<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No fee required] for the fiscal year ended December 31, 1999.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the transition period from to
Commission File Number: 000-2903-7
eMerge Interactive, Inc..
(Exact name of registrant as specified in its charter)
Delaware 65-0534535
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10315 102nd Terrace Sebastian, Florida 32958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(561) 589-7331
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on which
None. Registered: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.008
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $746.1 million as of March
17, 2000, based upon the closing sale price per share of the common stock, as
quoted on the Nasdaq National Market, excluding 17,959,515 shares of common
stock held by directors, officers and stockholders with representatives on the
board of directors whose ownership exceeds five percent of the common stock
outstanding at March 17, 2000. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
The number of shares of the registrant's common stock outstanding as of
March 17, 2000 was 33,031,395.
Documents incorporated by reference: Portions of eMerge Interactive, Inc. proxy
statement for its 2000 Annual Meeting of Stockholders to be filed within 120
days after the end of the year covered by this Form 10-K Report are incorporated
by reference into Part III of this Form 10-K.
===============================================================================
<PAGE> 2
eMerge Interactive, Inc.
FORM 10-K ANNUAL REPORT
(For Fiscal Year Ended December 31, 1999)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business............................................................................. 4
Item 2. Properties........................................................................... 17
Item 3. Legal Proceedings.................................................................... 17
Item 4. Submission Of Matters To A Vote Of Security Holders.................................. 18
Part II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters................ 18
Item 6. Selected Financial Data.............................................................. 20
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations........................................................................... 21
Item 7A. Quantitative And Qualitative Disclosure About Market Risk............................ 36
Item 8. Financial Statements And Supplementary Data.......................................... 36
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure........................................................................... 36
Part III
Item 10. Directors And Executive Officers Of The Registrant................................... 36
Item 11. Executive Compensation............................................................... 36
Item 12. Security Ownership Of Certain Beneficial Owners And Management....................... 36
Item 13. Certain Relationships And Related Transactions....................................... 36
Part IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K...................... 37
</TABLE>
2
<PAGE> 3
This Report contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. These forward-looking
statements include statements regarding, among other things, electronic
commerce strategy, acquisition and expansion strategy, development of services,
use of proceeds, projected capital expenditures, the sufficiency of our
liquidity and capital, development of additional revenue sources, market
acceptance of the Internet, expansion into new market segments, technological
advancement, ability to develop "brand" awareness and global expansion. Such
statements are based on management's current expectations and are subject to a
number of uncertainties and risks that could cause actual results to differ
significantly from those described in the forward-looking statements. Factors
that may cause such a difference include, but are not limited to, those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as those discussed elsewhere in this Report.
Our subsidiaries include STS Agriventures, Ltd. ("STS"), a Canadian corporation
and Cyberstockyard, Inc. ("Cyberstockyard").
3
<PAGE> 4
PART I
ITEM 1. BUSINESS
ITEM 1(A). GENERAL DEVELOPMENT OF THE BUSINESS
COMPANY 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 and cattle
performance can be addressed by using 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, 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. 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 SOLUTION
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:
4
<PAGE> 5
- 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.
- 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.
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.
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. Under this agreement, we will begin paying
royalties based on a percentage of sales beginning on July 29, 2000.
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
5
<PAGE> 6
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 February 1999, we purchased substantially all of the assets of CIN,
LLC, a company which collected, analyzed and distributed information for use in
animal food sciences markets, for an aggregate purchase price of approximately
$2.3 million. The purchase price consisted of 750,000 shares of our class A
common stock valued at $720,000, the assumption of $812,000 of liabilities, a
cash payment 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.
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.
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.
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 and
that feedlot is a customer of Turnkey, we will pay a fee to Turnkey.
ITEM 1(B). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information for the Company's two operating segments for the three year period
ended December 31, 1999, is contained in Note 11 to the Consolidated Financial
Statements on page F-23.
ITEM 1(C). NARRATIVE DESCRIPTION OF BUSINESS
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.
6
<PAGE> 7
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 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
7
<PAGE> 8
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 of Agriculture of $600 per head.
THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
We believe that industry participants generally collect and analyze
information on cattle that go through the beef production process
inconsistently and in a manual and time-consuming manner. Due to the nature of
data collection and dissemination, cattle industry participants are unable to
exchange critical information in an efficient and timely manner to optimize
performance and beef quality. We believe that businesses in the cattle industry
have not maximized the use of information to effectively address health,
quality and performance issues.
PRODUCERS
Cattle producers typically do not receive data related to the weight
of their animals upon arrival to and departure from feedlots or the quality
grades of their animals, making herd management difficult. Animal-specific
health and medication information is generally not passed on to subsequent
buyers at or prior to the feedlot, which may result in unnecessary additional
medication.
FEEDLOTS
Feedlots are the primary source of information currently used in
livestock management. As a general practice, information is collected manually
on a daily basis and subsequently entered into multiple information systems
that are typically not integrated. Given the time-intensive nature of
aggregating data under the current process, it is difficult to collect, analyze
and interpret this data in a meaningful way. Historically, feedlots collect and
share industry-wide information for benchmarking and performance purposes by
submitting reports to data warehouse services that aggregate and disseminate
the combined results in monthly reports. Although these data warehouse services
are valuable as general strategic and analytical tools, because of the delay in
disseminating the information, they are less effective for daily cattle
management decisions, such as decisions relating to feed and medication.
PACKERS
Packers, at the end of the cattle production chain, collect critical
carcass and quality information such as weight, dimension, yield and meat
quality grade after the animal is harvested. However, in 1997, only 47.5% of
cattle harvested were purchased based on these measures. Therefore, feedlots
receive carcass and quality data on less than half of harvested cattle. The
remaining harvested cattle are sold to packers based strictly on live weight,
and consequently very little health and quality data is provided to feedlots or
producers on these cattle.
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.
8
<PAGE> 9
OUR PRODUCTS AND SERVICES
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
CATTLEINFONET.COM
- Industry news
- Regional weather
- Links to commodity pricing
- Expert corner
9
<PAGE> 10
- 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 interface
- Analytical services
eMerge Online Store
- - eMerge branded products Professional Cattle Consultants
- Regional feedlot benchmarking data
Specialized Database Services
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.
ONLINE MARKETPLACE
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.
10
<PAGE> 11
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.
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 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 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.
MANAGEMENT INFORMATION SOLUTIONS
THE FEEDLOT INFORMATION SYSTEM
The Feedlot Information System provides feedlot customers daily
information services. This secure proprietary information management
application resides on our customers' operating systems and interfaces with our
centralized database over the Internet. Our system integrates information
contained in their disparate legacy systems into our database daily to create
relevant customer-specific analyses and graphical presentations. Customers'
information is automatically integrated into our database, analyzed and
available for use on the following day. The analyses created include
information and performance data designed to assist in the effective daily
management of a feedlot business. These analyses include:
- Feed consumption data;
- Feed-to-gain ratios; and
- A comprehensive summary of health results.
The Feedlot Information System also enables our customers to compare
their performance against other regional and national feedlot data and provides
useful proprietary content for business management decisions. Our customers can
use our system to manage their feedlot operations on a real-time basis using
numerous performance variables and individual parameters. Customers can also
access data and product performance results posted by practicing veterinarians
to further refine their business practices. All of our Internet applications
are easily accessible from our Feedlot Information System. In addition, our
staff provides valuable analysis and interpretation of the information
contained in the database.
PROFESSIONAL CATTLE CONSULTANTS
Through PCC-online.com, our Professional Cattle Consultants service,
we provide our customers access to services that are based on our confidential
and proprietary database of cattle industry information. This database has been
compiled over the last 26 years from over 90 different feedlots representing
over 20% of the total cattle processed annually through U.S. feedlots. As part
of their subscription, our customers submit information to our analysts twice
per month to update our database. Each month these customers receive our Cattle
Gram, a marketing report that analyzes and reports cattle market related
information, and our newsletter, a feed performance report containing compiled
data relating to over 100 different feed performance parameters. In our
newsletter, we provide national, regional and customer-specific analyses.
Customers may use a password to view these reports online or receive them via
e-mail or mail.
11
<PAGE> 12
SPECIALIZED DATABASE SERVICES
We offer specialized database management and Internet-based networking
services that target specific customer requirements, including individual
animal tracking through the entire production chain. We can also provide
customized data management and formatting services designed to enable suppliers
to better understand product performance in the field. Our analysts are
available to assist customers in understanding how to derive the most value
from the information being acquired.
STRESS MANAGEMENT PRODUCTS AND SERVICES
As part of our comprehensive solution, we offer our proprietary
NutriCharge restorative feed supplement for sale to our customers through our
Web sites and direct sales force. NutriCharge is designed to reduce the effects
of stress on the animals caused by transportation, handling and commingling,
which can result in a loss of product quality. In addition, we offer
educational materials and services to assist our customers to reduce handling
of animals and therefore reduce stress.
EQUINE IMAGING SYSTEMS
We have developed our infrared imaging thermography system and image
management software for use in the equine industry. Infrared thermography is a
non-invasive diagnostic imaging technique that is used to detect surface
temperature differences. 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.
12
<PAGE> 13
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 year ended December 31, 1998 and approximately $4.3
million for the year ended December 31, 1999 were related to research and
development. As of December 31, 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.
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 the
Canadian government 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
University 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.
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 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.
13
<PAGE> 14
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
Currently our order entry, e-commerce transactions and hardware and
software support functions are conducted at our Sebastian, Florida facility.
Our current field support organization is based in Meade, Kansas. We have a
dedicated toll free number for customer calls, which is staffed from 8:00 a.m.
to 8:00 p.m. EST.
INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS
SYSTEM ARCHITECTURE
Our Web sites use multiple front-end servers and a master database
located at our Sebastian, Florida facility. We have implemented scalable Web
site management, search, customer interaction, transaction processing and
fulfillment services and systems. Our Web site and extranet provide
customization, interactivity and performance required for business-to-business
electronic commerce. We utilize applications for:
- Accepting and validating customer orders;
- Placing and managing orders with suppliers and manufacturers;
- Notifying and updating customer order status; and
- Management of shipment of products.
All data communication between remotely located computers uses secure
socket layer, or SSL, encryption technology. This allows the transfer of a
local database from a feedlot to our main database which uses a Sun Enterprise
4500 server.
DATA COLLECTION
The data collection system for our Feedlot Information System gathers
information from the accounting, feedbunk and hospital systems at the feedlot.
This information is compared to a local database, and the changes and additions
are encrypted and transmitted securely to our main database storage along with
any orders that are being processed in the off-line 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.
14
<PAGE> 15
DATA DISSEMINATION
The data that is sent back to the feedlots includes video data for
Cyberstockyard and daily content and statistical data for our information
management products and services. This information is then stored in our local
databases, which function as a backup for off-line operation. Professional
Cattle Consultants provides information back to feedlots on a monthly basis
either through electronic mail, a password-protected Internet site, or in hard
copy form. Surveys are available only in hard copy form.
DATA DISPLAY AT THE FEEDLOT
Our system uses a standard browser to connect to the CattleInfoNet.com
Web site. A secure login is required for full access to Cyberstockyard.com,
PCC-online.com and the Feedlot Information System. When logged on, the system
downloads display applets, written in Java, to the user's system to display
relevant information. The user can view auction videos and bid on cattle in
real-time.
INTELLECTUAL PROPERTY
Our ability to protect and utilize our intellectual property rights is
important to our continued success. We have filed applications to register
Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the
U.S. Patent and Trademark Office. We currently have three patent applications
that are pending before the U.S. Patent and Trademark Office relating to:
- Early detection of inflammation using our infrared imaging
camera;
- Feedlot information systems and methods; and
- The cattle transaction process.
The intellectual property rights to use several patents that are
critical to our products and services are licensed to us by third parties. The
U.S. patents and corresponding international patent applications related to our
NutriCharge products and infrared animal screening methods are licensed to us
by the Canadian government under a master license agreement dated July 29,
1998. The master license provides us with an exclusive worldwide license to
develop and sell products and services that utilize the inventions contained in
the patents. The license continues until July 2018 and may be renewed after
that time unless the license is terminated by the Canadian government upon our
breach of and failure to cure a fundamental term of the license agreement, our
commencement of bankruptcy or insolvency proceedings, or the assignment of the
license agreement without Canada's prior written consent. In exchange for the
license, we must pay the Canadian government a royalty on a semi-annual basis
that is calculated as a percentage of the revenues we receive from the sale of
products and services related to the license. Our obligation to pay this
royalty begins July 29, 2000. Under the master license, we must achieve
milestones in order to maintain the master license. To date we are achieving
all required milestones.
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.
15
<PAGE> 16
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.
We have filed an application to register eMerge Interactive and
related service marks with the U.S. Patent and Trademark Office. We have
received notice from a third party claiming superior rights to these marks and
indicating an intent to oppose our registration of the marks in Patent and
Trademark Office proceedings as well as oppose our commercial use of the marks.
We believe that we will be able to ultimately overcome any such challenge. If
we are unsuccessful, however, we may be required to cease using the eMerge
marks at a future date.
PURCHASE AND LICENSE AGREEMENT
In January 1999, we granted a license to Sperry Marine, Inc., a
subsidiary of Litton Industries, Inc., to design, manufacture and assemble
infrared marine systems for worldwide sale. The license is exclusive and
nontransferable and applies to infrared technology that is unrelated to our
products and markets. Although we have not received any royalties to date,
under the agreement, we will receive a royalty of 8% of system sales up to a
maximum royalty of $4.3 million over a four year period or up to a maximum
royalty of $5.0 million if $4.3 million is not received within four years. Upon
receipt of the maximum amount, we will transfer all rights, title and interests
to the licensed intellectual property. In connection with this license
agreement, we also entered into an asset purchase agreement with Sperry for the
sale of assets relating to the infrared systems for approximately $1.9 million.
COMPETITION
In the cattle sales and auction services market, we compete against
traditional cattle auction services, as well as video cattle auction providers
and other online cattle auction services. Currently, the majority of cattle and
calf sales transactions occur through auctions held at traditional sale barns.
These sale barn operations are highly fragmented and vary in size. We believe
that the primary competitive factors in the cattle sales and auction services
market include:
- Availability and quality of inventory;
- Pricing;
- Reliability of service;
- Efficiency;
- Brand awareness;
- Customer service; and
- Convenience and ease of use.
We believe that we compete 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
16
<PAGE> 17
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 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 December 31, 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.
ITEM 1(D). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company does not have foreign sales and does not believe geographic
sales are significant to obtain an understanding of its business operations
during the three year period ended December 31, 1999.
ITEM 2. PROPERTIES
Our corporate facilities located in Sebastian, Florida, occupy
approximately 17,000 square feet. We sublease 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; Austin,
Texas; and Weatherford, Oklahoma.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in a lawsuit filed by Central
Biotech, Inc. on January 12, 2000 in the Queen's Bench Judicial Centre of
Regina, Province of Saskatchewan, Canada. The complaint alleges that eMerge and
E-Y Laboratories Inc.
17
<PAGE> 18
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REREGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
RECENT SALES OF UNREGISTERED SECURITIES
In February of 1999, eMerge Interactive issued 750,000 shares of class
A common stock in connection with the acquisition of assets of 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 $1.80
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.
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 $7.20 per share,
payable in cash and a promissory note. In connection with the sale of preferred
stock, we also 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-2 131
Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation
Plans, eMerge Interactive granted options to purchase a total of 1,415,250
shares of common stock to its employees and certain other individuals in the
year ended December 31, 1999 at a weighted average exercise price of $4.96 per
share. In the year ended December 31, 1999, 200,819 shares were purchased
pursuant to options at an average exercise price of $.93. 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
Our common stock trades on the Nasdaq National Market under the symbol
"EMRG." Prior to February 4, 2000, there was no established public trading
market for any of our securities.
The following table sets forth, for the periods indicated, the range of
high and low closing sales prices for our common stock as reported on the Nasdaq
National Market.
18
<PAGE> 19
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 2000
First Quarter (from February 4, 2000 through March 17, 2000) $70.50 $39.00
</TABLE>
On March 17, 2000, the last reported sale price of our common stock as
reported on the Nasdaq National Market was $49.50 per share and we had 622
holders of record of our common stock.
We have never declared or paid any dividends on our common stock. We do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 2000, we commenced an initial public offering of our
common stock. The registration statement relating to this offering (File No.
333-89815) was declared effective on February 3, 2000. Adams, Harkness & Hill,
Inc., First Union Securities, Inc., and FAC Equities were the managing
underwriters of the offering. As part of the offering, we offered 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 offered 694,000 shares to its shareholders.
The number of shares registered, the aggregate price of the offering
amount registered, the amount of shares sold and the aggregate offering price of
the shares sold were as follows:
<TABLE>
<CAPTION>
Shares of
Common Aggregate Price of Amount of Shares Aggregate Price
Registered Shares Registered Sold of Shares Sold
---------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
7,175,000 $107,625,000 7,175,000 $107,625,000
</TABLE>
We incurred the following expenses with respect to the offering during
the period from July 1998 through February 2000:
<TABLE>
<CAPTION>
Underwriting
Discounts
and
Commissions Management Underwriters'
Expenses Fee Finders' Fees Expenses Other Expenses Total Expenses
------------ ---------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$4,587,750 $1,178,520 $0 $0 $2,000,000 $7,765,970
</TABLE>
In addition, we issued 500,000 shares of class A common stock at $15.00
per share in a private placement that was completed concurrently with the
offering.
The net proceeds from the offering and the private placement after
deducting the foregoing discounts, commissions, management fees, finders fees
and expenses were $107.4 million. We have used the proceeds for payments to
related parties and Turnkey Computer Systems, Inc. and for general working
capital.
None of the foregoing expenses constituted direct or indirect payments
to our directors, officers, general partners or their associates or to persons
19
<PAGE> 20
owning 10% or more of any class of our equity securities or to our affiliates.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
All business activities from inception through 1996 related to the
transportation 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.
Selected consolidated financial data for the Company is set forth below
for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
(in thousands, except per share data)
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue $ -- $ 1,792 $ 43,783
Cost of revenue -- 2,623 43,517
Operating expenses:
Selling, general and administrative 628 3,660 11,240
Research and development 728 1,109 4,343
-------- -------- --------
Total operating expenses 1,356 4,769 15,583
Interest expense/other income, net (141) (332) (288)
-------- -------- --------
Loss from continuing operations $ (1,497) $ (5,932) $(15,605)
======== ======== ========
Loss from continuing operations per common
share basic and diluted $ (3.91) $ (1.36) $ (3.11)
======== ======== ========
Weighted average number of common
shares outstanding - basic and diluted 382 4,357 6,795
======== ======== ========
</TABLE>
The following table summarizes our balance sheet data for the periods
indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------- ------- ------- ------ ------- --------
(in thousands) Pro forma
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash $ -- $ 2 $ -- $ -- $12,316 $107,673
Total assets 6 260 2,165 6,602 25,762 120,671
Total indebtedness 1,747 3,636 8,040 5,572 13,260 460
Total stockholders' equity (deficit) (1,742) (3,457) (6,875) 3 8,891 117,006
</TABLE>
The unaudited pro forma consolidated balance sheet data give effect to:
- The sale of 7,175,000 shares of class A common stock in our
initial public offering;
- The issuance of 500,000 shares of class A common stock in a
concurrent private placement;
20
<PAGE> 21
- 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 concurrent with the offering;
- The termination of the redemption right relating to 62,500
shares of class A common stock, which occurs immediately
prior to the consummation of the offering;
- The repayment of $1.6 million of principal and interest owed
to XL Vision as of December 31, 1999
- The repayment of $10.3 million of principal and interest owed
to Safeguard as of December 31, 1999.
- The repayment of a $900,000 note payable to Turnkey Computer
Systems, Inc., as of December 31, 1999.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the related notes included elsewhere in this document and which are deemed
to be incorporated into this section. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including but not limited to, those set forth under
and included in other portions of this document.
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
21
<PAGE> 22
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.
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
December 31, 1999, we had an accumulated deficit of $32.4 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
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue increased from $1.8 million for the year ended December 31,
1998 to $43.8 million for the year ended December 31, 1999. Revenue from cattle
sales increased to $42.3 million for the year ended December 31,1999. There was
no revenue from cattle sales in 1998. Revenue from animal science products
decreased by 17% from $1.8 million for the year ended December 31, 1998 to $1.5
million for the year ended December 31, 1999. This decrease is due primarily to
lower revenue from sales of our equine imaging system due primarily to a decline
in units sold. Increased sales of NutriCharge and the sale of subscriptions to
our comparative feedlot analysis and market information service partially offset
the decline in revenue from equine camera sales.
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 cattle sales were $41.7
million for the year ended December 31, 1999. There were no direct costs from
cattle sales in 1998. Direct costs attributed to animal science products
decreased by 38% from $901,000 for the year ended December 31, 1998 to $558,000
for the year ended December 31, 1999. This decrease is due principally to the
decline in unit sales of equine imaging systems. We generated a gross loss of
$831,000 for the year ended December 31, 1998 and a gross profit of $266,000 for
the year ended December 31, 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 202% from $3.7
million for the year ended December 31, 1998 to $11.2 million for the year ended
December 31, 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 214% from $2.2 million for the year ended December 31, 1998 to $6.9
million for the year ended December 31, 1999. The increase is due primarily to
expenses associated with expanding the number of personnel from 11 people at
December 31, 1998 to 35 people at December 31, 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.
22
<PAGE> 23
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. As of December 31, 1999, we have not paid any amounts due to XL Vision
and Safeguard under these agreements. As of December 31, 1999 we owed XL Vision
and Safeguard approximately $45,000 and $56,000, respectively, 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 December 31, 1999, we
owed XL Vision $1,635,000 under this agreement. The amounts due under these
agreements will continue to accrue as we use the services.
General and administrative expenses increased 187% from $1.5 million
for the year ended December 31, 1998 to $4.3 million for the year ended December
31,1999. The increase was primarily due to increased amortization of
intangibles, increased expenses associated with expanding the number of
personnel from 4 people at December 31, 1998 to 10 people at December 31, 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 292% from $1.1 million for the year ended December 31,
1998 to $4.3 million for the year ended December 31, 1999. This increase in
expenses was primarily due to increased consulting costs, an increase in
personnel, 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 decreased 13% from $332,000 for the
year ended December 31, 1998 to $288,000 for the year ended December 31, 1999.
This decrease was primarily due to a lower average level of borrowing
accompanied by an increase in interest income.
Due to the losses incurred, we did not have any income tax expense for
the year ended December 31, 1998 or the year ended December 31, 1999. As of
December 31, 1999 we had approximately $28.0 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 2012 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.
23
<PAGE> 24
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 135% 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the quarters ended March 31, June 30, September 30, and
December 31, 1998, and March 31, June 30, September 30, and December 31, 1999.
The information for each quarter has been prepared on substantially the same
basis as the audited statements included in other parts of this annual report
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, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data
Revenue $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 $ 15,761 $ 25,444
Cost of revenue 459 578 649 937 540 2,228 15,514 25,235
Operating expenses 930 948 1,237 1,654 1,962 3,557 4,777 5,287
Interest expense/other income, net (77) (85) (85) (85) (127) (162) (155) 155
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) from continuing operations $ (1,143) $ (1,269) $ (1,529) $ (1,991) $ (2,024) $ (3,974) $ (4,685) $ (4,923)
======== ======== ======== ======== ======== ======== ======== ========
(Loss) from continuing operations
per common share -- basic and diluted $ (0.35) $ (0.39) $ (0.30) $ (0.34) $ (0.33) $ (0.58) $ (0.67) $ (1.48)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
24
<PAGE> 25
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
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 December 31, 1999, we had approximately $12.3 million
in cash and indebtedness to XL Vision and its affiliates of $12.4 million. We
repaid all of this outstanding debt balance in February 2000 with a portion of
the cash proceeds from our Initial Public Offering.
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 $15.6 million in 1999. Cash used in operating activities from inception
through December 31, 1999 consisted mostly of net operating losses offset in
part 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 $1.60 million for the year ended December 31, 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 $29.5 million for the year ended
December 31, 1999. Cash provided by financing activities consisted primarily of
the sale of our stock and borrowings from Internet Capital Group, XL Vision and
Safeguard.
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, of which $900,000 was outstanding at December
31, 1999. We repaid all of this outstanding debt balance in February 2000 with a
portion of the cash proceeds from our Initial Public Offering.
Our Recent Initial Public Offering
On February 17, 2000, we closed on our initial public offering, which
generated net proceeds of $107.4 million, and a private placement of $7.5
million. Subsequent to the offering, approximately $12.8 million of the proceeds
were used to pay amounts due to related parties and Turnkey Computer Systems.
The Company's cash balances as of February 29, 2000, approximated $100.0
million. We believe that the net proceeds from the offering, together with our
existing cash and cash equivalents, will be sufficient to meet our working
capital and capital expenditure requirements 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. If additional funds are raised through the issuance of
equity securities, our existing shareholders may experience significant
dilution. Furthermore, additional financing may not be available when needed or,
if available, such financing may not be on terms favorable to us. If such
financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our products and services. In
addition, we may be unable to take advantage of business opportunities or to
respond to competitive pressures. Any of these events could have a material
adverse effect on our business, financial condition or results of operations.
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.
25
<PAGE> 26
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.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
In addition to the other information included in this report, the
following factors should be considered while evaluating the Company and its
future prospects: 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 to 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 $15.6 million for the year ended
December 31, 1999, or 36% of total revenue. As of December 31, 1999, we had
accumulated net losses totaling approximately $32.4 million. Our operating
expenses have increased significantly in each year of our operation, and we
anticipate that such expenses will continue to increase over the next several
years as we expand our operations. Our revenue may not grow or may not even
continue at its current level and, as a result, our financial condition and
results of our operations may be harmed and our business may not be financially
viable in the future. To achieve profitability, we must successfully address the
following risks:
- Lack of commercial acceptance of our online cattle sales and
auction services;
- Failure to expand the number of livestock industry
participants using our network;
- Failure to obtain access to data from feedlots to adequately
address the information needs of our customers;
- Inability to respond to competitive developments;
- Failure to achieve brand recognition;
26
<PAGE> 27
- 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 be assured 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. To
date, we have not achieved revenues from cattle sales and auction services over
the Internet that are sufficient for us to determine whether these services
will achieve commercial acceptance. Any failure to successfully gain commercial
acceptance of these services would harm our business and the results of our
operations.
We recently completed significant acquisitions of businesses and
technologies and we may make other business acquisitions in the future, which
may be difficult to integrate into our business and may disrupt or negatively
impact our business.
We recently made, and will continue to make, investments in and
acquisitions of complementary companies, technologies and assets that constitute
critical aspects of our current and future business operations. If we fail to
successfully integrate the operations of these companies, technologies or assets
into our business, we may not be able to successfully execute our business
strategy. We acquired substantially all of the assets of CIN, LLC in February
1999, and Professional Cattle Consultants, L.L.C. in May 1999. In connection
with our acquisition of CIN, we hired Scott Crain, one of our key employees. We
also acquired all of the issued and outstanding stock of Cyberstockyard, Inc. in
March 1999. Each of these acquired businesses is critical to our current
business operations and growth strategy.
These and any future acquisitions may result in:
- Difficulties in assimilating technologies, products, personnel
and operations;
- Diversion of our management's attention;
- 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.
27
<PAGE> 28
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 $6.0 million of intangible assets on our balance sheet
as of December 31, 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 our common stock.
For the year ended December 31, 1999, we derived over 96% 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.
If we are unable to manage our growth effectively, our business may be
harmed.
We cannot assure 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
28
<PAGE> 29
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, there is generally frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
We have filed an application to register eMerge Interactive and related
service marks with the U.S. Patent and Trademark Office. We have received notice
from a third party claiming superior rights to these marks and indicating an
intent to oppose our registration of the marks in Patent and Trademark Office
proceedings as well as oppose our commercial use of the marks. If we are
unsuccessful in defending any such opposition, we may be required to cease using
the eMerge marks at a future date, which may cause us to change our name. A
change in our name may be costly and may result in customer confusion, which
could harm our business.
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 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 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
29
<PAGE> 30
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 and should not be relied 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.
30
<PAGE> 31
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.
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.
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
31
<PAGE> 32
- Consumer concern about the security of electronic commerce
transactions.
If the Internet or our Web sites and systems cannot support the growth
in electronic commerce, our business, financial condition and results of
operations will be harmed.
If the Internet fails to evolve to support growth in electronic
commerce, our business, financial condition and results of operations will be
harmed. Specifically, we would be harmed if:
- The infrastructure of the Internet does not evolve to
sufficiently support the substantial growth in usage of the
Internet and therefore cannot process a growing number of
transactions; and
- The availability of telecommunication services is insufficient
or telecommunication services do not evolve promptly to
support real-time interactions with customers.
If we do not continue to develop our Web sites and systems to
sufficiently support growth in the demand for our services, our business will
also be harmed. Specifically, we would be harmed if:
- We fail to expand our infrastructure, including our Web sites,
internet software and servers to accommodate an increased
number of users; and
- We fail to adapt our products and services to be compatible
with new technology, and are therefore unable to provide our
services to users of the new technology.
We may also need to devote substantial resources to updating our Web
sites and online services to support the growth of online commerce.
Risks associated with the security of transactions and transmitting
confidential information over the Internet may negatively impact our electronic
commerce business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers and
proprietary data, may prevent many potential customers from engaging in online
transactions and may harm our business. We intend to use authentication
technology, which requires passwords and other information to prevent
unauthorized persons from accessing a customer's information, or encryption,
which transforms information into a code designed to be unreadable by third
parties, to protect confidential information. In addition, despite the measures
we intend to take, our infrastructure is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If our security measures are
circumvented, proprietary information could be misappropriated or our operations
could be interrupted. Security breaches that result in access to confidential
information could expose us to a risk of loss or liability. If we do not
adequately address these concerns or face any claims in connection with a breach
of security, our business, financial condition and operating results could be
harmed.
We could face liability for information retrieved from or transmitted
through our Web sites, which could result in high litigation or insurance costs.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we carry
general liability insurance, our insurance may not cover claims of these types
or may not be adequate to cover us for all liability that may be imposed.
32
<PAGE> 33
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 that 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 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.
Internet Capital Group, Safeguard and XL Vision will be able to control
matters requiring stockholder approval.
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.
Internet Capital Group, Safeguard and XL Vision together have the power to vote
approximately 66.4% (as of March 17, 2000) 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. Matters that typically
require stockholder approval include:
33
<PAGE> 34
- 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;
- Anthony A. Ibarguen, a member of our board of directors, is a
Managing Director of Internet Capital Group; 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.
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,
then the market price of our common stock could fall. Based upon the 33,031,395
shares outstanding as of March 17, 2000:
- 8,675,000 shares are freely tradeable in the public market;
- 24,007,080 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
- 349,315 shares may be sold 90 days after February 4, 2000,
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 February 4, 2000. In addition, as
of December 31, 1999 there are 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.
Our common stock price is likely to be highly volatile.
34
<PAGE> 35
The market price of our common stock, like the market for
Internet-related and technology companies in general, has been and will likely
continue to be highly volatile. 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 trades is likely to be highly
volatile and may fluctuate substantially due to factors such as:
- Actual or anticipated variations in quarterly operating
results;
- Announcements of technological innovations;
- Conditions or trends in the cattle industry;
- New sales formats of new products or services;
- Changes in or failure by us to meet financial estimates of
securities analysts;
- Conditions or trends in the Internet industry;
- Announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
- Capital commitments;
- Additions or departures of key personnel; and
- Sales of common stock.
In addition, the U.S. stock markets have from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the common stock of technology companies, particularly Internet companies.
In the past, these broad market fluctuations have been unrelated or
disproportionate to the operating performance of these companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts the attention and resources of
management, which could harm our business and operating results.
Our undesignated preferred stock may deter potential acquisition bids
for our business.
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 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
35
<PAGE> 36
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We held no derivative securities as of December 31, 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 result of operations over the next fiscal year or the fair value of our
borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are submitted as a
separate section of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference the information contained under the
captions "Election of Directors (Item 1 on Proxy Card)" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Definitive Proxy Statement
relative to our annual meeting of shareholders, to be filed within 120 days
after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended. We also
incorporate by reference "Executive Officers of the Registrant" as set forth
under Item 4A of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the
captions "Executive Compensation" and "Other Forms of Compensation" in our
Definitive Proxy Statement relative to its annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Directors and Officers" in
our Definitive Proxy Statements relative to our annual meeting of shareholders,
to be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference the information contained under the caption
"Certain Relationships and Related Transactions" in its Definitive Proxy
Statement relative to its annual meeting of shareholders, to be filed within 120
days after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AN REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. The Consolidated Financial Statements and Schedules listed below are
located after the signature page beginning on page F-1:
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Independent Auditors' Reports............................... F-1
Consolidated Balance Sheets -- December 31, 1998 and 1999.. F-2
Consolidated Statements of Operations -- December 31, 1997
1998 and 1999.......................................... F-3
Consolidated Statements of Stockholders' Equity --
December 31, 1998 and 1999............................. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
2. Financial Statement Schedules: Not required or the information
required to be included therein is reflected in the Financial Statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------- ----------- ---------
<S> <C> <C>
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. *
10.1 Amended and Restated 1996 Equity
Compensation Plan. *
10.2 1999 Equity Compensation. *
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,
Cooperative, Inc. *
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, 1000. *
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, *
(c) Third Amended Revolving Note dated
December 6, 1999 and *
(d) Fourth Amended Revolving Note dated
January 31, 2000. *
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 Stockholder's 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
on Meat dated August 4, 1999. *
10.33 Exclusive License Agreement between Iowa State
University Research Foundation, Inc., and
eMerge dated August 3, 1999. *
10.34 Term Note and Pledge Agreement dated January 28, 2000
between eMerge and Charles Abraham. *
21.1 Subsidiaries of the Registrant. *
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 Scientific 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>
* Exhibit and exhibit number incorporated by reference to Registration
Statement No. 333-89815, dated February 4, 2000.
** Filed herewith.
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 2000
eMerge Interactive, Inc.
By: /s/ Charles L. Abraham President Chief Executive
-------------------------------------- Officer and Director (Principal
Charles L. Abraham Executive Officer)
/s/ T. Michael Janney Vice President and Chief
-------------------------------------- Financial Officer (principal
T. Michael Janney financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Charles L. Abraham President, Chief Executive Officer March 31, 2000
- -------------------------------------- and Director (principal
Charles L. Abraham executive officer)
/s/ Michael Janney Vice Chairman and Chief Financial March 31, 2000
- -------------------------------------- Officer (principal financial
Michael Janney and accounting officer)
/s/ John S. Scott Chairman of the Board March 31, 2000
- --------------------------------------
John S. Scott
/s/ Douglas A. Alexander Director March 31, 2000
- --------------------------------------
Douglas A. Alexander
/s/ Thomas C. Lynch Director March 31, 2000
- --------------------------------------
Thomas C. Lynch
/s/ John W. Poduska Director March 31, 2000
- --------------------------------------
John W. Poduska
/s/ Anthony A. Ibarguen Director March 31, 2000
- --------------------------------------
Anthony A. Ibarguen
</TABLE>
<PAGE> 39
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, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 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, 1998 and 1999 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
February 7, 2000, except for Note 14 which
is as of February 17, 2000
F-1
<PAGE> 40
eMERGE INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
PROFORMA
ASSETS 1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 268 $ 12,316,497 $ 12,316,497
Trade accounts receivable, less allowance for doubtful
accounts of $0 in 1998 and $75,000 in 1999. 68,421 1,144,133 1,144,133
Inventories (note 3) 706,557 1,201,203 1,201,203
Cattle deposits -- 473,859 473,859
Prepaid expenses 27,837 71,078 71,078
Net assets of discontinued operations (note 12) 2,285,341 297,003 297,003
Other current assets -- 136,349 136,349
------------ ------------ ------------
Total current assets 3,388,424 15,640,122 15,640,122
Property and equipment, net (note 4) 513,837 1,895,754 1,895,754
Capitalized offering costs -- 447,644 447,644
Investment in Turnkey Computer Systems, Inc. (note 5) -- 1,822,833 1,822,833
Intangibles, net (note 6) 2,699,828 5,955,360 5,955,360
------------ ------------ ------------
Total assets $ 6,602,089 $ 25,761,713 25,761,713
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligation with related party (note 10) $ 79,852 $ 82,320 $ 82,320
Note payable (note 5) -- 500,000 500,000
Accounts payable 423,946 1,187,900 1,187,900
Accrued liabilities:
Salaries and benefits 283,103 967,749 967,749
Other 319,989 818,041 818,041
Advance payments from customers -- 222,750 222,750
Due to related parties (note 10) 5,187,334 12,053,715 12,053,715
------------ ------------ ------------
Total current liabilities 6,294,224 15,832,475 15,832,475
Capital lease obligation with related party, excluding current installments
(note 10) 305,018 224,068 224,068
Note payable (note 5) -- 400,000 400,000
------------ ------------ ------------
Total liabilities 6,599,242 16,456,543 16,456,543
------------ ------------ ------------
Commitments and contingencies (notes 10 and 13)
Subsequent event (note 14)
Redeemable Class A common stock, no shares issued and outstanding in 1998,
62,500 shares issued and outstanding in 1999, no shares issued
and outstanding pro forma (note 5) -- 414,339 --
------------ ------------ ------------
Stockholders' equity (notes 7, 9, 10 and 14):
Preferred stock, $.01 par value, authorized 15,000,000 shares:
Series A preferred stock, (aggregate involuntary liquidation
preference of $7,386,314 in 1998 and $8,030,675 in 1999),
designated 6,500,000 shares, issued and outstanding
6,443,606 shares in 1998 and 1999; no shares issued and
outstanding proforma 64,436 64,436 --
Series B junior preferred stock, (aggregate involuntary liquidation
preference of $4,801,315 in 1998 and $5,281,316 in 1999),
designated 2,400,000 shares, issued and outstanding
2,400,000 shares in 1998 and 1999; no shares issued and
outstanding proforma 24,000 24,000 --
Series C preferred stock, (aggregate liquidation preference of $0 in 1998
and $5,891,781 in 1999), designated 1,300,000 shares; issued outstanding
-0- shares in 1998 and 1,100,000 shares in 1999; no shares issued and
outstanding proforma -- 11,000 --
Series D preferred stock, (aggregate liquidation preference of $0 in 1998
and $41,823,749 in 1999), designated 4,555,556 shares, issued and
outstanding no shares in 1998 and 4,555,556 in 1999; no shares
issued and outstanding proforma -- 45,556 --
Common stock, $.008 par value, authorized 100,000,000 shares:
Class A common stock, designated 92,711,110 shares, issued and
outstanding 5,845,625 shares in 1998 and 7,046,444 shares in 1999 and
19,538,452 shares proforma 46,765 56,372 156,308
Class B common stock, designated 7,288,890 shares; no shares issued
and outstanding in 1998 and 1999; 5,694,445 shares outstanding proforma -- -- 45,556
Additional paid-in capital 16,648,286 62,312,315 62,726,154
Accumulated deficit (16,780,640) (32,375,926) (32,375,926)
Subscription receivable from Internet Capital Group, Inc. -- (21,188,320) (21,188,320)
Unearned compensation -- (58,602) (58,602)
------------ ------------ ------------
Total stockholders' equity 2,847 8,890,831 9,305,170
------------ ------------ ------------
Total liabilities and stockholders' equity $ 6,602,089 $ 25,761,713 $ 25,761,713
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 41
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenue (note 11) $ -- $ 1,792,471 $ 43,783,124
Cost of revenue (including $-0-, $511,000 and $343,000
to related parties - notes 10 and 11) -- 2,623,447 43,517,459
----------- ----------- ------------
Gross profit (loss) -- (830,976) 265,665
----------- ----------- ------------
Operating expenses:
Selling, general and administrative (note 10) 627,606 3,659,810 11,239,188
Research and development (including $51,000,
$119,000 and $233,000 to related parties - note 10) 727,753 1,109,382 4,343,783
----------- ----------- ------------
Total operating expenses 1,355,359 4,769,192 15,582,971
----------- ----------- ------------
Profit (loss) from continuing operations (1,355,359) (5,600,168) (15,317,306)
Related party interest expense (note 10) (141,167) (331,594) (764,042)
Interest and other income -- -- 475,642
----------- ----------- ------------
Profit (loss) from continuing operations
before income taxes (1,496,526) (5,931,762) (15,605,706)
Income tax expense (benefit) (note 8) -- -- --
----------- ----------- ------------
Profit (loss) from continuing operations (1,496,526) (5,931,762) (15,605,706)
Discontinued operations (note 12):
Income (loss) from operations of discontinued
transportation segment (including $814,000,
$370,000 and $171,000 to related parties - note 10) (3,987,097) (1,808,951) 10,420
Loss on disposal of transportation segment -- (91,415) --
----------- ----------- ------------
Net profit (loss) $(5,483,623) $(7,832,128) $(15,595,286)
=========== =========== ============
Net profit (loss) attributable to common shareholders $(5,483,623) $(7,832,128) $(21,133,237)
=========== =========== ============
Net profit (loss) from continuing operations per
common share -- basic and diluted $ (3.91) $ (1.36) $ (3.11)
=========== =========== ============
Net profit (loss) per common share -- basic and diluted $ (14.34) $ (1.80) $ (3.11)
=========== =========== ============
Weighted average number of common shares
outstanding -- basic and diluted 382,273 4,356,926 6,794,755
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 42
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SERIES A SERIES B SERIES C SERIES D CLASS A
------------------- ------------------- ------------------ ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996 -- $ -- -- $ -- -- $ -- -- $ -- 450,000 $ 3,600
Issuance of common stock
to XL Vision, Inc., for
cash at $.008 per share
(note 10) -- -- -- -- -- -- -- -- 2,808,125 22,465
Sale of Series A
preferred stock for
cash at $1.00 per
share (note 6) 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 -- -- -- -- -- -- 3,258,125 26,065
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
(note 10) -- -- 2,400,000 24,000 -- -- -- -- -- --
Issuance of common stock
in connection with
Nutri-Charge
transaction at $0.80
per share (note 6) -- -- -- -- -- -- -- -- 2,587,500 20,700
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 -- -- -- -- 5,845,625 46,765
Exercise of stock
options for cash at
$.80 per share -- -- -- -- -- -- -- -- 200,819 1,607
Issuance of common stock
in connection with CIN
transaction at $0.96
per share (note 6) -- -- -- -- -- -- -- -- 750,000 6,000
Issuance of common stock
in connection with
Cyberstockyard
transaction at $1.80
per share (note 6) -- -- -- -- -- -- -- -- 250,000 2,000
Issuance of Series C
preferred stock at
$5.00 per share
(note 7) -- -- -- -- 1,100,000 11,000 -- -- -- --
Issuance of Series D
preferred stock at
$9.00 per share,
including beneficial
conversion feature
of $5,523,612
(note 10) -- -- -- -- -- -- 4,555,556 45,556 -- --
Beneficial conversion
feature (note 10) -- -- -- -- -- -- -- -- -- --
Issuance of warrant
(note 10) -- -- -- -- -- -- -- -- -- --
Accretion to redemption
value of Class A
common stock issued
in connection with
the Turnkey Computer
Systems, Inc.
transaction (note 5) -- -- -- -- -- -- -- -- -- --
Accretion of imputed
interest on note
receivable from
Internet Capital
Group, Inc. (note 10) -- -- -- -- -- -- -- -- -- --
Net profit (loss) -- -- -- -- -- -- -- -- -- --
Unearned compensation
(note 9) -- -- -- -- -- -- -- -- -- --
Amortization of unearned
compensation (note 9) -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Balances at December 31,
1999 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 4,555,556 $45,556 7,046,444 $56,372
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
COMMON STOCK FROM
CLASS B ADDITIONAL INTERNET
------------------- PAID-IN ACCUMULATED CAPITAL UNEARNED
SHARES AMOUNT CAPITAL DEFICIT GROUP, INC. COMPENSATION TOTAL
--------- ------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996 -- $ -- $ 3,816 $ (3,464,889) $ -- -- $ (3,457,473)
Issuance of common stock
to XL Vision, Inc., for
cash at $.008 per share
(note 10) -- -- -- -- -- -- 22,465
Sale of Series A
preferred stock for
cash at $1.00 per
share (note 6) -- -- 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 -- -- 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
(note 10) -- -- 4,776,000 -- -- -- 4,800,000
Issuance of common stock
in connection with
Nutri-Charge
transaction at $0.80
per share (note 6) -- -- 2,049,300 -- -- -- 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 -- -- 16,648,286 (16,780,640) -- -- 2,847
Exercise of stock
options for cash at
$.80 per share -- -- 185,798 -- -- -- 187,405
Issuance of common stock
in connection with CIN
transaction at $0.96
per share (note 6) -- -- 714,000 -- -- -- 720,000
Issuance of common stock
in connection with
Cyberstockyard
transaction at $1.80
per share (note 6) -- -- 448,000 -- -- -- 450,000
Issuance of Series C
preferred stock at
$5.00 per share
(note 7) -- -- 5,489,000 -- -- -- 5,500,000
Issuance of Series D
preferred stock at
$9.00 per share,
including beneficial
conversion feature
of $5,523,612
(note 10) -- -- 40,967,503 -- (20,815,000) -- 20,198,059
Beneficial conversion
feature (note 10) -- -- (5,523,612) -- -- -- (5,523,612)
Issuance of warrant
(note 10) -- -- 3,325,553 -- -- -- 3,325,553
Accretion to redemption
value of Class A
common stock issued
in connection with
the Turnkey Computer
Systems, Inc.
transaction (note 5) -- -- (14,339) -- -- -- (14,339)
Accretion to redemption
value of note
receivable from
Internet Capital
Group, Inc. (note 10) -- -- -- (373,320) -- (373,320)
Net profit (loss) -- -- -- (15,595,286) -- -- (15,595,286)
Unearned compensation
(note 9) -- -- 72,126 -- -- (72,126) --
Amortization of unearned
compensation (note 9) -- -- -- -- -- 13,524 13,524
--------- ------- ---------- ------------ ------------ ------- ------------
Balances at December 31,
1999 -- $ -- 62,312,315 $(32,375,926) $(21,188,320) (58,602) $ 8,890,831
========= ======= ========== ============ ============ ======= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 43
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net profit (loss) $(5,483,623) $(7,832,128) $(15,595,286)
Adjustments to reconcile net profit (loss) to net cash used in
operating activities:
Depreciation and amortization 122,486 438,576 1,770,571
Accretion of imputed interest on note receivable -- -- (373,320)
Amortization of unearned compensation -- -- 13,524
Changes in operating assets and liabilities:
Trade accounts receivable, net -- (368,421) (759,162)
Inventories (635,963) (70,594) (494,646)
Cattle deposits -- -- (473,859)
Prepaid expenses and other assets (32,338) 5,805 (179,590)
Net assets of discontinued operations (853,501) (1,140,425) --
Accounts payable 719,694 (301,423) 593,645
Accrued liabilities 198,759 328,791 (343,729)
Advance payments from customers -- -- 222,750
----------- ----------- ------------
Net cash used by operating activities (5,964,486) (8,939,819) (15,619,102)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- -- 1,927,230
Purchases of property and equipment (506,540) (460,290) (1,672,461)
Purchases of intangibles -- (431,923) (25,002)
Business combinations, net of cash acquired of $737 -- -- (1,799,263)
Investment in Turnkey Computer Systems, Inc. -- -- (22,833)
----------- ----------- ------------
Net cash used by investing activities (506,540) (892,213) (1,592,329)
----------- ----------- ------------
Cash flows from financing activities:
Net borrowings from related parties 3,810 9,447,030 6,866,381
Proceeds from capital lease financing with related party -- 440,832 --
Payment on note payable -- -- (500,000)
Payments on capital lease obligations -- (55,962) (78,482)
Capitalized Offering costs -- -- (447,644)
Sale of preferred stock 6,443,606 -- 23,500,000
Sale of common stock 22,465 -- 187,405
----------- ----------- ------------
Net cash provided by financing activities 6,469,881 9,831,900 29,527,660
----------- ----------- ------------
Net increase (decrease) in cash (1,145) (132) 12,316,229
Cash - beginning of period 1,545 400 268
----------- ----------- ------------
Cash - end of period $ 400 $ 268 $ 12,316,497
=========== =========== ============
</TABLE>
F-5
<PAGE> 44
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest $ -- $ 23,594 $
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 --
Contribution of put rights by XL Vision, Inc. (note 6) -- 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-6
<PAGE> 45
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 6) 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 proforma balance sheet as of December 31, 1999 assumes the
conversion of all redeemable common stock and preferred stock
into common stock upon an initial public offering ("IPO").
F-7
<PAGE> 46
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 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 buyer, typically a
24 to 48 hour period. In both cattle auction and resale
transactions, the Company acts as a principal in purchasing
cattle from suppliers and sales to customers so that the
Company recognizes revenue equal to the amount paid by
customers for the cattle.
(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-8
<PAGE> 47
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(f) INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(g) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," permits entities
to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25") and provide pro forma net income and
pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(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.
F-9
<PAGE> 48
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 and
beneficial conversion feature related to Series D preferred
stock) by the weighted average number of shares of common
stock outstanding less the shares of redeemable Class A common
stock. The Company's stock options (338,125 at December 31,
1997, 1,632,500 at December 31, 1998 and 2,769,116 at December
31, 1999) and convertible preferred stock (6,443,606 at
December 31, 1997, 8,843,606 at December 31, 1998 and
14,499,162 at December 31, 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, note
payable, 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.
(3) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
RAW MATERIALS $ 424,130 $ 658,454
WORK-IN-PROCESS 282,427 139,187
CATTLE -- 403,562
---------- ----------
$ 706,557 $1,201,203
========== ==========
</TABLE>
F-10
<PAGE> 49
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ ESTIMATED
USEFUL
1998 1999 LIVES
---------- ---------- ---------
<S> <C> <C> <C>
Engineering and manufacturing equipment
$ 366,150 $ 673,782 5 years
Office and computer equipment 259,462 1,896,741 3 years
Furniture and fixtures 104,706 112,122 7 years
Leasehold improvements 46,865 80,430 7 years
Automobiles -- 54,717 5 years
---------- ----------
777,183 2,817,792
Less accumulated depreciation
and amortization 263,346 922,038
---------- ----------
Property and equipment, net $ 513,837 $1,895,754
========== ==========
</TABLE>
Assets under capital lease amounted to $440,832 as of December 31,
1998 and 1999. Accumulated amortization for assets under capital lease
totaled approximately $152,300 and $239,200 as of December 31, 1998
and 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 (which
was paid in December 1999,) $500,000 at December 31, 2000 and $400,000
at December 31, 2001. This investment is carried on the cost method
since the Company does not have significant influence over Turnkey. The
common stock purchase agreement with Turnkey contains a put right which
allows Turnkey to have a one time right to put to the Company its
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 as of December 31, 1999. 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.
F-11
<PAGE> 50
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(6) INTANGIBLES
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
---------------------------- USEFUL
1998 1999 LIVES
----------- ---------- --------
<S> <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 1,177,996
---------- ----------
Intangibles, net $2,699,828 $5,955,360
========== ==========
</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-12
<PAGE> 51
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of CIN, LLC d/b/a Cattle'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 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.
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.
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 acquisition
above had been consummated as of January 1, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1998 1999
---------- ------------
<S> <C> <C>
Revenue $ 2,282,893 $ 44,005,044
=========== ============
Net profit (loss) $(7,161,345) $(16,074,834)
=========== ============
Net profit (loss) attributable to
common shareholders $(7,161,345) $(21,612,785)
=========== ============
Net profit (loss) per common share $ (1.34) $ (3.10)
=========== ============
</TABLE>
F-13
<PAGE> 52
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(7) EQUITY
COMMON STOCK
As of December 31, 1999, the Company had authorized the issuance of
100,000,000 shares of common stock.
CLASS A -- In 1999, the Company designated 92,711,110 as Class A
common stock.
CLASS B -- In 1999, the Company designated 7,288,890 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 December 31, 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 are convertible at the offering price into 1.25 shares of
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.
F-14
<PAGE> 53
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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 - On April 15, 1999, the Company designated 1,100,000 as
Series C shares. Series C shares are entitled to a liquidation
preference before any distribution to common stockholders equal to the
greater of (a) $5.00 per share plus an additional $.50 for each year
(pro rated for partial years) from April 15, 1999 or until the date of
distribution of available assets or (b) the amount which would be
distributed if all of the preferred stock of the Company were
converted to Class A common stock prior to liquidation. Series C
shares are on parity with Series A and D shares except as to voting
rights.
SERIES D - Series D shares are entitled to a liquidation preference
before any distribution to common stockholders equal to the greater of
(a) $9.00 per share plus an additional $1.00 for each year (pro rated
for partial years) from October 27, 1999 or until the date of
distribution of available assets or (b) the amount which would be
distributed if all the preferred stock of the Company were converted
to Class B common stock prior to liquidation. Series D shares are on
parity with Series A and C shares except as to voting rights. Series D
stockholders are entitled to two and one-half votes per share.
F-15
<PAGE> 54
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,967,000 $10,903,000
Amortization of acquired technology from
XL Vision (note 10) 1,704,000 1,500,000
Research and experimentation tax credits 448,000 740,000
Other 596,000 853,000
----------- -----------
8,715,000 13,996,000
Less valuation allowance 8,715,000 13,996,000
----------- -----------
Net deferred tax assets -- --
=========== ===========
</TABLE>
The Company has available at December 31, 1999 for federal income tax
purposes, unused net operating loss carryforwards of approximately
$28,000,000 which may be applied against future taxable income and
expires in years beginning in 2012. The Company also has approximately
$740,000 in research and experimentation credits carryforwards. The
research and experimentation credits, which begin to expire in 2012,
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> 55
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 reversed for issuance to employees, advisors
and for non-exempt 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
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE PRICE AVERAGE CONTRACTUAL
SHARES PER 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 0.84 9.48
====
Granted 1,415,250 1.60 - 11.20 4.96
Exercised (200,819) 0.80 0.93
Cancelled (77,815) 0.80 - 1.60 1.35
--------- --------------- --------
Balance outstanding, December
31, 1999 2,769,116 $ 0.80 - 11.20 $ 2.93 9.01
========= =============== ======== ====
</TABLE>
F-17
<PAGE> 56
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
At December 31, 1997, 1998 and 1999, there were 76,719, 414,375 and
761,045 shares exercisable, respectively, at weighted average exercise
prices of $0.80. $0.82 and $1.68, respectively.
At December 31, 1997, 1998 and 1999, 99,375, 511,250 and 1,597,875
shares were available for grant, respectively.
The per share weighted-average fair value of stock options granted was
$-0- in 1997, $0.08 in 1998 and $1.47 in 1999 on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Volatility 0% 0% 0%
Dividend paid 0% 0% 0%
Risk-free interest rate 6.11% 4.73% 4.99%
Expected life in years 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
through December 31, 1999 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 $13,524 for the year ended December
31, 1999.
F-18
<PAGE> 57
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 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>
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Net loss as reported $(5,483,623) $ (7,832,128) $ (15,595,286)
=========== ============ =============
Pro forma net loss $ 5,483,623) $ 7,865,031) $ (16,049,980)
=========== ============ =============
Net loss per share, as reported:
Basic and diluted $ (14.34) $ (1.80) $ (2.30)
=========== ============ =============
Pro forma net loss per share:
Basic and diluted $ (14.34) $ (1.81) $ (3.17)
=========== ============ =============
</TABLE>
(10) RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Due to related parties consist of:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
XL Vision $ 5,158,436 $ 1,668,317
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc. 28,898 10,385,398
----------- -----------
$ 5,187,334 $12,053,715
=========== ===========
</TABLE>
F-19
<PAGE> 58
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
<TABLE>
<CAPTION>
<S> <C>
AMOUNTS DUE TO XL VISION
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 (3,771,964)
Interest charges on technology transferred 281,845
-----------
Balance as of December 31, 1999 $ 1,668,317
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$6,239,600 in 1997, $12,782,400 in 1998 and $6,266,800 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% (9.5% at December 31, 1999) and is
due in full when the Company completes an IPO or sells all of its
assets of stock.
F-20
<PAGE> 59
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
NOTES 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% (9.5% at December 31, 1999) and is due February 29, 2000.
In August, September and October 1999, the Company signed demand notes
with interest payable monthly at the prime rate plus 1% (9.5% at
December 31, 1999) 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.
Interest expense was approximately $0 in 1997, $0 in 1998 and $454,800
in 1999.
TECHNOLOGY FEE
On July 15, 1997, the Company entered into an agreement with XL Vision
for the transfer of certain technology that is sued 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 en entity under common control in excess
of the cost of such asset. The note payable (included in amounts due to
XL Vision above) bears interest at 7% per annum. Interest expense was
approximately $141,200 in 1997, $308,000 in 1998 and $281,800 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 to or service fees charged by XL
Vision were approximately $720,000 in 1997, $460,000 in 1998 and
$455,000 in 1999. A portion of the fees in 1998 and all of the fees in
1997 were allocated to the discontinued transportation segment.
F-21
<PAGE> 60
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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
$53,200 in 1999.
LEASES
The Company leases equipment under a capital lease, effective April
20, 1998, with an affiliated entity, XL Realty, Inc. Future minimum
lease payments, including imputed interest at 7.53%, are $85,765 in
2000, $92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest
expense was approximately $23,600 in 1998 and $27,400 in 1999.
The Company rents its facilities 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 was approximately $354,000 in
1997, $1,129,000 in 1998 and $985,000 in 1999.
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 to Internet Capital Group, Inc., an affiliate of
Safeguard. 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 than $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-22 (Continued)
<PAGE> 61
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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 is shown as a reduction of stockholders' equity,
net of imputed interest. Interest income is accreted over the life of
the note using the effective interest method. The value of the warrant
was credited to additional paid-in capital. The beneficial conversion
feature was credited to preferred stock with a corresponding charge to
additional paid-in capital at issuance. The beneficial conversion
feature reduces net income available to common shareholders.
(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 data 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-23
<PAGE> 62
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The following summarizes revenue and contribution margin information
related to the Company's two operating segments:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
----------- ------------
<S> <C> <C>
Revenue:
Cattle $ -- $ 42,191,884
Animal sciences 1,792,471 1,591,240
----------- ------------
Total $ 1,792,471 $ 43,783,124
=========== ============
Cost of revenue:
Direct costs:
Cattle $ -- $ 41,746,723
Animal sciences 900,824 558,243
----------- ------------
Total direct costs 900,824 42,304,966
Unallocated overhead 1,722,623 1,212,493
----------- ------------
Total $ 2,623,447 $ 43,517,459
=========== ============
Gross profit (loss):
Contribution margin:
Cattle $ -- $ 445,161
Animal sciences 891,647 1,032,997
----------- ------------
Total 891,647 1,478,158
Unallocated overhead (1,722,623) (1,212,493)
----------- ------------
Gross profit (loss) $ (830,976) $ 265,665
=========== ============
</TABLE>
The Company's assets and other statement of operations data are not
allocated to a segment.
F-24
<PAGE> 63
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 December 31, 1999. The
remaining balance of approximately $294,142 is expected to be collected
by April 30, 2000. The Company is entitled to a royalty of 8% of net
AMIRIS system sales, up to a maximum royalty of $4.3 million over a
four year period or up to a maximum royalty of $5.0 million, if $4.3
million is not received within four years.
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
1998 1999
----------- ---------
<S> <C> <C>
Accounts receivable $ 381,435 $ 10,353
Inventory, net 2,020,625 123,093
Note receivable -- 294,142
Property and equipment, net 134,098 --
Intangibles, net 61,108 --
Accounts payable (80,510) (28,185)
Accrued liabilities including provision for
operating loss during phase out period of
$72,667 in 1998 and $0 in 1999 (231,415) (102,400)
----------- ---------
Net assets $ 2,285,341 $ 297,003
=========== =========
</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
approximately $38,200 in 1997, $62,100 in 1998 and $81,700 in 1999.
F-25
<PAGE> 64
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 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. Royalty expense in connection with this
agreement was nominal through the period ended December 31, 1999.
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. No such royalties have been paid as of December 31, 1999.
LEGAL PROCEEDING
The Company has been named as a defendant in a lawsuit filed by
Central Biotech, Inc. on January 12, 2000 in the Queen's Bench
Judicial Centre of Regina, Providence of Saskatchewan, Canada. The
complaint alleges that eMerge and E-Y laboratories, Inc. 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 $18,000,000 (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.
(14) SUBSEQUENT EVENTS
On February 17, 2000, the Company closed on its IPO and a concurrent
private placement of common stock and raised net proceeds of
approximately $107,400,000. Approximately $12,800,000 of the proceeds
were used to pay amounts due to related parties (see note 10) and
$900,000 was paid to Turnkey (see note 5).
F-26
<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...........................
6
<PAGE> 7
PROTECTED - BUSINESS INFORMATION
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......................................................................
7
<PAGE> 8
PROTECTED - BUSINESS INFORMATION
PRE-MIX FORMULATION...................................................
APPENDIX......................................................................
RMS / AGRESEARCH AGREEMENTS...........................................
APPENDIX......................................................................
eVS INFRA RED TECHNOLOGIES............................................
8
<PAGE> 9
PROTECTED - BUSINESS INFORMATION
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
9
<PAGE> 10
PROTECTED - BUSINESS INFORMATION
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
10
<PAGE> 11
PROTECTED - BUSINESS INFORMATION
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.
11
<PAGE> 12
PROTECTED - BUSINESS INFORMATION
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 &
12
<PAGE> 13
PROTECTED - BUSINESS INFORMATION
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
13
<PAGE> 14
PROTECTED - BUSINESS INFORMATION
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);
14
<PAGE> 15
PROTECTED - BUSINESS INFORMATION
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
15
<PAGE> 16
PROTECTED - BUSINESS INFORMATION
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:
16
<PAGE> 17
PROTECTED - BUSINESS INFORMATION
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:
17
<PAGE> 18
PROTECTED - BUSINESS INFORMATION
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.
18
<PAGE> 19
PROTECTED - BUSINESS INFORMATION
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.;
19
<PAGE> 20
PROTECTED - BUSINESS INFORMATION
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
20
<PAGE> 21
PROTECTED - BUSINESS INFORMATION
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
21
<PAGE> 22
PROTECTED - BUSINESS INFORMATION
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
22
<PAGE> 23
PROTECTED - BUSINESS INFORMATION
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.
23
<PAGE> 24
PROTECTED - BUSINESS INFORMATION
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.
24
<PAGE> 25
PROTECTED - BUSINESS INFORMATION
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
25
<PAGE> 26
PROTECTED - BUSINESS INFORMATION
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.
26
<PAGE> 27
PROTECTED - BUSINESS INFORMATION
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
27
<PAGE> 28
PROTECTED - BUSINESS INFORMATION
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.
28
<PAGE> 29
PROTECTED - BUSINESS INFORMATION
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
29
<PAGE> 30
PROTECTED - BUSINESS INFORMATION
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.
30
<PAGE> 31
PROTECTED - BUSINESS INFORMATION
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.
31
<PAGE> 32
PROTECTED - BUSINESS INFORMATION
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
32
<PAGE> 33
PROTECTED - BUSINESS INFORMATION
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.
33
<PAGE> 34
PROTECTED - BUSINESS INFORMATION
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.
34
<PAGE> 35
PROTECTED - BUSINESS INFORMATION
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:
35
<PAGE> 36
PROTECTED - BUSINESS INFORMATION
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;
36
<PAGE> 37
PROTECTED - BUSINESS INFORMATION
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.
37
<PAGE> 38
PROTECTED - BUSINESS INFORMATION
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
38
<PAGE> 39
PROTECTED - BUSINESS INFORMATION
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.
39
<PAGE> 40
PROTECTED - BUSINESS INFORMATION
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.
40
<PAGE> 41
PROTECTED - BUSINESS INFORMATION
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).
41
<PAGE> 42
PROTECTED - BUSINESS INFORMATION
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,
42
<PAGE> 43
PROTECTED - BUSINESS INFORMATION
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).
43
<PAGE> 44
PROTECTED - BUSINESS INFORMATION
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;
44
<PAGE> 45
PROTECTED - BUSINESS INFORMATION
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.
45
<PAGE> 46
PROTECTED - BUSINESS INFORMATION
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.
46
<PAGE> 47
PROTECTED - BUSINESS INFORMATION
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
47
<PAGE> 48
PROTECTED - BUSINESS INFORMATION
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
48
<PAGE> 49
PROTECTED - BUSINESS INFORMATION
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.
49
<PAGE> 50
PROTECTED - BUSINESS INFORMATION
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
50
<PAGE> 51
PROTECTED - BUSINESS INFORMATION
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
51
<PAGE> 52
PROTECTED - BUSINESS INFORMATION
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
52
<PAGE> 53
PROTECTED - BUSINESS INFORMATION
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.
53
<PAGE> 54
PROTECTED - BUSINESS INFORMATION
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
54
<PAGE> 55
PROTECTED - BUSINESS INFORMATION
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.
55
<PAGE> 56
PROTECTED - BUSINESS INFORMATION
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
56
<PAGE> 57
PROTECTED - BUSINESS INFORMATION
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
57
<PAGE> 58
PROTECTED - BUSINESS INFORMATION
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;
58
<PAGE> 59
PROTECTED - BUSINESS INFORMATION
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.
59
<PAGE> 60
PROTECTED - BUSINESS INFORMATION
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
60
<PAGE> 61
PROTECTED - BUSINESS INFORMATION
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
61
<PAGE> 62
PROTECTED - BUSINESS INFORMATION
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
62
<PAGE> 63
PROTECTED - BUSINESS INFORMATION
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
63
<PAGE> 64
PROTECTED - BUSINESS INFORMATION
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.
64
<PAGE> 65
PROTECTED - BUSINESS INFORMATION
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
65
<PAGE> 66
PROTECTED - BUSINESS INFORMATION
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
66
<PAGE> 67
PROTECTED - BUSINESS INFORMATION
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
67
<PAGE> 68
PROTECTED - BUSINESS INFORMATION
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
68
<PAGE> 69
PROTECTED - BUSINESS INFORMATION
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.
69
<PAGE> 70
PROTECTED - BUSINESS INFORMATION
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.
70
<PAGE> 71
PROTECTED - BUSINESS INFORMATION
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
71
<PAGE> 72
PROTECTED - BUSINESS INFORMATION
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
72
<PAGE> 73
PROTECTED - BUSINESS INFORMATION
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
73
<PAGE> 74
PROTECTED - BUSINESS INFORMATION
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
74
<PAGE> 75
PROTECTED - BUSINESS INFORMATION
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
75
<PAGE> 76
PROTECTED - BUSINESS INFORMATION
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
76
<PAGE> 77
PROTECTED - BUSINESS INFORMATION
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.
77
<PAGE> 78
PROTECTED - BUSINESS INFORMATION
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.
78
<PAGE> 79
PROTECTED - BUSINESS INFORMATION
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:
79
<PAGE> 80
PROTECTED - BUSINESS INFORMATION
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.
80
<PAGE> 81
PROTECTED - BUSINESS INFORMATION
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
<PAGE> 87
PROTECTED - BUSINESS INFORMATION
APPENDIX "B"
ARBITRATION RULES
87
<PAGE> 88
APPENDIX "D"
88
<PAGE> 89
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.
89
<PAGE> 90
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
90
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMERGE
INTERACTIVE, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001092605
<NAME> EMERGE INTERACTIVE, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 12,316,497
<SECURITIES> 0
<RECEIVABLES> 1,144,133
<ALLOWANCES> 75,000
<INVENTORY> 1,201,203
<CURRENT-ASSETS> 15,640,122
<PP&E> 2,817,792
<DEPRECIATION> 922,038
<TOTAL-ASSETS> 25,761,713
<CURRENT-LIABILITIES> 15,832,475
<BONDS> 0
0
144,992
<COMMON> 56,372
<OTHER-SE> 8,689,467
<TOTAL-LIABILITY-AND-EQUITY> 25,761,713
<SALES> 43,783,124
<TOTAL-REVENUES> 43,783,124
<CGS> 43,517,459
<TOTAL-COSTS> 15,582,971
<OTHER-EXPENSES> 288,400
<LOSS-PROVISION> 75,000
<INTEREST-EXPENSE> 764,042
<INCOME-PRETAX> (15,605,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,605,706)
<DISCONTINUED> 10,420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,595,286)
<EPS-BASIC> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
