTIES acknowledge that there are no
representations, either oral or written, between eVS and
Canada other than those expressly set out in the MASTER
LICENCE.
Pre-Contractual Representations
19.2 The MASTER LICENCE supersedes and revokes all negotiations,
arrangements, letters of intent, offers, proposals, brochures,
representations and information conveyed, whether oral or in
writing, between the PARTIES hereto or their respective
representatives, or any other person purporting to represent
eVS or Canada. The PARTIES agree that:
19.2.1 none has been induced to enter into the MASTER
LICENCE by any representations not set forth in the
MASTER LICENCE;
19.2.2 none has relied on any such representations;
19.2.3 no such representations shall be used in the
interpretation or construction of the MASTER LICENCE;
and
19.2.4 no claims (including, without limitation, loss of
profits, consequential damages and economic loss)
arising directly or indirectly from any such
representation shall accrue in law or equity to, or
be pursued by eVS, and Canada shall have no liability
for any such claims.
Due Diligence Search
19.3 eVS agrees that it has conducted its own due diligence
examinations.
Independent Legal Advice
19.4 It is acknowledged by the PARTIES that each has had legal
advice to the full extent deemed necessary by each PARTY.
Furthermore, the PARTIES acknowledge that neither acted under
any duress in negotiating, drafting and executing the MASTER
LICENCE.
No Adverse Presumption in Case of Ambiguity
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19.5 There shall be no presumption that any ambiguity in the MASTER
LICENCE be resolved in favour of either of the PARTIES. For
greater certainty, the contra proferentum rule shall not be
applied in any interpretation of the MASTER LICENCE.
Severability
19.6 If any part of the MASTER LICENCE is declared or held invalid
for any reason, the invalidity of that part will not affect
the validity of the remainder, which will continue in full
force and effect and be construed as if the MASTER LICENCE had
been executed without the invalid portion. The intention of
the PARTIES is that the MASTER LICENCE would have been
executed without reference to any portion which may, for any
reason, be declared or held invalid.
Plurality and Gender
19.7 The MASTER LICENCE will be for the benefit of and be binding
upon the heirs, executors, administrators, successors,
permitted assigns of eVS and other legal representatives, as
the case may be, of each of the PARTIES. Every reference in
the MASTER LICENCE to any PARTY includes the heirs, executors,
administrators, successors, permitted assigns and other legal
representatives of the PARTY.
Not a Joint Venture
19.8 The PARTIES expressly disclaim any intention to create a
partnership, joint venture or joint enterprise.
19.9 The PARTIES acknowledge and agree that:
19.9.1 nothing contained in the MASTER LICENCE nor any acts
of any PARTY shall constitute or be deemed to
constitute the PARTIES as partners, joint venturers
or principal and agent in any way or for any purpose;
19.9.2 no PARTY has the authority to act for, or to assume
any obligation or responsibility on behalf of any
other PARTY; and
19.9.3 the relationship between the PARTIES is that of
licencor and licencee.
Minister Not Fettered
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19.10 Nothing in the MASTER LICENCE shall derogate or otherwise
fetter the ability of Canada to regulate, administer, manage
or otherwise deal with agriculture and all attendant matters
thereto.
Federal Legislation
19.11 The reference in the MASTER LICENCE to any Federal act or
regulation includes any subsequent amendment, revision,
substitution, consolidation to that act or regulation,
notwithstanding that such amendment, revision or substitution
occurred after the execution of the MASTER LICENCE or may have
a retroactive effect.
Right to Legislate
19.12 Nothing in the MASTER LICENCE shall prohibit, restrict or
affect the right or power of the Parliament of Canada to enact
any laws of general application whatsoever with respect to any
area of law for which the Parliament of Canada has legislative
jurisdiction, even if the enactment of any such law affects
the MASTER LICENCE, its interpretation, or the rights of
either PARTY.
No Implied Obligations
19.13 No implied terms or obligations of any kind, by or on behalf
of either of the PARTIES, shall arise from anything in the
MASTER LICENCE. The express covenants and agreements herein
contained and made by the PARTIES are the only covenants and
agreements upon which any rights against either of the PARTIES
may be founded.
Access to Information
19.14 Notwithstanding any provision to the contrary in the MASTER
LICENCE, eVS acknowledges that Canada is subject to the Access
to Information Act, R.S.C. 1985, c.A-1 and related acts, and
may be required to release, in whole or in part, the MASTER
LICENCE and any other information or documents in Canada's
possession or control relating to the MASTER LICENCE and the
PARTIES.
Governing Law
19.15 The MASTER LICENCE shall be governed firstly by applicable
Canadian Federal laws, and secondly by the laws of the
Province of Ontario. The PARTIES expressly exclude:
19.15.1 application of the United Nations Convention on
Contracts for the International Sale of Goods; and
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19.15.2 any conflict of laws rules or principles which might
refer disputes under the MASTER LICENCE to the laws
of another jurisdiction.
The MASTER LICENCE shall be treated in all respects as an
Alberta, Canada contract. Subject to Article 18 (Alternate
Dispute Resolution (ADR)) the PARTIES irrevocably attorn to
and submit to the exclusive jurisdiction of the courts of
Ontario, Canada with respect to any matter arising under the
MASTER LICENCE
Waiver
19.16 No condoning, excusing, or overlooking by either of the
PARTIES of any default by the other PARTY, at any time or
times, in performing or observing any of the PARTIES'
respective covenants, will operate as a waiver of or otherwise
affect the rights of the PARTIES in respect of any continuing
or subsequent default. No waiver of these rights will be
inferred from anything done or omitted by the PARTIES, except
by an express waiver in writing.
19.17 For greater clarity, the failure by either of the PARTIES or
their authorized representatives, as the case may be, to
require the fulfilment of these obligations or to exercise any
rights herein contained, shall not constitute a waiver, a
renunciation, or a surrender of those obligations or rights.
Contract Always Speaks
19.18 Where a matter or thing is expressed in the present tense, it
shall be applied to the circumstances as they arise, so that
effect may be given to the MASTER LICENCE according to its
true spirit, intent and meaning.
Time is of the Essence
19.19 Time shall be of the essence in this MASTER LICENCE.
Force Majeure
19.20 Except with regard to any payments required pursuant to the
MASTER LICENCE neither of the PARTIES shall be liable for any
default, or delay in performance in any obligations under the
MASTER LICENCE occasioned by any cause beyond the power of
that PARTY, including without limitation:
19.20.1 acts of God, war, riot, fire, explosion, flood,
sabotage, accidents floods, droughts, weather,
natural calamities;
19.20.2 compliance with any demand or requirement of any
governmental agency or authority other than
Agriculture and Agri-Food Canada's Western Research
Branch; or
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19.20.3 restraining orders or decrees of any court or judge
having jurisdiction.
The PARTY affected by such event hereunder shall give written
notice to the other PARTY upon becoming aware of the event.
The affected PARTY shall complete performance as required by
this MASTER LICENCE immediately after removal or cessation of
the cause for the delay.
Headings
19.21 All headings in the MASTER LICENCE have been inserted as a
matter of convenience and for reference only, and in no way
define, limit, enlarge, modify, the scope or meaning of the
MASTER LICENCE or any of its provisions.
19.22 Any reference in the MASTER LICENCE to an Article, paragraph,
subparagraph, will mean an Article, paragraph or subparagraph
of the MASTER LICENCE, unless otherwise expressly provided.
Appendices
19.23....The documents attached hereto as Appendix "A" to " E" form an
integral part of this MASTER LICENCE as fully as if it were
set forth herein in extenso, and consist of:
Appendix "A" - LICENCED TECHNOLOGIES
Appendix "B" - (Arbitration) Rules
Appendix "C" - PRE-MIX Formulation
Appendix "D" - RMS / AgResearch Agreements
Appendix "E" - eVS Infra Red Technologies
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20 LEGAL RIGHTS
Amendments
20.1 No modification or waiver of any provision of the MASTER
LICENCE will be inferred from anything done or omitted by
either of the PARTIES, except by an express amendment in
writing, duly executed by the PARTIES.
Assignment by Canada
20.2 Canada shall not sell, assign or transfer the MASTER LICENCE
or any of the LICENCED Technologies without the prior written
consent of eVS, which consent shall not be unreasonably
withheld.
Sub-Contract Rights
20.3 eVS shall have the right to subcontract any portion of its
obligations under the MASTER LICENCE granted:
20.3.1 all of eVS's material obligations under the MASTER
LICENCE are not subcontracted to any one
subcontractor or group of related subcontractors;
20.3.2 eVS notifies Canada in writing in a timely manner of
any significant subcontracts or subcontractors;
20.3.3 eVS takes all necessary precautions to ensure quality
control and protection of any disclosed CONFIDENTIAL
INFORMATION; and
20.3.4 the subcontract is not a de facto assignment.
Assignment
20.4 eVS shall not assign (or transfer, sell, encumber, sub-licence
or otherwise deal) or permit any such assignment, in whole or
in part, of the MASTER LICENCE, whether such assignment takes
place by way of:
20.4.1 sale of assets;
20.4.2 amalgamation, merger or other reorganization of eVS;
20.4.3 acquisition by a person or persons acting in concert
of a majority interest of the securities of eVS, by a
person or persons acting in concert who did not hold
such a majority interest at the time of the initial
public offering (IPO), at any time after the IPO
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20.4.4 operation of law;
20.4.5 operation of contract; or
20.4.6 otherwise;
without the prior written consent of Canada, which consent
will not be unreasonably withheld. The failure to obtain
written consent shall render such assignment void, and shall
be a material breach of the MASTER LICENCE.
20.5 It will not be unreasonable for Canada to refuse to consent to
any assignment, if it is foreseeable that the assignment might
negatively affect Canada in any way or derogate from the
COMMERCIALIZATION of the LICENCED TECHNOLOGIES.
Notwithstanding the foregoing, Canada may still consent in
exchange for payment of [ ** ] of the consideration . being
exchanged between eVS and any assignee, transferee,
sub-licencee or otherwise.
20.6 Consent to any assignment will not be construed as consent to
any other assignment.
20.7 Failure of eVS to obtain the prior written consent of Canada
to any assignment shall be deemed to be a material breach of
the MASTER LICENCE.
No Third Party Rights
20.8 Nothing expressed or implied in the MASTER LICENCE is intended
to, or shall be construed to confer on or give to, any person
other than the PARTIES and their respective successors and
permitted assigns, any rights or remedies under or by reason
of the MASTER LICENCE.
Remedies Cumulative
20.9 All rights and remedies of the PARTIES are cumulative and are
in addition to, and do not exclude any other right or remedy
provided in the MASTER LICENCE, or otherwise allowed by law.
Mutual Assistance
20.10 The PARTIES will at all times hereafter, upon every reasonable
request of the other, make, do, and execute or cause to be
procured, made, done, and executed, all such further acts,
deeds and assurances for the carrying out of the terms,
covenants and agreements of the MASTER LICENCE, according to
the true intent and meaning of the MASTER LICENCE.
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Facsimile Counterparts
20.11 The MASTER LICENCE may be validly executed by facsimile
transmission and in any number of counterparts, all of which
taken together shall constitute one and the same agreement and
each of which shall constitute an original. MASTER LICENCE.
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21 CROWN GENERAL
No Bribes
21.1 eVS warrants that no bribe, gift, or other inducement has been
paid, given, promised or offered to any Government official or
employee for the obtaining of this MASTER LICENCE.
No Share to Members of Parliament
21.2 Pursuant to the Parliament of Canada Act, R.S.C. 1985, c.P-1,
no member of the House of Commons or Senate will be admitted
to any share or part of the MASTER LICENCE or to any benefit
to arise from the MASTER LICENCE.
Public Office Holders
21.3 It is a term of this MASTER LICENCE that no former public
Office holder, who is not in compliance with the post
employment provisions of the Conflict of Interest and
Post-Employment Code for Public OFFICE Holders, shall derive a
direct benefit from this MASTER LICENCE.
Compliance with Law
21.4 eVS shall comply with all municipal, provincial, state and
federal laws applicable to eVS's obligations under the MASTER
LICENCE in that jurisdiction. The failure by eVS to comply
with such laws shall have a material adverse effect on eVS or
Canada in order to be a grounds of termination as contemplated
in Article 16 (Termination).
Disclosure of Master Licence during Due Diligence Audit - eVS
21.5 If under a commercially prudent practice involving a
commercial transaction a third party conducting due diligence
searches, requires the disclosure of the fact and contents of
the MASTER LICENCE, then eVS authorizes Canada to disclose the
MASTER LICENCE to such a third party, less any material
financial, scientific or business information that could
prejudice eVS or is not relevant to the due diligence search.
Disclosure of Master Licence during Due Diligence Audit -
Canada
21.6 If under a commercially prudent practice involving a
commercial transaction a third party conducting due diligence
searches, requires the disclosure of the fact and contents of
the MASTER LICENCE, then subject to:
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21.6.1 the Access to Information Act, Privacy Act, and any
other then relevant statutes or regulations; and
21.6.2 the protection and confidentiality of any material
financial, business scientific information that could
prejudice Canada or is not relevant to the due
diligence search;
Canada authorizes eVS to disclose the MASTER LICENCE to such a
third party.
Material Terms
21.7 The obligations invested in eVS pursuant to this Article
(Crown General) are material terms of the MASTER LICENCE.
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22 NOTICE
Addresses / Contacts
22.1 Wherever in this MASTER LICENCE it is required or permitted
that notice or demand be given, or served by either PARTY to
or on the other PARTY, such notice or demand will be in
writing and will be validly given or sufficiently communicated
if hand delivered or forwarded by certified mail, priority
post mail, telegram, telex, or facsimile or sent by overnight
delivery by a nationally recognized courier as follows:
The addresses for delivery are:
To eMERGE Vision Systems Inc.:
Chuck Abraham,
President & CEO
10315 102nd Terrance
Sabastian, Florida
United States, 32958
Telephone: (561) 581-7135
Facsimile: (561) 581-7110
To Canada:
Director
Agriculture and Agri-Food Canada
Lacombe Research Centre, 6000 C&E Trail
Lacombe, Alberta, T4L 1W1
Telephone: (403) 327-4561
Facsimile: (403) 382-3156
Deemed Delivery
22.2 Notice will be deemed to have been delivered:
22.2.1 if delivered by hand, upon receipt;
22.2.2 if sent by electronic transmission, forty eight (48)
hours after the time of transmission, excluding from
the calculation weekends and public holidays;
22.2.3 if sent by certified mail, four (4) days after the
mailing thereof, provided that if there is a postal
strike or other disruption, such notice will be
delivered by hand or electronic transmission.
81
<PAGE> 82
PROTECTED - BUSINESS INFORMATION
Change of Address
22.3 The PARTIES may change their respective addresses for delivery
by delivering notice of change as provided in this paragraph.
IN WITNESS WHEREOF this MASTER LICENCE has been executed by duly authorized
representatives of the PARTIES.
Executed in duplicate and effective this 29th day of July 1998.
FOR HER MAJESTY THE QUEEN IN RIGHT OF CANADA:
- --------------------------- --------------------------
(Witness) Dr. David Bailey
Director
Lacombe Research Centre
Agriculture & Agri-Food Canada
EMERGE VISION SYSTEMS INC.:
- --------------------------- --------------------------
(Witness) Chuck Abraham
President & CEO
FINANCIAL CODE:
--------------------
82
<PAGE> 83
PROTECTED - BUSINESS INFORMATION
APPENDIX "A"
LICENCED TECHNOLOGIES PATENTS
83
<PAGE> 84
PROTECTED - BUSINESS INFORMATION
PATENT LISTING
INFRA-RED THERMOGRAPHY PATENTS
1) Method for detecting meat quality in live animals.
Inventors: S.D. Morgan Jones, A.L. Schaefer, A.K. Tong, S.L.
Scott, C.D.J. Gariepy, R.C. Graham
<TABLE>
<CAPTION>
Country Status Application # Filing Date Patent # Issue Date
------- ------ ------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
US Issued 08/084,993 02/07/1993 5458418 17/10/1995
Canada Pending 2099532 02/07/1993
New Zealand Granted 268868 30/06/1994 268868 13/12/1996
Australia Granted 72248/94 34514 673942 22/04/1997
United Kingdom Granted 94921561 30/06/1994 706654 14/05/1997
Ireland Granted 94921561 30/06/1994 E74008 14/05/1997
Denmark Granted 94921561 30/06/1994 706654 14/05/1997
France Granted 94921561 30/06/1994 706654 14/05/1997
Japan Pending 7-503190 30/06/1994
China Pending 94193218.4 30/06/1994
South Korea Pending 706009/95 30/06/1994
</TABLE>
84
<PAGE> 85
PROTECTED - BUSINESS INFORMATION
2) Method for detecting poor meat quality in groups of live animals.
Continuation in Part of Patent 5,458,418
Inventors: A.K. Tong, S.D. Morgan Jones, A.L. Schaefer
<TABLE>
<CAPTION>
Country Status Application # Filing Date Patent # Issue Date
------- ------ ------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
US Issued 08/543,752 16/10/1995 5595444 21/01/1997
Canada Pending 2234953 16/10/1996
New Zealand Pending 319540 16/10/1996 268868
Australia Pending 72085/96 16/10/1996 673942
Europe(1) Pending 96933288.1 16/10/1996
</TABLE>
(1) Countries designated: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Netherlands, Portugal, Spain,
Sweden, Switzerland/Liechtenstein, United Kingdom.
3) Process for determining a tissue composition characteristic of an
animal
Inventors: A.L. Schaefer, A.K. Tong
<TABLE>
<CAPTION>
Country Status Application # Filing Date Patent # Issue Date
------- ------ ------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
US Pending 09/039,630 16/03/1998
PCT Search report due PCT/CA98/00209 17/03/1998
17/07/1998
</TABLE>
85
<PAGE> 86
PROTECTED - BUSINESS INFORMATION
4) Antemortem nutrient supplement for livestock.
Inventors: A.L. Schaefer, S.D. Morgan-Jones, R.W. Stanley, I.K.S.
Turnbull, J.R. Johanns
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Country Status Application # Filing Date Patent # Issue Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Issued 08/084,989 02/07/1993 5505968 09/04/1996
- --------------------------------------------------------------------------------
US Issued 08/465,324 05/06/1995 5728675 17/03/1998
(Continuation)
- --------------------------------------------------------------------------------
Canada Pending 2099529 02/07/1993
- --------------------------------------------------------------------------------
New Zealand Granted 268322 27/06/1994 268322 02/12/1997
- --------------------------------------------------------------------------------
Australia Granted 71,188/94 34511 692784 *
- --------------------------------------------------------------------------------
Europe (2) Pending 94920356.6 27/06/1994
- --------------------------------------------------------------------------------
Japan Pending 7-503189 27/06/1994
- --------------------------------------------------------------------------------
China Pending 94193219.2 27/06/1994
- --------------------------------------------------------------------------------
South Korea Pending 706008/95 27/06/1994
- --------------------------------------------------------------------------------
</TABLE>
(2) Countries designated: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Monaco,
Netherlands, Portugal, Spain, Slovinia, Sweden,
Switzerland, United Kingdom.
* Allowed, 5 / 28/ 98, no issuance date yet.
86
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PROTECTED - BUSINESS INFORMATION
APPENDIX "B"
ARBITRATION RULES
87
<PAGE> 88
PROTECTED - BUSINESS INFORMATION
APPENDIX "C"
PRE-MIX FORMULATION
Ingredient Composition List and Quantitative Nutrient Analysis for
NUTRI-CHARGE(R) MR (market-ready)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INGREDIENTS PERCENT WEIGHT MINIMUM MAXIMUM
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bentonite 2.5 25 25 25
- --------------------------------------------------------------------------------
Dairy Lure 0.1 1 1 1
- --------------------------------------------------------------------------------
Canola Oil 1 10 10 10
- --------------------------------------------------------------------------------
Legume Screen 58 580 580 580
- --------------------------------------------------------------------------------
Tryptophan 0.4 4 4 4
- --------------------------------------------------------------------------------
Threonine
- --------------------------------------------------------------------------------
Epsom salts 1 10 10 10
- --------------------------------------------------------------------------------
Dyna-K 1.5 15 15 15
- --------------------------------------------------------------------------------
Sodium Bicarbonate
- --------------------------------------------------------------------------------
Corn
- --------------------------------------------------------------------------------
Dextrose
- --------------------------------------------------------------------------------
Alfalfa, Dehyd.
- --------------------------------------------------------------------------------
Corn Gluten ML 15 150 150 150
- --------------------------------------------------------------------------------
Skim Milk Dried 2.5 25 25 25
- --------------------------------------------------------------------------------
Kraft Whey 16 160 160 160
- --------------------------------------------------------------------------------
TOTAL 100 1000 420
- --------------------------------------------------------------------------------
</TABLE>
88
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PROTECTED - BUSINESS INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUTRIENT UNITS ACTUAL NUTRIENT UNITS ACTUAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dry Matter % 89.649 Ash % 3.66
- --------------------------------------------------------------------------------
Crude Protein % 22.658 Iron ppm 80.55
- --------------------------------------------------------------------------------
Crude Fibre % 14.104 Zinc ppm 22.11
- --------------------------------------------------------------------------------
Lysine % 1.293 Manganese ppm 1.35
- --------------------------------------------------------------------------------
Methionine % 0.437 Copper ppm 4
- --------------------------------------------------------------------------------
Meth-cyc % 0.807 Selenium ppm 0.338
- --------------------------------------------------------------------------------
Tryptophan % 0.607 Cobalt ppm 0.008
- --------------------------------------------------------------------------------
Threonine % 0.982 Iodine ppm 0.003
- --------------------------------------------------------------------------------
DE Swine /100 336.049 Sulphur % 0.135
- --------------------------------------------------------------------------------
TDN Rum % 73.375 Vit. A. mg/* 0.293
- --------------------------------------------------------------------------------
ME SWINE /100 296.885 Vit. E. mg/* 5.59
- --------------------------------------------------------------------------------
Calcium % 0.275 Vit. B12 mg/kg
- --------------------------------------------------------------------------------
Phosphorous % 0.516 Vit. D mg/* 8.45
- --------------------------------------------------------------------------------
Av. PhosS % 0.17 Vit. K mg/*
- --------------------------------------------------------------------------------
Sodium % 1.018 Niacin mg/kg 27.76
- --------------------------------------------------------------------------------
Magnesium % 0.217 Biotin mg/kg 0.154
- --------------------------------------------------------------------------------
Potassium % 1.774 Thiamine mg/kg 2.793
- --------------------------------------------------------------------------------
Crude fat % 7.305 Choline mg/kg 394.42
- --------------------------------------------------------------------------------
Leucine % 2.728 Riboflavin mg/kg 1.837
- --------------------------------------------------------------------------------
Isoleucine % 1.183 Panto acid mg/kg 11.941
- --------------------------------------------------------------------------------
Phenylalanine % 1.372 Folic acid mg/kg 0.219
- --------------------------------------------------------------------------------
Tyrosine % 0.507 Pyridox mg/kg 5.08
- --------------------------------------------------------------------------------
Valine % 1.411 Lino acid % 0.853
- --------------------------------------------------------------------------------
</TABLE>
89
<PAGE> 90
PROTECTED - BUSINESS INFORMATION
Ingredient Composition List and Quantitative Nutrient Analysis for
NUTRI-CHARGE(R) ON (over-night treatment at slaughter plant)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INGREDIENTS PERCENT WEIGHT MINIMUM MAXIMUM
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bentonite 2.5 25 25 25
- --------------------------------------------------------------------------------
Dairy Lure 0.1 1 1 1
- --------------------------------------------------------------------------------
Methionine 0.11 1.1 1.1 1.1
- --------------------------------------------------------------------------------
Lysine 0.07 0.7 0.7 0.7
- --------------------------------------------------------------------------------
Tryptophan 0.44 4.37 2
- --------------------------------------------------------------------------------
Threonine 0.04 0.35 0.35 0.35
- --------------------------------------------------------------------------------
Epsom salts 0.45 4.5 4.5 4.5
- --------------------------------------------------------------------------------
Dyna-K 0.68 6.75 6.75 6.75
- --------------------------------------------------------------------------------
Sodium Bicarbonate 1.3 13 13 13
- --------------------------------------------------------------------------------
Corn 51.32 513.23
- --------------------------------------------------------------------------------
Dextrose 4.5 45 45 45
- --------------------------------------------------------------------------------
Alfalfa, Dehyd. 25 250 250 250
- --------------------------------------------------------------------------------
Corn Gluten ML 2.5 25 25 25
- --------------------------------------------------------------------------------
Skim Milk Dried 2.5 25 25 25
- --------------------------------------------------------------------------------
Kraft Whey 2.5 25 25 25
- --------------------------------------------------------------------------------
TOTAL 100 1000 484.4
- --------------------------------------------------------------------------------
</TABLE>
90
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PROTECTED - BUSINESS INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUTRIENT UNITS ACTUAL NUTRIENT UNITS ACTUAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dry Matter % 85.937 Ash % 4.093
- --------------------------------------------------------------------------------
Crude Protein % 16.092 Iron ppm 143.377
- --------------------------------------------------------------------------------
Crude Fibre % 7.504 Zinc ppm 14.647
- --------------------------------------------------------------------------------
Lysine % 0.594 Manganese ppm 11.046
- --------------------------------------------------------------------------------
Methionine % 0.429 Copper ppm 6.822
- --------------------------------------------------------------------------------
Meth-cyc % 0.657 Selenium ppm 0.189
- --------------------------------------------------------------------------------
Tryptophan % 0.6 Cobalt ppm 0.105
- --------------------------------------------------------------------------------
Threonine % 0.619 Iodine ppm 0.039
- --------------------------------------------------------------------------------
DE Swine /100 267.893 Sulphur % 0.061
- --------------------------------------------------------------------------------
TDN Rum % 64.854 Vit. A. mg/* 0.293
- --------------------------------------------------------------------------------
ME SWINE /100 249.892 Vit. E. mg/* 41.331
- --------------------------------------------------------------------------------
Calcium % 0.423 Vit. B12 mg/kg
- --------------------------------------------------------------------------------
Phosphorous % 0.274 Vit. D mg/* 8.45
- --------------------------------------------------------------------------------
Av. PhosS % 0.166 Vit. K mg/* 2.153
- --------------------------------------------------------------------------------
Sodium % 0.44 Niacin mg/kg 27.381
- --------------------------------------------------------------------------------
Magnesium % 0.197 Biotin mg/kg 0.144
- --------------------------------------------------------------------------------
Potassium % 1.218 Thiamine mg/kg 2.707
- --------------------------------------------------------------------------------
Crude fat % 2.857 Choline mg/kg 630.061
- --------------------------------------------------------------------------------
Leucine % 1.858 Riboflavin mg/kg 4.503
- --------------------------------------------------------------------------------
Isoleucine % 0.651 Panto acid mg/kg 11.346
- --------------------------------------------------------------------------------
Phenylalanine % 0.809 Folic acid mg/kg 1.279
- --------------------------------------------------------------------------------
Tyrosine % 0.63 Pyridox mg/kg 33.576
- --------------------------------------------------------------------------------
Valine % 0.761 Lino acid % 1.417
- --------------------------------------------------------------------------------
</TABLE>
91
<PAGE> 92
PROTECTED - BUSINESS INFORMATION
Ingredient Composition List and Quantitative Nutrient Analysis for
NUTRI-CHARGE(R) TM (Tank Mixable)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INGREDIENTS PERCENT WEIGHT MINIMUM MAXIMUM
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bentonite
- --------------------------------------------------------------------------------
Dairy Lure 0.25 2.5 2.5 2.5
- --------------------------------------------------------------------------------
Methionine
- --------------------------------------------------------------------------------
Lysine
- --------------------------------------------------------------------------------
Tryptophan
- --------------------------------------------------------------------------------
Threonine
- --------------------------------------------------------------------------------
Epsom salts 0.25 2.5 2.5 2.5
- --------------------------------------------------------------------------------
Dyna-K
- --------------------------------------------------------------------------------
K+ Bicarbonate 0.45 4.5 4.5 4.5
- --------------------------------------------------------------------------------
Corn
- --------------------------------------------------------------------------------
Dextrose 98.6 986 45 45
- --------------------------------------------------------------------------------
Alfalfa, Dehyd.
- --------------------------------------------------------------------------------
Corn Gluten ML
- --------------------------------------------------------------------------------
Skim Milk Dried
- --------------------------------------------------------------------------------
Kraft Whey
- --------------------------------------------------------------------------------
Salt 0.45 4.5 4.5 4.5
- --------------------------------------------------------------------------------
TOTAL 100 1000 484.4
- --------------------------------------------------------------------------------
</TABLE>
92
<PAGE> 93
PROTECTED - BUSINESS INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUTRIENT UNITS ACTUAL NUTRIENT UNITS ACTUAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dry Matter % 0.45 Ash %
- --------------------------------------------------------------------------------
Crude Protein % Iron ppm
- --------------------------------------------------------------------------------
Crude Fibre % Zinc ppm
- --------------------------------------------------------------------------------
Lysine % Manganese ppm
- --------------------------------------------------------------------------------
Methionine % Copper ppm
- --------------------------------------------------------------------------------
Meth-cyc % Selenium ppm
- --------------------------------------------------------------------------------
Tryptophan % Cobalt ppm
- --------------------------------------------------------------------------------
Threonine % Iodine ppm
- --------------------------------------------------------------------------------
DE Swine /100 Sulphur %
- --------------------------------------------------------------------------------
TDN Rum % Vit. A. mg/*
- --------------------------------------------------------------------------------
ME SWINE /100 Vit. E. mg/*
- --------------------------------------------------------------------------------
Calcium % 0 Vit. B12 mg/kg
- --------------------------------------------------------------------------------
Phosphorous % Vit. D mg/*
- --------------------------------------------------------------------------------
Av. PhosS % Vit. K mg/*
- --------------------------------------------------------------------------------
Sodium % 0.18 Niacin mg/kg
- --------------------------------------------------------------------------------
Magnesium % 0.025 Biotin mg/kg
- --------------------------------------------------------------------------------
Potassium % Thiamine mg/kg
- --------------------------------------------------------------------------------
Crude fat % Choline mg/kg
- --------------------------------------------------------------------------------
Leucine % Riboflavin mg/kg
- --------------------------------------------------------------------------------
Isoleucine % Panto acid mg/kg
- --------------------------------------------------------------------------------
Phenylalanine % Folic acid mg/kg
- --------------------------------------------------------------------------------
Tyrosine % Pyridox mg/kg
- --------------------------------------------------------------------------------
Valine % Lino acid %
- --------------------------------------------------------------------------------
</TABLE>
APPENDIX "D"
93
<PAGE> 94
PROTECTED - BUSINESS INFORMATION
RMS / AGRESEARCH AGREEMENTS
1) AgResearch Collaboration Agreement, Electrolyte Therapy, 1 November
1994.
2) AgResearch Licence, NUTRI-CHARGE(R), for Beef Cattle, dated 29 May
1997, effective 1 July 1997.
3) RMS Research Management Systems Inc., Letter of Intent, dated 26 April
1996, & Licence, Swine Electrolyte (pending).
4) RMS Research Management Systems Inc., Licence, NUTRI-CHARGE(R) for Beef
Cattle, dated 5 March 1997, effective 1 January 1997.
5) STS Agriventures Inc., Nutri-Charge Partnership, IBP Inc.,
collaboration overnight NUTRI-CHARGE(R) and Infra-Red Thermography for
Cattle, dated 1 May 1996.
94
<PAGE> 95
PROTECTED - BUSINESS INFORMATION
APPENDIX "E"
eVS INFRA RED TECHNOLOGIES
APPLICATIONS FOR THERMAL IMAGING EQUIPMENT
CYROGENIC COOLED THERMAL CAMERA WITH 3-5 MICRON SPECTRALBAND
Features:
- - With single field of view or three field of view step zoom
- - With visible camera image overlay
- - With precision pan and tilt platform
- - With line of sights stabilization
- - With remote control
Applications:
- - Maritime, navigation, search and rescue, collision avoidance, iceberg
detection
- - Airborne navigation, pilotage, night operation, target tracking
- - Surveillance for harbors, borders, railways, airports
- - Thermal inspection for mechanical or electrical faults, i.e. machinery,
industrial processes and transportation equipment
- - Spectral inspections of chemical, vapor, gases, for leaks,
contamination and illegal production
- - Spectral surveys for crops, forest, and mineral characteristics
- - Medical applications for cryo and vascular surgery, inflammatory
conditions, arthritis, and cancer detection
- - Military applications for surveillance, guidance, and fire control
UNCOOLED THERMAL CAMERA WITH 8-12 MICRON SPECTRABAND
Applications:
- - Animal health for Equine for injuries and illness
- - Exotic animal health and observation
- - Human medical applications for cryo and vascular surgery, inflammatory
conditions, arthritis, and cancer detection
- - Industrial inspection
- - Military applications for night vision, driving, and fire control
- - Spectral inspections of chemical, vapor, gases, for leaks,
contamination and illegal production
- - Inspection of industrial processes and fault detection
95
<PAGE> 1
Exhibit 10.13
** Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
COPY
MLE Marketing
- --------------------------------------------------------------------------------
A Division of Southern States Cooperative, Inc.
January 12, 2000
VIA FACSIMILE AND REGULAR MAIL
eMerge Interactive, Inc.
Attn: Scott Matthews, Chief Operating Officer
10315 102nd Terrace
Sebastian, FL 32958
Dear Scott:
This letter agreement (hereinafter the "Agreement") sets forth the
proposed terms and conditions under which Southern States Cooperative, Inc. of
6606 West Broad Street, Richmond, Virginia 23260 (hereinafter "Southern States")
and eMERGE INTERACTIVE of 10315 102nd Terrace, Sebastian, FL 32958 (hereinafter
"eMerge") intend to sell cattle via the Internet using eMerge's technology and
cyberstockyard website.
OBJECTIVES.
- - Southern States and eMerge will work together to create a strategic
relationship leveraging the strengths of both companies.
- - Southern States and eMerge will conduct auctions on the dates set forth on
Schedule A, which are projected auction dates and may be changed from time
to time as necessary.
TERM.
- - This Agreement shall expire on May 31, 2000. The terms and conditions
herein supercede any and all previous written agreements between the
parties. This Agreement may not be amended or extended without the written
agreement of both parties.
AGENCY.
<PAGE> 2
Mr. Scott Matthews
January 7, 2000
Page 2
- - Southern States will be eMerge's exclusive representative for eMerge's
live cattle auction technology in the in the territory described in
Schedule B.
- - Southern States will also be acting as paying agent for eMerge according
to this Agreement. As such Southern States, accepts no risk of non-payment
by the Qualified Buyers (as hereinafter defined below), unless non-payment
is the direct result of misrepresentation or negligence on the part of
Southern States or its designated representative.
EXCLUSIVE RIGHTS.
- - eMerge grants Southern States an exclusive right to use and promote its
live cattle auction technology in the territory described in Schedule B.
eMerge acknowledges and agrees that it, and any of its representatives or
agents other than Southern States, are prohibited from soliciting cattle
for cyberstockyard auctions in the territory described in Schedule B.
eMerge and Southern States agree that both parties may solicit cattle for
cyberstockyard auctions outside of this defined region.
- - During the term of this Agreement, all producer profiles and cattle
Information that Southern States furnishes to eMerge regarding Southern
States' customers shall be considered confidential and will remain the
exclusive property of Southern States.
- - Southern States, exclusive rights under this Agreement shall be subject to
Southern States' ability to deliver the number of cattle described In
Schedule C.
INDIVIDUAL OBLIGATIONS OF THE PARTIES.
SOUTHERN STATES:
- - Southern States will be responsible for locating and videotaping quality
load lots of cattle from producers (hereinafter "Seller(s)") from the
territory described in Schedule B to Qualified Buyers (defined herein
below) provided by eMerge.
- - After each auction, Southern States will work with eMerge to facilitate
delivery of the cattle from the Sellers to the Qualified Buyers. Southern
States will coordinate the transportation arrangements between the
Qualified Buyers and the Sellers. Southern States will be responsible for
verifying the insurance coverage, both liability and cargo, of all
transportation agents unless the Qualified Buyer provides "buyer-owned"
transportation.
- - Southern States agrees to perform all of the process requirements outlined
in Schedule D.
<PAGE> 3
Mr. Scott Matthews
January 7, 2000
Page 3
- - cattle are not accepted by the Qualified Buyers due to misrepresentation
by Southern States, eMerge will contact Southern States immediately upon
receiving notice from the Qualified Buyer. Southern States will have the
opportunity to talk with the Qualified Buyer to investigate and determine
the validity of the misrepresentation claim. If Southern States determines
that it misrepresented the cattle at the time of the auction, or the
cattle delivered to the Qualified Buyer do not meet the specifies outlined
at the time of the sale, Southern States will be responsible for
negotiating any price adjustment and the cattle auction price paid to
Southern States by eMerge will be adjusted dollar for dollar.
eMERGE:
- - eMerge will provide Qualified Buyers for the auctions whose
credit-worthiness and identities eMerge has Investigated and verified
prior to enabling such users access to the cyberstockyard auction system
(hereinafter "Qualified Buyers").
- - eMerge will only allow those Qualified Buyers onto the site whose identity
it has verified through the use of a secure password system.
- - eMerge agrees to make its internet auction site available for sales on the
dates listed on Schedule A. In the event that eMerge is unable to make Its
auction site available on those dates, eMerge's sole obligation is to
provide an alternative date(s) that is/are mutually agreed upon by the
parties. Auctions shall begin at a time mutually agreed upon by the
parties.
- - eMerge will provide demonstration software for the cyberstockyard auction
system to Southern States, including all upgrades, advances and now
releases. EMERGE approves and releases Southern States to demonstrate and
promote such software technology to its field personnel, producers and
corporate employees.
- - eMerge will provide Southern States with up to 20 cameras necessary for
the taping of cattle.
- - eMerge will provide all necessary support for the digitizing, encoding,
and delivering of the video to the Feedlot Information System ("FIS") web
site.
- - If the Qualified Buyers refuse delivery of the cattle due to alleged
misrepresentation by Southern States, eMerge must contact Southern States
immediately upon receiving notice from the Qualified Buyer. eMerge agrees
that Southern States will have the opportunity to talk with the Qualified
Buyer to investigate and determine the validity of the misrepresentation
claim. If Southern States determines that it misrepresented the cattle at
<PAGE> 4
Mr. Scott Matthews
January 7, 2000
Page 4
the time of the auction, or the cattle delivered to the Qualified Buyer do
not meet the specifics outlined at the time of the sale, Southern States
will be responsible for negotiating any price adjustment with the
Qualified Buyer and the payment between Southern States and eMerge will be
adjusted accordingly . In the case of a misrepresentation or cattle
rejection, eMerge will enter the negotiation process, to assist in
resolving the situation.
- - eMerge agrees to perform all of the process requirements outlined in
Schedule D.
- - eMerge consents to the use of its trademarks in Southern states promotions
and advertising at no cost to Southern States.
JOINT OBLIGATIONS OF THE PARTIES.
- - Southern States and eMerge will work together to facilitate participation
with the National Livestock Producer's Association Members (N.L.P.A.).
- - Southern States will agree to help distribute any producer technologies
including but not limited to eMerge's e-commerce platform to its customers
on behalf of eMerge Interactive for a fee as long as they see that such
technology is useful and profitable for Southern States' customers and
their businesses.
- - Southern States and eMerge agree that the development of a shared
advertising program is mutually beneficial to the interest of both
parties. Both parties agree to undergo discussions to develop these
programs as soon as is practicable after the signing of this Agreement
- - Each party recognizes the importance of the other party's relationship
with its customer base and agrees to consult with the other party in
matters concerning same.
- - Each party agrees to indemnify the other party and hold the other party
harmless from and against any and all claims, liabilities, damages, costs
(including attorneys' fees) for personal injury or damage to any person or
property arising out of the other party's actions, operations, duties or
obligations arising under the terms of this Agreement.
DEFAULT AND TERMINATION.
- - If one of the parties defaults under the terms and conditions of this
Agreement, the non-defaulting party may terminate this Agreement within
five days of the default. Failure of the non-defaulting party to exercise
this right shall not waive any of the non-defaulting party's rights and
remedies to recovery of damages under contract law.
<PAGE> 5
Mr. Scott Matthews
January 7, 2000
Page 5
- - Should a default under or termination of this Agreement occur and there
are outstanding and unpaid financial obligations between the parties under
the Agreement, both parties agree that each party shall be and remain
liable for the full performance of those outstanding financial
obligations.
REMEDIES.
- - All rights and remedies provided herein shall be in addition to and not in
substitution of all other rights and remedies available to a party at law
or in equity.
WARRANTIES.
- - SOUTHERN STATES DISCLAIMS ANY AND ALL WARRANTIES TO EMERGE AND THE
QUALIFIED BUYERS WITH THE REGARD TO THE CATTLE, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
- - Southern States warrants that the descriptions of the cattle and the
videos that it provides to eMerge for the cyberstockyard auctions shall
accurately reflect the Sellers' cattle.
ENTIRE AGREEMENT.
- - This Agreement, together with the Schedules attached hereto, represents
the entire agreement and understanding between the parties with reference
to the transactions contemplated herein and no representations or
warranties have been made in connection with this Agreement other than
those expressly set forth herein or in the Schedules. This Agreement may
not be contradicted by evidence of prior or contemporaneous or subsequent
oral agreements between the parties. This Agreement may be modified,
altered or amended only by the written agreement of the parties hereto.
SCHEDULES.
- - Schedules A-D as listed below and attached hereto are incorporated herein
by reference and shall be made a part of this Agreement:
<TABLE>
<CAPTION>
Schedule Description
-------- -----------
<S> <C>
Schedule A: Auction dates scheduled for 2000
</TABLE>
<PAGE> 6
Mr. Scott Matthews
January 7, 2000
Page 6
<TABLE>
<S> <C>
Schedule B: Region in which eMerge grants Southern States an
exclusive right to solicit cattle for cyberstockyard
auctions and also to use and promote eMerge's live cattle
auction technology
Schedule C: Volume That Will Be Generated by Southern States for
Cyberstockyard Auctions
Schedule D: Roles, Responsibilities, Process and Procedures
</TABLE>
WAIVERS AND AMENDMENTS.
- - Any failure of any party to comply with any of its obligations, agreements
or conditions as set forth in this Agreement may be expressly waived in
writing by the other parties, but no such waiver shall operate or be
construed as a waiver of any subsequent default. The acceptance of any
payment or performance by any party which Is different from the provisions
of this Agreement on one or more occasions shall not be deemed to be a
waiver of the right to insist upon prompt or consistent payment or
performance in the future according to this Agreement as written. This
Agreement may be amended, modified or supplemented only by a written
instrument executed by the parties hereto.
COSTS OF ENFORCEMENT.
- - In the event that any party hereto defaults in the performance of its
obligations hereunder, the non-defaulting party shall be entitled to
recover from the defaulting party all fees, costs, and expenses (including
attorneys' fees and expenses) incurred in enforcing the provisions of this
Agreement.
CONSTRUCTION OF AGREEMENT.
- - No provision of this Agreement shall be construed against or interpreted
to the disadvantage of any party hereto or thereto by any court or other
governmental or judicial authority by reason of such party having or being
deemed to have structured or dictated such provision.
AUTHORITY TO ENTER INTO AGREEMENT.
- - By their signatures on this Agreement, both parties covenant that they
have the authority to enter into this Agreement and bind their respective
companies to the terms and conditions contained herein.
COUNTERPART.
<PAGE> 7
Mr. Scott Matthews
January 7, 2000
Page 7
- - This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall be considered
one and the same agreement.
Scott, if you are in agreement with the terms and conditions contained
herein, please sign and return it to me. On behalf of Southern States, we look
forward to a successful relationship with eMerge in the area of cyberstockyard
auctions.
Sincerely,
SOUTHERN STATES COOPERATIVE, INC. ACCEPTED AND AGREED TO:
EMERGE INTERACTIVE, INC.
___________________________________(Seal)
Ray R. Ramsey
Director of Livestock Marketing By:______________________________________
Its:_____________________________________
<PAGE> 8
Mr. Scott Matthews
January 7, 2000
Page 8
SCHEDULE A
Letter Agreement between Southern States and eMerge
January 6, 2000
AUCTION DATES SCHEDULED FOR 2000
January 28, 2000
February 16, 2000
March 1, 2000
March 15, 2000
April 6, 2000
April 19, 2000
May 3, 2000
May 17, 2000
**Note: These auction dates may be changed from time to time as deemed necessary
by the parties.
<PAGE> 9
Mr. Scott Matthews
January 7, 2000
Page 9
SCHEDULE B
Letter Agreement between Southern States and eMerge
January 6, 2000
REGION IN WHICH eMERGE GRANTS SOUTHERN STATES AN EXCLUSIVE RIGHT TO
SOLICIT CATTLE FOR CYBERSTOCKYARD AUCTIONS AND ALSO TO USE AND
PROMOTE eMERGE'S LIVE CATTLE AUCTION TECHNOLOGY
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ]
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
<PAGE> 10
Mr. Scott Matthews
January 7, 2000
Page 9
SCHEDULE C
Letter Agreement between Southern States and eMerge
January 6, 2000
VOLUME THAT WILL BE GENERATED BY
SOUTHERN STATES FOR CYBERSTOCKYARD
AUCTIONS* **
January [ ** ] head of cattle
February [ ** ] head of cattle
March [ ** ] head of cattle
April [ ** ] head of cattle
May [ ** ] head of cattle
*Months and quotas listed above are for the year 2000.
**Monthly volume quotas listed above are a collective figure for all
auctions during that month.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
<PAGE> 11
Mr. Scott Matthews
January 7, 2000
Page 11
SCHEDULE D
Letter Agreement between Southern States and eMerge
January 6, 2000
ROLES, RESPONSIBILITIES, PROCESS AND PROCEDURES
PRIOR TO THE AUCTION:
1. Southern States will solicit cattle producers (hereinafter "Seller(s)") to
participate in selling their cattle on the Internet using eMerge's
Cyberstockyards auction website.
2.. Southern States will film the cattle, describe the cattle in a consignment
agreement with each Seller and collect a $[ ** ] per head consignment fee.
3. Southern States will send the film and one copy of the consignment
agreement to eMerge at least five business days prior to the auction date.
Southern States will be responsible for all mailing expenses.
4. Consignment information will be entered into systems of both eMerge and
Southern States. Both parties will work to develop a system that
eliminates this duplication of effort. In the future, information will be
entered by Southern States and downloaded to eMerge.
5. Film is edited at eMerge with the assistance of Southern States personnel
and incorporated into the Cyberstockyard auction arena at least 48 hours
prior to sale date. Determining sale order will be a joint effort between
Southern States and eMerge.
6. eMerge will provide Qualified Buyers for the cattle that Southern States
signs up through the consignment forms.
7. eMerge will only allow those Qualified Buyers onto the site whose
identities it has verified through the use of a secure password system.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
<PAGE> 12
Mr. Scott Matthews
January 7, 2000
Page 12
SCHEDULE D (CONTINUED)
DAY OF THE AUCTION
8. Southern States will communicate each Seller's suggested starting auction
price, required final selling price and any changes or corrections to lot
descriptions to the eMerge sale administrator at least one (1) hour before
the lot is scheduled to sell. Southern States will also be in contact with
both the Seller and the eMerge sale administrator throughout the sale of
each lot as changes may be necessary (i.e. delivery date).
9. After bidding has ended on each lot of cattle, eMerge will notify the
highest bidder that they are the successful Qualified Buyer. Southern
States will contact the Seller and notify eMerge of the Seller's
acceptance or rejection of the Qualified Buyers final bid as soon as
possible. % If the Seller rejects the Qualified Buyer's final bid Price,
eMerge
will notify the Qualified Buyer of the "no sale" on that particular
lot of cattle. The Seller will forfeit the $[ ** ] per head
consignment fee to Southern States as a "no sale" fee.
10. eMerge will communicate confirmation of the purchase to the Qualified
Buyer following the sale by executing an agreement with the Qualified
Buyer. eMerge agrees to include the following in its agreement with each
Qualified Buyer:
- Specifically indicate that transportation and delivery are to be
coordinated between the Qualified Buyer and the listed
representative for each lot of calls.
- If Qualified Buyer rejects the cattle due to misrepresentation, the
Qualified Buyer must verbally notify and provide written notice to
eMerge of such rejection within twenty-four- (24) hours of delivery.
- Confirmation of price, delivery dates and transportation
arrangements.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
Delivery and Equipment
<PAGE> 13
Mr. Scott Matthews
January 7, 2000
Page 13
11. Qualified Buyer will send a $[ ** ] per head prepayment by overnight mail
or electronic funds transfer to eMerge within 24 hours of the final sale.
If the delivery date is over five (5) days from the sale date, eMerge will
send a prepayment of $[ ** ] per head to Southern States within
forty-eight (48) hours of the final sale. Southern States will then pay a
$[ ** ] per head prepayment to the Seller. All prepayments, including the
remaining $[ ** ] per head not paid to the Seller which is retained by
Southern States and eMerge, will be appropriately adjusted for in the
final sale transaction.
12. eMerge will provide a list of the Qualified Buyers and bidders, including
names and phone numbers, to Southern States immediately following each
auction. Southern States will disperse this information to the appropriate
representatives so that they can be present at the loading and weighing of
the cattle.
13. The cattle will be picked up at the Seller's location according to the
trucking arrangement provided by the Qualified Buyer and will be taken to
the weighing location specified by the Seller.
14. At the weighing location, Southern States will record the head count say,
weight and physical conclusion of the cattle.
15. Risk of loss and passage of title to the cattle will pass from the Seller
to the Qualified Buyer at the time that the cattle leave the scales and an
invoice is created confirming the terms of the sale.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
16. When the cattle are weighed, Southern States will pay the Seller as
eMerge's agent on behalf of eMerge's contract with the Qualified Buyer.
Such payment will be based on a per pound calculation using the final bid
price listed on the Qualified Buyer's agreement with eMerge. The gross
sale price will include any necessary weight-related adjustments. Southern
States will deduct a [ ** ] commission from the gross sales price (net of
the
<PAGE> 14
Mr. Scott Matthews
January 7, 2000
Page 14
[ ** ] per head consignment fee) and distribute the net sale proceeds in
the form of a check to the Seller.
17. Southern States will document the average weight of the cattle loaded onto
the truck the calculation of the net price and the check number for the
payment. Southern States will send this information to eMerge along with
an invoice for payment from eMerge to Southern States. The invoice will
clearly set forth the portion of the sale price that shall be retained by
eMerge.
18. Within 48 hours of Southern States' payment to the Seller, eMerge will
electronically pay Southern States per the terms of the invoice described
in #17.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
19. eMerge is responsible for collecting the Qualified Buyer's payment to
eMerge. Southern States shall bill paid as described in #18, regardless of
Qualified Buyers arrangement with eMerge and regardless of when eMerge
receives payment from the Qualified Buyer. If Qualified Buyer rejects the
cattle for any reason other than misrepresentation (see exception noted
below) or fails to pay eMerge, eMerge bears the burden of collection and
placement of the cattle.
- Exception: If the Qualified Buyer rejects the cattle due to a claim
of misrepresentation based on Southern States' filming or
descriptions of the cattle,
<PAGE> 15
Mr. Scott Matthews
January 7, 2000
Page 15
eMerge must contact Southern States immediately upon receiving
notice from the Qualified Buyer. Southern States will have the
opportunity to talk with the Qualified Buyer to investigate and
determine the validity of the Qualified Buyer's misrepresentation
claim. If Southern States determines that it misrepresented the
cattle at the time of the auction, or the cattle delivered to the
Qualified Buyer do not meet the specifics outlined at the time of
the sale, Southern States will be responsible for negotiating any
price adjustment with the Qualified Buyer and the payment between
Southern States and eMerge will be adjusted accordingly. In the case
of a misrepresentation or cattle rejection, eMerge will enter the
negotiation process to assist in resolving the situation.
- eMerge agrees to transfer its security interest to Southern States
in the event that Southern States' accepts responsibility for any
misrepresentation and agrees to remarket the cattle.
20. [ ** ] of the gross sales price of each sale will be distributed as
follows:
- [ ** ] will be deducted by eMerge from its payment to Southern
States.
- Southern States will retain [ ** ] of its payment from eMerge.
- The remaining [ ** ] will be retained as a commission by the party
whose representative solicited the Seller in each individual
transaction. Each party will be responsible for administering such
commissions to its employees and representatives where applicable.
[ ** ] Certain portions of this exhibit have been omitted based upon a request
for confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
POST-AUCTION
21. eMerge agrees to keep a copy of the film and sales information used in
each auction for a period of six (6) months or to provide a copy of such
information to Southern States for its files promptly after each auction.
<PAGE> 1
EXHIBIT 10.28
*Certain portions of this exhibit have been
omitted based upon a request for
confidential treatment that has been filed
with the Commission. The omitted portions
have been filed separately with the
Commission.
TOLL PROCESSING AGREEMENT
THIS AGREEMENT is made this 16th day of August, 1999, by and between
EMERGE INTERACTIVE, INC., (formerly EMERGE VISION SYSTEMS, INC.) a Delaware
corporation ("EMERGE"), and ADM ANIMAL HEALTH & NUTRITION, a division of
ARCHER-DANIELS-MIDLAND COMPANY, a Delaware corporation ("ADM").
WITNESSETH:
WHEREAS, ADM agrees to produce on a non-exclusive basis NutriCharge(TM)
Premix and/or complete animal feeds to be marketed under the name
NutriCharge(TM) (collectively the "End Product") pursuant to the specifications
set forth in Exhibits A, B and C (collectively, the "Specifications");
WHEREAS, EMERGE desires to retain the non-exclusive services of ADM for
the manufacture of the End Product;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows;
1. MANUFACTURE OF THE END PRODUCT
(a) ADM hereby agrees to undertake on behalf of EMERGE the manufacture,
testing, packaging and labeling of the End Product in strict compliance with the
Specifications and with all applicable laws and regulations, and not to deviate
in any way from the Specifications without EMERGE's prior written consent. ADM
is currently subcontracting the feed mill portion of the product to an EMERGE
approved source and shall not further contract portions of the manufacturing,
testing, packaging and labeling process of the End Product to third parties
without the prior written consent of the Chief Operating Officer of EMERGE.
(b) EMERGE shall purchase all End Products if (i) the End Product meets
the Specification quality and (ii) the End Product is made pursuant to an
express written purchase order of EMERGE.
(c) ADM has and shall maintain in good standing at its own expense all
necessary licenses, permits, authorizations and approvals required by any and
all governmental agencies in connection with the manufacture, testing,
packaging, labeling and shipment of the End Product.
<PAGE> 2
2. MATERIALS AND PACKAGING MATERIALS
(a) ADM shall be responsible for acquiring all materials and packaging
materials to be used in the manufacture, packaging and labeling of the End
Product and shall ensure that these comply with the Specifications, and all
applicable laws and regulations.
(b) ADM shall be responsible for ordering the relevant quantity of
necessary materials for timely delivery to enable ADM to manufacture, package
and label the End Product by the date required by EMERGE in its purchase order.
3. TERM
This Agreement shall commence on the date this Agreement is signed by both
EMERGE and ADM and shall continue for a period of twelve (12) months (the
"Initial Term"). This Agreement shall be renewed automatically for successive
periods of twelve (12) months each unless either party delivers written notice
to the other at least ninety (90) days before the termination of the then
current term (the Initial Term and each such successive twelve month term shall
each be referred to a "Term"); provided, however, that the delivery of such
written notice shall not impair the obligations of either party with respect to
any outstanding purchase order that has been accepted by ADM in accordance with
the terms of this Agreement.
4. WARRANTIES
ADM warrants that the End Product covered by this Agreement shall meet the
Specifications and that the End Product has been manufactured, packaged, shipped
and delivered in compliance with all applicable federal, state and local laws,
rules and regulations including without limitation "good manufacturing
practices" as defined by the U.S. Food and Drug Administration and the EMERGE
Quality Procedure 300131-000, entitled "Feed Manufacturing Quality Plan"
attached as Exhibit D hereto. Except as expressly set forth herein, ADM makes no
warranties or representations concerning the end product, whether express or
implied, and hereby disclaims the implied warranty of merchantability and the
implied warranty of fitness for a particular purpose.
5. DELIVERY OF END PRODUCT
Unless otherwise agreed to by the parties, EVS shall make all arrangements for
the shipment and delivery of all End Products from ADM's facilities to EMERGE's
facilities. ADM shall prepare each shipment of End Product in compliance with
the packaging specification provided by EVS (see attached exhibit E).
6. PAYMENT, INVOICING
(a) For the services rendered by ADM under this Agreement, EMERGE
shall pay ADM an amount equal to the cost shown on Exhibit F,
for product
(2)
<PAGE> 3
that is shipped to EMERGE and meets the Specifications and
other warranties set forth herein.
(b) Payment terms are net 30 days upon receipt of invoice.
(c) The parties agree to negotiate a change in the price set forth
in subsection
(a) where such change is necessary to reflect an increase or decrease in the
cost of raw materials. Any such modification shall not exceed the retail price
index or its equivalent in the Territory and shall be limited to one change in
any three- (3) month period.
7. INDEMNITY
(a) ADM shall defend, indemnify and hold EMERGE, its subsidiaries,
divisions and affiliates, and their respective officers, directors, employees
and agents, harmless from and against any and all liability, loss, damage or
expense on account of personal injuries, including death or property loss or
damage to others (including each party and it employees) arising out of ADM's
negligence or willful misconduct including, without limitation, the failure of
ADM to manufacture the End Product in compliance with the Specifications;
provided, however, no such obligation shall exist with respect to any liability,
loss, damage or expense arising in whole or in part from EMERGE's negligence or
willful misconduct.
(b) EMERGE shall defend, indemnify and hold ADM, its subsidiaries,
divisions and affiliates, and their respective officers,
directors, employees and agents, harmless from and against any
and all liability, loss, damage or expense on account of
personal injuries, including death or property loss or damage
to others (including each party and its employees) arising out
of EMERGE's negligence or willful misconduct including, any
action alleging infringement of the NutriCharge(TM)mark, or
any patent, copyright or trades secret action related to the
Specifications, provided, however, no such obligation shall
exist with respect to any liability, loss, damage or expense
arising in whole or in part from ADM's negligence or willful
misconduct.
8. EMERGE EXCLUSIVE REMEDIES ON ADM'S DEFAULT
Should ADM fail to make delivery of End Product to EMERGE, EMERGE shall have as
its exclusive remedy, damages measured by the difference between contract price
and the lowest market price of the goods between the time when EMERGE learned of
ADM's breach and the time at which replacement goods are purchased by EMERGE, or
judgment against ADM is obtained. ADM shall not be liable under any
circumstances for consequential or incidental damages, of whatever kind and
amount incurred by EMERGE. EMERGE shall be barred from any and all claims or
rights based upon the quality of the goods delivered unless within ten (10) days
after EMERGE learns by use or otherwise of the defect complained of, but in any
event within thirty (30) days after EMERGE becomes aware of the arrival of said
goods at destination and EMERGE sends
(3)
<PAGE> 4
ADM notice clearly specifying the nature of the complaint. Any action on behalf
of EMERGE for breach of the Agreement must be commenced within one (1) year
after the cause of action accrued.
9. INDEPENDENT CONTRACTOR
The parties agree that ADM shall be construed to be an independent contractor
under this Agreement and that its relationship with EMERGE shall be, and shall
not be presented as anything other than, an independent contractor. ADM shall
have no authority to execute contracts or to assume any obligation or liability
on behalf of EMERGE. ADM agrees that all personnel employed by it in the
performance of services under this Agreement shall be deemed for all purposes
employees of ADM and not of EMERGE.
10. DEFAULT
Upon a material breach of this Agreement by either party, the non-breaching
party may give written notice to the breaching party of its intent to terminate
this Agreement, specifying the alleged breach, and if the breach is not cured
within thirty (30) days after the giving of such notice (unless the breach
cannot be cured within 30 days in which event this party in breach must be
diligently attempting to cure the breach). Then the non-breaching party may
without prejudice to its rights terminate this Agreement forthwith by written
notice thereof the breaching party.
11. CONFIDENTIALITY
The parties hereto acknowledge and agree that the information contained in this
Agreement and all exhibits hereto is considered confidential "Information" as
such term is defined in the NonDisclosure Agreement between ADM and EMERGE dated
November 12, 1998 (the "NDA Agreement") and is governed by the terms of such NDA
Agreement. The parties further acknowledge and agree that NDA Agreement remains
in full force and effect and is hereby incorporated by reference.
12. ASSIGNMENT
This Agreement shall not be assigned by either party without the prior written
consent of the other party, which consent will not be unreasonably withheld.
13. FORCE MAJEURE
Neither party shall be responsible for failure or delay in performance hereunder
if such failure or delay is due to an act of God, war, fire, strike, differences
with workman, accident, equipment breakdown, governmental acts or requirements,
shortages of labor, materials, containers or transportation equipment delays in
transportation, or transportation, or other causes, either similar or dissimilar
to the foregoing, beyond the party's control.
(4)
<PAGE> 5
14. SEVERABILITY
The parties hereby agree that if any part, term or provision of this Agreement
is held by a court of competent jurisdiction to be illegal or in conflict with
any controlling law the validity of the remaining portions or provisions shall
not be affected thereby, and the rights and obligations of the parties shall be
construed and enforced as if this Agreement did not contain the particular part,
term or provision held to be invalid.
15. GOVERNING LAW
This Agreement shall be deemed made in Decatur, Illinois, and the validity and
interpretation thereof shall be governed by the laws of the state of Illinois
without regard to its conflict of law principles.
16. NOTICE
Any notice given or required to be given hereunder shall be deemed to have been
effectively given when written in English and delivered personally or sent by
certified mail, return receipt requested, with postage prepaid, to the addresses
set forth below and/or such other (or additional) address (es) requested by a
notice given in accordance with this section:
If to ADM: If to EMERGE:
ADM Animal Health & Nutrition eMERGE Vision Systems, Inc.
1877 N.E. 58th Avenue 10315 102nd Terrace
Des Moines, IA 50313 Sebastian, FL 32958
Attn: Matt Harper Attn: Alan Bonn, V.P. Operations
Copy to: Copy to:
Archer-Daniel-Midland Company Karen M. Keating, Esquire
4666 Faries Parkway 800 The Safeguard Building
Decatur, IL 62522 435 Devon Park Drive
Attn: General Counsel Wayne, PA 19087-1945
Nothing contained herein shall justify or excuse failure to give oral notice or
notice by facsimile for the purpose of informing the other party thereof when
prompt notification is appropriate, but such oral notice or notice by facsimile
shall not satisfy the requirement of written notice.
17. ENTIRE AGREEMENT
This Agreement, in addition to any accompanying purchase order, contains the
entire agreement between the parties and the undersigned are not relying upon
any representations or agreements other than contained herein. Any additions,
modifications or amendments to the Agreement shall not be binding unless made in
writing and signed
(5)
<PAGE> 6
by the parities. This Agreement supersedes all previous agreements, written or
oral, which have existed or now exist between the parties. To the extent the
terms and conditions printed on or accompanying any purchase order,
acknowledgement, invoices or similar document utilized by the parties in
connection with this Agreement conflict with the provision of this Agreement,
the provisions of this Agreement shall control.
18. HEADINGS
Section titles and captions contained in this Agreement are inserted as a matter
of convenience and for reference and are to be of no force or effect in
construing and interpreting provisioning of this Agreement.
19. COUNTERPARTS
This Agreement maybe executed in Counterparts, each of which shall be deemed an
original, but both of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the
day first written above.
EMERGE INTERACTIVE, INC. ADM ANIMAL HEALTH &
NUTRITION, a division of
ARCHER-DANIELS-MIDLAND
COMPANY
By: __________________________ By: __________________________
Name: Name:
Title: Title:
(6)
<PAGE> 7
EXHIBIT A
Reference: Specification for the confidential formulation of NutriCharge(TM)
Premix previously supplied to Matt Harper, ADM Animal Health & Nutrition
Division, Des Moines, IA, in accordance with the terms of the Non-Disclosure
Agreement referenced herein. eMerge Interactive document number 300103.
EXHIBIT B
Reference: Specification for the confidential formulation of NutriCharge(TM)
Feedyard Pre-harvest Conditioner(TM) Crumbles previously supplied to Matt
Harper, ADM Animal Health & Nutrition Division, Des Moines, IA, in accordance
with the terms of the Non-Disclosure Agreement referenced herein. eMerge
Interactive document number 300104.
EXHIBIT C
Reference: Specification for the confidential formulation of NutriCharge(TM)
Plus Packer Pre-harvest Conditioner(TM) Pellets previously supplied to Matt
Harper, ADM Animal Health & Nutrition Division, Des Moines, IA, in accordance
with the terms of the Non-Disclosure Agreement referenced herein. eMerge
Interactive document number 300105.
EXHIBIT D
Reference: Quality procedure 300131-000 attached.
EXHIBIT E
Reference: Packaging Specification Attachment
EXHIBIT F
Reference: Current Pricing Schedule attached
(7)
<PAGE> 8
EXHIBIT A
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE> 9
EXHIBIT B
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE> 10
EXHIBIT C
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE> 11
EXHIBIT D
THIS DOCUMENT AND THE DATA DISCLOSED HEREIN OR HEREWITH IS NOT TO BE REPRODUCED,
USED, OR DISCLOSED IN WHOLE OR IN PART TO ANYONE WITHOUT THE EXPRESS WRITTEN
PERMISSION OF eMERGE VISION.
1.0 Purpose
1.1 This document describes the Quality Plan for the eMERGE
Vision, Animal Sciences and Nutricharge project. It states the
levels of quality to be achieved during the project and how
they will be monitored, verified, and reported during the life
of the project.
2.0 Scope
2.1 The Quality Plan covers the organization and activities that
are vital to success and to what standard each activity is to
be performed. The Quality Plan allocates responsibilities for
each activity to eMERGE/ADM/ various Feed Mills and printers
and states the interfaces between the companies.
The Quality Plan is a living document with commitment from all
project members.
3.0 Applicable Documents:
400190Animal Science Part Number Matrix
400189Animal Science General Requirements
300072-000 Nutricharge Procedural Diagram
300106Feed Manufacturing Schematic
4.0 Organization
4.1 Internal organization and Responsibility
Business Development
Key customer interface. Responsible for all trials and
introductory periods. Will provide forecasts-quantities and
locations.
Project Manager
It is the Project Managers responsibility to ensure proper
formulation of the products and to ensure their
manufacturability.
VP Operations
Manufacturing shall be responsible for the project costing and
that the project is administered according to this Quality
Plan and maintains the level of quality
1
<PAGE> 12
commensurate with our customers expectations. Manufacturing is
also responsible for ensuring the proper manufacturing
processes are followed and verified in conjunction with the
Quality Manager.
Contract Manager
Inventory control, distribution, customer service, and order
entry are the responsibilities of the Contract Manager. The
Contract Specialist reports to the Contract Manager.
Regulatory requirements are the responsibility of the Contract
Specialist.
Quality Assurance Manager
The QA Manager shall provide audits of the project against the
Quality Plan as an independent authority. Document control
reports to the QA Manager. Batch and lot control are the
responsibilities of the QA Manager.
Field Technicians
The Field Technicians shall provide customer assistance during
the product start-up phase and will work with the Project
Manager and Business Development during the trials and
testing.
4.2 Project Organizational Structure
The project organizational structure comprises eMerge as the
prime contractor with the VP of operations as the key
coordinator. ADM (Animal Health and Nutrition Division) shall
be a sub-contractor. ADM shall manufacture the pre-mix and in
some cases will coordinate the manufacture of the feed. Other
major sub-contractors include Nutrition Services, Inc. who
shall manufacture the completed feed as part of the ADM team
along with various other feed mills throughout the country.
The manufacture of the micro-tracer shall be done by
Micro-Tracers, Inc. Printing of labels and bags shall be done
by various printers.
5.0 Project Structure
5.1 Regulatory
5.1.1 All of the products must be registered with each state in
order to sell within that state. The requirements for each
state, tonnage fees for each state and which states
Nutricharge is registered in are kept in folders by the
Contract Specialist. It is the responsibility of the Contract
Specialist to ensure these files are kept up to date and that
the tonnage fees are paid.
2
<PAGE> 13
5.2 Design Control
5.2.1 The formulation of the product shall be the responsibility of
the Project Manager. The Project manager shall work with
Business Development and Field Technicians to ensure the
trials of new product are conducted and documented per
released procedures.
5.3 Document and data control
5.3.1 Electronic master copies of the formula shall be maintained by
the Project Manager. Should the trials, tests, or
manufacturability cause a change to occur in the formula, the
Project Manager will provide the QA Manager with a changed
hard copy. The eVS ECO process shall be utilized to control
the change. The approvals for the ECO shall be the QA Manager
and the VP Operations exclusively. If the change effects the
labeling the Project Manager will notify the QA Manager in
writing as to what should be on the labels. The QA Manager
shall include the label change on the ECO. The formula shall
be controlled at eVS in the QA Managers office in a fireproof
safe. Access is limited to the QA Manager and the VP
Operations. The labels shall be controlled by Document
Control. Upon ECO approval a hard copy of the formula will be
faxed to Matt Harper of ADM who will initiate the changes at
the feed mills. It is Matt Harper's responsibility to ensure
that access to the formula is restricted. A Non-Disclosure/Non
Compete letter was signed by ADM and feed mills. Should the
label change, the QA Manager and Matt Harper will determine if
regulations require a copy of the revised label be sent to the
states where the product is registered. It shall be the
Contract Specialist's responsibility to ensure the revised
labels are sent to the appropriate regulatory agencies.
5.3.2 For bulk load orders, a unique bulk label will be distributed
by ADM to the Feed Mill. It will be the responsibility of ADM
and the Feed Mill to ensure this label is distributed to the
bulk driver. The Feed Mill shall stamp the Lot Code on the
label. These labels shall be controlled as described in 6.3.1
which also applies to bagged feed.
The bag size, material, and printing are controlled at the
printer, Grief Brothers Printers in Omaha. They maintain
scatter proofs for quality control on the 4 color process.
eVS Document Control shall maintain a master record index.
This index shall list all procedures, test results, formulas,
labels, etc. The revision of each document and location shall
also be specified.
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5.4 Subcontractor Quality
5.4.1 The VP of Operations and the Quality Manager shall determine
if a subcontractor has the ability to provide eVS with quality
products. Quality audits shall be performed per eVS's Quality
Audit procedure 400131. The subcontractor shall document how
he will control his process and provide eVS with a copy. This
will be kept by document control.
5.5 Product identification and Traceability
5.5.1 Upon initiating a P.O. to ADM or the feed mill, eVS purchasing
department shall include as instructions, for ADM or the feed
mill to place upon their invoice the location each batch is
sent. The feed mill shall attach to the invoice copies of
shipping documents which will specify the lot number that the
feed mill assigns for tracking purposes. Copies of the
invoices shall be kept by the Contract Specialist.
5.5.2 ADM shall provide the feed mill with lot codes for all batches
of pre-mix. The feed mill shall record all pre-mix lot codes
on their batch records. The feed mill shall maintain records
of all lot numbers for a minimum of two years.
5.5.3 The micro-tracer manufacturer shall provide lot numbers on
each batch made and ADM shall place the number on their
pre-mix batch record.
5.5.4 Upon placement of an order for final product, ADM shall
initiate the printing of the labels with the printer in the
quantities necessary, plus 4%. The printer shall FAX a copy of
the label to ADM and eVS Quality Mgr. for print approval.
5.6 Process control
5.6.1 Part numbering-see Procedure 400190 Animal Science Part
Numbering Matrix
5.6.2 Order entry and process flow-see Nutricharge Procedural
Diagram 300072-000.
5.6.3 Process steps:
1) When a product is manufactured it will be tested per
documented procedures developed by the Project
Manager. It will be the QA Managers responsibility
along with the Project Manager to determine what
tests are to be performed by the independent lab and
to ensure they are documented with the results being
turned over to document control.
2) Quality and Manufacturability audits shall be
performed on all feed mills during their first runs
of product.
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3) The manufacturing process shall be documented by the
Feed Mill and given to eVS. The Feed Manufacturing
Schematic 300106 shows the process flow.
4) eVS Manufacturing shall establish delivery methods
and document them in the form of a flow chart.
5) Once the product is delivered to the customer a
startup procedure shall be followed by the field
technicians.
6) The Contract Manager shall develop a customer service
procedure.
5.7 Inspection and testing
The formula shall be verified by having the first lot
manufactured by a feed mill and sample (approximately -1/2 LB)
tested to the following requirements. These analyses to be
performed by Woodson-Tenet Laboratories, 3507 Delaware Ave.
Des Moines, Iowa 50313; (515) 265-1461
1. Proximate Grouped Analysis:
Moisture and Fat-Ether Extraction, Fiber-Crude, Protein.
Estimated levels for the Feedyard Crumbles are:
Fat- 4.00%, Crude Fiber- 2.50%, Protein- 17.50%.
Estimated levels for the Packer Pellets are:
Fat- 3.50%, Crude Fiber- 2.50%, Protein- 13.00%
2. Inorganic Grouped Analysis:
Feed Group Elements-Three: Magnesium, Potassium, and Sodium.
Estimated levels for the Feedyard Crumbles are:
Magnesium- 0.13%, Potassium- 1.00%, Sodium- 1.75%
Estimated levels for the Packer Pellets are:
Magnesium- 0.10%, Potassium- 0.65%, Sodium- 1.00%
3. Amino Acid Analysis:
Amino Acid Profile including Tryptophan.
Numbers 1 and 2 above are to be performed on every batch for
the first 6 months. Number 3 is to be performed on the 1st
batch from each product. Copies of the
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analyses data will be maintained by document control and
entered into a data base.
A sample of each batch of product, approximately -1/2 to 1
pound, to be sent for tracking purposes to QA at eMerge Vision
where it will be labeled and placed into a cabinet in the QA
area. Samples shall be maintained for a 2 year period from
date of manufacture.
There will be no tolerance for antibiotics or pesticides in
any of the mixes.
5.7.1 Should the test results show that product is nonconforming to
the above specified tests, the QA department shall immediately
fill out the appropriate paperwork per NC-1300- Control of
Nonconforming Product and forward a copy to ADM and the feed
mill.
ADM and/or the feed mill shall quarantine or recall all lots
of nonconforming product specified by the lot number.
5.8 Inspection, Measuring, and Test Equipment
All test and measurement equipment at the pre-mix,
micro-tracer, and final product manufacturers shall be
calibrated to the applicable standards.
5.9 Every lot of pre-mix and final product shall be tested for
complete micro tracer mixing. This testing shall be done by
the micro tracer manufacturer:
Micro Tracers, Inc. 1370 Van Dyke Avenue
San Francisco, CA 94124
415-882-1100
fax 415-822-6615
Contact: David Eisenberg
ADM shall be responsible for ensuring that the samples of
pre-mix and final product are sent to Micro Tracer, Inc. The
sample sizes shall be:
Pre-mix - six, 100 gram samples Final Product - six, 2
kilogram samples
The results of all tests are to be sent to the Quality
Assurance Manager at eVS for entry into A database. The
results shall be interpreted by the eVS QA Manager and Micro
Tracer, Inc.
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Recoverability should be 60% +40%, - 0% for the final product.
Recoverability should be 75% +25%, - 0% for the pre-mix.
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EXHIBIT E
1) Pallet must be in good-working condition with no protruding nails or
any other deficiencies that could damage bagged feed.
2) 200 lb. single-walled (minimum) cardboard slipsheet must be placed
directly on top of pallet to protect bagged feed. Dimensions will
coincide with pallet size (approx. 48" by 40").
3) Feed bags must be stacked efficiently in a cubed manner, also
coinciding with pallet dimensions.
4) Apply plastic exterior covering or stretchwrap (4 layers minimum)
around bundle from bottom to top to secure feed for shipment.
5) Each pallet must have a label (8-1/2" by 11") applied to the center of
two sides (front & side) of the stretchwrapped-bundle. Labels must be
easily visible and marked with the lot number and part number of the
feed to be shipped.
6) Each feed bag and pallet label must have a lot number attached to its
label as follows:
[NE 060999 CHART] 1st-2nd: denotes State abbreviation
3rd-8th: denotes mfg date (mmddyy)
9th: eMERGE Interactive, Inc. assigned
facility code as derived from eI
facility code list held in Contracts
7) Each pallet label must have a part number matching that on the purchase
order provided by eMERGE Interactive, Inc.
8) Ensure no forklift damage occurs on bags or plastic covering
(stretchwrap) in the process of loading packaged feed into truck or
relocating in warehouse.
<PAGE> 19
ANIMAL HEALTH & 1877 NE 58th Avenue
NUTRITION Division Des Moines, IA 50313
- --------------------------------------------------------------------------------
515-262-9763
FAX 515-266-1925
WATTS 1-800-247-5450
EXHIBIT F
eMERGE VISION - PRICE SCHEDULE
JULY - SEPTEMBER 1999
<TABLE>
<CAPTION>
PRICE/POUND
ADM PRODUCT CODE PRODUCT DESCRIPTION (F.O.B.)
- ---------------- ------------------- --------
<S> <C> <C>
190082 NC Packer Pellets $[ ** ]
190083 NC Feedyard Crumbs $[ ** ]
310011 NC Tank Mixer $[ ** ]
</TABLE>
<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
January 28, 2000