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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-89815
8,000,000 Shares
eMerge Interactive Logo
Class A Common Stock
------------------------
This is an initial public offering of class A common stock of eMerge
Interactive, Inc. We are offering 6,500,000 shares of class A common stock in
this offering and several stockholders identified in this prospectus are selling
an additional 1,500,000 shares. As part of this offering, we are offering
2,806,000 shares of our class A common stock at the public offering price to
shareholders of Safeguard Scientifics, Inc., one of our principal stockholders,
that owned at least 100 shares of common stock of Safeguard as of October 20,
1999 and Safeguard is offering up to 694,000 shares to its shareholders.
Safeguard or its designees will purchase any shares of class A common stock that
are not purchased by Safeguard shareholders under the Safeguard Subscription
Program. See the section entitled Plan of Distribution -- Safeguard Subscription
Program. After this offering, Safeguard, together with Internet Capital Group,
Inc. and XL Vision, Inc., two of our other stockholders, will have the power to
vote approximately 65.2% of the aggregate number of votes to which our
stockholders will be entitled.
SAFEGUARD IS AN UNDERWRITER WITH RESPECT TO THE SHARES OFFERED TO THE
SHAREHOLDERS OF SAFEGUARD. SAFEGUARD IS NOT AN UNDERWRITER WITH RESPECT TO ANY
OTHER SHARES OFFERED AND IS NOT INCLUDED IN THE TERM UNDERWRITER AS USED
ELSEWHERE IN THIS PROSPECTUS.
Prior to this offering, there has been no public market for the class A
common stock. The shares of our class A common stock will be listed on the
Nasdaq National Market under the symbol EMRG.
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
PLEASE SEE THE SECTION ENTITLED RISK FACTORS STARTING ON PAGE 10 TO READ ABOUT
RISKS THAT YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR CLASS A
COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
Underwritten Public Offering --------- -----------
<S> <C> <C> <C>
Public Offering Price.................................. $15.00 $67,500,000
Underwriting Discounts................................. $ 1.05 $ 4,725,000
Proceeds to eMerge Interactive......................... $13.95 $51,531,300
Proceeds to Selling Stockholders....................... $13.95 $11,243,700
</TABLE>
<TABLE>
<CAPTION>
PER SHARE TOTAL
Safeguard Subscription Program --------- -----------
<S> <C> <C> <C>
Public Offering Price.................................. $15.00 $52,500,000
Management Fee......................................... $ 0.42 $ 1,470,000
Proceeds to eMerge Interactive......................... $14.58 $40,911,480
Maximum proceeds, before expenses, to Safeguard
Scientifics, Inc...................................... $14.58 $10,118,520
</TABLE>
<TABLE>
<CAPTION>
TOTAL
Aggregate Offering Proceeds -----------
<S> <C> <C> <C>
Proceeds to eMerge Interactive from Underwritten Public
Offering and Safeguard Subscription Program............ $92,442,780
</TABLE>
At our request, the underwriters have reserved 500,000 shares of our class
A common stock for sale at the public offering price to a potential investor
identified on page 77. The potential investor has not committed to purchasing
these shares. In addition, at our request, the underwriters have reserved
365,000 shares of our class A common stock for sale at the public offering price
to our employees, directors and other persons with relationships with us. See
the section entitled Plan of Distribution for more information. In addition, we
will issue 500,000 shares of class A common stock at a price per share equal to
the initial public offering price in a private placement that will be completed
concurrently with the completion of this offering. The underwriters have an
option to purchase 675,000 additional shares of class A common stock from us at
the initial public offering price to cover any over-allotments of shares.
------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
PROSPECTUS DATED FEBRUARY 4, 2000
<PAGE> 2
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our class A common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 10
Forward-Looking Statements.................................. 23
Use of Proceeds............................................. 24
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 27
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 37
Management.................................................. 54
Related Party Transactions.................................. 61
Principal and Selling Stockholders.......................... 64
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 72
Plan of Distribution........................................ 74
Legal Matters............................................... 79
Experts..................................................... 79
Additional Information...................................... 80
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
Until February 29, 2000, all dealers that buy, sell or trade in our class A
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to its unsold
allotments or subscriptions.
-------------------------
We maintain a Web site at www.cattleinfonet.com, which includes information
relating to eMerge Interactive. Information contained on our Web site does not
constitute a part of this prospectus.
Cyberstockyard(TM) and NutriCharge(TM) are trademarks of eMerge
Interactive. This prospectus also contains trademarks and tradenames of other
companies.
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[This Page Intentionally Left Blank]
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PROSPECTUS SUMMARY
eMERGE INTERACTIVE, INC.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our products and services to cattle industry
participants through our family of integrated Web sites, our proprietary
information management application and our direct sales force. Our products and
services are designed to create an efficient market for the purchase and sale of
cattle and to improve quality and productivity in the cattle industry. Our
current products and services include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement products.
THE ONLINE LIVESTOCK OPPORTUNITY
We believe that the production chain of the cattle industry, which includes
cattle producers, feedlots, packers and suppliers, contains inefficiencies that
reduce animal health and value. These inefficiencies, which include excessive
animal transportation and handling, result in additional transaction costs and
reduced beef quality. Further, we believe that inadequate access to current and
accurate data and a lack of integrated information management tools have limited
the ability of industry participants to optimize their operating results and
performance.
Due to its functionality, scalability and accessibility, the Internet is
emerging as a single destination for commerce and information related to the
livestock industry. Many of the variables that affect beef quality can be
addressed by using the Internet's open architecture, universal accessibility and
ability to provide more timely and comprehensive information. According to
Forrester Research, business-to-business electronic commerce in the United
States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003.
THE eMERGE INTERACTIVE EXPERIENCE
We offer commerce, information and technology to cattle industry
participants. Our complementary products and services are designed to reduce
inefficiencies throughout the cattle production chain, improve cattle quality
and improve overall productivity in the cattle industry. Our current products
and services include the following:
- Cyberstockyard.com, our online cattle sales and auction services Web
site, allows our customers to participate in our live cattle sales and
auctions, thereby providing efficient and effective access to an
inventory of cattle by directly connecting buyers and sellers of cattle.
We believe a less fragmented market for cattle sales may reduce the
excessive handling of cattle that results from transportation and
commingling during transactions, thereby reducing animal stress, which
can lead to improved cattle quality. In addition, by reducing the need
for multiple transactions, we seek to lower overall transaction costs
associated with cattle sales.
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- The Feedlot Information System, our cattle information management
product, is designed to assist in the effective daily management of our
customers' cattle operations. Using our proprietary information
management application, subscribing feedlot customers transmit raw
operating data to us on a daily basis over the Internet. We then use each
subscribing customer's raw data to compile customer-specific information
and performance data and analyses, such as feed consumption data, feed-
to-gain ratios and a comprehensive summary of health results, which we
disseminate daily to that customer over the Internet.
- PCC-online.com, our Professional Cattle Consultants service, is designed
to provide our customers with national, regional and customer-specific
industry analysis services that are derived from our proprietary
centralized database of cattle industry information. This information has
been compiled from over 90 different feedlots over the last 26 years.
These services include feed performance benchmarking services and monthly
market analysis that we provide to subscribing customers on a periodic
basis. PCC-online.com enables our feedlot customers to compare the
performance of their feedlot to the average performance of other feedlots
in our database.
- NutriCharge, our therapeutic product for livestock, is a restorative feed
supplement designed to reduce the effects of stress on the animals caused
by transportation, handling and commingling. We sell our NutriCharge
product over our Web sites and through our direct sales force.
Our customers can access our family of integrated Web sites through our
platform site, CattleInfoNet.com. This industry-specific Web site features
general industry information, such as current industry news, links to
commodities pricing and weather updates, as well as personalized information
based upon customers' individual preferences and geographic location.
CattleInfoNet.com also provides customers with an online community to facilitate
the exchange of information among livestock producers, feedlots and packers and
to provide access to our in-house cattle industry experts.
FINANCIAL INFORMATION
We currently derive our revenue from:
- Purchasing and selling cattle through our online cattle sales and auction
services, which accounted for approximately 96% of our revenues in 1999;
- Subscription fees for our PCC-online information management services,
which we provide over the Internet and through our periodic marketing
reports and newsletters; and
- Sales of our proprietary products.
You should be aware that we incurred net losses of approximately $7.8
million for the year ended December 31, 1998 and approximately $10.7 million for
the nine months ended September 30, 1999, resulting in an accumulated deficit of
approximately $27.5 million at September 30, 1999. We expect to continue to
incur substantial losses in the future related to expanding our network,
expanding our product and service offerings, establishing brand recognition and
upgrading and enhancing our technology.
------------------------
We are a Delaware corporation originally incorporated on September 12, 1994
under the name Enhanced Vision Systems, Inc. On June 11, 1999, we changed our
name to eMerge Interactive, Inc. Our principal executive offices are located at
10315 102nd Terrace, Sebastian, Florida 32958 and our telephone number is
561-589-5310.
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THE OFFERING
Class A common stock offered by:
eMerge Interactive.......................... 6,500,000 shares
The Selling Stockholders.................... 1,500,000 shares
Common stock to be outstanding after the
offering......................................... 32,232,902 shares
Use of proceeds.................................. For repayment of debt,
working capital and general
corporate purposes,
including sales and
marketing expenditures,
research and development
expenditures and capital
expenditures. See the
section entitled Use of
Proceeds.
Nasdaq National Market symbol.................... EMRG
In addition to the 32,232,902 shares of common stock to be outstanding
after this offering, there are:
- 2,769,116 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
December 31, 1999 at a weighted average exercise price of $2.93 per
share, of which options to purchase 761,045 shares of class A common
stock were exercisable at a weighted average exercise price of $1.68 per
share;
- 1,597,875 additional shares of class A common stock available for
issuance under our 1996 and 1999 equity compensation plans as of December
31, 1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
For a description of our equity compensation plans, please see the section
entitled Management -- Equity Compensation.
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SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares of our class A common
stock to shareholders of Safeguard Scientifics, Inc. that owned at least 100
shares of Safeguard common stock on October 20, 1999 in the Safeguard
Subscription Program. The program is described in greater detail in the section
of this prospectus entitled Plan of Distribution -- Safeguard Subscription
Program.
------------------------
Unless otherwise noted, the information in this prospectus takes into
account the conversion of preferred stock into shares of common stock, which
will automatically occur immediately before this offering is completed. Each
outstanding share of series A preferred stock, series B preferred stock and
series C preferred stock will convert into 1.25 shares of class A common stock
and each outstanding share of series D preferred stock will convert into 1.25
shares of class B common stock. All shares offered by this prospectus are shares
of class A common stock. The holders of class A common stock are entitled to one
vote per share. Holders of our class B common stock are entitled to two and
one-half votes per share. Unless otherwise indicated, the references to common
stock in this prospectus refer to both our class A and class B common stock.
The information in this prospectus also takes into account a 5-for-4 common
stock split which was authorized by the Company's Board of Directors on December
6, 1999 and was effective on December 23, 1999.
The references to Safeguard in this prospectus refer to Safeguard
Scientifics, Inc. and its affiliates. The information throughout this prospectus
also assumes that all of the shares offered in the Safeguard Subscription
Program are purchased by shareholders of Safeguard Scientifics, Inc. and, as a
result, no shares are shown as purchased by Safeguard under the Standby Stock
Purchase Agreement. In addition, the information in this prospectus assumes that
the underwriters will not exercise their over-allotment option.
Please see the section entitled Capitalization for more information
regarding the outstanding shares of our common stock and options to purchase our
common stock.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes consolidated statements of operations data
for our business. The pro forma consolidated statements of operations data gives
effect to our acquisition of CIN, LLC and Professional Cattle Consultants,
L.L.C. as if we had consummated these acquisitions at the beginning of each
period. Cyberstockyard, Inc. is not included because the pro forma effects are
not significant. We acquired CIN, LLC in February 1999 for an aggregate purchase
price of approximately $2.3 million, which consisted of cash, shares of our
class A common stock, assumption of liabilities, future contingent payments
relating to sales of products over the CIN Web site and transaction costs. We
acquired Professional Cattle Consultants, L.L.C. in May 1999 for an aggregate
purchase price of approximately $1.8 million, which consisted of cash, the
assumption of liabilities and transaction costs. We acquired Cyberstockyard,
Inc. in March 1999 for an aggregate purchase price of approximately $542,000,
which consisted of shares of our class A common stock and transaction costs.
Business activities related to our continuing operations began on January 1,
1997. From our inception in 1994 until January 1997, our business activities
related to the development and commercialization of infrared products focused on
the transportation industry, primarily the maritime transportation industry. The
historical data for the nine months ended September 30, 1998 and the pro forma
data for the year ended December 31, 1998 and the nine months ended September
30, 1999 are unaudited.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED NINE MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
----------------- ------------------ 1998 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- ------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue............................ $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................... -- 2,623 1,629 18,283 2,801 18,354
Operating expenses................. 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income,
net.............................. 141 332 231 443 315 454
------- ------- ------- -------- ------- --------
Profit (loss) from continuing
operations....................... $(1,497) $(5,932) $(3,941) $(10,683) $(7,099) $(11,087)
======= ======= ======= ======== ======= ========
Profit (loss) from continuing
operations per common share --
basic and diluted................ $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======= ======== ======= ========
Weighted average number of common
shares outstanding -- basic and
diluted.......................... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======= ======== ======= ========
</TABLE>
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The following table summarizes our balance sheet data as of September 30,
1999.
The unaudited pro forma consolidated balance sheet data give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock at an
exercise price equal to the initial public offering price, for $38.8
million ($18.0 million of cash and a $20.8 million note receivable) under
a securities purchase agreement dated October 27, 1999, and the
application of a portion of the proceeds from that agreement which repaid
indebtedness to XL Vision of approximately $4.5 million;
- The issuance of 500,000 shares of class A common stock in the concurrent
private placement;
- The automatic conversion of all outstanding shares of series A, series B,
series C and series D preferred stock into shares of our common stock,
which will occur immediately prior to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc., which is due upon the completion of this offering.
The unaudited pro forma as adjusted consolidated balance sheet data below
give effect to:
- The events described in the five preceding paragraphs; and
- The sale of 6,500,000 shares of class A common stock in this offering and
our application of the estimated net proceeds from the sale of these
shares, as described in the section entitled Use of Proceeds.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................... $ 1,650 $13,750 $ 96,052
Total assets................................... 16,229 28,329 109,889
Total indebtedness............................. 15,133 9,233 --
Total stockholders' equity..................... (3,907) 14,499 105,292
</TABLE>
Total indebtedness as of September 30, 1999 includes amounts due to XL
Vision totaling $6.1 million and to Safeguard totaling $7.3 million. We intend
to use a portion of the net proceeds from this offering to pay in full amounts
due to XL Vision and Safeguard. As of December 31, 1999, approximately $1.6
million was owed to XL Vision after repayment of $4.5 million with the net
proceeds from the sale of series D preferred stock and a warrant to purchase
1,138,889 shares of class B common stock to Internet Capital Group, Inc.; the
remaining $1.6 million will be paid with a portion of the net proceeds from this
offering. The amount owed to Safeguard as of December 31, 1999 was approximately
$10.3 million, and is to be repaid with the net proceeds of this offering.
Safeguard owns approximately 14% of the outstanding common stock of Internet
Capital Group, Inc., and owns approximately 55% of the outstanding capital stock
of XL Vision.
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RISK FACTORS
You should carefully consider the risks described below before investing in
our class A common stock. The factors discussed below may harm our business,
financial condition and results of operations and could result in a complete
loss of your investment.
RISKS RELATED TO OUR BUSINESS
WE BEGAN OPERATIONS IN OUR CURRENT LINE OF BUSINESS IN JANUARY 1997 AND FACE
SIGNIFICANT RISKS TYPICAL OF EARLY STAGE COMPANIES, WHICH COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which you can evaluate our business. In addition, our business strategy and
revenue model have changed significantly during the past year. Prior to this
change, we generated revenue primarily from the sale and licensing of our AMIRIS
product, a maritime navigational thermal imaging system, which we no longer
sell, and our equine imaging system, an infrared product used to detect injuries
in horses, which we continue to sell. We have sold the AMIRIS product line and
have changed our business strategy to focus on business-to-business Internet
commerce for the livestock industry. We only recently launched our commercial
Web site for our initial target market, the cattle industry, in August 1999. Our
limited operating history, combined with our recent shift in business strategy,
makes predicting our future results of operations difficult. Our new business
model has not been tested and, accordingly, we cannot be certain that our
business strategy will be successful.
Specific uncertainties relating to our new business model include our
ability to:
- Achieve acceptance of our Web site as a marketplace for electronic
commerce;
- Expand the number of cattle producers, feedlots and packers that utilize
our services;
- Develop and upgrade our products and technologies more effectively and
rapidly than our competitors; and
- Successfully implement our sales and marketing strategy.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE. IF WE CONTINUE TO INCUR LOSSES, OUR BUSINESS MAY NOT
ULTIMATELY BE FINANCIALLY VIABLE.
We have incurred significant net losses since inception. We reported a net
loss of approximately $7.8 million for the year ended December 31, 1998, or 437%
of total revenue, and approximately $10.7 million for the nine months ended
September 30, 1999, or 58% of total revenue. We expect to continue to incur
significant losses for the foreseeable future. As of September 30, 1999, we had
accumulated net losses totaling approximately $27.5 million and a stockholders'
deficit of $3.9 million. Our operating expenses have increased significantly in
each year of our operation, and we anticipate that such expenses will continue
to increase over the next several years as we expand our operations. Our revenue
may not grow or may not even continue at its current level and, as a result, our
financial condition and results of our operations may be harmed and our business
may not be
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financially viable in the future. To achieve profitability, we must successfully
address the following risks:
- Lack of commercial acceptance of our online cattle sales and auction
services;
- Failure to expand the number of livestock industry participants using our
network;
- Failure to obtain access to data from feedlots to adequately address the
information needs of our customers;
- Inability to respond to competitive developments;
- Failure to achieve brand recognition;
- Failure to introduce new products and services; and
- Failure to upgrade and enhance our technologies to accommodate expanded
product and service offerings and increased customer traffic.
If we are unable to successfully address any of these risks, our business
may be harmed.
THE INTERNET LIVESTOCK PRODUCTS AND SERVICES MARKET, INCLUDING, IN PARTICULAR,
THE ONLINE CATTLE SALES AND AUCTION MARKET, IS NEW AND UNCERTAIN AND OUR
BUSINESS MAY NOT DEVELOP AS WE ANTICIPATE.
The Internet market for livestock products and services, including, in
particular, the online cattle sales and auction market, has only recently
developed, and its continued development is subject to substantial uncertainty.
To date, we have not realized adequate revenues from this market to achieve
profitability. We cannot assure you that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based products and services. We do not know if our target customers
will use the Internet as a means of purchasing products and services. Even if
potential customers choose to purchase livestock products and services over the
Internet, they may not choose our online services to do so. If the market for
livestock products and services over the Internet does not develop as we
anticipate, our business and the results of our operations will be harmed.
For the nine months ended September 30, 1999, we relied on online cattle
sales and auction services for over 90% of our revenue and we expect to rely on
the success of our online cattle sales and auction services for a significant
majority of our revenue for the foreseeable future. As a result, our ability to
achieve commercial acceptance of our cattle sales and auction services is
critical to our ability to obtain future revenue. To date, we have not achieved
revenues from cattle sales and auction services over the Internet that are
sufficient for us to determine whether these services will achieve commercial
acceptance. Any failure to successfully gain commercial acceptance of these
services would harm our business and the results of our operations.
WE RECENTLY COMPLETED SIGNIFICANT ACQUISITIONS OF BUSINESSES AND TECHNOLOGIES
AND WE MAY MAKE OTHER BUSINESS ACQUISITIONS IN THE FUTURE, WHICH MAY BE
DIFFICULT TO INTEGRATE INTO OUR BUSINESS AND MAY DISRUPT OR NEGATIVELY IMPACT
OUR BUSINESS.
We recently made, and will continue to make, investments in and
acquisitions of complementary companies, technologies and assets that constitute
critical aspects of our current and future business operations. If we fail to
successfully integrate the operations of these companies, technologies or assets
into our business, we may not be able to successfully execute our business
strategy. We acquired substantially all of the assets of CIN,
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<PAGE> 12
LLC in February 1999, and Professional Cattle Consultants, L.L.C. in May 1999.
In connection with our acquisition of CIN, we hired Scott Crain, one of our key
employees. We also acquired all of the issued and outstanding stock of
Cyberstockyard, Inc. in March 1999. Each of these acquired businesses is
critical to our current business operations and growth strategy.
These and any future acquisitions may result in:
- Difficulties in assimilating technologies, products, personnel and
operations;
- Diversion of our management's attention;
- Entering markets in which we have no or limited prior experience;
- Loss of key employees of acquired organizations; and
- Capital requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also require
us to make cash payments, assume debt, incur large write-offs related to
intangible assets and issue equity, which will dilute ownership interest.
IF WE FAIL TO GENERATE SUFFICIENT CASH FLOWS IN THE FUTURE, WE MAY BE UNABLE TO
RECOVER THE CARRYING AMOUNT OF OUR INTANGIBLE ASSETS, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
As a result of our recent acquisitions of companies, technologies and
assets, we have recorded $6.3 million of intangible assets on our balance sheet
as of September 30, 1999. If we are unable to generate sufficient cash flows
that are attributable to these intangible assets, we may be unable to recover
all or a portion of the carrying amount of such assets. Therefore, we may be
required to reduce the value of these assets as recorded on our balance sheet.
This would require us to record an expense in our statement of operations. This
would also reduce our net assets and increase our losses, or reduce our profits,
as the case may be. Any negative impact on our results of operations or balance
sheet could reduce the price of your common stock.
A DECLINE IN THE DEMAND FOR BEEF COULD HARM OUR RESULTS OF OPERATIONS.
For the nine months ended September 30, 1999, we derived over 90% of our
revenue from products and services relating to the sale of cattle. If the demand
for beef declines, the demand for our products and services would likely
decline, and our results of operations would be harmed.
In addition, because the economic benefit to a customer of using
NutriCharge is based on receiving a substantial premium for higher quality beef
over lower grade beef, if the price of prime beef declines relative to that of
choice or select beef, the lower grades of beef as determined by the U.S.
Department of Agriculture, our sales of NutriCharge could decline and our
results of operations could be harmed. Generally, the difference between the
value of prime grade beef, the most desirable grade, and choice grade beef, the
next highest grade, represents a loss of value of approximately 80%, with an
additional loss of value of 10-15% between choice and select beef.
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IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
We cannot assure you that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. In particular, we are currently seeking to hire a Vice President of
Human Relations and additional order buyers for our cattle auction and sales
services. Our growth is likely to place a significant strain on our resources
and systems. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business
strategy successfully and we will need to implement new and improve existing
systems, procedures and controls. We will also need to expand, train and manage
our workforce.
WE CURRENTLY DO NOT HAVE AN ADEQUATE CORPORATE INFRASTRUCTURE TO SUPPORT OUR
OPERATIONS AND WE DEPEND UPON XL VISION AND SAFEGUARD TO PROVIDE SUCH SERVICES.
We depend upon XL Vision and Safeguard for accounting, management and
administrative resources. We are currently in the process of establishing our
own corporate infrastructure. If our management team fails to manage this growth
effectively, successfully establish our corporate infrastructure or if there are
unanticipated costs or delays in the improvement and implementation of new and
existing systems, procedures and controls, our business and financial condition
may be harmed.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
COMPETITIVE POSITION WILL BE HARMED.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We currently have three pending U.S. patent applications, which
relate to (i) the early detection of inflammation using our infrared imaging
camera, (ii) feedlot information systems and methods and (iii) the cattle
transaction process. We also have 31 pending U.S. trademark applications
relating to our corporate identity, products and services. We cannot guarantee
that any of our pending patent or trademark applications will be approved. Even
if they are approved, the patents or trademarks may be challenged by other
parties or invalidated. Because brand recognition is an important component of
our business strategy, the protection of our trademarks is critical to our
success. We also depend upon patents licensed to us by the Canadian government
and trade secret law to protect the proprietary nature of our NutriCharge
products. In addition, we depend upon our proprietary database of industry and
client information to provide our clients with our information services. Despite
our efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and technology or obtain access to our confidential
proprietary database. Other parties may also breach confidentiality agreements
and other protective contracts. We may not become aware of these breaches or
have adequate remedies available. In addition, effective copyright, patent and
trademark protection may be unavailable in certain countries to which we might
expand our operations.
In technology markets generally, there is frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
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employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
We 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 you that we will receive full and timely payment in each instance. If the
buyer does not accept the cattle, we may not be able to sell the cattle to other
buyers on the same terms, and our profitability may be harmed. If the cattle
suffer from health deterioration or weight loss while in our ownership, the
purchasers may assert claims against us. Our business and financial condition
may be harmed if we have to defend any claims or pay any refunds. If the cattle
are destroyed while we have ownership, we may be held responsible for the loss
or may be obligated to purchase additional cattle to fulfill our delivery
commitments. As a result, our business may be harmed.
WE RELY ON TECHNOLOGY LICENSED FROM THE CANADIAN GOVERNMENT, THE LOSS OF WHICH
MAY HARM OUR ABILITY TO SELL OUR NUTRICHARGE PRODUCT.
We incorporate technology licensed exclusively from the Canadian government
under a portfolio of patents relating to animal food science technology into our
NutriCharge product. If we are unable to maintain this license on commercially
favorable terms or need to replace the technology upon termination of the
license, our ability to sell our NutriCharge product may be harmed. The license
agreement expires in July 2018. The Canadian government can terminate the
license agreement prior to its expiration if we breach a material term of the
license agreement and fail to cure such breach, commence bankruptcy or
insolvency proceedings or assign the license agreement without the Canadian
government's prior written consent. If the license is terminated, we must return
all acquired confidential information, including all licensed technologies, to
the Canadian government and pay all costs due under the agreement. In such
event, it may be impossible to develop or otherwise obtain rights to equivalent
noninfringing technology.
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WE HAVE SELECTED ARCHER-DANIELS-MIDLAND COMPANY AS OUR CURRENT SINGLE SOURCE OF
SUPPLY FOR THE BASE COMPONENTS OF NUTRICHARGE. IF THIS RELATIONSHIP IS
TERMINATED OR IF ARCHER-DANIELS-MIDLAND COMPANY IS UNABLE TO MEET OUR NEEDS ON A
TIMELY BASIS, WE MAY INCUR SIGNIFICANT COSTS WHILE SEEKING AN ALTERNATIVE SOURCE
OF SUPPLY AND MAY SUFFER DELAYS IN DELIVERING OUR PRODUCTS, WHICH COULD HARM OUR
BUSINESS AND THE RESULTS OF OUR OPERATIONS.
We currently have an agreement with a division of Archer-Daniels-Midland
Company, or ADM, to provide us with the base components for NutriCharge. The
agreement expires in August 2000, and will be automatically renewed for
successive 12-month periods. If ADM fails to meet its obligations under the
agreement and does not supply us in a timely fashion, we will be delayed in
shipping products to our customers. ADM may terminate the agreement with 90
days' notice before the end of a term. If ADM terminates our relationship, we
could experience a significant delay in providing NutriCharge as we seek other
suppliers. As a result, we may realize reduced revenue during this period and
may lose NutriCharge customers. In addition, we may incur significant costs
while seeking an alternative source of supply. If we are delayed in delivering
or are unable to deliver products to our customers, our business, financial
condition and operating results would be adversely affected.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR SUCCESS. THE LOSS OF ANY OF THESE PERSONS
COULD HARM OUR ABILITY TO COMPETE.
Our success depends on the continued services of the following executive
officers and key employees:
- Charles L. Abraham;
- T. Michael Janney;
- Scott L. Mathews;
- Marvin L. Slosman;
- Arvind Subramanian;
- J. Tom Brink;
- Scott Crain, D.V.M.; and
- Jim Gibb, Ph.D.
The loss of the services of any of these persons could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
WE MAY FACE COSTLY PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
AWARDS AGAINST US OR IMPAIR OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND
SERVICES.
A successful product liability claim brought against us could harm our
financial condition and reputation in the industry. We may face product
liability claims in connection with our cattle sales and auction services,
feedlot operations analysis, comparative cattle industry analysis and
benchmarking studies, cattle inventory management tools and NutriCharge, as well
as future products and services. Even if unsuccessful, a product liability claim
could result in costly litigation and divert management's attention and
resources. We do not maintain product liability insurance.
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WE EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF WE FAIL TO MEET THE
EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE.
We expect that our revenue and operating results will vary in the future as
a result of a number of factors. Our quarterly results of operations may not
meet the expectations of securities analysts and investors, which could cause
the price of our common stock to decline. Our operating results in the future
may not follow any prior trends. You should not rely on our historical results
as an indication of future results. The factors that affect our quarterly
operating results include:
- Our ability to retain existing customers and attract new customers;
- Our ability to develop and market new and enhanced products and services
on a timely basis;
- The introduction of new or enhanced Web sites, products and services by
us;
- Continued purchases by our existing customers; and
- Future revenues from our equine imaging system, a decline in which may
result in disproportionate fluctuations in our results of operations,
since related manufacturing costs to a large extent remain fixed
regardless of the number of units sold.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- Demand for our products and services;
- Product and price competition;
- The introduction of new or enhanced Web sites, products and services by
our competitors; and
- Significant downturns in our targeted markets.
OUR QUARTERLY RESULTS COULD FLUCTUATE AS A RESULT OF SEASONAL FLUCTUATIONS IN
THE CATTLE INDUSTRY.
The cattle industry has historically experienced, and may continue to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. In particular, a disproportionate number
of cattle are sold to feedlots during the third and fourth quarters of each
calendar year. Therefore, a greater number of sales transactions occur during
these two calendar quarters. Due to our limited operating history and the recent
changes in our business as a result of acquisitions, it is difficult to predict
the effect that this seasonal pattern will have on our revenue and quarterly
operating results.
OUR BACK-UP MECHANISMS ARE UNPROVEN, AND THEREFORE ARE VULNERABLE TO DAMAGE OR
INTERRUPTION WHICH WOULD HARM OUR ABILITY TO RELIABLY SERVICE OUR CUSTOMERS.
Our network server, satellites, computers and facilities are vulnerable to
damage or interruption from a number of sources, including fire, flood, power
loss, earthquakes, telecommunications failures, system failures, Internet
brownouts, computer viruses, electronic break-ins and similar disruptions. We
depend on these systems to provide our customers with online cattle sales and
auction services, feedlot and cattle industry analyses, cattle inventory
management tools and the sale of NutriCharge. During the past year, we
experienced a system interruption caused by adverse weather conditions, which
resulted in our system shutting down for approximately 24 hours. We may
experience such an
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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.
RISKS RELATED TO THE INTERNET
IF ELECTRONIC COMMERCE DOES NOT CONTINUE TO GROW AS EXPECTED, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Our long-term success depends on widespread market acceptance of the
Internet and online commercial services as a medium for commerce. If the
Internet commerce market does not grow or grows more slowly than anticipated,
our business, financial condition and results of operations will be harmed. A
number of factors could prevent such acceptance, including:
- The early stage of the Internet;
- The lack of continued development of the Internet's technological
infrastructure; and
- Consumer concern about the security of electronic commerce transactions.
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IF THE INTERNET OR OUR WEB SITES AND SYSTEMS CANNOT SUPPORT THE GROWTH IN
ELECTRONIC COMMERCE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WILL BE HARMED.
If the Internet fails to evolve to support growth in electronic commerce,
our business, financial condition and results of operations will be harmed.
Specifically, we would be harmed if:
- The infrastructure of the Internet does not evolve to sufficiently
support the substantial growth in usage of the Internet and therefore
cannot process a growing number of transactions; and
- The availability of telecommunication services is insufficient or
telecommunication services do not evolve promptly to support real-time
interactions with customers.
If we do not continue to develop our Web sites and systems to sufficiently
support growth in the demand for our services, our business will also be harmed.
Specifically, we would be harmed if:
- We fail to expand our infrastructure, including our Web sites, internet
software and servers to accommodate an increased number of users; and
- We fail to adapt our products and services to be compatible with new
technology, and are therefore unable to provide our services to users of
the new technology.
We may also need to devote substantial resources to updating our Web sites
and online services to support the growth of online commerce.
RISKS ASSOCIATED WITH THE SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT OUR ELECTRONIC COMMERCE
BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet, such as credit card numbers and proprietary data,
may prevent many potential customers from engaging in online transactions and
may harm our business. We intend to use authentication technology, which
requires passwords and other information to prevent unauthorized persons from
accessing a customer's information, or encryption, which transforms information
into a code designed to be unreadable by third parties, to protect confidential
information. In addition, despite the measures we intend to take, our
infrastructure is potentially vulnerable to physical or electronic break-ins,
viruses or similar problems. If our security measures are circumvented,
proprietary information could be misappropriated or our operations could be
interrupted. Security breaches that result in access to confidential information
could expose us to a risk of loss or liability. If we do not adequately address
these concerns or face any claims in connection with a breach of security, our
business, financial condition and operating results could be harmed.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED THROUGH
OUR WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we 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.
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GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL BURDENS
TO DOING BUSINESS ON THE INTERNET.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional cost on conducting business over the Internet or impose
additional restrictions on our ability to conduct our business operations.
In 1998, the Internet Tax Freedom Act placed a three-year moratorium on
state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes which discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
Laws and regulations that apply to Internet communications, commerce and
advertising could increase the costs of communicating on the Web and adversely
affect the demand for our products and services and thereby harm our business,
results of operations and financial conditions. In addition, as a general
matter, laws and regulations may also be adopted in the future covering
e-commerce issues such as user privacy, pricing, content, copyrights,
distribution, antitrust matters, taxation and quality of products and services
that may increase the cost of e-commerce. Several telecommunications carriers
have asked the Federal Communications Commission to regulate telecommunications
connections to the Internet, which could result in higher costs of doing
business over the Internet. Legislation of these kinds could hinder growth in
the use of the Internet generally and decrease the acceptance of the Internet as
a communications and commercial medium.
Due to the global nature of the Internet, it is possible that governments
of foreign countries might attempt to regulate our transmissions or levy sales
or other taxes relating to our activities and we may incur significant costs to
comply with foreign laws. Furthermore, the European Union recently adopted a
directive addressing data privacy that may result in limits on the collection
and use of user information. In addition, the growth and development of the
market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet.
THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES, WHICH COULD
REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE.
Competition for Internet products and services and electronic commerce is
intense. We expect that competition will continue to intensify. Barriers to
entry are minimal, and competitors can launch new Web sites at a relatively low
cost. Our competitors, such as traditional cattle auction services, video cattle
auction providers, online cattle auction services, cattle and livestock
information services and cattle industry product manufacturers, may develop
Internet products or services that are superior to, or have greater market
acceptance, than our products and services. If we are unable to compete
successfully against our competitors, our business, financial condition and
operating results will be harmed.
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RISKS RELATED TO THE OFFERING
INTERNET CAPITAL GROUP, SAFEGUARD AND XL VISION WILL BE ABLE TO CONTROL MATTERS
REQUIRING STOCKHOLDER APPROVAL AND MAY VOTE AGAINST MATTERS THAT YOU VOTE IN
FAVOR OF OR MAY VOTE IN FAVOR OF MATTERS THAT YOU VOTE AGAINST.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities and Safeguard and XL Vision are affiliated entities.
Following the closing of this offering, Internet Capital Group, Safeguard and XL
Vision together will have the power to vote approximately 65.2% of the aggregate
number of votes to which the holders of our common stock are entitled. In
addition, Safeguard and Internet Capital Group are parties to a joint venture
agreement under which they have agreed to use their best efforts to vote
together on matters submitted to stockholders for approval. As a result, these
stockholders will be able to control all matters requiring stockholder approval.
These stockholders may have interests that differ from yours. Matters that
typically require stockholder approval include:
- Election of directors;
- Approval of a merger or consolidation; and
- Approval of a sale of all or substantially all of our assets.
Of the seven members of our board of directors, the following four
directors also serve as directors and/or officers of Internet Capital Group,
Safeguard or XL Vision:
- John S. Scott, Chairman of our board of directors, is the Chief Executive
Officer and the Chairman of the board of directors of XL Vision;
- Douglas A. Alexander, a member of our board of directors, is the Managing
Director of Internet Capital Group;
- E. Michael Forgash, a member of our board of directors, is a Vice
President of Safeguard, a member of the board of directors of Internet
Capital Group and a member of the board of directors of XL Vision; and
- John W. Poduska, Sr., Ph.D., a member of our board of directors, is a
member of the board of directors of Safeguard and a member of the board
of directors of XL Vision.
In addition, Internet Capital Group has the right to elect two directors to
our board, one of which has not yet been designated. Under the joint venture
agreement, Safeguard and Internet Capital Group have agreed to vote for two
designees of Safeguard and two designees of Internet Capital Group in all future
elections of directors. Safeguard, XL Vision and Internet Capital Group will
therefore have the ability to significantly influence our management.
SINCE WE HAVE NO PLANS FOR THE USE OF THE MOST OF THE PROCEEDS OF THIS OFFERING,
WE WILL HAVE BROAD DISCRETION IN THE USE OF THESE PROCEEDS AND MAY USE THE
PROCEEDS FOR PURPOSES NOT CURRENTLY CONTEMPLATED BY US AND FOR WHICH YOU DO NOT
AGREE, SUCH AS ACQUISITIONS.
Our primary purpose for this offering is to create a public market for our
common stock. We will have broad discretion in how we use the proceeds of this
offering and you will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions on how to use the
proceeds. We plan to use the proceeds from this offering to repay outstanding
debt relating to a recent acquisition and for working capital and general
corporate purposes. We may also use the proceeds in future strategic
acquisitions of, or investments in, businesses that offer products, services and
technologies
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that further our ability to provide products and services to businesses or
increase our ability to sell our products and offer services to new markets.
Until the need arises to use the proceeds from this offering, we plan to invest
the net proceeds in investment grade, interest-bearing securities.
THE SALE OF OUTSTANDING SHARES IN THE MARKET BY OUR EXISTING STOCKHOLDERS IN THE
FUTURE MAY ADVERSELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Based upon the number of shares outstanding as of December 31, 1999,
of the 32,232,902 shares that will be outstanding after the consummation of this
offering:
- 8,000,000 shares offered through this prospectus will be freely tradeable
in the public market;
- 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
- 225,822 shares may be sold 90 days following the date of this prospectus
subject to compliance with Rule 701.
Although 23,131,956 of the shares described above are subject to lock-up
agreements, such shares may become tradeable, subject to compliance with Rule
144 or Rule 701, beginning 180 days after the date of this prospectus. In
addition, after the consummation of this offering, there will be options to
purchase 2,769,116 shares of class A common stock outstanding that were granted
under our equity compensation plans. We intend to file a registration statement
on Form S-8 to register the shares issued pursuant to the exercise of options
granted under our equity compensation plans. There is also a warrant to purchase
1,138,889 shares of class B common stock outstanding.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD NEGATIVELY
IMPACT THE VALUE OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock. Accordingly, the market price of our common stock, like the market for
Internet-related and technology companies in general, could be highly volatile.
The initial public offering price for our shares will be determined by us and
the representatives of the underwriters and may not be indicative of the price
that will prevail in the public market after our shares begin trading. Any
significant fluctuations in the future might result in a material decline in the
market price of our common stock.
The price at which our common stock will trade after this offering is
likely to be highly volatile and may fluctuate substantially due to factors such
as:
- Actual or anticipated variations in quarterly operating results;
- Announcements of technological innovations;
- Conditions or trends in the cattle industry;
- New sales formats of new products or services;
- Changes in or failure by us to meet financial estimates of securities
analysts;
- Conditions or trends in the Internet industry;
- Announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
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- Capital commitments;
- Additions or departures of key personnel; and
- Sales of common stock.
In addition, the U.S. stock markets have from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the common stock of technology companies, particularly Internet companies.
In the past, these broad market fluctuations have been unrelated or
disproportionate to the operating performance of these companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts the attention and resources of
management, which could harm our business and operating results.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing our common stock in
this offering will, therefore, incur immediate dilution of $11.92 in net
tangible book value per share of our common stock. This dilution figure deducts
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us from the initial public offering price. Investors will
incur additional dilution upon the exercise of outstanding stock options.
OUR UNDESIGNATED PREFERRED STOCK MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR
BUSINESS, INCLUDING BIDS THAT MAY BE BENEFICIAL TO YOU.
Our board of directors may issue up to 15,000,000 shares of preferred stock
in one or more series. The board of directors can fix the number of shares of
each class and the voting rights, preferences, limitations and special rights,
if any, without any further vote or action by our stockholders. The issuance of
shares of preferred stock without further action by our stockholders may delay
or prevent a change in control transaction. The issuance of shares of preferred
stock may adversely affect your relative voting and other rights relating to
your shares of common stock.
DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING
BIDS WHICH MAY BE BENEFICIAL TO YOU.
Delaware law may deter potential bids for our business. We are subject to
the anti-takeover provisions of the Delaware General Corporation Law, which
regulates corporate acquisitions. Delaware law prevents us from engaging in a
business combination with any interested stockholder for three years following
the date that the stockholder became an interested stockholder. For purposes of
Delaware law, a business combination includes a merger or consolidation
involving us and the interested stockholder and the sale of more than 10% of our
assets. In general, Delaware law defines an interested stockholder as any entity
or person beneficially owning 15% or more of the outstanding voting stock of a
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. Under Delaware law, a Delaware corporation
may opt out of the anti-takeover provisions. We do not intend to opt out of
these anti-takeover provisions.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address electronic
commerce strategy, acquisition and expansion strategy, development of services,
use of proceeds, projected capital expenditures, liquidity, development of
additional revenue sources, development and maintenance of strategic alliances,
market acceptance of the Internet, technological advancement, ability to develop
brand identification and global expansion. These statements may be found in the
sections of this prospectus entitled Prospectus Summary, Risk Factors, Use of
Proceeds, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Business and in this prospectus generally. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
Risk Factors and elsewhere in this prospectus.
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USE OF PROCEEDS
We expect to receive approximately $90.7 million in net proceeds from the
sale of the 6,500,000 shares of class A common stock in this offering, given the
initial public offering price of $15.00 per share, underwriters' discount and
management fees of $6.2 million and our offering expenses of $1.7 million. We
expect to receive approximately $9.4 million in additional net proceeds if the
underwriters' over-allotment option is exercised in full. We will not receive
any proceeds from the sale of class A common stock by the selling stockholders.
The primary purpose of this offering is to obtain additional capital,
create a public market for the common stock and facilitate future access to
public markets.
We intend to use a portion of the net proceeds from this offering to pay
outstanding debt owed to XL Vision and Safeguard.
- We intend to repay approximately $1.6 million of principal and interest
owed to XL Vision as of December 31, 1999 with the net proceeds from this
offering. The debt owed to XL Vision is evidenced by a promissory note,
which bears interest at an annual rate of 7% and matures upon
consummation of our initial public offering or a sale of the company.
- We intend to repay approximately $10.3 million of principal and interest
owed to Safeguard as of December 31, 1999 with the proceeds of this
offering. The debt owed to Safeguard is evidenced by two promissory
notes, which bear interest at an annual rate equal to the prime lending
rate plus 1%. The note covering $3.0 million matures in January 2000 and
the note covering the remainder matures in October 2000.
In addition, we intend to use proceeds from this offering to repay any
additional debt that may be incurred by us prior to the completion of this
offering to XL Vision pursuant to our revolving promissory note, which bears
interest at an annual rate equal to the prime lending rate plus 1% and matures
upon consummation of our initial public offering or the sale of the company or
to Safeguard. The actual amount of the proceeds used for the repayment of debt
will depend upon the amount of interest accrued and any additional borrowings or
payments that are made prior to the completion of this offering.
In addition, we intend to use the net proceeds of this offering for payment
of $1.4 million representing a deferred payment of a portion of the purchase
price of a 19% investment in Turnkey Computer Systems, Inc. The payment is due
and payable upon the earlier of the consummation of this offering or in payments
of $500,000, which was due and paid on December 31, 1999, $500,000 due on
December 31, 2000 and $400,000 due on December 31, 2001. We also intend to use
the proceeds from this offering for working capital and other general corporate
purposes.
We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies or to establish joint ventures that we
believe will complement our current or future business. However, we have no
specific plans, agreements or commitments, oral or written, to do so. We are not
currently engaged in any negotiations for any acquisition or joint venture. The
amounts that we actually expend for working capital purposes will vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash we generate from operations and the progress of our
product development efforts. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will invest the net proceeds in short-term interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
future.
24
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
We present capitalization:
- On an actual basis;
- On a pro forma basis to give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock for
$38.8 million ($18.0 million of cash and a $20.8 million note
receivable) under a securities purchase agreement with Internet
Capital Group Inc. dated October 27, 1999 and the application of a
portion of the proceeds therefrom to repay indebtedness to XL Vision
of approximately $4.5 million;
- The issuance of 500,000 shares of class A common stock in the
concurrent private placement;
- The automatic conversion of all outstanding shares of series A,
series B and series C preferred stock into shares of class A common
stock and all outstanding shares of series D preferred stock into
shares of class B common stock, which will occur immediately prior
to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc. which is due upon the completion of this offering.
- On a pro forma as adjusted basis to give effect to:
- The events described in the five preceding paragraphs; and
- The sale of the 6,500,000 shares of class A common stock in this
offering and application of the estimated net proceeds from the sale
of these shares, as described in the section entitled Use of
Proceeds, at the initial public offering price of $15.00 per share,
after deducting underwriting discounts and commissions and our
estimated offering expenses.
The table does not include the following:
- 2,488,494 shares of class A common stock issuable upon the
exercise of outstanding options granted under our equity
compensation plans as of September 30, 1999 at a weighted average
exercise price of $1.54 per share, of which options to purchase
716,369 shares of class A common stock were exercisable at a
weighted average exercise price of $1.06 per share;
- 747,250 additional shares of class A common stock available for
issuance under our 1996 and 1999 equity compensation plans as of
September 30, 1999; and
- 1,138,889 shares of class B common stock issuable on the exercise
of a warrant that will be exercisable upon consummation of this
offering at an exercise price equal to the initial public
offering price.
25
<PAGE> 26
This table should be read in conjunction with the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total indebtedness.................................. $ 15,133 $ 9,233 $ --
Class A common stock, subject to redemption; 62,500
shares issued and outstanding actual; no shares
issued and outstanding pro forma or pro forma as
adjusted.......................................... 406 -- --
-------- -------- ---------
Stockholders' equity:
Preferred stock, par value $0.01 per share,
15,000,000 shares authorized:
Series A preferred stock; 6,500,000 shares
designated; 6,443,606 shares issued and
outstanding actual and no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 64 -- --
Series B junior preferred stock; 2,400,000
shares designated; 2,400,000 shares issued
and outstanding actual and no shares issued
and outstanding pro forma or pro forma as
adjusted..................................... 24 -- --
Series C preferred stock; 1,300,000 shares
designated; 1,100,000 shares issued and
outstanding actual; no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 11 -- --
Series D preferred stock; 4,555,556 shares
designated; no shares issued and outstanding
actual, pro forma or pro forma as adjusted... -- -- --
Common stock, par value $.008 per share;
100,000,000 shares authorized:
Class A common stock; 92,711,110 shares
designated; 6,957,694 shares issued and
outstanding actual; 19,949,702 shares issued
and outstanding pro forma; 26,449,702 shares
issued and outstanding pro forma as
adjusted..................................... 56 156 208
Class B common stock; 7,288,890 shares
designated; no shares issued and outstanding
actual; 5,694,445 shares issued and
outstanding pro forma and pro forma as
adjusted..................................... -- 46 46
Additional paid-in capital........................ 23,454 62,628 153,369
Accumulated deficit............................... (27,453) (27,453) (27,453)
Note receivable from Internet Capital Group,
Inc. .......................................... -- (20,815) (20,815)
Unearned compensation............................. (63) (63) (63)
-------- -------- ---------
Total stockholders' equity................... (3,907) 14,499 105,292
-------- -------- ---------
Total capitalization...................... $ 11,632 $ 23,732 $ 105,292
======== ======== =========
</TABLE>
26
<PAGE> 27
DILUTION
As of September 30, 1999, our net tangible book value on a pro forma basis
giving effect to the issuance of 4,555,556 shares of series D preferred stock
and a warrant to purchase 1,138,889 shares of class B common stock for an
aggregate of $18.0 million in cash and a note receivable on October 27, 1999,
the conversion of our preferred stock into shares of our common stock, and the
termination of the redemption right related to the 62,500 shares of class A
common stock, which will automatically occur immediately prior to the
consummation of this offering, and the issuance of 500,000 shares of common
stock in a concurrent private placement, was approximately $8.2 million or $0.32
per share of common stock. Net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities. As of September 30, 1999, our net tangible book value, on a pro
forma basis as adjusted for the sale of the 6,500,000 shares of our class A
common stock, based on the initial public offering price of $15.00 per share,
and after deducting the underwriting discounts and commissions and our estimated
offering expenses, would have been approximately $3.08 per share. This
represents an immediate increase of $2.76 per share to existing stockholders and
an immediate dilution of $11.92 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................. $15.00
Pro forma net tangible book value per share at
September 30, 1999.................................. $ 0.32
Increase in pro forma net tangible book value per share
attributable to new investors....................... 2.76
------
Pro forma net tangible book value per share after the
offering............................................... 3.08
------
Dilution per share to new investors...................... $11.92
======
</TABLE>
The following summarizes on a pro forma basis as of September 30, 1999 the
differences between the total consideration paid and the average price per share
paid by the existing stockholders and the new investors with respect to the
number of shares of common stock purchased from us based on the initial public
offering price of $15.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 25,644,147 79.8% $ 42,271,589 30.2% $ 1.65
New investors................ 6,500,000 20.2 97,500,000 69.8 15.00
---------- ----- ------------ -----
Total................... 32,144,147 100.0% $139,771,589 100.0%
========== ===== ============ =====
</TABLE>
The total consideration does not include the non-cash portion of the
consideration for the series D preferred stock or the proceeds allocated to the
warrant totaling $24.1 million described above.
The information set forth above does not include the following:
- 2,488,494 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
September 30, 1999 at a weighted average exercise price of $1.54 per
share, of which options to purchase 716,369 shares of class A common
stock were exercisable at a weighted average exercise price of $1.06 per
share;
- 747,250 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of September 30,
1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
27
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999
are derived from our consolidated financial statements which have been audited
by KPMG LLP, independent certified public accountants, and are included
elsewhere in this prospectus. All business activities from inception through
1996 related to the transportation business segment which was disposed of in
January 1999. As a result, we have not included operations data for the years
ended December 31, 1994, 1995 and 1996.
We prepared the unaudited pro forma consolidated financial information for
the year ended December 31, 1998 and for nine months ended September 30, 1999 by
combining the historical results of two of the three companies we acquired, CIN,
LLC and Professional Cattle Consultants, L.L.C., with our historical results
using the purchase method of accounting. Cyberstockyard, Inc. is not included
because the pro forma effects are not significant. We acquired CIN, LLC in
February 1999, Professional Cattle Consultants, L.L.C. in May 1999 and
Cyberstockyard, Inc. in March 1999. This is described in the notes accompanying
the pro forma consolidated financial information included elsewhere in this
prospectus. We have presented this information to give you a better picture of
what our business might have looked like if we had owned CIN, LLC and
Professional Cattle Consultants, L.L.C. during the periods presented. These
companies may have performed differently if they had actually been combined with
our operations. You should not rely on the unaudited pro forma information as
being indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions.
You should read the selected consolidated financial data together with our
historical and pro forma consolidated financial statements and notes thereto and
the section of the prospectus entitled Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ENDED
----------------- ------------------- 1998 SEPTEMBER 30, 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- -------- -------- ------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.......................................... $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................................. -- 2,623 1,629 18,283 2,801 18,354
Operating expenses:
Selling, general and administrative............ 628 3,660 2,428 7,540 4,815 7,992
Research and development....................... 728 1,109 759 2,756 1,451 2,792
------- ------- -------- -------- -------- --------
Total operating expenses..................... 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income, net............... 141 332 231 443 315 454
------- ------- -------- -------- -------- --------
Profit (loss) from continuing operations......... $(1,497) $(5,932) $ (3,941) $(10,683) $ (7,099) $(11,087)
======= ======= ======== ======== ======== ========
Profit (loss) from continuing operations per
common share -- basic and diluted.............. $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======== ======== ======== ========
Weighted average number of common shares
outstanding -- basic and diluted............... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
----- ------- ------- ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash........................................................ $ -- $ -- $ 2 $ -- $ -- $ 1,650
Total assets................................................ -- 6 260 2,165 6,602 16,229
Total indebtedness.......................................... 411 1,747 3,636 8,040 5,572 15,133
Total stockholders' equity (deficit)........................ (411) (1,742) (3,457) (6,875) 3 (3,907)
</TABLE>
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
information included elsewhere in this prospectus. The following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results contemplated by these
forward-looking statements as a result of many factors, including those
discussed below and elsewhere in this prospectus.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our comprehensive cattle products and services
through our integrated family of Web sites, our proprietary information
management application, and our direct sales force. Our products and services
are designed to create an efficient market for the purchase and sale of cattle
and to improve quality and productivity in the cattle industry. Our revenue is
derived from cattle sales through Cyberstockyard, subscriptions to our
information management products and services and sales of NutriCharge and equine
imaging systems.
We were incorporated in 1994 as a subsidiary of XL Vision, Inc. to develop
and commercialize infrared technology applications. XL Vision is a private
company that provides strategic, technical and business support to create
technology companies. Our initial focus was on the transportation market in
which we sold our navigational infrared imaging system, the AMIRIS system. The
AMIRIS system uses infrared technology to create an image based on small
differences in the temperatures of the objects being viewed, such as an iceberg
in water. In 1997, we expanded our infrared applications to the animal sciences
industry with the development of an equine imaging system to detect health
problems. The equine imaging system enables veterinarians to visualize small
differences in the surface temperature of horses, and therefore identify heat, a
common sign of inflammation associated with injury at early stages. In July
1997, we also completed our first round of private financing and began our
direct relationship with Safeguard Scientifics, Inc., which was the largest
single purchaser of our series A preferred stock. Safeguard beneficially owns
approximately 55% of the outstanding capital stock of XL Vision and
approximately 27% of our outstanding capital stock prior to this offering.
To expand our product base, in July 1998, we licensed a portfolio of
patents from a division of the Canadian government relating to the application
of infrared technology to the animal science field and a restorative feed
supplement called NutriCharge. 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 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.
29
<PAGE> 30
In November 1999, we sold 4,555,556 shares of our Series D preferred stock
to Internet Capital Group, as a result of which Internet Capital Group became
one of our principal stockholders. Internet Capital Group owns approximately 31%
of our outstanding capital stock and controls approximately 50% of the voting
power of our outstanding capital stock prior to this offering. Internet Capital
Group is an Internet holding company that invests in business-to-business
electronic commerce companies. Safeguard owns approximately 14% of the
outstanding common stock of Internet Capital Group.
In January 2000, we entered into an agreement with Southern States
Cooperative, Inc. under which Southern States will procure cattle for us for
sale through our online cattle sales and auction services. Under this agreement,
we will pay royalties to Southern States based on the number of cattle we sell
that were procured by Southern States.
REVENUE RECOGNITION
We recognize revenue in accordance with the terms of the sale or contract,
generally as products are shipped or services are provided. In cattle sales
transactions we act as principal when purchasing cattle from suppliers and
reselling them to customers. We take title when the supplier delivers the cattle
to us, arrange for shipment to our customer, and own as inventory until
delivered to and accepted by the buyer, typically a 24 to 48 hour period. We are
responsible for the resale of the cattle, bear all risk associated with the
cattle until resold, and bear the credit risk until full payment is received
from our customers. We recognize revenue when cattle are shipped to the customer
equal to the purchase price paid by the customer. Gross profit on cattle sale
transactions is determined by the mark-up that we add to the price that we pay
to purchase the cattle. Revenue from the sale of livestock health management and
quality enhancement products, equine imaging cameras and NutriCharge, is
recognized on shipment to the customer. Revenue from our information management
products is recognized in the period in which the information or analysis is
delivered to the customer, normally on a monthly basis.
ACQUISITIONS
In February 1999, we purchased substantially all of the tangible and
intangible assets of CIN, LLC for an aggregate purchase price of approximately
$2.3 million. These assets included the Feedlot Information System, a
proprietary, patent pending, information system for cattle feedlots. In
addition, we acquired tangible assets including computers and office equipment
and furnishings, which we are currently utilizing. The purchase price for the
assets consisted of 750,000 shares of our class A common stock valued at
$720,000, the assumption of $812,000 of liabilities, a cash payment due in
October 1999 of $358,000, and an agreement to pay the first $350,000 from
Internet sales of third-party products over the Web site and transaction costs
of $57,000.
In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc.
for approximately $542,000. The purchase price consisted of 200,000 shares of
our class A common stock valued at $450,000, the assumption of $90,000 of
liabilities and transaction costs of $2,000. Through this acquisition, we
obtained Cyberstockyard.com, our online cattle sales and auction services, and
related software applications. Cyberstockyard.com has been integrated into our
suite of products and services. During the three months ended June 30, 1999, we
began executing cattle sales utilizing Cyberstockyard.com.
In May 1999, we purchased substantially all of the tangible and intangible
assets of Professional Cattle Consultants, L.L.C., a leading cattle industry
information resource and database for approximately $1.8 million. The purchase
price consisted of $1.8 million in cash, the assumption of approximately $3,000
in liabilities and transaction costs of $25,000.
30
<PAGE> 31
In June 1999, we began selling comparative analysis and market information for
the feedlot industry with the assets acquired from Professional Cattle
Consultants, L.L.C.
We have presented pro forma results of operations as if the acquisition of
CIN, LLC and Professional Cattle Consultants, L.L.C. had occurred on January 1,
1998. Cyberstockyard, Inc. is not included because the pro forma effects are not
significant. The pro forma loss from continuing operations for the year ended
December 31, 1998 was $7.1 million compared to the actual net loss of $5.9
million. The increase in the net loss results primarily from the net losses of
the acquired companies and the pro forma amortization of the intangible assets
associated with these acquisitions. The pro forma loss from continuing
operations for the nine months ended September 30, 1999 was $11.1 million
compared to the actual loss from continuing operations of $10.7 million. The
increase in the loss is primarily related to the losses of the companies
acquired and the pro forma amortization of the intangible assets associated with
the acquisitions.
Because of the significance of these acquisitions and the resulting
additions to our products and services, the historical financial results are not
indicative of future performance.
We have incurred significant net losses since our inception. At September
30, 1999, we had an accumulated deficit of $27.5 million. The net losses and
accumulated deficit resulted from our lack of substantial revenues, the costs of
the significant personnel infrastructure and other costs incurred for the
development and marketing of our initial products. We may never achieve
significant revenue or profitability, or if we achieve significant revenue or
profitability they may not be sustained.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue increased from $1.1 million for the nine months ended September 30,
1998 to $18.3 million for the nine months ended September 30, 1999. Revenue from
our cattle sales segment increased to $17.0 million for the nine months ended
September 30, 1999. There was no revenue from the cattle sales segment in 1998.
Revenue from the animal sciences segment increased by 19% from $1.0 million for
the nine months ended September 30, 1998 to $1.3 million for the nine months
ended September 30, 1999. This growth is due primarily to the increased sales of
NutriCharge and the sale of subscriptions to our comparative feedlot analysis
and market information service. Revenue from sales of our equine imaging system
was flat, as increased average selling prices offset a decline in units sold.
Cost of revenue consists primarily of the direct cost to acquire cattle,
NutriCharge and equine imaging systems components and indirect manufacturing
overhead costs such as support personnel, facilities costs, supplies and
depreciation, which were primarily associated with the production of the equine
imaging system. Direct costs attributed to our cattle sales segment increased to
$16.9 million for the nine months ended September 30, 1999. There were no direct
costs from the cattle sales segment in 1998. Direct costs attributed to the
animal sciences segment decreased by 23% from $603,000 for the nine months ended
September 30, 1998 to $492,000 for the nine months ended September 30, 1999.
This decrease is due principally to the decline in unit sales of equine imaging
systems. We generated a gross loss of $522,000 for the nine months ended
September 30, 1998 and a gross profit of $56,000 for the nine months ended
September 30, 1999. The change from a gross loss to a gross profit is due
primarily to the increase in revenue, while cost of goods, principally
manufacturing overhead, did not increase in proportion to the increase in
revenue.
31
<PAGE> 32
Selling, general and administrative expenses increased 211% from $2.4
million for the nine months ended September 30, 1998 to $7.5 million for the
nine months ended September 30, 1999.
Sales and marketing expenses consist primarily of salaries and related
costs, commissions for sales and marketing personnel, consulting fees, travel
and entertainment, advertising and trade shows. Sales and marketing expenses
increased 250% from $1.3 million for the nine months ended September 30, 1998 to
$4.6 million for the nine months ended September 30, 1999. The increase is due
primarily to expenses associated with expanding the number of personnel from 11
people at September 30, 1998 to 38 people at September 30, 1999 and consulting,
travel and advertising costs to effect our business strategy. We expect these
costs to continue to increase significantly as we continue to pursue additional
sales and marketing opportunities.
Our general and administrative expenses consist primarily of salaries,
bonuses and related costs for executives, amortization of intangibles and
administrative and professional service fees, including administrative support
fees to XL Vision and Safeguard. We have contractual service agreements with XL
Vision and Safeguard Scientifics. Under an administrative services agreement
dated December 15, 1997, as amended on August 17, 1999, XL Vision and Safeguard
provide us with management consultation, investor relations, financial
management, human resource management, legal services, insurance programs, and
administrative services. We pay a fee calculated pursuant to a formula that is
based on a percentage of our revenue, not to exceed $300,000 annually. The fee
is not due until we achieve positive cash flow from operations. The agreement
extends through December 31, 2002 and continues unless terminated by either
party. To date, we have not paid any amounts due to XL Vision and Safeguard
under these agreements. As of September 30, 1999, we owed each of XL Vision and
Safeguard approximately $40,000 under these agreements. In addition, under a
direct charge administrative services agreement dated April 14, 1997, XL Vision
also provides us with management services on a time and materials basis. This
agreement continues on a month-to-month basis, and may be terminated at any time
by either party. As of September 30, 1999, we owed XL Vision $850,000 under this
agreement. The amounts due under these agreements will continue to accrue as we
use the services.
General and administrative expenses increased 99% from $1.1 million for the
nine months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. The increase was primarily due to increased amortization of
intangibles, increased expenses associated with expanding the number of
personnel from 5 people at September 30, 1998 to 9 people at September 30, 1999
and increased legal and travel expenses required to support and grow our
business. We expect these expenses to continue to increase as additional
personnel are hired and additional expenses are incurred to support future
growth.
Our research and development expenses consist of salaries and related
costs, payments to outside consultants, material costs for prototype imaging
systems and, to a lesser extent, depreciation on equipment used for development.
Our expenses increased 263% from $759,000 for the nine months ended September
30, 1998 to $2.8 million for the nine months ended September 30, 1999. This
increase in expenses was primarily due to increased consulting costs, increased
expenses associated with expanding the number of personnel from 14 people at
September 30, 1998 to 33 people at September 30, 1999, and increased spending
for materials and supplies. The increase in expenses was required to integrate
and expand our product lines such as our online cattle sales and auction
software, Feedlot Information System software, and continued development efforts
on imaging systems. We expect these costs to increase significantly as we plan
to invest heavily to develop and commercialize new products, expand our
offerings and adapt our technologies to new markets.
32
<PAGE> 33
Interest expense/other income, net increased 92% from $231,000 for the nine
months ended September 30, 1998 to $443,000 for the nine months ended September
30, 1999. This increase was primarily due to a higher average level of
borrowing.
Due to the losses incurred, we did not have any income tax expense in the
first nine months of 1998 or the first nine months of 1999. As of September 30,
1999, we had approximately $21.0 million of federal income tax loss carry
forwards that can be used to offset future taxable income. Our tax loss carry
forwards begin to expire in 2010 and we are not currently aware of any
limitation on our ability to offset future taxable income.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Substantially all of our 1998 revenue of $1.8 million was from the sale of
equine imaging systems that we began selling in March of 1998. There was no
revenue from equine imaging systems sales in 1997.
Our gross loss of $831,000 in 1998 was due primarily to a substantial
increase in manufacturing overhead as we built our manufacturing infrastructure.
There was no manufacturing activity related to the production of equine imaging
systems in 1997.
Selling, general and administrative expenses increased 483% from $628,000
in 1997 to $3.7 million in 1998.
Our sales and marketing expenses increased 527% from $344,000 in 1997 to
$2.2 million in 1998. The increase in these expenses was due primarily to
increased staffing and related costs, advertising, travel, trade shows and
consulting fees in these areas to effect our business strategy.
Our general and administrative expenses increased 430% from $284,000 in
1997 to $1.5 million in 1998. The increase in these expenses from 1997 to 1998
was primarily due to increases in the number of personnel and related support
costs to expand and grow our business and increased administrative support fees
to XL Vision and Safeguard.
Our research and development expenses increased 52% from $728,000 in 1997
to $1.1 million in 1998. This increase was driven primarily by increased
staffing of research and development personnel, related costs, and depreciation
of development equipment costs necessary to further develop our products.
Interest expense/other income, net increased 134% from $141,000 in 1997 to
$332,000 in 1998. This increase was primarily due to a higher average level of
borrowing.
Due to the losses incurred, we did not have any income tax expense in 1997
or 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
There was no business activity in 1996 related to our equine imaging
systems. All sales, cost of goods sold, general and administrative expenses,
sales and marketing expenses and research and development expenses in 1996
related to our transportation segment which has been reported as a discontinued
operation.
Selling, general and administrative expenses were $628,000 in 1997.
There was no revenue from sales of equine imaging systems or manufacturing
activity related to equine imaging systems in 1997. All general and
administrative expenses, sales and marketing expenses and research expenses
during 1997 related to our initial activities associated with equine imaging
systems.
Sales and marketing expenses of $344,000 in 1997 were principally for
salaries and related costs of personnel shifted from the transportation business
segment to support the
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<PAGE> 34
equine imaging system operations. Additionally we initiated spending for costs
such as advertising, travel, trade shows and consulting fees.
General and administrative expenses of $284,000 in 1997 were principally
for salaries and related costs for executives and administrative and
professional service fees including administrative support fees to XL Vision
shifted from the transportation operations to support the equine imaging system
operations.
Research and development expenses of $728,000 in 1997 were principally for
salaries and related costs of personnel shifted from the transportation business
segment to support the equine imaging system development. Additionally, we
initiated spending costs to develop prototype equine imaging systems.
Interest expense/other income, net was $141,000 in 1997.
Due to the losses incurred, we did not have any income tax expense in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the quarters ended March 31, 1998, June 30, 1998, September
30, 1998, December 31, 1998, March 31, 1999, June 30, 1999 and September 30,
1999. The information for each quarter has been prepared on substantially the
same basis as the audited statements included in other parts of this prospectus
and, in the opinion of management, include all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and the results of the interim
periods are not indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Revenue...................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 $15,761
Cost of revenue.............. 459 578 649 937 540 2,228 15,514
Operating expenses........... 930 948 1,237 1,654 1,962 3,557 4,777
Interest expense/other
income, net................ 77 85 85 85 127 162 155
------- ------- ------- ------- ------- ------- -------
Profit (loss) from continuing
operations................. $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974) $(4,685)
======= ======= ======= ======= ======= ======= =======
Profit (loss) from continuing
operations per common
share -- basic and
diluted.................... $ (0.35) $ (0.39) $ (0.30) $ (0.34) $ (0.33) $ (0.58) $ (0.67)
======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operating and investing cash requirements
principally through private equity financings and through borrowings from XL
Vision and Safeguard Scientifics. As of December 31, 1999, we have raised
approximately $45.6 million from the sale of our common stock and preferred
stock. On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock to
Internet Capital Group for aggregate consideration of $38.8 million. We 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
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<PAGE> 35
September 30, 1999, we had approximately $1.7 million in cash and indebtedness
to XL Vision and its affiliates of $13.4 million. We repaid $4.5 million of this
outstanding debt balance on November 16, 1999 from the cash proceeds of the sale
of our series D preferred stock and warrant.
We have had significant negative cash flows from operating activities for
each fiscal and quarterly period to date. Net cash used in operating activities
was $1.7 million in 1996, $6.0 million in 1997, $8.9 million in 1998 and $10.5
million for the nine months ended September 30, 1999. Cash used in operating
activities from inception through September 30, 1999 consisted mostly of net
operating losses offset by increases in accrued liabilities.
Net cash used in investing activities was $157,000 in 1996, $507,000 in
1997, $892,000 in 1998, and $1.2 million for the nine months ended September 30,
1999. Net cash used in investing activities in these periods consisted mostly of
business acquisitions and capital expenditures.
Net cash provided by financing activities was $1.9 million in 1996, $6.5
million in 1997, $9.8 million in 1998 and $13.4 million for the nine months
ended September 30, 1999. Cash provided by financing activities consisted
primarily of the sale of our stock and borrowings from XL Vision and Safeguard.
In December 1998, XL Vision agreed to cancel $7.5 million of indebtedness,
and convert $4.8 million of indebtedness into 2,400,000 shares of our series B
preferred stock.
In May 1999, we raised $5.5 million through the issuance of 1,000,000
shares of our series C preferred stock to Safeguard and 100,000 shares of series
C preferred stock to individuals.
In July 1999, we obtained a revolving credit line from Safeguard evidenced
by a promissory note for working capital advances associated with our cattle
sales operations of up to $3.0 million. Amounts borrowed under the promissory
note, as amended, bear interest at the prime lending rate plus 1%, or 9.5% on
December 31, 1999, and are payable on January 31, 2000.
In August 1999, we entered into an agreement to acquire a 19% interest in
the common stock of Turnkey Computer Systems, Inc. for a purchase price of
62,500 shares of our common stock valued at $400,000 and additional cash
payments totaling $1.4 million. The cash payments are due in full upon the
completion of our initial public offering or in periodic payments of $500,000 at
December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31,
2001, whichever occurs first.
In August 1999, we signed a demand note with Safeguard in the principal
amount of $2.5 million. The note bears interest at the prime rate plus 1%, or
9.5% on December 31, 1999, and is payable on demand. In September 1999, we
signed a demand note with Safeguard in the principal amount of $2.0 million. The
note bears interest at the prime rate plus 1% and is payable on demand. In
October 1999, we signed a demand note with Safeguard in the principal amount of
$2.5 million. The note bears interest at the prime rate plus 1%, or 9.5% on
December 31, 1999, and is payable on demand. In October 1999, we cancelled these
outstanding notes in exchange for a note in the amount of $7.1 million. The note
bears interest at the prime rate plus 1%, or 9.5% on December 31, 1999, and is
payable in full in October 2000, when we complete an initial public offering or
when the note issued to us in connection with the series D preferred stock is
repaid, whichever occurs earlier.
We believe that our existing cash balances, together with the proceeds from
the sale of series D preferred stock and the warrant to purchase class B common
stock, the revolving line of credit provide adequate liquidity and capital
resources to support operations for the next twelve months. Additionally, we
believe that these sources of liquidity and capital
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<PAGE> 36
combined with the net proceeds from this offering will be sufficient to meet our
working capital and capital expenditures needs for at least the next 24 months
under our current business plan, which may change. To the extent we are required
to raise additional capital, we may need to issue additional equity securities
or incur additional debt.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivatives and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
adoption of SFAS No. 133 is not expected to have a material impact on our
results of operations, financial position or cash flows.
In June 1999, the FASB issued SFAS No. 137 which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
MARKET RISK
We held no derivative securities as of September 30, 1999. We are exposed
to changes in interest rates as a result of our borrowings from XL Vision and
Safeguard, which are based on the prime lending rate.
A 10% increase in interest rates related to our borrowings would not have a
material effect on our results of operations over the next fiscal year or the
fair value of our borrowings.
RECENT UNAUDITED FINANCIAL DATA
Our revenue for the three months ended December 31, 1999 was approximately
$25.4 million, including approximately $25.2 million in revenue resulting from
cattle sales. The increase in our cattle sales revenue resulted from a 67%
increase in the number of head of cattle sold in the three months ended December
31, 1999, as compared to the three months ended September 30, 1999, partially
offset by a 2% decrease in the average selling price. Our revenue for the year
ended December 31, 1999 was approximately $43.8 million, including approximately
$42.2 million in revenue resulting from cattle sales. Our net loss for the three
months ended December 31, 1999 was approximately $4.9 million, resulting in a
net loss of approximately $1.47 per share. Our net loss for the year ended
December 31, 1999 was approximately $15.5 million, resulting in a net loss of
approximately $3.10 per share. The financial data for such periods are
unaudited. The preparation of these financial data requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
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<PAGE> 37
BUSINESS
OVERVIEW
eMerge Interactive, Inc. is a business-to-business electronic commerce
company combining content, community and transaction services to create an
online marketplace for the cattle industry. We offer our products and services
through our family of integrated Web sites, our proprietary information
management application and our direct sales force. Our products and services are
designed to create an efficient market for the purchase and sale of cattle and
to improve quality and productivity in the cattle industry. Our current products
and services for the cattle industry include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement product, NutriCharge.
INDUSTRY BACKGROUND
BEEF INDUSTRY
According to the National Cattlemen's Beef Association, or NCBA, the cattle
industry is the largest single segment of the American agricultural economy. The
U.S. Department of Agriculture reports that sales of cattle accounted for
approximately $34 billion in 1998. On an annual basis, the U.S. beef production
industry spends over $6 billion for feed and, based on our estimates,
approximately $600 million for medication. At the retail level, the cattle
industry generates over $51 billion in sales of beef. Furthermore, the NCBA
estimates that worldwide cattle production is three times greater than U.S.
production.
INDUSTRY PARTICIPANTS
The U.S. beef production chain can be classified into three primary
segments: producers, feedlots, and packers.
Producers
According to the NCBA, there are approximately one million producers
comprised of ranchers and small farm owners who breed and raise cattle. Most of
the producers are independently owned and are dispersed throughout the United
States. Each year these producers market approximately 35 million head of cattle
that are eventually harvested for food, of which approximately 27 million are
processed through feedlots. These cattle, raised for 12-18 months in an average
herd size of approximately 35 head, are often located in different geographic
regions, aggregated into larger herds and then sold to centralized feedlots to
increase their weight and value.
Feedlots
Feedlots typically purchase cattle weighing 300 to 900 pounds and manage
the health and growth of the cattle for a period of 110 to 250 days. We estimate
that during this time, each animal is fed on average 20-30 lbs. of grain per
day. There are approximately 700 major feedlot operations concentrated in 10
Midwestern states. These feedlots can manage
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<PAGE> 38
from 4,000 to 115,000 head of cattle at any given time. After reaching a weight
of approximately 900 to 1,400 pounds, the animal is typically sold to a packer
for harvesting.
Packers
Packers usually hold the cattle for 2 to 24 hours before harvesting and
fabricating them for sale and eventual consumption. In addition to processing
beef, packers inspect beef for cleanliness in preparation for quality grading.
There are currently 64 major beef packing operations in the United States, which
in total process approximately 35 million head of cattle into roughly 25 billion
pounds of beef annually. Approximately 82% of the beef processed in the United
States is processed by beef packing operations owned by IBP, Inc., Cargill,
ConAgra, Inc., and Farmland Industries, Inc.
LIMITATIONS OF THE CURRENT SYSTEM
The current cattle production chain contains a number of inefficiencies
that reduce livestock quality and increase cost. These inefficiencies include
multiple transaction costs, exposure to stress and disease, and the loss of
important feeding and medication information.
INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS
As cattle move through the beef production chain, from an individual
producer's ranch to a feedlot to a meat packing facility, the cattle may be
bought, sold and transported three or four times. Due to the highly fragmented
nature of the cattle producer segment, the majority of cattle are sold through
traditional livestock sales and auctions, which bring together regional buyers
and sellers. The cattle are then sold either directly to feedlots or sold once
again to larger buyers and then onto feedlots. Typically, cattle sales and
auctions are hosted at sale barns, where livestock brokers act as agents in the
buying and selling of animals. The livestock broker is paid a fee or commission
each time an individual lot of cattle is bought or sold. As a result of the
geographic dispersion of producers and sale barns, buyers often purchase cattle
from livestock brokers without having the opportunity to visually survey the
cattle. In addition, this current method of exchange does not facilitate easy
access to real-time price information or a geographically broad marketplace for
the product.
REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND
PROFITABILITY
The combination of the method of exchange used in traditional cattle sales
and auctions and the fragmentation of the producer segment of the industry
results in the repetitive transportation and handling of cattle. As cattle are
moved from one environment to another throughout the production chain, they are
commingled multiple times and can be exposed to contagious diseases. In
addition, the transportation, handling and commingling of cattle often results
in a predictable stress response, which may cause significant health
deterioration. However, because there is currently no convenient or
cost-effective method available to measure an animal's stress level, stress is
not assessed today as a meaningful measure of health. Stress and exposure to
disease often result in sub-optimal performance at the feedlot and reduced beef
quality. A study conducted by researchers at Texas A&M University estimated that
sick animals yield approximately $80 per head less than comparable healthy
animals, which represents a significant loss based on the average value cited by
the U.S. Department or Agriculture of $600 per head.
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<PAGE> 39
THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
We believe that industry participants generally collect and analyze
information on cattle that go through the beef production process inconsistently
and in a manual and time-consuming manner. Due to the nature of data collection
and dissemination, cattle industry participants are unable to exchange critical
information in an efficient and timely manner to optimize performance and beef
quality. We believe that businesses in the cattle industry have not maximized
the use of information to effectively address health, quality and performance
issues.
Producers
Cattle producers typically do not receive data related to the weight of
their animals upon arrival to and departure from feedlots or the quality grades
of their animals, making herd management difficult. Animal-specific health and
medication information is generally not passed on to subsequent buyers at or
prior to the feedlot, which may result in unnecessary additional medication.
Feedlots
Feedlots are the primary source of information currently used in livestock
management. As a general practice, information is collected manually on a daily
basis and subsequently entered into multiple information systems that are
typically not integrated. Given the time-intensive nature of aggregating data
under the current process, it is difficult to collect, analyze and interpret
this data in a meaningful way. Historically, feedlots collect and share
industry-wide information for benchmarking and performance purposes by
submitting reports to data warehouse services that aggregate and disseminate the
combined results in monthly reports. Although these data warehouse services are
valuable as general strategic and analytical tools, because of the delay in
disseminating the information, they are less effective for daily cattle
management decisions, such as decisions relating to feed and medication.
Packers
Packers, at the end of the cattle production chain, collect critical
carcass and quality information such as weight, dimension, yield and meat
quality grade after the animal is harvested. However, in 1997, only 47.5% of
cattle harvested were purchased based on these measures. Therefore, feedlots
receive carcass and quality data on less than half of harvested cattle. The
remaining harvested cattle are sold to packers based strictly on live weight,
and consequently very little health and quality data is provided to feedlots or
producers on these cattle.
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<PAGE> 40
U.S. BEEF PRODUCTION CHAIN
[PRODUCERS, FEEDLOTS, PACKERS GRAPHIC]
We believe improved information flow between and within the three main
groups of industry participants can significantly enhance product quality. There
is currently no network or method for compiling and communicating information
rapidly throughout all stages of the cattle production chain. Product
performance information gathered by packers and feedlots will help refine and
improve handling practices earlier in the production chain. Information relating
to an animal's medical history will minimize redundant medication. In addition,
we believe that information about an animal's genealogy disseminated by
producers and feedlots will enable more accurate differentiation among breeds of
cattle at the packer level and a more easily implemented quality branding
strategy at the retail level. Finally, information linking handling, feeding and
medication techniques and the ensuing performance results, gathered and
disseminated on a daily basis by feedlots, can help the entire segment rapidly
adopt best practices.
THE ONLINE CATTLE MANAGEMENT OPPORTUNITY
We believe that the cattle industry is well-suited for Internet commerce
and information sharing due to the industry's size and fragmentation and the
inefficiencies associated with the current cattle production chain. The
Internet's widespread and growing acceptance make it an optimal foundation for
business-to-business interaction. Many of the variables that affect cattle
performance can be addressed by the Internet's open architecture, universal
accessibility and ability to provide more timely and comprehensive information.
We believe the Internet can create a more efficient marketplace for the exchange
of cattle by directly connecting buyers and sellers and providing information
related to the cattle for sale. A report by the National Association of Farm
Broadcasters showed that as of February 1999,
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<PAGE> 41
45.5% of producers and 53.4% of feedlots used a personal computer for farm
business, and 19.7% of producers and 29.1% of feedlots accessed Web sites for
farm-related topics. According to a Gallup and Agricultural Publisher's Survey,
it is estimated that by 2001 over 55% of large producers in the beef industry
will use the Internet for primary information in the conduct of their daily
business.
THE eMERGE INTERACTIVE EXPERIENCE
We combine content, community and commerce to create an online marketplace
for the cattle industry. We offer our comprehensive cattle products and services
through our integrated Web sites, our proprietary information management
application, and our direct sales force. Our products and services are designed
to create an efficient market for the purchase and sale of cattle and to improve
quality and productivity in the cattle industry. We believe our solution
provides the following benefits throughout the cattle production chain.
BENEFITS TO CATTLE INDUSTRY PARTICIPANTS
<TABLE>
<CAPTION>
PRODUCERS FEEDLOTS PACKERS
--------- -------- -------
<S> <C> <C> <C>
ONLINE CATTLE SALES AND AUCTION MARKETPLACE
- -----------------------------------------------
Broader Access to Buyers and Sellers........... -- --
Reduced Transportation and Transaction Costs... -- --
Convenience and Ease of Use.................... -- --
Healthier Cattle............................... -- -- --
Cattle Source Information...................... -- --
Access to Additional Products and Services..... -- --
Quality Certification.......................... -- -- --
PROPRIETARY INFORMATION SERVICES AND MANAGEMENT
TOOLS
- -----------------------------------------------
Performance Information........................ -- --
Detailed Operational Comparisons............... --
Historical Best Practices...................... -- -- --
Analytical and Consulting Feedback............. -- -- --
Comprehensive Content.......................... -- --
</TABLE>
THE eMERGE ONLINE CATTLE MARKETPLACE
Through our Cyberstockyard.com Web site, we enable cattle producers and
feedlot operators to participate in daily online sales and auctions of cattle.
We believe that because online procurement results in fewer cattle shipments and
less handling, transaction costs are reduced and animals arrive at their
destination healthier and less stressed, thereby increasing the value of the
animals. We also believe that online cattle procurement creates a powerful
medium for obtaining access to market pricing from various buyers and sellers
located throughout the United States. We believe that this may eventually reduce
the amount of commission fees paid by the cattle industry as a whole, and
thereby reduce the cost to produce cattle. Through this comprehensive online
marketplace, we also have the ability to
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<PAGE> 42
sell products and services that are designed to improve productivity within the
livestock industry. We currently offer NutriCharge through our online
marketplace to help our customers reduce the effects of pre-harvest stress in
their cattle.
PROPRIETARY INFORMATION MANAGEMENT PRODUCTS AND SERVICES
We provide cattle producers, feedlots and packers with information
management products and services designed for the more efficient and profitable
production of cattle. Through our integrated Web sites, users can access a broad
range of database services and information related to the cattle industry,
including general industry news, regional weather, commodity prices and industry
analyses and proprietary data. We provide our customers with monthly detailed
pricing, operations and benchmarking data on the cattle industry. In addition,
through our proprietary information application, which is installed on our
customers' systems, we collect cattle data, such as feeding and medication
history, from each customer's disparate systems over the Internet. We then
analyze the data and compile daily reports, which customers subscribing to our
feedlot information systems receive over the Internet and use to improve their
daily management decisions.
We also provide an online community for the cattle industry where users can
actively communicate with our staff of industry experts through e-mails, which
our staff generally respond to within 24 hours. We believe this proactive
approach can improve overall meat quality and reduce health-related losses of
cattle.
OUR BUSINESS STRATEGY
Our objective is to expand our position as a provider of
business-to-business electronic commerce products and services for the livestock
industry. Our business strategy includes the following key elements:
LEVERAGE OUR MARKET POSITION TO BUILD BRAND AWARENESS AND FURTHER ESTABLISH OUR
ONLINE MARKETPLACE
We seek to combine our industry expertise with the first Internet-based
cattle information and commerce network to attract industry participants to our
growing online marketplace. By offering industry participants tools to make
better informed purchasing decisions, improve cattle health, and operate more
efficiently, we believe that we will be able to bring users to our Web sites and
build loyalty and future demand for our products, services and solutions. We
seek to increase the supply of cattle offered through our online marketplace by
continuing to build relationships with cattle producers and to stimulate demand
for our marketplace and information services by nurturing relationships with
feedlots. We believe that by attracting additional industry participants to our
marketplace, we will enhance the value of our online community.
DRIVE COMMUNITY LOYALTY THROUGH THE USE OF MANAGEMENT INFORMATION TOOLS AND
PROPRIETARY CONTENT
By providing an online, comprehensive source of cattle-related news,
industry data and management tools, we intend to increase our customers' daily
usage of the eMerge Interactive marketplace. Our electronic commerce marketplace
is prominently featured throughout our integrated Web sites that provide
information management products and services to our customers. We believe our
May 1999 acquisition of Professional Cattle Consultants, L.L.C., serving over 90
feedlots, provides us with a strong customer base and the credibility to develop
a trading community and marketplace. Also, our Feedlot
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<PAGE> 43
Information System, which is designed to be the principal management system for
daily feedlot operations, will continuously expose feedlot managers to our
online marketplace.
LEVERAGE OUR STRONG CUSTOMER RELATIONSHIPS AND INDUSTRY EXPERTISE TO EXPAND OUR
ONLINE COMMUNITY
Historically, relationships among industry participants have played a key
role in conducting business within the cattle industry. We believe that we have
strong existing customer relationships with key cattle producers, feedlots and
packers. Through our acquisition strategy and human resources strategy, we have
acquired companies and hired individuals with long-standing expertise and
relationships in the cattle industry. Our industry experts and advisers consist
of veterinarians, cattle buyers, nutritionalists, data analysts, cattle
producers and former feedlot managers. We seek to leverage our current customer
base, existing relationships and industry expertise to attract additional
industry participants. We also seek to market and sell additional products and
services to our existing customers.
DEVELOP NEW PRODUCTS AND SERVICES
We intend to increase revenue through offering additional products and
services that complement our existing offerings. We seek to obtain new products
and services through strategic acquisitions of technologies or businesses,
internal development and research and development relationships. We currently
have research relationships for the development of proprietary technologies
relating to the cattle and livestock industry with the U.S. Department of
Agriculture, Iowa State University, and the Canadian government. We also intend
to invest in the research and development of new data collection systems to
increase our proprietary electronic commerce offerings to the livestock
industry. For example, we are developing infrared imaging solutions for use in
identification of stress in live animals and fluorescence imaging for use in
improving food safety through the detection of fecal contamination on beef. Our
lead infrared product candidate is still in the development phase and we do not
anticipate that it will be released for commercial use in the foreseeable
future.
EXPAND INTO NEW MARKET SEGMENTS
Expand Internationally
We believe the international appeal of the Internet and the global demand
for cattle products and services present opportunities to expand our
comprehensive cattle solution globally. Although we have not completed the
development of our plan for international expansion, we believe opportunities
exist to offer our products and services, including our cattle sales and auction
services, within other regions of North America, and within South America,
Asia/Pacific and Europe. We intend to expand beyond the United States through
strategic acquisitions or by expanding our capabilities and sales personnel into
the international market.
Extend Our Products and Services to Beef Retailers
As part of our comprehensive products and services, we are developing the
capability to track and manage health and performance information related to
individual animals from birth to harvest. We believe that industry participants
may purchase these services because the ability to trace the progress of
individual cattle from the producer through the feedlot, and through grading at
the packer may enable industry participants to improve health and feed
management practices, lower costs and ultimately improve product quality. In
addition, this capacity to track individual cattle from producer through packer
will allow beef retailers to verify the source, history and quality of their
beef, thereby enabling them to develop high quality brands of beef for sale to
consumers at a premium price.
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Expand into other Markets Within the Livestock Industry
We intend to expand our products and services into other market segments
within the livestock industry. In particular, we believe that opportunities may
exist to apply our integrated electronic commerce and information products and
services to the swine and dairy markets.
OUR PRODUCTS AND SERVICES
We offer our customers a comprehensive set of Internet-based business
products and services designed to address the needs of the livestock industry.
Our products and services can be accessed through our integrated Web sites.
These sites include:
- CattleInfoNet.com, the platform from which our customers can access our
comprehensive product and services offerings;
- Cyberstockyard.com, our online cattle sales and auction site; and
- PCC-online.com, our cattle industry-specific information Web site.
In addition, through our Feedlot Information System, we provide our feedlot
customers with daily analyses of their feedlot operations as well as information
management products and services.
THE eMERGE MARKETPLACE
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
CATTLEINFONET.COM
- Industry news
- Regional weather
- Links to commodity pricing
- Expert corner
- Reports online
- Links to industry information
----------------------------------------------------------------------------------
ONLINE MARKETPLACE MANAGEMENT INFORMATION SOLUTIONS
Cyberstockyard.com Feedlot Information System
- Cattle sales - Feedlot specific content
- Cattle auctions - Daily performance data
- Order fulfillment - Web-enabled with graphical user
eMerge Online Store interface
- eMerge branded products - Analytical services
- Health products * Professional Cattle Consultants
- General store * - Regional feedlot benchmarking data
Specialized Database Services
Advanced Commodities Content *
Advanced Weather Services *
----------------------------------------------------------------------------------
</TABLE>
* Expected to be offered in the first quarter of 2000
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CATTLEINFONET.COM
CattleInfoNet.com is our industry-specific Web site that serves as the
platform from which participants in the cattle industry can access our
comprehensive product and service offerings. This site features content to
facilitate cattle management, including industry news, weather and links to
commodities pricing. Also, through this site, our customers can access
Cyberstockyard.com to purchase or sell cattle, and PCC-online.com, our
information resource and database. In addition, our customers can use this Web
site to purchase our NutriCharge product.
CYBERSTOCKYARD.COM
Cyberstockyard.com is our cattle sales and auction service Web site.
Through Cyberstockyard.com, our customers utilize our online listing of cattle
to obtain access to inventory and market pricing from various buyers and sellers
located throughout the United States in an efficient and effective manner. In
addition, our customers can access scheduled online video cattle auctions. We
transmit inventory lists with detailed product descriptions to our customers by
both e-mail and facsimile and periodically post schedules for live video
auctions on the Web site.
Cattle Sales
We have developed a detailed posting and transaction process to ensure that
adequate information is provided to the purchaser prior to the transaction. We
verify the identity of a purchaser through use of a secure password system and
verify credit-worthiness of each participant prior to enabling access to our
system. Our expert livestock brokers in the field certify all cattle offered for
sale through Cyberstockyard.com. We provide a detailed description of each lot
of cattle, which can be accessed by a purchaser online. We update our inventory
of cattle for sale daily and customers can review our full inventory listings.
In addition, customers can post descriptions, quantity and pricing criteria for
cattle they would like to purchase and our system will automatically search for
a match. If a match is found, the customer is notified immediately online. If no
match is found, the customer can choose to have our system perform a daily
search for a match as new inventory is added to our system. Notification of a
match is sent to the customer by email or facsimile. Our livestock brokers and
online producers also have access to these postings and may respond with
potential matches. After identifying particular cattle to purchase, our
customers complete the transaction through e-mail or the telephone. Once cattle
have been purchased, we manage the shipment logistics through our sales and
customer service organization.
Cattle Auctions
In addition to our online cattle sales, we offer cattle for sale through
our online video auctions. Although not necessary to facilitate cattle sales
transactions, video is available to customers who have installed our satellite
dish system. We offer a mock auction to help our customers get acquainted with
the auction process. We have developed a system that allows participants to
automatically bid in set increments up to a predetermined limit. Once a bid is
accepted, the purchaser is notified online. Our customer service team then
follows-up by telephone and e-mail with specific shipment logistics regarding
the cattle.
MANAGEMENT INFORMATION SOLUTIONS
The Feedlot Information System
The Feedlot Information System provides feedlot customers daily information
services. This secure proprietary information management application resides on
our customers'
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operating systems and interfaces with our centralized database over the
Internet. Our system integrates information contained in their disparate legacy
systems into our database daily to create relevant customer-specific analyses
and graphical presentations. Customers' information is automatically integrated
into our database, analyzed and available for use on the following day. The
analyses created include information and performance data designed to assist in
the effective daily management of a feedlot business. These analyses include:
- Feed consumption data;
- Feed-to-gain ratios; and
- A comprehensive summary of health results.
The Feedlot Information System also enables our customers to compare their
performance against other regional and national feedlot data and provides useful
proprietary content for business management decisions. Our customers can use our
system to manage their feedlot operations on a real-time basis using numerous
performance variables and individual parameters. Customers can also access data
and product performance results posted by practicing veterinarians to further
refine their business practices. All of our Internet applications are easily
accessible from our Feedlot Information System. In addition, our staff provides
valuable analysis and interpretation of the information contained in the
database.
Professional Cattle Consultants
Through PCC-online.com, our Professional Cattle Consultants service, we
provide our customers access to services that are based on our confidential and
proprietary database of cattle industry information. This database has been
compiled over the last 26 years from over 90 different feedlots representing
over 20% of the total cattle processed annually through U.S. feedlots. As part
of their subscription, our customers submit information to our analysts twice
per month to update our database. Each month these customers receive our Cattle
Gram, a marketing report that analyzes and reports cattle market related
information, and our newsletter, a feed performance report containing compiled
data relating to over 100 different feed performance parameters. In our
newsletter, we provide national, regional and customer-specific analyses.
Customers may use a password to view these reports online or receive them via
e-mail or mail.
Specialized Database Services
We offer specialized database management and Internet-based networking
services that target specific customer requirements, including individual animal
tracking through the entire production chain. We can also provide customized
data management and formatting services designed to enable suppliers to better
understand product performance in the field. Our analysts are available to
assist customers in understanding how to derive the most value from the
information being acquired.
STRESS MANAGEMENT PRODUCTS AND SERVICES
As part of our comprehensive solution, we offer our proprietary NutriCharge
restorative feed supplement for sale to our customers through our Web sites and
direct sales force. NutriCharge is designed to reduce the effects of stress on
the animals caused by transportation, handling and commingling, which can result
in a loss of product quality. In addition, we offer educational materials and
services to assist our customers to reduce handling of animals and therefore
reduce stress.
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EQUINE IMAGING SYSTEMS
We have developed our infrared imaging thermography system and image
management software for use in the equine industry. Infrared thermography is a
non-invasive diagnostic imaging technique that is used to detect surface
temperature differences. The camera is lightweight, portable and has a high
degree of resolution and sensitivity. Our infrared camera and software allow a
user to download thermal images to the user's computer to be viewed, catalogued,
annotated and measured. Our system is used by veterinarians to detect heat, one
of the first indicators of inflammation or injury, in horses and exotic animals.
PRODUCT DEVELOPMENT RELATIONSHIPS
We have entered into agreements for the development of technology with a
division of the Canadian government as represented by the Minister of
Agriculture and Agri-Food Canada. We license patents and technology related to
NutriCharge and our Animal Science Tracker infrared camera, which is currently
under development. This agreement also gives us and the Canadian government,
through the Lacombe Research Centre, the right to collaborate with the other on
any project which relates to the license. Any improvements will be owned by
Canada and licensed to us on an exclusive basis. Please see the section entitled
Intellectual Property for a description of the license.
We have entered into a Research Support Agreement with the Canadian
government, under which we provide the Lethbridge Research Centre with one of
our infrared imaging systems, analytical software, and technical support in
exchange for a right of first refusal to license any resulting technology. The
Canadian government may terminate this agreement at any time.
We have entered into a cooperative research and development agreement with
the USDA Agricultural Research Service and Iowa State University of Science and
Technology, in which we have been granted exclusive rights and responsibilities
for product development and commercialization of technology developed and
patented by them for the detection of small, diluted quantities of mammalian
fecal matter on animal carcasses. We will provide design and engineering
expertise. When commercialized, we believe that this technology may reduce
safety inspection and processing costs at packing plants while reducing e-coli
contamination risks. The parties to the agreement may only terminate in the
event of a breach by another party. In connection, with this agreement, we have
also entered into an exclusive license agreement with Iowa State for patent
rights relating to the research and development agreement. Under the license
agreement, we have the right to make or have made, use, sell, offer to sell and
import products using technical data and information owned by the Iowa State
University Research Foundation, or ISURF. The license agreement applies to all
present and future patents, patent applications and inventions relating to meat
and carcass inspection technology. In exchange for the license, we paid a
license fee in the amount of $10,000. We will also pay a royalty of six percent
of the net sales of any licensed products. If we sublicense the technology, we
will also pay ISURF 50% of any fees paid to us by the sublicensees. Currently,
there are no licensed products and we have not made any royalty payments to
date. The license will expire when the last of the patents covered by the
license expire, unless we terminate earlier.
BUSINESS ACQUISITIONS
CIN, LLC
In February 1999, we purchased substantially all of the assets of CIN, LLC,
a company which collected, analyzed and distributed information for use in
animal food sciences
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markets, for an aggregate purchase price of approximately $2.3 million. The
purchase price consisted of 750,000 shares of our class A common stock valued at
$720,000, the assumption of $812,000 of liabilities, a cash payment due in
October 1999 of $358,000, an agreement to pay the first $350,000 from Internet
sales of third-party products over the Web site and transaction costs of
$57,000.
CYBERSTOCKYARD, INC.
In March 1999, we purchased all of the outstanding stock of Cyberstockyard,
Inc., a company selling cattle and other products through auction software over
the Internet for approximately $542,000. The purchase price consisted of 250,000
shares of our class A common stock valued at $450,000, the assumption of $90,000
of liabilities and transaction costs of $2,000.
PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
In May 1999, we purchased substantially all of the assets of Professional
Cattle Consultants, L.L.C. for an aggregate purchase price of approximately $1.8
million. The purchase price consisted of $1.8 million of cash, the assumption of
$3,000 of liabilities and transaction costs of $25,000. The primary asset of
Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and
market information and analysis. For the past 26 years, Professional Cattle
Consultants, L.L.C. has collected a variety of performance and other data from
its subscribers' feedlot operations and provided subscribers with periodic
analyses of certain performance characteristics of their feedlot operations and
comparative analysis related to the performance of feedlots within their
regions.
INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
In August 1999, we entered into an agreement to acquire 19% of the common
stock of Turnkey Computer Systems, Inc., a provider of administrative/accounting
legacy systems to feedlots, for an aggregate purchase price of $1.8 million. The
purchase price consisted of 62,500 shares of our class A common stock, which is
subject to redemption, $1.4 million of cash and $23,000 of transaction costs. In
connection with this investment, we obtained the exclusive right to provide
cattle sales and auction services and feed sales services to customers of
Turnkey through Turnkey's system. This right will expire in August 2019. If we
reach a specified level of revenue per feedlot that is a customer of Turnkey, we
will pay a fee to Turnkey.
RESEARCH AND DEVELOPMENT
We intend to continue to devote significant time and resources to enhance
our current core technology to improve our existing products, expand our product
line and enter into other market segments. Approximately $1.1 million during the
period ended December 31, 1998 and approximately $2.7 million for the nine
months ended September 30, 1999 were related to research and development. As of
September 30, 1999, we had 36 employees dedicated to product development. We
intend to continue to invest in research and development and focus on the
recruitment of experienced scientists and engineers. Our current research and
development activities are primarily focused on the development of information
technologies to complement our products and services for the animal sciences
industry.
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SALES AND MARKETING
SALES
Our sales organization is structured around a direct sales team and an
electronic commerce sales team. We have a staff of 13 account managers who are
responsible for sales of products and services through our electronic commerce
platform to feedlot and packer customers in given geographic territories. We
have a staff of cattle buying representatives who, along with independent buyer
representatives with whom we have entered into relationships, are responsible
for obtaining inventory for livestock sales from producers. We are assembling a
dedicated team to increase advertising revenue and to add third party products
to our electronic commerce offering.
MARKETING
We seek to establish broad customer awareness of our technologies, products
and services within the industries we serve. Our marketing efforts include
direct advertising through trade journals and press releases coordinated by our
communications and public relations firm. We also participate in professional
societies and university programs and have developed strategic marketing
relationships with industry professionals and academic institutions. Much of the
initial interest in our products and services has been created through the
extensive network of relationships we have in the cattle industry as well as
through our sales organization. We are developing an international marketing
effort to promote our products and services worldwide.
OUR CUSTOMERS
Our initial customer focus is the 300 largest feedlots in the United
States. These feedlots manage 20.1 million head of cattle annually, accounting
for 74% of cattle processed through feedlots in the United States. Currently, we
sell our products and services to approximately 130 of those feedlots, which
account for approximately 30% of the total cattle harvested in the U.S. We also
offer our products and services to participants throughout the cattle production
chain.
CUSTOMER SERVICE
Our current customer service organization consists of four individuals who
are responsible for delivering service to our customers. Currently our order
entry, e-commerce transactions and hardware and software support functions are
conducted at our Sebastian, Florida facility. Our current field support
organization is based in Meade, Kansas. We have a dedicated toll free number for
customer calls, which is staffed from 8:00 a.m. to 8:00 p.m. EST.
INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS
SYSTEM ARCHITECTURE
Our Web sites use multiple front-end servers and a master database located
at our Sebastian, Florida facility. We have implemented scalable Web site
management, search, customer interaction, transaction processing and fulfillment
services and systems. Our Web site and extranet provide customization,
interactivity and performance required for business-to-business electronic
commerce. We utilize applications for:
- Accepting and validating customer orders;
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- Placing and managing orders with suppliers and manufacturers;
- Notifying and updating customer order status; and
- Management of shipment of products.
All data communication between remotely located computers uses secure
socket layer, or SSL, encryption technology. This allows the transfer of a local
database from a feedlot to our main database which uses a Sun Enterprise 4500
server.
DATA COLLECTION
The data collection system for our Feedlot Information System gathers
information from the accounting, feedbunk and hospital systems at the feedlot.
This information is compared to a local database, and the changes and additions
are encrypted and transmitted securely to our main database storage along with
any orders that are being processed in the off-line batch mode. Once received,
we add the data to our master database for statistical analysis and generate
reports for individual site locations. The results are encrypted and sent back
to the individual feedlots. All confirmations of placed orders are sent back to
the feedlot that generated the order. Professional Cattle Consultants data is
collected on a monthly basis using a variety of interfaces with feedlot software
vendors. Data is transmitted electronically or by hard copy. This information is
then imported into the Professional Cattle Consultants architecture where it is
stored and utilized as necessary.
DATA DISSEMINATION
The data that is sent back to the feedlots includes video data for
Cyberstockyard and daily content and statistical data for our information
management products and services. This information is then stored in our local
databases, which function as a backup for off-line operation. Professional
Cattle Consultants provides information back to feedlots on a monthly basis
either through electronic mail, a password-protected Internet site, or in hard
copy form. Surveys are available only in hard copy form.
DATA DISPLAY AT THE FEEDLOT
Our system uses a standard browser to connect to the CattleInfoNet.com Web
site. A secure login is required for full access to Cyberstockyard.com,
PCC-online.com and the Feedlot Information System. When logged on, the system
downloads display applets, written in Java, to the user's system to display
relevant information. The user can view auction videos and bid on cattle in
real-time.
INTELLECTUAL PROPERTY
Our ability to protect and utilize our intellectual property rights is
important to our continued success. We have filed applications to register
Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the U.S.
Patent and Trademark Office. We currently have three patent applications that
are pending before the U.S. Patent and Trademark Office relating to:
- Early detection of inflammation using our infrared imaging camera;
- Feedlot information systems and methods; and
- The cattle transaction process.
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The intellectual property rights to use several patents that are critical
to our products and services are licensed to us by third parties. The U.S.
patents and corresponding international patent applications related to our
NutriCharge products and infrared animal screening methods are licensed to us by
the Canadian government under a master license agreement dated July 29, 1998.
The master license provides us with an exclusive worldwide license to develop
and sell products and services that utilize the inventions contained in the
patents. The license continues until July 2018 and may be renewed after that
time unless the license is terminated by the Canadian government upon our breach
of and failure to cure a fundamental term of the license agreement, our
commencement of bankruptcy or insolvency proceedings, or the assignment of the
license agreement without Canada's prior written consent. In exchange for the
license, we must pay the Canadian government a royalty on a semi-annual basis
that is calculated as a percentage of the revenues we receive from the sale of
products and services related to the license. Our obligation to pay this royalty
begins July 29, 2000. Under the master license, we must achieve milestones in
order to maintain the master license. To date we are achieving all required
milestones.
The U.S. patents relating to technology for detecting fecal contamination
on meat carcasses during and after slaughter are licensed to us by the Iowa
State University Research Foundation and the USDA under a license agreement
entered into August 1999. The license provides us with an exclusive worldwide
license until the patents expire on a country by country basis to develop and
sell products and services that utilize the inventions contained in the patents.
In exchange for the license, we are obligated to pay Iowa State University a
royalty on revenues we receive from the sale of products and services related to
the license.
We believe our commercial success depends on our ability to protect our
proprietary technology and enforce our rights in the technology we license to
other parties. We currently rely on a combination of patents, copyrights and
trade secrets to protect our proprietary technology. We are not aware of any
patents held by others that would prevent us from manufacturing and
commercializing our technology in the United States and abroad.
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
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services. Currently, the majority of cattle and calf sales transactions occur
through auctions held at traditional sale barns. These sale barn operations are
highly fragmented and vary in size. We believe that the primary competitive
factors in the cattle sales and auction services market include:
- Availability and quality of inventory;
- Pricing;
- Reliability of service;
- Efficiency;
- Brand awareness;
- Customer service; and
- Convenience and ease of use.
We believe that we compete favorably based on these factors, particularly
due to our access to inventory, our focus on ensuring quality and reliability,
the brand awareness developed through our comprehensive solution and the
convenience and ease of use of our Web site.
We compete against other companies in the information services segment,
including established cattle and livestock information services. We also face
competition from cattle industry product manufacturers who use information
technology to promote the effectiveness of their products. These services are
often provided in connection with the sale of products to industry participants.
In addition, providers of software to feedlots also offer information services
to their feedlot customers. We believe that the primary competitive factors in
the information services market include:
- Breadth of available data;
- Quality of analyses;
- Timeliness of information;
- Brand recognition;
- Value-added consulting services; and
- Convenience and ease of use.
We believe that we compete favorably based on these factors particularly
due to the size and quality of our proprietary database, the timeliness of our
service offerings, the expertise of our professionals and the convenience and
ease of use of our Web sites.
Our current competitors may include large companies that have substantially
greater market presence, brand-name recognition and financial resources than we
do. Some of our smaller competitors may also enjoy greater recognition and close
relationships within a particular community.
EMPLOYEES
As of September 30, 1999, we employed a total of 99 persons, including 36
persons in product development and engineering, 35 persons in marketing and
sales, 18 persons in production and 10 persons in administration. We are not
subject to any collective bargaining agreements and we believe that our
relationship with our employees is good.
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FACILITIES
Our corporate facilities located in Sebastian, Florida, occupy
approximately 17,000 square feet. We lease our facilities from XL Vision, which
leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard. We
believe that the rent that we pay pursuant to our lease is consistent with the
market rent for similar space in the area. Our lease terminates on January 1,
2001, at which time we have the option to renew the lease for an additional one
year term. We believe that this space is adequate to support our needs for the
foreseeable future.
We also maintain offices in Meade, Kansas; Denver, Colorado; and
Weatherford, Oklahoma.
LEGAL PROCEEDINGS
We have been named as a defendant in a lawsuit filed 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. 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.
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MANAGEMENT
This table sets forth information with respect to our executive officers,
directors and key employees with significant industry expertise as of December
31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham................... 44 Chief Executive Officer and Director
T. Michael Janney.................... 50 Chief Financial Officer and Treasurer
Scott L. Mathews..................... 42 President and Chief Operating Officer
Marvin L. Slosman.................... 35 Executive Vice President, Sales
Arvind Subramanian................... 38 Executive Vice President, Marketing and
E-Business
John S. Scott, Ph.D.................. 48 Chairman of the Board
Douglas A. Alexander................. 38 Director
E. Michael Forgash................... 41 Director
Thomas C. Lynch...................... 57 Director
Christopher Moller, Ph.D............. 46 Director
John W. Poduska, Sr., Ph.D........... 62 Director
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY
EXPERTISE
J. Tom Brink......................... 38 Director, Analytical Services
Scott Crain, D.V.M................... 41 Executive Vice President, Professional
Services
Jim Gibb, Ph.D....................... 47 Director, Advanced Technologies
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham has served as Chief Executive Officer and as a member of
the board of directors of eMerge Interactive since July 1998. From July 1997
until July 1998, Mr. Abraham was Vice President and General Manager with the
Home Care Division of Nellcor Puritan Bennett Incorporated. From 1994 until July
1997, Mr. Abraham was Manager of the Global Vascular Business of General
Electric Medical Systems, located in Paris, France.
T. Michael Janney has served as Chief Financial Officer and Treasurer of
eMerge Interactive since November 1998. From March 1993 until October 1998, Mr.
Janney was Senior Vice President and Chief Financial Officer of Datamax
Corporation, a privately held company that designs, develops, manufactures and
sells bar code printers worldwide.
Scott L. Mathews has served as President of eMerge Interactive since
November 1999, and as Chief Operating Officer of eMerge Interactive since April
1999. From May 1996 until April 1999, Mr. Mathews was Vice President and General
Manager for Key Technology, Inc., a manufacturer of machine vision and material
handling products for the food processing and pharmaceutical industries. From
January 1994 until May 1996, Mr. Mathews was Manager of the Global Positron
Emission Tomography business of General Electric Medical Systems, located in
Waukesha, Wisconsin and Uppsala, Sweden.
Marvin L. Slosman has served as the Executive Vice President, Sales of
eMerge Interactive since August 1998. From May 1996 until July 1998, Mr. Slosman
was a Division Manager for Cordis, Johnson and Johnson. From April 1995 until
May 1996, Mr. Slosman was a Vice President at GE Capital Corporation. From 1993
until April 1995, he served as a Programs Manager at General Electric Medical
Systems. Mr. Slosman currently serves on the board of directors of ReMar, Inc.
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Arvind Subramanian has served as Executive Vice President, Marketing and
E-business of eMerge Interactive since December 1999. From January 1997 until
December 1999, Mr. Subramanian was a General Manager for General Electric
Information Services. From September 1994 until December 1996, Mr. Subramanian
was a Global Product Line Manager for General Electric Medical Systems.
John S. Scott, Ph.D. has served as Chairman of the Board of eMerge
Interactive since September 1994 and has served as Chief Executive Officer and
Chairman of the Board of XL Vision, Inc. since its inception in May 1993. From
August 1991 until July 1993, Dr. Scott was President of Lenzar Electro-Optics,
Inc., a manufacturer of imaging devices. Dr. Scott also currently serves as
Chairman of the Board of ChromaVision Medical Systems, Inc., a public company,
and Who?Vision Systems, Inc., both of which are affiliated with Safeguard.
Douglas A. Alexander has served as a member of the board of directors of
eMerge Interactive since April 1999. Mr. Alexander is a managing director of
Internet Capital Group, Inc., an affiliate of Safeguard and is Chairman of the
Board of VerticalNet, Inc., a public company, and serves as a director of
Arbinet Communications, Inc., Blackboard Inc., ComputerJob.com, Inc., Deja.com,
Inc., LinkShare Corporation, SageMaker, Inc. and Star-Cite! Solutions, Inc., all
of which are privately held companies that are affiliated with Internet Capital
Group. Mr. Alexander co-founded Reality Online, Inc., a company that developed
financial planning tools and online services aimed at the individual investor,
and continued to serve as its President and Chief Executive Officer after its
acquisition by Reuters Group PLC until September 1997.
E. Michael Forgash has served as a member of the board of directors of
eMerge Interactive since March 1999 and has held the position of Vice President,
Operations at Safeguard Scientifics, Inc. since January 1998. From August 1996
until October 1997, Mr. Forgash was President and Chief Executive Officer of
Creative Multimedia, an interactive marketing agency that consulted, designed
and delivered Web solutions for businesses. From November 1994 until July 1996,
Mr. Forgash served as President of Continental Healthcare Systems, Inc., a
leading supplier of departmental healthcare information systems and consulting
in the United States and England. Mr. Forgash currently serves as a director of
Internet Capital Group, Inc. and US Interactive, Inc., both public companies,
4anything.com, Inc., Who?Vision Systems, Inc. and XL Vision, Inc., all of which
are affiliated with Safeguard. Mr. Forgash is the Safeguard designee on our
board of directors under a stockholders' agreement dated July 17, 1997.
Thomas C. Lynch has served as a member of the board of directors of eMerge
Interactive since June 1997 and currently serves as the President, Chief
Operating Officer and a member of the board of directors of CompuCom, Inc., a
public company, which is affiliated with Safeguard. From November 1995 until
October 1998, Mr. Lynch held the position of Senior Vice President at Safeguard
Scientifics, Inc. From September 1994 until October 1995, Mr. Lynch was Director
of the Navy Staff, where he was responsible for coordinating Navy defense
issues. Prior to August 1994, Mr. Lynch held several positions in the United
States Navy, including Superintendent of the U.S. Naval Academy.
Christopher Moller, Ph.D. has served as a member of the board of directors
of eMerge Interactive since June 1997. Since 1990, he has served as Vice
President of TL Ventures, a company which manages a series of private equity
funds and is affiliated with Safeguard. Since 1994, Dr. Moller has served as a
Managing Director of the following funds managed by TL Ventures: Radnor Venture
Partners, Technology Leaders, Technology Leaders II, TL Ventures III and TL
Ventures IV. He is also a Managing Director of TL Leaders Management II L.P. Dr.
Moller is a director of Who?Vision Systems, Inc., an affiliate of Safeguard,
Adolor Corporation and OraPharma, Inc. Dr. Moller serves on the medical advisory
board of
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Lankenau Research Institute. Dr. Moller is the TL Ventures designated director
on our board of directors, under a stockholder agreement dated July 17, 1997.
John W. Poduska, Sr., Ph.D. has served as a member of the board of
directors of eMerge Interactive since January 1997. Since 1992, Dr. Poduska, Sr.
has served as the Chairman of Advanced Visual Systems Inc., a provider of
visualization software. From December 1989 until December 1991, Dr. Poduska was
President and Chief Executive Officer of Stardent Computer Inc., a computer
manufacturer. Dr. Poduska is also a member of the board of directors of
Safeguard Scientifics, Inc., Cambridge Technology Partners, Inc., an affiliate
of Safeguard, and Union Pacific Resources Group Inc., all public companies, and
XL Vision, Inc., an affiliate of Safeguard.
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERTISE
J. Tom Brink has served as the Director, Analytical Services of eMerge
Interactive since April 1999. Mr Brink focuses on marketing methods, feedlot and
grid value and cow production costs, and has conducted extensive research on
cattle markets and price cycles. His articles have been featured in many key
industry publications. From December 1996 to April 1999, Mr. Brink served as the
Executive Director of the American Gelbvieh Association, a leading breed
value-based marketer of fed cattle and the largest breed-coordinated alliance in
the United States. From July 1992 until December 1996, Mr. Brink was the
Director of Market Research of Cattle-Fax.
Scott Crain, D.V.M. has served as the Executive Vice President,
Professional Services of eMerge Interactive since March 1999. Since 1990, Dr.
Crain has also maintained a veterinary feedlot practice. In 1995, Dr. Crain
founded CIN, LLC, a company that established an information system for the beef
industry, and served as its President and Chief Executive Officer until that
company was acquired by eMerge Interactive in 1999.
Jim Gibb, Ph.D. has served as the Director, Advanced Technologies for
eMerge Interactive since June 1999. Dr. Gibb identifies opportunities to
implement and integrate new technology into eMerge Interactive's informations
system. From May 1996 until June 1999, he served as the Vice President at the
Center for Quality of the National Cattlemen's Beef Association. From 1991 until
May 1996, Dr. Gibb served as the Executive Director of the American Gelbvieh
Association.
BOARD OF DIRECTORS
Our board of directors is composed of seven members. All of our directors
are elected to serve for one-year terms and are elected at each annual meeting
of our stockholders.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. Our
audit committee consists of three independent directors. Currently our audit
committee consists of Douglas A. Alexander, Christopher Moller, Ph.D. and John
W. Poduska, Sr., Ph.D. The audit committee reviews the scope and result of the
audit and other services provided by our independent auditors and reviews and
evaluates our internal control functions.
Our compensation committee consists of at least three disinterested
directors who are non-employee directors. Currently, our compensation committee
consists of John S. Scott, Ph.D., E. Michael Forgash and Thomas C. Lynch. The
compensation committee evaluates and approves the compensation and benefits for
our executive officers and administers our equity compensation plans and makes
recommendations to the board of directors regarding such matters.
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<PAGE> 57
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of eMerge Interactive and administering various incentive compensation
and benefit plans. During the 1998 fiscal year, our compensation committee
consisted of Dr. Scott and Messrs. E. Scott Blackwell and Lynch. Dr. Scott is
the Chief Executive Officer and Chairman of the Board of XL Vision. Mr.
Blackwell is an executive officer of XL Vision. At the end of fiscal 1998, we
owed XL Vision $8.0 million.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We do not pay our
directors cash compensation for attending meetings of the board of directors and
committee meetings. Directors are eligible to receive options to purchase common
stock under our equity compensation plan. All options granted to directors have
been approved by unanimous vote of the board of directors. In each of October
1997 and March 1999, we granted Dr. Poduska options to purchase 31,250 shares of
our common stock under our 1996 Equity Compensation Plan at an exercise price of
$0.80 and $1.60 per share, respectively. In April 1999, we granted Mr. Alexander
options to purchase 100,000 shares of our common stock under our 1996 Equity
Compensation Plan at an exercise price of $2.40 per share.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the compensation we paid
to our chief executive officer and each executive officer who was paid
compensation greater than $100,000 in 1999. In 1999, we did not pay any of our
other executive officers salary and bonus exceeding $100,000. The amount
appearing in the All Other Compensation column for Mr. Abraham for 1999 consists
of $13,714 for reimbursement of relocation expenses, $11,050 for car allowance
and $5,484 for 401(k) employer contributions and term life insurance and for
1998 consists of $34,663 for reimbursement of relocation expenses, $5,525 for
car allowance and $1,690 for 401(k) employer contributions. The $3,771 for Mr.
Janney consists of 401(k) employer contributions and term life insurance. For
Mr. Mathews, the $65,935 consists of $63,435 for relocation expenses and $2,500
for 401(k) employer contributions and term life insurance. For Mr. Slosman the
$48,309 consists of $46,586 for relocation expenses and $1,723 for 401(k)
employer contributions and term life insurance. Mr. Abraham joined eMerge
Interactive in April 1998.
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<PAGE> 58
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- --------------------------- ------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles L. Abraham......... 1999 $175,791 $35,000 -- $30,248
Chief Executive Officer 1998 84,469 -- 750,000 41,878
T. Michael Janney.......... 1999 136,744 5,625 31,250 3,771
Chief Financial Officer
and Treasurer
Scott L. Mathews........... 1999 113,136 50,000 225,000 65,935
President and Chief
Operating Officer
Marvin L. Slosman.......... 1999 144,517 18,670 31,250 48,309
Executive Vice President,
Sales
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Summary Compensation Table above.
Charles L. Abraham was not granted any options during fiscal 1999. Amounts
represent the hypothetical gains that could be achieved from the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date based upon the
grant price.
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES APPRECIATED FOR
UNDERLYING PERCENTAGE OF OPTION TERM
OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION ---------------------
NAME GRANTED GRANTED PRICE ($/SHARE) DATE 5% 10%
- ---- ---------- ------------- --------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
T. Michael Janney.... 31,250 2.2% $2.40 4/21/09 $ 47,167 $119,531
Scott L. Mathews..... 166,665 11.8 2.40 4/21/09 251,555 637,491
58,335 4.1 2.40 4/21/09 88,048 223,130
Marvin L. Slosman.... 31,250 2.2 2.40 4/21/09 47,167 119,531
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on an assumed value equal to the initial public offering price
of $15.00 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles L. Abraham...... 37,500 $60,000 150,000 562,500 $2,130,000 $7,987,500
T. Michael Janney....... 3,313 33,788 82,625 101,563 1,160,775 1,404,690
Scott L. Mathews........ -- -- 56,250 168,750 708,750 2,126,250
Marvin L. Slosman....... -- -- 85,938 101,563 1,207,815 1,404,690
</TABLE>
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<PAGE> 59
EMPLOYMENT, CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Charles L. Abraham holds the position of Chief Executive Officer and
receives an annual salary of $175,000 per year, and a bonus of up to $70,000 per
year based on performance objectives established by the board of directors. Mr.
Abraham will receive continued salary and benefits for a period of six months if
we terminate his employment without cause. Mr. Abraham also holds options to
purchase 750,000 shares of common stock at $0.80 per share, of which 25% or
187,500 shares, vest at the grant date with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
Marvin L. Slosman holds the position of Executive Vice President, Sales and
receives an annual salary of $150,000 and a bonus of up to $60,000 based on the
achievement of annual objectives. Mr. Slosman will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Slosman also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
T. Michael Janney holds the position of Chief Financial Officer and
receives an annual salary of $150,000 and a bonus of up to $45,000 based on the
achievement of annual objectives. Mr. Janney will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Janney also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
Scott L. Mathews holds the position of President and Chief Operating
Officer and receives an annual salary of $160,000 and a bonus of up to $64,000
based on the achievement of annual objectives. Mr. Mathews will receive
continued salary and benefits for a period of six months if we terminate his
employment without cause. Mr. Mathews also holds options to purchase 225,000
shares of our common stock at $2.40 per share. These options vested 25% on the
day of grant with the remaining options vesting in three annual installments of
25% each. If we experience a change of control, 100% of the options will
automatically vest.
Arvind Subramanian holds the position of Executive Vice President, Sales
and E-Business and receives an annual salary of $150,000 and a bonus of up to
$52,500 based on the achievement of annual objectives. Mr. Subramanian will
receive continued salary and benefits for a period of twelve months if we
terminate his employment without cause. Mr. Subramanian also holds options to
purchase 187,500 shares of our common stock at $11.20 per share. These options
vested 25% on the day of grant with the remaining options vesting in three
annual installments of 25% each. If we experience a change of control, 100% of
the options will automatically vest.
EQUITY COMPENSATION
AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN
Our Amended and Restated 1996 Equity Compensation Plan was approved by our
stockholders on January 26, 1996. The aggregate number of shares of common stock
available for awards under the 1996 plan was 2,168,750 shares. No more than
625,000 shares in the aggregate may be granted to any individual in any calendar
year. As of December 31,
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<PAGE> 60
1999, there were 1,866,991 shares issuable upon the exercise of outstanding
options granted under the 1996 plan.
1999 EQUITY COMPENSATION PLAN
Our 1999 Equity Compensation Plan was approved by our stockholders on May
10, 1999. The aggregate number of shares of common stock available for awards
under the 1999 plan is 2,500,000 shares. No more than 625,000 shares in the
aggregate may be granted to any individual in any calendar year. As of December
31, 1999, there were 902,125 shares issuable upon the exercise of outstanding
options granted under the 1999 plan.
GENERAL
The 1996 and 1999 equity compensation plans provide for grants of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock and performance units to our designated employees, advisors and
consultants, and to non-employee directors. The compensation committee of the
board of directors administers and interprets the plans. The compensation
committee consists of two or more persons appointed by the board of directors
from among its members, each of whom must be a non-employee director as defined
by Rule 16b-3 under the Securities Exchange Act of 1934, and an outside director
as defined by section 162(m) of the Internal Revenue Code of 1986 and related
Treasury Regulations.
ELIGIBILITY FOR PARTICIPATION
Grants may be made to any of our employees or to employees of any of our
subsidiaries, to any non-employee member of the board of directors or, under the
1999 plan, to individuals to whom an offer of employment has been extended. Key
consultants and advisers who perform services for us or any of our subsidiaries
are eligible if they render bona fide services, not as part of the offer or sale
of securities in a capital-raising transaction.
401(k) PLAN
We have adopted a tax qualified employee savings and retirement plan, the
401(k) plan, for eligible employees. We make matching contributions on behalf of
all participants who have elected to make deferrals to the 401(k) plan. Any
contributions to the 401(k) plan by us or by the participants are paid to a
trustee. The 401(k) plan, and the accompanying trust, is intended to qualify
under Section 401(k) of the Internal Revenue Code, so that contributions and
income earned, if any, are not taxable to employees until withdrawn. The
contributions made by us vest in increments according to a vesting schedule. At
the direction of each participant, the trustee invests the contributions made to
the 401(k) plan in any number of investment options.
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<PAGE> 61
RELATED PARTY TRANSACTIONS
EQUITY AND DEBT FINANCING AGREEMENTS WITH XL VISION
We were incorporated in September 1994 as a subsidiary of XL Vision, Inc.,
a private company that provides strategic, technical and business support to
create imaging-related technology companies. From our inception through June
1999, we have funded our operating and investing cash requirements principally
through private placements of common stock and preferred stock and from
borrowings from XL Vision. As of the date of this prospectus, XL Vision owns
24.0% of our outstanding capital stock.
In July 1997, we signed a subordinated purchase money note with XL Vision
for $4.4 million related to the transfer of infrared technology to eMerge. The
note bears interest at an annual rate of 7% and is due in full when we complete
an initial public offering or sell all of our assets or stock. Approximately
$1.4 million was outstanding under the note as of December 31, 1999, all of
which will be paid with a portion of the proceeds of this offering.
In December 1998, we issued 2,400,000 shares of series B junior preferred
stock to XL Vision, one of our significant stockholders, at a purchase price of
$2.00 per share. As payment for the shares, XL Vision cancelled our debt of $4.8
million owed to XL Vision related to working capital expenditures, which were
incurred on our behalf by XL Vision. As a result of that transaction, XL
Vision's ownership of our capital stock increased from 22.0% to 35.8% as of
December 1998. XL Vision also canceled $7.5 million of debt related to working
capital expenditures, which were incurred on our behalf by XL Vision as a
contribution of debt to equity. The shares of series B junior preferred stock
are also subject to the registration rights agreement executed in connection
with the series A preferred stock. See the section entitled Description of
Capital Stock for a description of the registration rights agreement. The shares
of series A and series B preferred stock convert into shares of class A common
stock immediately prior to completion of this offering.
In January 1999, we signed a revolving promissory note with XL Vision for
up to $3.0 million, of which approximately $232,000 was outstanding as of
December 31, 1999. The revolving promissory note bears interest at the prime
lending rate plus 1% and is due in full when we complete an initial public
offering or sell all of our assets or stock.
EQUITY AND DEBT FINANCING AGREEMENTS WITH AFFILIATES OF SAFEGUARD SCIENTIFICS,
INC.
In April 1999, we signed two promissory notes, totaling $1.1 million with
Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics,
Inc. and the sole general partner of Safeguard XL Capital and Safeguard 99
Capital L.P., two of our significant stockholders. Safeguard Scientifics, Inc.
beneficially owns approximately 55% of the outstanding shares of capital stock
of XL Vision. These promissory notes were paid in full with the proceeds of the
sale of our series C preferred stock.
In May 1999, we issued 1,000,000 shares of series C preferred stock to
Safeguard 99 Capital L.P., an affiliate of Safeguard Scientifics, Inc., at a
price of $5.00 per share. The shares of series C preferred stock are also
subject to the registration rights agreement executed in connection with the
series A preferred stock. The shares of series C preferred stock convert into
shares of class A common stock immediately prior to completion of this offering.
In July 1999, we signed a revolving promissory note with Safeguard
Delaware, Inc. for up to $3.0 million. At September 30, 1999, $3.0 million had
been advanced by Safeguard. The revolving promissory note bears interest at the
prime lending rate plus 1%. In December 1999, we amended the note to extend the
maturity date until January 31, 2000 and in January 2000, we amended the note to
extend the maturity date until March 31, 2000.
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<PAGE> 62
In August 1999, we signed a demand note with Safeguard Delaware, Inc. in
the principal amount of $2.5 million. The note bears interest at the prime rate
plus 1% and is payable on demand. In September 1999, we signed a demand note
with Safeguard Delaware, Inc. in the principal amount of $2.0 million. The note
bears interest at the prime rate plus 1% and is payable on demand. In October
1999, we signed a demand note with Safeguard Delaware, Inc. in the principal
amount of $2.5 million. The note bears interest at the prime rate plus 1% and is
payable on demand. In October 1999, we cancelled these outstanding notes in
exchange for a note in the amount of $7.1 million. The note bears interest at
the prime rate plus 1% and is due in full in one year, when we complete an
initial public offering or when Internet Capital Group repays its note to us,
whichever occurs earlier. As of December 31, 1999, we owed a total of
approximately $10.3 million to Safeguard.
ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC.
On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock for the
aggregate consideration of $38.8 million to Internet Capital Group, Inc.
We received $18.0 million of the total purchase price in cash and $23.0
million in the form of a promissory note. The note will be due and payable one
year after its issue and does not bear interest. The note is secured by
2,555,556 shares of series D preferred stock. Interest on the promissory note
was imputed at 9.5% and amounts to $2.2 million over the life of the note. In
connection with the issuance of the stock and the warrant, we granted Internet
Capital Group registration rights that are substantially the same as those that
apply to our series A preferred stock.
The series D preferred stock will automatically convert into shares of
class B common stock immediately prior to completion of this offering. Class B
common stock is entitled to two and one-half votes per share. The warrant
expires three years from the date of issuance, and is exercisable at the initial
public offering price of the class A common stock. The class B common stock
automatically converts into class A common stock upon transfer by Internet
Capital Group to a non-affiliated party.
Douglas A. Alexander, one of our directors, is an executive officer of
Internet Capital Group. E. Michael Forgash, one of our directors, is also a
member of the board of directors of Internet Capital Group. Additionally,
Safeguard Scientifics, Inc. beneficially owns approximately 14.3% of the
outstanding shares of common stock of Internet Capital Group.
Internet Capital Group and Safeguard are parties to a joint venture
agreement under which each has agreed to:
- Use best efforts to agree and vote on a course of action that is in the
best interest of both parties in all matters submitted to the
stockholders for approval;
- Vote its shares for the election of two designees of Safeguard and two
designees of Internet Capital Group in any election of directors of
eMerge Interactive;
- Offer shares of eMerge Interactive stock to the other party at the fair
market price of the shares before offering the shares to any unaffiliated
party, other than in a sale of all of its shares; and
- Discuss its intentions with the other party before selling all of its
shares to an unaffiliated party and use its best efforts to provide the
other party with the opportunity to purchase or participate in the
purchase of the shares.
Together, Internet Capital Group and Safeguard beneficially own
approximately 55.8% of our capital stock and as a result control approximately
68.2% of the voting power of our
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<PAGE> 63
capital stock prior to this offering. After this offering, Internet Capital
Group and Safeguard together will beneficially own approximately 42.1% of our
capital stock and as a result will control approximately 55.7% of the voting
power of our capital stock.
SERVICE AGREEMENTS WITH XL VISION AND SAFEGUARD SCIENTIFICS
We have contractual service agreements with XL Vision and Safeguard
Scientifics. Under an administrative services agreement dated December 15, 1997,
as amended on August 17, 1999, XL Vision and Safeguard provide us with
management consultation, investor relations, financial management, human
resource management, legal services, insurance programs, and administrative
services. We pay a fee pursuant to a formula that is based on a percentage of
our revenue, not to exceed $300,000 annually. The fee is not due until we
achieve positive cash flow from operations. We owe XL Vision and Safeguard each
$18,600 under this agreement for fiscal 1998, and $21,750 for the nine months
ended September 30, 1999. The agreement extends through December 31, 2002 and
continues unless terminated by either party.
Under a direct charge administrative services agreement dated April 14,
1997, XL Vision also provides us with management services on a time and
materials basis. We owe XL Vision $460,000 under this agreement for fiscal 1998,
and $390,000 for the nine months ended September 30, 1999. This agreement
continues on a month-to-month basis, and may be terminated at any time by either
party.
REAL ESTATE LEASE WITH XL VISION
We currently lease our facilities in Sebastian, Florida from XL Vision,
Inc., which leases the entire facility from XL Realty, Inc., a subsidiary of
Safeguard Scientifics, Inc. We believe that the rent that we say pursuant to our
lease is consistent with the market rent for similar space in the area. Our
lease terminates on January 1, 2001 and we will have the option to renew the
lease for an additional one year term.
LOAN AGREEMENT WITH MR. ABRAHAM
On January 28, 2000, we entered into a term note with Charles L. Abraham,
our Chief Executive Officer, under which Mr. Abraham borrowed $100,000. The note
will mature on the earlier to occur of the second anniversary of the date of the
note and the date on which Mr. Abraham receives a bonus from us relating to the
successful completion of this offering. The note is secured by shares of our
common stock owned by Mr. Abraham pursuant to a pledge agreement. The note bears
interest at the prime lending rate plus one percent, which as of February 1,
2000 equaled 9.5%. The proceeds of the loan were used to finance the exercise of
options to purchase 30,000 shares of our common stock and to pay taxes in
connection therewith.
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<PAGE> 64
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of eMerge Interactive's common stock as of December 31, 1999 by:
- Each person or entity who is known by us to beneficially own more than 5%
of eMerge Interactive's outstanding common stock;
- Each of the executive officers set forth on the summary compensation
table;
- Each director of eMerge Interactive;
- All directors and executive officers as a group; and
- All other selling stockholders.
In addition, we are voluntarily disclosing information for each of our
other executive officers.
A person has beneficial ownership of shares if the individual has the power
to vote or dispose of shares. This power can be exclusive or shared, direct or
indirect. In addition, a person beneficially owns shares underlying options that
are presently exercisable or will become exercisable within 60 days of December
31, 1999 and shares acquirable upon conversion of our preferred stock.
Applicable percentage ownership in the following table is based on 25,232,902
shares of common stock outstanding as of December 31, 1999. Applicable
percentage ownership after the offering includes 500,000 shares of class A
common stock issued in connection with a concurrent private placement. To the
extent that any shares are issued upon exercise of options, warrants or other
rights to acquire our capital stock that are presently outstanding, granted in
the future or reserved for future issuance under our equity plans, there will be
further dilution to new public investors. Because of the disparate voting rights
between the class A and class B common stock, we have also presented beneficial
ownership as a percent of total voting power in the table below.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol * means that the percentage is
less than one percent.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER THE OFFERING
-------------------------------------- CLASS A ---------------------------------------
PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF
NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER
------------------------ ---------- ---------- ------------ --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Internet Capital Group,
Inc.(1)(11).................. 14,734,978 55.8% 68.2% 694,000 14,040,978 42.1% 55.7%
800 The Safeguard Building
435 Devon Park Drive Wayne,
PA 19087
Safeguard XL Capital
L.P.(2)(6)(11)............... 14,734,978 55.8 68.2 694,000 14,040,978 42.1 55.7
800 The Safeguard Building
435 Devon Park Drive Wayne,
PA 19087
Safeguard 99 Capital
L.P.(3)(6)(11)............... 14,734,978 55.8 68.2 694,000 14,040,978 42.1 55.7
800 The Safeguard Building
435 Devon Park Drive Wayne,
PA 19087
XL Vision, Inc.(4)(5).......... 6,058,125 24.0 17.9 500,000 5,558,125 17.2 13.6
10315 102nd Terrace
Sebastian, FL 32958
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER THE OFFERING
-------------------------------------- CLASS A ---------------------------------------
PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF
NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER
------------------------ ---------- ---------- ------------ --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
XL Partners, L.P.(4)........... 3,058,125 12.1 9.1 -- 3,058,125 9.5 7.5
10315 102nd Terrace
Sebastian, FL 32958
The Biegert Family Trust(7).... 1,250,000 5.0 3.7 -- 1,250,000 3.9 3.1
c/o Judith Ackland P.O. Box
197 Shickley, NE 68436
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
Charles L. Abraham(10)......... 375,000 1.5 1.1 -- 375,000 1.2 *
T. Michael Janney (10)......... 78,125 * * -- 78,125 * *
Scott L. Mathews (10).......... 56,250 * * -- 56,250 * *
Marvin L. Slosman (10)......... 78,125 * * -- 78,125 * *
John S. Scott, Ph.D.(12)....... 25,000 * * -- 25,000 * *
Douglas A. Alexander........... -- * * -- -- * *
E. Michael Forgash............. -- * * -- -- * *
Thomas C. Lynch................ -- * * -- -- * *
Christopher Moller, Ph.D....... -- * * -- -- * *
John W. Poduska, Ph.D.......... 65,938 * * -- 65,938 * *
OTHER EXECUTIVE OFFICER:
Arvind Subramanian (10)........ 46,875 * * -- 46,875 * *
All directors and executive
officers as a group (11
persons)..................... 725,313 2.8 2.1 -- 725,313 2.2 1.8
OTHER SELLING STOCKHOLDERS:
Technology Leaders II(8)....... 1,070,000 4.2 3.2 150,000 920,000 2.9 2.3
Technology Leaders I(9)........ 1,004,062 4.0 3.0 150,000 854,062 2.7 2.1
Richard Stanley,
D.V.M.(10)(13)............... 46,413 * * 6,000 40,413 * *
</TABLE>
- -------------------------
(1) The share numbers for Internet Capital Group, Inc. include 5,226,644 shares
owned by Safeguard XL Capital L.P. and 1,675,000 shares owned by Safeguard
99 Capital L.P. Internet Capital Group disclaims beneficial ownership of
these shares. The share numbers for Internet Capital Group also include
5,694,445 shares of class B common stock and a warrant to purchase
1,138,889 shares of class B common stock. There are no other shares of
class B common stock outstanding. Holders of class B common stock are
entitled to two and one-half votes per share. These numbers also include
1,250,000 shares of class A common stock.
(2) The share numbers for Safeguard XL Capital L.P. include 1,675,000 shares
that are owned by Safeguard 99 Capital L.P. and 8,083,334 shares that are
owned by Internet Capital Group, Inc. Safeguard XL Capital L.P. disclaims
beneficial ownership of the shares owned by Safeguard 99 Capital L.P. and
Internet Capital Group.
(3) The share numbers for Safeguard 99 Capital L.P. include 5,226,644 shares
that are owned by Safeguard XL Capital L.P. and 8,083,333 shares that are
owned by Internet Capital Group, Inc. Safeguard 99 Capital L.P. disclaims
beneficial ownership of the shares owned by Safeguard XL Capital L.P. and
Internet Capital Group, Inc. The share numbers for Safeguard 99 Capital
L.P. also include options to acquire 425,000 shares of our stock that are
currently owned by
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XL Vision. These options become exercisable when we complete an initial public
offering, subject to restrictions.
(4) The share numbers for XL Vision, Inc. include 625,000 shares that are
subject to an option to holders of its 6% convertible subordinated notes
and 75,000 shares that are subject to an option to certain XL Vision
employees. The options become exercisable when we complete an initial
public offering, subject to restrictions.
(5) XL Vision, Inc. is the sole general partner of XL Partners, L.P. Therefore,
the share numbers for XL Vision include 3,058,125 shares owned by XL
Partners, L.P.
(6) Safeguard Delaware, Inc. holds approximately a 91.6% general partnership
interest in Safeguard XL Capital L.P. and an 89.8% general partnership
interest in Safeguard 99 Capital L.P. Safeguard Delaware, Inc., a
wholly-owned subsidiary of Safeguard Scientifics, Inc., is the sole general
partner of Safeguard XL Capital L.P. and Safeguard 99 Capital L.P.
Safeguard Delaware, Inc. has sole authority and responsibility for all
investments, voting and disposition decisions regarding such shares. The
limited partnership interests are held by executives and employees of
Safeguard, subject to vesting. These numbers exclude any shares that may be
purchased by Safeguard Scientifics, Inc. that have not been purchased by
its shareholders in the Safeguard Subscription Program.
(7) We have a proxy to vote the 1,250,000 shares owned by the Biegert Trust
until the completion of the series D preferred stock and warrant purchase
by Internet Capital Group.
(8) Technology Leaders II Management L.P., a limited partnership, is the sole
general partner of Technology Leaders II L.P. and a co-general partner of
Technology Leaders II Offshore C.V. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are venture capital partnerships that
are required by their governing documents to make all investment, voting
and disposition actions in tandem. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are referred to as Technology Leaders
II. Technology Leaders II Management L.P. has sole authority and
responsibility for all investment, voting and disposition decisions for
Technology Leaders II. The general partner of Technology Leaders II
Management, L.P. is Technology Leaders Management, Inc., a wholly-owned
subsidiary of Safeguard. Robert E. Keith, Jr., Gary J. Anderson, M.D., Mark
J. DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive,
are the officers of Technology Leaders Management, Inc. Technology Leaders
II Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, which consists of nine voting
members including (i) Warren V. Musser, who is a designee of Technology
Leaders Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. DeNino, Dr.
Moller, individually, and (iii) one designee of each of four other
corporations (the TLA Corporations) and (as a non-voting member) Clayton S.
Rose. Technology Leaders Management, Inc. is the administrative manager of
Technology Leaders II, subject to the control and direction of the
executive committee of Technology Leaders II Management L.P. Mr. Keith is
Vice Chairman of Safeguard.
(9) Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are venture capital partnerships that are required by
their governing documents to make all investment, voting and disposition
actions in tandem. Technology Leaders MI Corp. is wholly-owned by
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are referred to collectively as Technology Leaders I.
Technology Leaders Management L.P. has sole responsibility for all
investment, voting and disposition decisions for Technology Leaders I. The
general partners of Technology Leaders Management L.P. are (i) Technology
Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii)
Technology Leaders Partners I, a partnership among Technology Leaders
Management, Inc. and the Managing Directors of Technology Leaders
Management, Inc., other than Mark J. DeNino, and four
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other corporations (the TLA Corporations) owned by individuals, one of whom
serves as a director of Safeguard, and three of whom are not currently
otherwise affiliated with Safeguard or eMerge Interactive. Technology
Leaders Management L.P. is managed by an executive committee, by whose
decisions the general partners have agreed to be bound, that consists of
seven voting members including (i) Warren V. Musser, Robert E. Keith, Jr.
and Gary J. Anderson, M.D., each of whom are designees of Technology
Leaders Management, Inc., and (ii) one designee of each of the TLA
Corporations. Clayton S. Rose is a non-voting member of that executive
committee. Technology Leaders Management, Inc. is the administrative
manager of Technology Leaders, subject to the control and direction of the
executive committee of Technology Leaders Management L.P. Mr. Musser is the
chairman and Mr. Keith is president and chief executive officer of
Technology Leaders Management, Inc. and Mr. Keith, Dr. Anderson, Mr. DeNino
and Christopher Moller, Ph.D., a director of eMerge Interactive, are the
managing directors of Technology Leaders Management, Inc. Mr. Keith and Dr.
Anderson are former officers of Safeguard and Mr. Keith is Vice Chairman of
Safeguard.
(10) Includes options to purchase the following shares of class A common stock:
- 337,500 shares by Mr. Abraham;
- 74,812 shares by Mr. Janney;
- 56,250 shares by Mr. Mathews;
- 78,125 shares by Mr. Slosman;
- 6,250 shares by Mr. Stanley; and
- 46,875 shares by Mr. Subramanian.
(11) Internet Capital Group and Safeguard are parties to a joint venture
agreement under which they have agreed to use best efforts to agree to vote
together on matters submitted to the stockholders for approval and for two
designees of Safeguard and two designees of Internet Capital Group in any
elections of directors. See footnotes (1), (2) and (3).
(12) John S. Scott, Ph.D. is Chief Executive Officer and Chairman of the Board
of XL Vision, and disclaims beneficial ownership of the 6,058,125 shares
held by XL Vision.
(13) Richard Stanley was President and a stockholder of STS Agriventures, Ltd.,
which was acquired by eMerge Interactive in July 1998. Mr. Stanley
currently serves as a consultant to eMerge Interactive. Mr. Stanley
disclaims beneficial ownership of 30,713 shares of our class A common stock
owned by his wife, Sylvia Doerksen.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
100,000,000 shares of common stock, $.008 par value per share, consisting of
92,711,110 shares of class A common stock and 7,288,890 shares of class B common
stock, and 15,000,000 shares of preferred stock, $.01 par value per share. All
outstanding shares of preferred stock will automatically convert into common
stock immediately prior to the closing of this offering as follows:
- Shares of series A, series B and series C preferred stock will convert
into shares of class A common stock; and
- Shares of series D preferred stock will convert into shares of class B
common stock.
COMMON STOCK
As of December 31, 1999, there were 25,232,902 shares of common stock
outstanding, assuming the conversion of the shares of preferred stock then
outstanding. After giving effect to the sale of the 6,500,000 shares of our
class A common stock in this offering and the sale of 500,000 shares of our
class A common stock in a private placement that will be completed concurrently
with this offering, there will be 32,232,902 shares of common stock outstanding.
Holders of class A common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Holders of
class B common stock are entitled to two and one-half votes for each share held
of record. The shares of class A and class B common stock are identical in all
other respects. The election of directors is determined by a plurality of the
votes cast and, except as otherwise required by law, all other matters are
determined by a majority of the votes cast. Our stockholders do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors. Holders of common stock are entitled to receive any dividends
declared by the board of directors out of funds legally available for that
purpose, subject to any preferential dividend rights of outstanding shares of
preferred stock. Upon the liquidation, dissolution or winding up of eMerge
Interactive, the holders of common stock are entitled to receive pro-rated
shares of our net assets after we have paid all debts and other liabilities.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of common
stock may be adversely affected by the rights of the holders of shares of any
class or series of preferred stock which we may designate and issue in the
future.
In the event of a sale or transfer of any shares of class B common stock to
a party that is not affiliated with the original purchaser, the shares will
automatically convert into class A common stock.
PREFERRED STOCK
Under our second amended and restated certificate of incorporation, our
board of directors, without further action by our stockholders, is authorized to
issue up to an aggregate of 15,000,000 shares of preferred stock in one or more
classes or series. Our board of directors may, without stockholder approval,
issue any class or series of preferred stock with dividend rights, dividend
rates, conversion rights, redemption rights, preferences on liquidation or
dissolution, voting rights and any other preferences, which could adversely
affect the voting power of the holders of common stock. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate
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purposes, could make it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock. Following this offering, after the conversion of all outstanding shares
of series A, series B and series C preferred stock into class A common stock,
and the conversion of all outstanding shares of series D preferred stock into
class B common stock, there will be no shares of preferred stock outstanding. We
have no plans to issue any additional shares of preferred stock.
REGISTRATION RIGHTS
Some holders of our class A common stock and all holders of preferred stock
have been granted registration rights. Under a registration rights agreement, as
amended, beginning six months after an initial public offering, the holders of
series A, series B, series C and series D preferred stock can, on two occasions,
demand that we register their shares, so long as the shares covered by each
registration have an aggregate market value of more than $5.0 million.
The holders of series A, series B, series C and series D preferred stock
are also entitled to piggyback registration rights, which may be reduced at the
discretion of an underwriter. Piggyback registration rights entitle stockholders
to include shares in a registered public offering initiated by us. We have
obtained a waiver of the piggyback registration rights from all of the holders
of series A, series B, series C and series D preferred stock in connection with
this offering, except from those participating as selling stockholders in this
offering.
In a stockholders' agreement, we granted the former stockholders of STS
Agriventures, Ltd. and the partners of NutriCharge piggyback registration rights
for their shares of our common stock. In a stockholders' and registration rights
agreement, we granted CIN, LLC (now Lost Pelican, LLC) piggyback registration
rights for its shares of our class A common stock. In a joinder and correction
to the stockholders' and registration rights agreement, we granted the former
stockholders of Cyberstockyard, Inc. piggyback registration rights for their
shares of our common stock. In a common stock purchase agreement, we granted
Turnkey Computer Systems, Inc. piggyback registration rights for its shares of
our class A common stock, except for in an initial public offering. We have
obtained waivers of the piggyback registration rights from these holders of
class A common stock, except from those participating as selling stockholders in
this offering.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our second amended and restated certificate of incorporation
and bylaws could make the acquisition of eMerge Interactive and the removal of
incumbent officers and directors more difficult. These provisions are expected
to discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of eMerge Interactive to negotiate
with us first.
Our board of directors has the authority to issue and to establish the
rights of substantial amounts of preferred stock without stockholder approval,
upon such terms and conditions, and having such rights, privileges and
preferences, as our board of directors may determine. This authority may be used
to create voting impediments, hinder changes in control or to dilute the stock
ownership of holders of common stock seeking to obtain control of eMerge
Interactive. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions, financings and other
corporate transactions, may have the effect of discouraging, delaying or
preventing a change in control.
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DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, or the anti-takeover law, which regulates corporate
acquisitions. The law generally prohibits business combinations between a
publicly held Delaware corporation and an interested stockholder.
- An interested stockholder is a person who, together with any affiliates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a corporation.
- A business combination includes mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation.
Section 203 prohibits any business combination that results in a financial
benefit to an interested stockholder for three years following the date the
person became an interested stockholder.
WARRANT
In November 1999, we issued a warrant to Internet Capital Group to purchase
up to 1,138,889 shares of class B common stock. The warrant is exercisable upon
the earlier of:
- The consummation of this offering;
- The closing date of a round of equity financing of at least $20.0
million; and
- The one year anniversary of the issue date of the warrant.
In the event that the warrant becomes exercisable as a result of this
offering or as a result of a private equity offering, the exercise price will be
equal to the offering price per share. If the warrant becomes exercisable as a
result of the one year anniversary of its issue, the exercise price will be
$9.00 per share. The warrant terminates on the third anniversary of its issue.
The warrant is transferable, but once transferred, it will be exercisable for
shares of class A common stock.
LIMITATION ON LIABILITY
Our second amended and restated certificate of incorporation and bylaws
contain provisions relating to the limitation of liability and indemnification
of directors and officers. Our amended and restated certificate of incorporation
specifies that none of our directors shall be personally liable to us or our
shareholders for monetary damages for a breach of fiduciary duty, except for
liability:
- For any breach of the duty of loyalty;
- For acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- For the payment of unlawful dividends and other actions prohibited by
Delaware General Corporation Law; and
- For any transaction resulting in receipt of an improper personal benefit
by the director.
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Our bylaws require us to indemnify our directors and officers, so long as
their actions are in good faith, are in the best interests of the corporation,
and are not unlawful. Our bylaws also permit us to purchase and maintain
insurance on behalf of our directors, officers and agents. We intend to obtain
directors' and officers' liability insurance to provide our directors and
officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park,
New Jersey 07660.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the concurrent private placement,
there will be 32,232,902 shares of our common stock outstanding based upon the
number of shares that were outstanding as of December 31, 1999. Immediately
after the offering, the 8,000,000 shares sold in this offering will be freely
tradeable and 24,232,902 shares will be eligible for resale subject to
compliance with Rule 144 or Rule 701, as the case may be. Of these shares,
23,131,956 shares are subject to 180-day lock-up agreements with the
underwriters.
RULE 144
In general, shares held by persons deemed not to have been affiliates of
ours at any time during the 90 days preceding a sale and who have beneficially
owned the shares for at least two years can be sold under Rule 144(k) without
regard to the volume limitations, manner of sale provisions or other limitations
of Rule 144. As of the date of this prospectus, immediately after consummation
of the offering, 11,312,423 shares will be eligible for resale in the public
market without restriction under Rule 144(k) if they are not held by our
affiliates.
In addition, under Rule 144, a person who has beneficially owned shares for
at least one year, including an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- one percent of the then outstanding shares of our common stock
(approximately 322,000 shares immediately following the offering); and
- the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale.
As of the date of this prospectus, immediately after consummation of the
offering, 5,603,125 shares not eligible for resale under Rule 144(k) will be
eligible for resale in the public market subject to the volume, manner of sale
and other limitations of Rule 144.
RULE 701
We have granted options and issued underlying shares of common stock to our
employees through our equity compensation plans. Under Rule 701, non-affiliates
who purchased shares upon the exercise of options granted under the plans prior
to this offering are entitled to sell their shares 90 days after the date of
this prospectus without having to comply with the holding period, volume
limitations or other restrictions of Rule 144. Rule 701 also permits shares
subject to unexercised options granted under our plans to be sold upon exercise
without having to comply with the provisions of Rule 144. Upon consummation of
this offering, 225,822 shares of common stock will be eligible for resale under
Rule 701.
LOCK-UP AGREEMENTS
In addition to the restrictions imposed by Rule 144 and Rule 701 as
described above, the holders of common stock and options who collectively
account for 23,131,956 shares of our common stock and options to purchase
1,906,250 shares of our common stock, including all of our officers and
directors, have agreed, pursuant to lock-up agreements, that they will not
offer, sell, contract to sell, or otherwise dispose of, directly or indirectly,
any shares of common stock or securities convertible or exchangeable for common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Adams, Harkness & Hill, Inc.
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STOCK OPTIONS
As of December 31, 1999, there were outstanding options to purchase an
aggregate of 2,769,116 shares of our common stock, at a weighted average
exercise price of $2.93 per share, of which 761,045 were exercisable at a
weighted average of $1.68 per share. The holders of options to purchase a total
of 562,310 shares exercisable upon the offering have executed lock-up agreements
and agreed to restrict their ability to sell or otherwise dispose of common
stock acquired upon the exercise of options for 180 days after the date of this
prospectus without the prior consent of Adams, Harkness & Hill, Inc.
As of December 31, 1999, we had an additional 1,597,875 shares of common
stock available for future grant under the 1996 and 1999 equity compensation
plans. Prior to the expiration of the lock-up agreements, we intend to file a
registration statement on Form S-8 to register the shares of common stock that
may be issued pursuant to the options granted under the plans. Therefore, the
shares of common stock that are acquired and offered thereafter pursuant to that
registration statement may be resold in the public market without restriction or
limitation, except in the case of our affiliates, who may only resell such
shares in accordance with the provisions of Rule 144.
WARRANT
On November 16, 1999, we issued a warrant to Internet Capital Group to
purchase up to 1,138,889 shares of class B common stock upon completion of the
series D preferred stock purchase. This warrant is exercisable upon closing of
this offering and will expire on the third anniversary of its issuance. Internet
Capital Group has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any of its shares, the warrant, or the
shares acquired as a result of exercising the warrant, for 180 days after the
date of this prospectus, other than through a bona fide pledge of these
securities to its creditors.
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PLAN OF DISTRIBUTION
Of the 8,000,000 shares offered by this prospectus, 4,500,000 shares are
being offered by means of an underwritten public offering and 3,500,000 shares
are being offered by means of the Safeguard Subscription Program to shareholders
of Safeguard Scientifics, Inc., one of our principal stockholders.
UNDERWRITTEN PUBLIC OFFERING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each underwriter named
below, for whom Adams, Harkness & Hill, Inc., First Union Securities, Inc. and
FAC/Equities, a division of First Albany Corporation are acting as
representatives, has agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CLASS A
UNDERWRITERS COMMON STOCK
- ------------ -----------------
<S> <C>
Adams, Harkness & Hill, Inc. .............................. 1,400,000
First Union Securities, Inc. .............................. 1,400,000
FAC/Equities, a division of First Albany Corporation....... 700,000
Banc of America Securities LLC............................. 100,000
Hambrecht & Quist LLC ..................................... 100,000
Deutsche Bank Securities Inc. ............................. 100,000
Lehman Brothers Inc. ...................................... 100,000
J.P. Morgan Securities Inc. ............................... 100,000
Prudential Securities Incorporated......................... 100,000
Thomas Weisel Partners LLC ................................ 100,000
First Montauk Securities Corp. ............................ 50,000
Janney Montgomery Scott LLC................................ 50,000
Legg Mason Wood Walker, Inc. .............................. 50,000
Parker/Hunter Incorporated................................. 50,000
Pennsylvania Merchant Group................................ 50,000
Wedbush Morgan Securities.................................. 50,000
----------
Total................................................. 4,500,000
==========
</TABLE>
Of the 4,500,000 shares to be purchased by the underwriters, 3,694,000
shares will be purchased from us and 806,000 shares will be purchased from the
selling stockholders. Of the 3,500,000 shares to be offered by means of the
Safeguard Subscription Program, 2,806,000 shares will be sold by us and 694,000
shares will be sold by Safeguard.
The underwriting agreement provides that the underwriters' obligation to
purchase shares of class A common stock depends on the satisfaction of the
conditions contained in the underwriting agreement and that, if any of the
shares of class A common stock are purchased by the underwriters under the
underwriting agreement, all of the shares of class A common stock that the
underwriters have agreed to purchase under the underwriting agreement must be
purchased. The conditions contained in the underwriting agreement include the
requirement that the representations and warranties made by us to the
underwriters are true, that all of the shares offered in the Safeguard
Subscription Program
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have been purchased, that there is no material change in the financial markets
and that we deliver to the underwriters customary closing documents.
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of class A common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to dealers, who may include the underwriters, at the public
offering price less a selling concession not in excess of $0.63 per share. The
underwriters may also allow, and dealers may reallow, a concession not in excess
of $0.10 per share to brokers and dealers. After the offering, the underwriters
may change the offering price and other selling terms.
Adams, Harkness & Hill, Inc., First Union Securities, Inc. and FAC/Equities
have informed us that they do not intend to confirm sales of shares of common
stock offered by this prospectus to any accounts over which they exercise
discretionary authority. In addition, the other underwriters have informed us
that they do not intend to confirm sales to discretionary accounts that exceed
5% of the total number of shares of common stock offered by them.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us and the selling stockholders. This information is
presented assuming both no exercise and full exercise by the underwriters of
their overallotment option.
<TABLE>
<CAPTION>
TOTAL
--------------------------
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ----------- -----------
<S> <C> <C> <C>
Public offering price........................ $15.00 $67,500,000 $77,625,000
Underwriting discount........................ $ 1.05 $ 4,725,000 $ 5,433,750
Proceeds before expenses to eMerge
Interactive................................ $13.95 $51,531,300 $60,947,550
Proceeds before expenses to the selling
stockholders............................... $13.95 $11,243,700 $11,243,700
</TABLE>
The total proceeds before expenses to be received by us from both the
underwritten public offering and the Safeguard Subscription Program will be
approximately $92.4 million, assuming no exercise of the over-allotment option.
The expenses of the underwritten offering, exclusive of the underwriting
discount, are estimated at $928,000 and are payable by us. The following table
details these expenses. All amounts shown are estimates, with the exception of
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee......................... $ 21,473
NASD filing fee.............................. 7,601
Nasdaq filing fee............................ 53,400
Printing and engraving expenses.............. 281,300
Legal fees and expenses...................... 253,100
Accounting fees and expenses................. 253,100
Blue Sky fees and expenses (including legal
fees)...................................... 5,600
Transfer agent and registrar fees and
expenses................................... 8,400
Miscellaneous................................ 44,026
----------
Total................................... $ 928,000
==========
</TABLE>
The total expenses for the offering, including the expenses associated with
the Safeguard Subscription Program, are estimated at $1.7 million.
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We have granted to the underwriters an option to purchase up to 675,000
additional shares of class A common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of class A common stock
proportionate to the underwriters' initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of class A common stock to the underwriters.
We have agreed that, without the prior consent of Adams, Harkness & Hill,
Inc., we will not directly or indirectly, offer, sell or otherwise dispose of
any shares of common stock or any securities which may be converted into or
exchanged for any such shares of common stock for a period of 180 days from the
date of this prospectus. All of our executive officers and directors, Safeguard,
XL Vision, Technology Leaders and Internet Capital Group, have agreed under
lock-up agreements that, without the prior written consent of Adams, Harkness &
Hill, Inc., they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of common stock or any securities that may be converted
into or exchanged for any such share for the period ending 180 days after the
date of this prospectus. All other stockholders who beneficially own over 30,000
shares of common stock, including all of the key employees named in this
prospectus, have agreed under lock-up agreements that, without the prior consent
of Adams, Harkness & Hill, Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities that
may be converted into or exchanged for any such share for the period ending 180
days after the date of this prospectus. These restrictions will also apply to
any shares that Safeguard purchases under the Safeguard Subscription Program.
See the section entitled Shares Eligible for Future Sale.
Prior to the offering, there has been no public market for the shares of
class A common stock. The initial public offering price and the underwriters'
compensation was negotiated between the representatives and us. In determining
the initial public offering price of the common stock, we and the
representatives considered, in addition to prevailing market conditions, our
historical performance and capital structure, estimates of our business
potential and earning prospects, an overall assessment of our management and the
consideration of the above factors in relation to the market valuation of
companies in related businesses.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EMRG."
We will indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create a
short position, then the representatives
76
<PAGE> 77
may reduce that short position by purchasing common stock in the open market.
The representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, the representatives may reclaim the
amount of the selling concession from the underwriters and selling group members
who sold those shares as part of the offering. In addition, the representatives
reserve the right to reclaim selling concessions from underwriters and selling
group members if the representatives receive a report that clients of the
underwriters and selling group members have sold the stock they purchased in
this offering, generally within 30 days following this offering. The
representatives reserve this right even if the representatives do not purchase
shares in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it might discourage resales of the security by purchasers in an
offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase (outside of the United States), in addition to the
offering price listed on the cover of this prospectus.
At our request, the underwriters have reserved 500,000 shares of our common
stock for sale to IncuVest, LLC. This investor has not committed to purchase
these shares. In addition, the underwriters have reserved up to 365,000 shares
of the common stock offered by this prospectus for sale to our officers,
directors, employees and their family members and to our business associates at
the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering 2,806,000 shares of our class A
common stock in the Safeguard Subscription Program to shareholders of Safeguard,
one of our principal stockholders, and Safeguard is offering 694,000 shares to
its shareholders. Safeguard's shareholders may subscribe for one share of class
A common stock for every ten shares of Safeguard common stock held by them, and
may not transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least 100 shares of
Safeguard common stock as of October 20, 1999 are eligible to purchase shares
from us under the program. Shareholders who own less than 100 shares of
Safeguard common stock will be ineligible to participate in the Safeguard
Subscription Program.
Under a standby stock purchase agreement, which is filed as an exhibit to
this registration statement relating to this prospectus, Safeguard will purchase
from us any of the shares offered by us under the program that are not purchased
by the shareholders of Safeguard. Distribution of share certificates purchased
through the Safeguard Subscription Program will be made to the purchasers as
soon as practicable following closing of the sale of the shares to the public.
It is expected that sales under the Safeguard Subscription
77
<PAGE> 78
Program will be reflected in purchasers' book-entry accounts at the Depository
Trust Company, if any, upon the closing of these sales. After the closing of
these sales, we will mail stock certificates to all purchasers who do not
maintain book-entry accounts at the Depository Trust Company. Prior to this
offering, Safeguard owned 25.7% of our common stock. After this offering,
Safeguard will own approximately 17.9% of our common stock, assuming that all
3,500,000 shares are purchased by shareholders of Safeguard, and will own
approximately 28.8% of our common stock assuming that none of the 3,500,000
shares are purchased by the shareholders of Safeguard. The purchase price under
the program, whether paid by Safeguard or its shareholders, will be the same
price per share as set forth on the cover page of this prospectus. All shares
will be sold either to Safeguard or to shareholders of Safeguard. The
underwriters, as a group, will receive a 2.8% management fee on all shares
offered through the Safeguard Subscription Program, including any shares
actually purchased by Safeguard. The management fee represents compensation for
the underwriters' role as it relates to due diligence, participation in the
drafting of this prospectus, and general coordination of the overall offering.
Safeguard will not receive any compensation from eMerge Interactive or any other
person, with respect to this offering, including any underwriting discounts or
commissions.
The following table shows the per share and total offering price,
management fee to be paid by us to the underwriters and the proceeds before
expenses to us.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price.............................. $15.00 $52,500,000
Management fee..................................... $ 0.42 $ 1,470,000
Proceeds before expenses to eMerge Interactive..... $14.58 $40,911,480
Proceeds before expenses to Safeguard.............. $14.58 $10,118,520
</TABLE>
The total proceeds before expenses to be received by eMerge Interactive
from both the underwritten public offering and the Safeguard Subscription
Program will be approximately $92.4 million, assuming no exercise of the
over-allotment option.
The expenses of the Safeguard Subscription Program, exclusive of the
management fee to be paid to the underwriters, are estimated at $722,000 and are
payable by us. The following table details these expenses. All amounts shown are
estimates, with the exception of the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,702
NASD filing fee............................................. 5,912
Nasdaq filing fee........................................... 41,600
Printing and engraving expenses............................. 218,700
Legal fees and expenses..................................... 196,900
Accounting fees and expenses................................ 196,900
Blue Sky fees and expenses (including legal fees)........... 4,400
Transfer agent and registrar fee and expenses............... 6,600
Miscellaneous............................................... 34,286
--------
Total....................................................... $722,000
========
</TABLE>
The total expenses for the offering, including the expenses associated with
the underwritten public offering, are estimated at approximately $1.7 million.
Safeguard is an underwriter with respect to the shares included in the
Safeguard Subscription Program. Safeguard is not an underwriter with respect to
the other shares
78
<PAGE> 79
offered by this prospectus. Safeguard is not included in the term "underwriter"
as used in this prospectus. Safeguard's sole condition to purchase any shares
that are not purchased by its shareholders in the Safeguard Subscription Program
is that the conditions to the underwriter's obligations have been met. This
means that Safeguard will be required to purchase these shares if, and only if,
the underwriters are obligated to purchase shares. Safeguard has not
participated in any discussions or negotiations with the Company and the
underwriters regarding the initial public offering price. Safeguard will not
have any right to seek indemnification from eMerge Interactive regarding its
agreement to accept underwriter liability with respect to the shares included in
the Safeguard Subscription Program.
LEGAL MATTERS
An opinion as to the validity of the shares of class A common stock offered
hereby will be provided to us by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and September 30,
1999 and for each of the years in the three-year period ended December 31, 1998
and the nine months ended September 30, 1999 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Lost Pelican, L.L.C. (d/b/a Cattlemen's
Information Network) as of December 31, 1997 and 1998 and for each of the years
in the two-year period ended December 31, 1998 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of QDD Investment Company, L.L.C. (d/b/a
Professional Cattle Consultants, L.L.C.) as of December 31, 1998 and for the
year then ended have been included in this Prospectus and the Registration
Statement in reliance upon the report of KPMG LLP, independent certified public
accountants and upon the authority of said firm as experts in accounting and
auditing.
79
<PAGE> 80
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to eMerge
Interactive and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto. You may read and copy any
document we file at the SEC's public reference rooms located at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices in Chicago,
Illinois and New York, New York. Copies of these materials can be obtained from
the SEC at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov. Upon completion of
this offering, we will become subject to the information and periodic reporting
requirements of the Securities Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference rooms, and the Web site of
the SEC referred to above.
80
<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
eMerge INTERACTIVE, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, September 30, 1999 and pro forma September 30, 1999
(unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 (unaudited) and September 30, 1999..... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended
September 30, 1999........................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998, and the nine months
ended September 30, 1998 (unaudited) and September 30,
1999...................................................... F-7
Notes to Consolidated Financial Statements.................. F-9
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998........... F-25
Unaudited Pro Forma Condensed Combined Statement of
Operations for the nine months ended September 30, 1999... F-26
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-27
LOST PELICAN, L.L.C. (FORMERLY CIN, LLC) D/B/A CATTLEMEN'S
INFORMATION NETWORK
Independent Auditors' Report................................ F-29
Balance Sheets as of December 31, 1997 and 1998 and February
23, 1999.................................................. F-30
Statements of Operations for the years ended December 31,
1997 and 1998, the nine months ended September 30, 1998
(unaudited), and for the period January 1, 1999 through
February 23, 1999 (unaudited)............................. F-31
Statements of Members' Equity (Deficit) for the years ended
December 31, 1997 and 1998 and for the period January 1,
1999 through February 23, 1999 (unaudited)................ F-32
Statements of Cash Flows for the years ended December 31,
1997 and 1998, the nine months ended September 30, 1998
(unaudited), and for the period January 1, 1999 through
February 23, 1999 (unaudited)............................. F-33
Notes to Financial Statements............................... F-34
QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE
CONSULTANTS, L.L.C.
Independent Auditors' Report................................ F-38
Balance Sheets as of December 31, 1998 and May 19, 1999
(unaudited)............................................... F-39
Statements of Operations for the year ended December 31,
1998, the nine months ended September 30, 1998 (unaudited)
and for the period January 1, 1999 through May 19, 1999
(unaudited)............................................... F-40
Statements of Members' Equity for the year ended December
31, 1998 and for the period January 1, 1999 through May
19, 1999 (unaudited)...................................... F-41
Statements of Cash Flows for the year ended December 31,
1998, the nine months ended September 30, 1998 (unaudited)
and for the period January 1, 1999 through May 19, 1999
(unaudited)............................................... F-42
Notes to Financial Statements............................... F-43
</TABLE>
F-1
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
eMerge Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of eMerge
Interactive, Inc. as of December 31, 1997 and 1998 and September 30, 1999 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998, and for the nine months ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of eMerge
Interactive, Inc. at December 31, 1997 and 1998 and September 30, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, and for the nine months ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
December 6, 1999
F-2
<PAGE> 83
eMERGE INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PROFORMA
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 1(B))
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 400 $ 268 $ 1,650,134 $ 1,650,134
Trade accounts receivable................................. -- 368,421 2,790,427 2,790,427
Inventories (note 3)...................................... 635,963 706,557 655,129 655,129
Cattle deposits........................................... -- -- 489,760 489,760
Prepaid expenses.......................................... 33,642 27,837 103,242 103,242
Net assets of discontinued operations (note 12)........... 1,066,804 2,285,341 390,336 390,336
----------- ------------ ------------ ------------
Total current assets................................ 1,736,809 3,388,424 6,079,028 6,079,028
Property and equipment, net (note 4)........................ 428,140 513,837 1,711,404 1,711,404
Capitalized offering costs.................................. -- -- 341,967 341,967
Investment in Turnkey Computer Systems, Inc. (note 5)....... -- -- 1,822,833 1,822,833
Intangibles, net (note 6)................................... -- 2,699,828 6,273,309 6,273,309
----------- ------------ ------------ ------------
Total assets........................................ $ 2,164,949 $ 6,602,089 $ 16,228,541 $ 16,228,541
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of capital lease obligation with
related party (note 10)................................. $ -- $ 79,852 $ 83,917 $ 83,917
Note payable (note 5)..................................... -- -- 500,000 500,000
Accounts payable.......................................... 725,369 423,946 1,633,132 1,633,132
Accrued liabilities: --
Salaries and benefits................................... 175,597 283,103 908,271 908,271
Other................................................... 98,704 319,989 1,435,987 1,435,987
Advanced payments from customers.......................... -- -- 619,270 619,270
Due to related parties (note 10).......................... 8,040,304 5,187,334 13,405,957 13,405,957
----------- ------------ ------------ ------------
Total current liabilities........................... 9,039,974 6,294,224 18,586,534 18,586,534
Capital lease obligation with related party, excluding
current installments (note 10)............................ -- 305,018 242,673 242,673
Note payable (note 5)....................................... -- -- 900,000 900,000
----------- ------------ ------------ ------------
Total liabilities................................... 9,039,974 6,599,242 19,729,207 19,729,207
----------- ------------ ------------ ------------
Commitments and contingencies (notes 6, 10 and 13)
Redeemable Class A common stock, issued and outstanding. No
shares issued and outstanding in 1997 and 1998, 62,500
shares issued and outstanding in 1999. No shares issued
and outstanding pro forma (note 5)........................ -- -- 406,000 --
----------- ------------ ------------ ------------
Stockholders' equity (deficit) (notes 7, 9 and 14):
Preferred stock, $.01 par value, authorized 15,000,000
shares:
Series A preferred stock, (aggregate involuntary
liquidation preference of $6,741,954 in 1997,
$7,386,314 in 1998 and $7,545,198 in 1999), designated
6,500,000 shares, issued and outstanding 6,443,606
shares in 1997, 1998 and 1999. No shares designated,
issued and outstanding pro forma...................... 64,436 64,436 64,436 --
Series B junior preferred stock, (aggregate involuntary
liquidation preference of $-0- in 1997, $4,801,315 in
1998 and $4,919,671 in 1999), designated 2,400,000
shares, issued and outstanding -0- shares in 1997,
2,400,000 shares in 1998 and 1999. No shares
designated, issued and outstanding pro forma.......... -- 24,000 24,000 --
Series C preferred stock, designated 1,300,000 shares,
issued and outstanding -0- shares in 1997 and 1998 and
1,100,000 shares in 1999. No shares designated, issued
and outstanding pro forma............................. -- -- 11,000 --
Series D preferred stock, designated 4,555,556 shares,
no shares issued and outstanding in 1997, 1998 and
1999. No shares designated, issued and outstanding pro
forma................................................. -- -- -- --
Common stock, $.008 par value, authorized 100,000,000
shares:
Class A common stock, designated 92,711,110 shares,
issued and outstanding 3,258,125 shares in 1997,
5,845,625 shares in 1998 and 6,957,694 shares in 1999
and 19,449,702 shares pro forma....................... 26,065 46,765 55,662 155,723
Class B common stock, designated 7,288,890 shares; no
shares issued and outstanding in 1997, 1998, 1999 or
pro forma............................................. -- -- -- --
Additional paid-in capital................................ 1,982,986 16,648,286 23,454,170 23,859,545
Accumulated deficit....................................... (8,948,512) (16,780,640) (27,452,825) (27,452,825)
Unearned compensation..................................... -- -- (63,109) (63,109)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)................ (6,875,025) 2,847 (3,906,666) (3,500,666)
----------- ------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)......................................... $ 2,164,949 $ 6,602,089 $ 16,228,541 $ 16,228,541
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 84
eMERGE INTERACTIVE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ -- $ -- $ 1,792,471 $ 1,106,452 $ 18,338,645
Cost of revenue (including $0, $0,
$511,000, $388,000 and $255,000 to
related parties -- note 10).............. -- -- 2,623,447 1,628,757 18,282,330
----------- ----------- ----------- ----------- ------------
Gross profit (loss)................. -- -- (830,976) (522,305) 56,315
----------- ----------- ----------- ----------- ------------
Operating expenses:
Selling, general and administrative
(including $0, $219,000, $627,000,
$507,000, and $600,000 to related
parties -- note 10)................. -- 627,606 3,659,810 2,427,944 7,539,689
Research and development (including $0,
$51,000, $119,000, $95,000 and
$171,000 to related parties -- note
10)................................. -- 727,753 1,109,382 759,434 2,756,262
----------- ----------- ----------- ----------- ------------
Total operating expenses............ -- 1,355,359 4,769,192 3,187,378 10,295,951
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations........................ -- (1,355,359) (5,600,168) (3,709,683) (10,239,636)
Related party interest expense (note
10).................................... -- (141,167) (331,594) (231,000) (458,624)
Other income............................. -- -- -- -- 15,655
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations before income taxes.... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Income tax expense (benefit) (note 8).... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations........................ -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Discontinued operations (note 12):
Income (loss) from operations of
discontinued transportation segment
(including $468,000, $814,000,
$370,000, $287,000, and $171,000 to
related parties -- note 10)......... (1,719,492) (3,987,097) (1,808,951) (1,721,060) 10,420
Loss on disposal of transportation
segment............................. -- -- (91,415) -- --
----------- ----------- ----------- ----------- ------------
Net profit (loss)................... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
=========== =========== =========== =========== ============
Profit (loss) from continuing operations
per common share -- basic and
diluted................................ $ -- $ (3.91) $ (1.36) $ (0.67) $ (1.59)
=========== =========== =========== =========== ============
Net profit (loss) per common
share -- basic and diluted............. $ (9.24) $ (14.34) $ (1.80) $ (0.97) $ (1.59)
=========== =========== =========== =========== ============
Weighted average number of common shares
outstanding -- basic and diluted....... 186,096 382,273 4,356,926 5,845,625 6,709,854
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 85
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C SERIES D
------------------- ------------------- ------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... -- $ -- -- $ -- -- $ -- -- $ --
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share............... -- -- -- -- -- -- -- --
Issuance of common stock for
cash at $.008 per share...... -- -- -- -- -- -- -- --
Exercise of stock options for
cash at $.008 per share...... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1996......................... -- -- -- -- -- -- -- --
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share.............. -- -- -- -- -- -- -- --
Sale of Series A preferred
stock for cash at $1.00 per
share (note 7)............... 6,443,606 64,436 -- -- -- -- -- --
Transfer of technology by XL
Vision, Inc. (note 10)....... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1997......................... 6,443,606 64,436 -- -- -- -- -- --
Contribution of debt to equity
by XL Vision, Inc. (note
10).......................... -- -- -- -- -- -- -- --
Issuance of Series B preferred
stock in exchange for
contribution of debt to
equity by XL Vision, Inc. at
$2.00 per share (notes 7 and
10).......................... -- -- 2,400,000 24,000 -- -- -- --
Issuance of common stock in
connection with Nutri-Charge
transaction at $0.80 per
share (note 6)............... -- -- -- -- -- -- -- --
Contribution of put rights by
XL Vision, Inc. (note 6)..... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1998......................... 6,443,606 64,436 2,400,000 24,000 -- -- -- --
Exercise of stock options for
cash at $0.80 per share...... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with CIN
transaction at $0.96 per
share (note 6)............... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with
Cyberstockyard transaction at
$1.80 per share (note 6)..... -- -- -- -- -- -- -- --
Issuance of Series C preferred
stock at $5.00 per share
(note 7)..................... -- -- -- -- 1,100,000 11,000 -- --
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
------------------- --------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- ------ ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 1,250 $ 10 -- $ -- $ 3,816 $(1,745,397) $ -- $(1,741,571)
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share............... 248,750 1,990 -- -- -- -- -- 1,990
Issuance of common stock for
cash at $.008 per share...... 175,000 1,400 -- -- -- -- -- 1,400
Exercise of stock options for
cash at $.008 per share...... 25,000 200 -- -- -- -- -- 200
Net profit (loss)............. -- -- -- -- -- (1,719,492) -- (1,719,492)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1996......................... 450,000 3,600 -- -- 3,816 (3,464,889) -- (3,457,473)
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share.............. 2,808,125 22,465 -- -- -- -- -- 22,465
Sale of Series A preferred
stock for cash at $1.00 per
share (note 7)............... -- -- -- -- 6,379,170 -- -- 6,443,606
Transfer of technology by XL
Vision, Inc. (note 10)....... -- -- -- -- (4,400,000) -- -- (4,400,000)
Net profit (loss)............. -- -- -- -- -- (5,483,623) -- (5,483,623)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1997......................... 3,258,125 26,065 -- -- 1,982,986 (8,948,512) -- (6,875,025)
Contribution of debt to equity
by XL Vision, Inc. (note
10).......................... -- -- -- -- 7,500,000 -- -- 7,500,000
Issuance of Series B preferred
stock in exchange for
contribution of debt to
equity by XL Vision, Inc. at
$2.00 per share (notes 7 and
10).......................... -- -- -- -- 4,776,000 -- -- 4,800,000
Issuance of common stock in
connection with Nutri-Charge
transaction at $0.80 per
share (note 6)............... 2,587,500 20,700 -- -- 2,049,300 -- -- 2,070,000
Contribution of put rights by
XL Vision, Inc. (note 6)..... -- -- -- -- 340,000 -- -- 340,000
Net profit (loss)............. -- -- -- -- -- (7,832,128) -- (7,832,128)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1998......................... 5,845,625 46,765 -- -- 16,648,286 (16,780,640) -- 2,847
Exercise of stock options for
cash at $0.80 per share...... 112,069 897 -- -- 88,758 -- -- 89,655
Issuance of common stock in
connection with CIN
transaction at $0.96 per
share (note 6)............... 750,000 6,000 -- -- 714,000 -- -- 720,000
Issuance of common stock in
connection with
Cyberstockyard transaction at
$1.80 per share (note 6)..... 250,000 2,000 -- -- 448,000 -- -- 450,000
Issuance of Series C preferred
stock at $5.00 per share
(note 7)..................... -- -- -- -- 5,489,000 -- -- 5,500,000
</TABLE>
F-5
<PAGE> 86
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C SERIES D
------------------- ------------------- ------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accretion to redemption value
of Class A common stock issued
in connection with the Turnkey
Computer Systems, Inc. (note
5)............................ -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
Unearned compensation
(note 9)..................... -- -- -- -- -- -- -- --
Amortization of unearned
compensation (note 9)........ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at
September 30, 1999........... 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 -- $ --
========= ======= ========= ======= ========= ======= ====== =======
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
------------------- --------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- ------ ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accretion to redemption value
of Class A common stock issued
in connection with the Turnkey
Computer Systems, Inc. (note
5)............................ -- -- -- -- (6,000) -- -- (6,000)
Net profit (loss)............. -- -- -- -- -- (10,672,185) -- (10,672,185)
Unearned compensation
(note 9)..................... -- -- -- -- 72,126 -- (72,126) --
Amortization of unearned
compensation (note 9)........ -- -- -- -- -- -- 9,017 9,017
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at
September 30, 1999........... 6,957,694 $55,662 -- $ -- $23,454,170 $(27,452,825) $(63,109) $(3,906,666)
========= ======= ==== ==== =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 87
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net profit (loss).................... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
Adjustments to reconcile net profit
(loss) to net cash used in
operating activities:
Depreciation and amortization.... 1,503 122,486 438,576 230,964 1,176,431
Amortization of unearned
compensation................... -- -- -- -- 9,017
Changes in operating assets and
liabilities:
Trade accounts receivable,
net......................... -- -- (368,421) (138,705) (2,405,456)
Inventories.................... -- (635,963) (70,594) (30,741) 51,428
Cattle deposits................ -- -- -- -- (489,760)
Prepaid expenses and other
assets...................... (1,304) (32,338) 5,805 (77,079) (75,405)
Net assets of discontinued
operations.................. (96,209) (853,501) (1,140,425) (1,477,150) --
Accounts payable............... 5,675 719,694 (301,423) (32,037) 1,038,877
Accrued liabilities............ 75,542 198,759 328,791 151,016 214,739
Advanced payments from
customers................... -- -- -- -- 619,270
----------- ----------- ----------- ----------- ------------
Net cash used by operating
activities.................. (1,734,285) (5,964,486) (8,939,819) (7,035,475) (10,533,044)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Business combinations, net of cash
acquired of $737................. -- -- -- -- (1,799,263)
Purchases of property and
equipment........................ (56,861) (506,540) (460,290) (269,831) (1,228,432)
Purchase of intangibles............ (100,000) -- (431,923) (431,923) --
Proceeds from discontinued
operations....................... -- -- -- -- 1,825,407
Investment in Turnkey Computer
Systems, Inc..................... -- -- -- -- (22,833)
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities.................. (156,861) (506,540) (892,213) (701,754) (1,225,121)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Net borrowings from related
parties.......................... 1,889,101 3,810 9,447,030 7,737,227 8,218,623
Proceeds from capital lease
financing with related party..... -- -- 440,832 -- --
Payments on capital lease
obligations...................... -- -- (55,962) -- (58,280)
Offering costs..................... -- -- -- -- (341,967)
Sale of preferred stock............ -- 6,443,606 -- -- 5,500,000
Sale of common stock............... 3,590 22,465 -- -- 89,655
----------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities.................. 1,892,691 6,469,881 9,831,900 7,737,227 13,408,031
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in
cash........................ 1,545 (1,145) (132) (2) 1,649,866
Cash -- beginning of period.......... -- 1,545 400 400 268
----------- ----------- ----------- ----------- ------------
Cash -- end of period................ $ 1,545 $ 400 $ 268 $ 398 $ 1,650,134
=========== =========== =========== =========== ============
</TABLE>
F-7
<PAGE> 88
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest............. $ -- $ -- $ 23,594 $ 13,517 $ 20,628
Non-cash investing and financing
activities:
Transfer of technology by XL
Vision, Inc. (note 10)......... -- 4,400,000 -- -- --
Contribution of debt to equity by
XL Vision, Inc. (note 10)...... -- -- 7,500,000 -- --
Issuance of preferred stock in
exchange for contribution of
debt to equity by XL Vision,
Inc. (note 10)................. -- -- 4,800,000 -- --
Non-cash issuance of Class A
common stock in connection with
Nutri-Charge transaction (note
6)............................. -- -- 2,070,000 2,070,000 --
Contribution of put rights by XL
Vision, Inc. (note 6).......... -- -- 340,000 340,000 --
Issuance of Class A common stock
in connection with CIN
transaction (note 6)........... -- -- -- -- 720,000
Issuance of Class A common stock
with Cyberstockyard transaction
(note 6)....................... -- -- -- -- 450,000
Issuance of redeemable Class A
common stock with Turnkey
Computer Systems, Inc.
transaction (note 5)........... -- -- -- -- 400,000
Issuance of note payable to
Turnkey Computer Systems, Inc.
(note 5)....................... -- -- -- -- 1,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 89
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO SEPTEMBER 30, 1998 OR THE NINE MONTHS
ENDED
SEPTEMBER 30, 1998 IS UNAUDITED)
(1) ORGANIZATION
(a) OVERVIEW
eMerge Interactive, Inc. (the "Company") is a Delaware corporation that was
incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly owned
subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was changed to
eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge Interactive, Inc. on
June 11, 1999.
The Company was incorporated to develop and commercialize infrared
technology focused on the transportation segment. In 1997, the Company entered a
new business segment, animal sciences, by developing an infrared camera system
for use primarily by veterinarians. The Company further expanded its operations
in 1998 by licensing NutriCharge and infrared technology (see note 5) for
commercialization. In December 1998, the Company's Board of Directors decided to
dispose of the transportation segment. The Company's AMIRIS thermal imaging
system, which was the sole product sold by the transportation segment, was sold
on January 15, 1999.
(b) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of eMerge
Interactive, Inc. and its wholly-owned subsidiaries, STS Agriventures, Ltd.
("STS"), a Canadian corporation and Cyberstockyard, Inc. ("Cyberstockyard").
All significant intercompany balances and transactions have been eliminated
upon consolidation.
The pro forma balance sheet as of September 30, 1999 assumes the conversion
of all preferred stock to Class A common stock upon the Company's planned
initial public offering ("IPO").
(c) MANAGEMENT'S PLANS
As of September 30, 1999, the Company had a working capital deficiency of
$12,507,506 and stockholders' deficit of $3,906,666. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts for its products. Subsequent to September 30, 1999, the
Company obtained equity financing (see note 14). The Company also plans an IPO.
Although management believes that its IPO will be successful, there can be no
assurances that it will be completed.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
The Company recognizes revenue in accordance with the terms of the sale or
contract, generally as products are shipped or services are provided. The
Company bears both the inventory and credit risk with respect to sales of all of
its products. In cattle sales transactions, the Company purchases cattle from
the seller, takes title at shipment and records the cattle as inventory until
delivered to and accepted by the buyer, typically a 24 to
F-9
<PAGE> 90
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
48 hour period. In both cattle auction and resale transactions, the Company acts
as a principal in purchasing cattle from suppliers and sales to customers so
that the Company recognizes revenue equal to the amount paid by customers for
the cattle.
(b) INVENTORIES
Inventories are stated at standard cost which approximates the lower of
first-in, first-out cost or market.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Amortization of equipment under capital lease is computed
over the shorter of the lease term or the estimated useful life of the related
assets.
(d) INTANGIBLES
Intangibles are stated at amortized cost. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of". This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of their carrying
amount or fair value less costs to sell.
(f) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," permits entities to recognize as expense over the
vesting period the
F-10
<PAGE> 91
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25") and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
(h) USE OF ESTIMATES
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
(i) NET PROFIT (LOSS) PER SHARE
Net profit (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," by dividing the net profit (loss) allocable to common
stockholders (net profit (loss) less accretion related to redeemable Class A
common stock) by the weighted average number of shares of common stock
outstanding less the 62,500 shares of redeemable Class A commom stock. The
Company's stock options (338,125 at December 31, 1997, 1,632,500 at December 31,
1998 and 2,488,494 at September 30, 1999) and convertible preferred stock
(6,443,606 at December 31, 1997, 8,843,606 at December 31, 1998 and 9,943,606 at
September 30, 1999), have not been used in the calculation of diluted net profit
(loss) per share because to do so would be anti-dilutive. As such, the numerator
and the denominator used in computing both basic and diluted net profit (loss)
per share allocable to common stockholders are equal.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 and SEC staff policy, all common stock and common stock
equivalents issued for nominal consideration during the periods presented herein
and through the filing of the registration statement for the IPO are to be
reflected in a manner similar to a stock split or stock dividend for which
retroactive treatment is required in the calculation of net profit (loss) per
share; the Company did not have any such issuances.
(j) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, trade accounts receivable, accounts payable,
accrued liabilities and amounts due to related parties reflected in the
consolidated financial statements approximates fair value due to the short-term
maturity of these instruments.
(k) INTERIM FINANCIAL INFORMATION
The consolidated financial statements for the period ended September 30,
1998 are unaudited but reflect only normal and recurring adjustments which are,
in the opinion of management, necessary for the fair presentation of financial
position and results of
F-11
<PAGE> 92
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations. Operating results for the nine months ended September 30, 1999 and
1998 are not necessarily indicative of the results that may be expected for the
full year.
(3) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Raw materials......................... $346,335 $424,130 $594,337
Work-in-process....................... 289,628 282,427 60,792
-------- -------- --------
$635,963 $706,557 $655,129
======== ======== ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30, ESTIMATED
1997 1998 1999 USEFUL LIVES
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Engineering and manufacturing
equipment....................... $258,082 $366,150 $ 634,625 5 years
Office and computer equipment..... 179,315 259,462 1,532,298 3 years
Furniture and fixtures............ 67,282 104,706 112,122 7 years
Leasehold improvements............ 46,865 46,865 80,430 7 years
Automobiles....................... -- -- 54,717 5 years
-------- -------- ----------
551,544 777,183 2,414,192
Less accumulated depreciation and
amortization.................... 123,404 263,346 702,788
-------- -------- ----------
Property and equipment, net....... $428,140 $513,837 $1,711,404
======== ======== ==========
</TABLE>
Assets under capital lease amounted to $-0-, $440,832 and $440,832 as of
December 31, 1997, 1998 and September 30, 1999, respectively. Accumulated
amortization for assets under capital lease totaled approximately $-0-, $152,300
and $217,500 as of December 31, 1997, 1998 and September 30, 1999, respectively.
(5) INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
On August 16, 1999, the Company acquired 19% of the common stock of Turnkey
Computer Systems, Inc. ("Turnkey") for $1,822,833. The purchase price consisted
of 62,500 shares of the Company's redeemable Class A common stock valued at
$400,000, $1,400,000 in cash and $22,833 of transaction costs. The $1,400,000 is
payable upon the earlier of the completion of the Company's IPO or $500,000 at
December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31,
2001. This investment is carried on the cost method since the Company does not
have significant influence over Turnkey. The
F-12
<PAGE> 93
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock purchase agreement with Turnkey contains a put right which allows
Turnkey to have a one time right to put to the Company its 62,500 redeemable
Class A common shares with a fixed purchase price of $500,000. The put right can
only be exercised upon a change in control or after December 31, 2001, if the
Company has not completed an IPO. This redeemable Class A common stock is
classified outside of stockholders' equity (deficit). The difference between the
carrying amount and the redemption amount of $500,000 is being accreted to
redeemable Class A common stock as a charge to additional paid-in capital from
issuance to December 31, 2001 using the effective interest method.
(6) INTANGIBLES
Intangibles consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30, ESTIMATED
1997 1998 1999 USEFUL LIFE
---- ---------- ------------- -----------
<S> <C> <C> <C> <C>
NutriCharge license.................. $ -- $2,273,538 $2,273,538 10 years
Infrared technology license.......... -- 568,385 568,385 5 years
Goodwill -- CIN...................... -- -- 2,076,368 5 years
Non-compete agreement -- CIN......... -- -- 100,000 5 years
Goodwill -- Cyberstockyard........... -- -- 427,274 3 years
Non-compete agreement --
Cyberstockyard..................... -- -- 100,000 3 years
Goodwill -- PCC --................... -- -- 1,487,791 5 years
Non-compete agreement -- PCC......... 100,000 4 years
---- ---------- ----------
-- 2,841,923 7,133,356
Less accumulated amortization........ -- 142,095 860,047
---- ---------- ----------
Intangibles, net..................... $ -- $2,699,828 $6,273,309
==== ========== ==========
</TABLE>
On July 29, 1998, the Company acquired licenses for NutriCharge and
infrared technology. The purchase price of $2,841,923 (consisting of $300,000 in
cash, 2,587,500 of the Company's Class A common shares valued at $0.80 per
share, $131,923 in acquisition costs and the estimated fair value of put rights
granted by XL Vision) was allocated to the acquired NutriCharge and infrared
technology licenses based on estimated fair values determined by estimated cash
flows from the underlying licensed product. In connection with the transaction,
XL Vision granted a put right that allows the sellers to require XL Vision to
purchase up to 1,250,000 shares of the Company's Class A common stock at $3.00
per share. The fair value of the put was estimated to be $340,000 and was
credited to additional paid-in capital. The put right may only be exercised
thirty days prior to or after the fourth anniversary of the agreement. The
ultimate amount payable under the put agreement is reduced by the amount, if
any, of indemnification obligations related to the transaction. The estimated
fair value of the put was determined with the assistance of an independent,
third party valuation expert by calculating the net present value (at 10%
interest) of the product of the $2,000,000 intrinsic value of the put adjusted
for the 25% probability that the put would be exercised.
F-13
<PAGE> 94
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of CIN, LLC d/b/a/ Cattlemen's Information
Network ("CIN") for $2,296,610. The purchase price for the assets consisted of
750,000 shares of the Company's Class A common stock valued at $720,000, the
assumption of $812,021 of liabilities, a cash payment due in October 1999 of
$357,816, and an agreement to pay the first $350,000 from Internet sales of
third party products over the Company's Web site and transaction costs of
$56,773. CIN is in the business of selling access to its cattle feedlot
performance measurements database. Immediately after the closing, CIN changed
its name to Lost Pelican, L.L.C.
On March 29, 1999, the Company acquired 100% of the stock of
Cyberstockyard, Inc. for $542,265. The purchase price consisted of 250,000
shares of the Company's Class A common stock valued at $450,000, the assumption
of $89,972 of liabilities and transaction costs of $2,293. Cyberstockyard, Inc.
is in the business of selling cattle through its proprietary auction software
over the Internet.
On May 19, 1999, the Company acquired substantially all of the tangible and
intangible assets of PCC, LLC d/b/a Professional Cattle Consultants, L.L.C.
("PCC") for $1,827,861. The purchase price consists of a cash payment of
$1,800,000 and an assumption of $2,861 of liabilities and transaction costs of
$25,000. PCC is in the business of providing comparative analysis and market
information for the feedlot industry. Immediately after the closing, PCC changed
its name to QDD Investment Company, L.L.C.
Each acquisition was accounted for as a purchase and the results of
operations of the acquired companies is included in the statement of operations
since the respective date of acquisition.
The aggregate purchase price of the above acquisitions was approximately
$4,666,736, which included related acquisition costs of approximately $84,000
and was allocated as follows:
<TABLE>
<S> <C>
Goodwill....................................... $3,991,433
Non-compete agreements......................... 300,000
Equipment...................................... 358,016
Current assets, including cash acquired of
$737......................................... 17,287
----------
$4,666,736
==========
</TABLE>
Unaudited pro forma information for the Company as if the acquisitions
above had been consummated as of January 1, 1998 and 1999 follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Revenue............................... $ 1,687,077 $ 18,560,565
=========== ============
Net profit (loss)..................... $(4,987,862) $(11,097,329)
=========== ============
Net profit (loss) per common share.... $ (0.97) $ (1.61)
=========== ============
</TABLE>
F-14
<PAGE> 95
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) EQUITY
COMMON STOCK
As of September 30, 1999, the Company had authorized the issuance of
100,000,000 shares of common stock.
CLASS A -- In 1999, the Company designated 92,711,110 shares 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 September 30, 1999, the Company had authorized the issuance of
15,000,000 shares of preferred stock and had designated 6,500,000 as Series A
shares, and 2,400,000 as Series B shares, 1,300,000 as Series C shares and
4,555,556 as Series D shares. Each share of preferred stock is convertible into
1.25 shares of Class A common stock at the option of the holder or upon the vote
of holders of two-thirds of the respective preferred stock class outstanding
except for Series D shares which is convertible at the offering price into 1.25
shares Class B common stock. Preferred stock is automatically converted into
common stock upon a qualified IPO of at least $10 million with a Company
valuation of at least $30 million or upon a public rights offering of the
Company to shareholders of Safeguard Scientifics, Inc.
SERIES A -- The Series A shares are entitled to a liquidation preference
before any distribution to common stockholders equal to the greater of (a) $1.00
per share plus an additional $.10 per year (pro rated for partial years) from
July 16, 1997 or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to Class A common stock prior to
liquidation. The holders of Series A preferred stock are entitled to vote as a
separate class to elect two directors to the Board of Directors of the Company.
SERIES B -- Series B shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $2.00 per
share plus an additional $.20 for each year (pro rated for partial years) from
December 31, 1998 or until the date of distribution of available assets or (b)
the amount which would be distributed if all of the preferred stock of the
Company were converted to Class A common stock prior to liquidation. Series B
shares are junior to Series A, C and D shares.
SERIES C -- Series C shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $5.00 per
share plus an additional $.50 for each year (pro rated for partial years) from
April 15, 1999 or until the date of distribution of available assets or (b) the
amount which would be distributed if all of the preferred stock of the Company
were converted to Class A common stock prior to liquidation. Series C shares are
on parity with Series A and D shares except as to voting rights.
SERIES D -- Series D shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $9.00 per
share plus an additional $1.00 for each year (pro rated for partial years) from
October 27, 1999 or until the
F-15
<PAGE> 96
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of distribution of available assets or (b) the amount which would be
distributed if all the preferred stock of the Company were converted to Class B
common stock prior to liquidation. Series D shares are on parity with Series A
and C shares except as to voting rights. Series D stockholders are entitled to
two and one-half votes per share.
(8) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards................ $3,237,000 $5,967,000 $ 8,057,000
Amortization of acquired
technology from XL
Vision (note 10)........ 1,829,000 1,704,000 1,704,000
Research and
experimentation tax
credits................. 294,000 448,000 718,000
Other...................... 125,000 596,000 1,524,000
---------- ---------- -----------
5,485,000 8,715,000 12,003,000
Less valuation allowance... 5,370,000 8,715,000 12,003,000
---------- ---------- -----------
Net deferred tax
assets................ 115,000 -- --
Deferred tax liability:
Imputed interest........... (115,000) -- --
---------- ---------- -----------
Net deferred tax asset
(liability)........... $ -- $ -- $ --
========== ========== ===========
</TABLE>
The Company has available at September 30, 1999 for federal income tax
purposes, unused net operating loss carryforwards of approximately $21,000,000
which may be applied against future taxable income and expires in years
beginning in 2010. The Company also has approximately $718,000 in research and
experimentation credits carryforwards. The research and experimentation credits,
which begin to expire in 2010, can also be used to offset future regular tax
liabilities. A valuation allowance for deferred tax assets is provided when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The difference between the "expected" tax benefit (computed by applying the
federal corporate income tax rate of 34% to the loss before income taxes) and
the actual tax benefit is primarily due to the effect of the valuation
allowance.
F-16
<PAGE> 97
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK PLAN
In January 1996, the Company adopted an equity compensation plan (the "1996
Plan") pursuant to which the Company's Board of Directors may grant shares of
common stock or options to acquire common stock to certain directors, advisors
and employees. The Plan authorizes grants of shares or options to purchase up to
2,168,750 shares of authorized but unissued common stock. Stock options granted
have a maximum term of ten years and have vesting schedules which are at the
discretion of the Compensation Committee of the Board of Directors and
determined on the effective date of the grant.
In May 1999, the Company's stockholders approved the 1999 Equity
Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional
1,250,000 shares of authorized, unissued shares of common stock of the Company
are reserved for issuance to employees, advisors and for non-employee members of
the Board of Directors. Option terms under the 1999 Plan may not exceed 10
years.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE WEIGHTED REMAINING
PRICES PER AVERAGE CONTRACTUAL
SHARES SHARE EXERCISE PRICE LIFE (IN YEARS)
--------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding, December 31,
1996.............................. 3,125 $ 0.80 $ 0.80 4.85
====
Granted........................... 335,000 0.80 0.80
--------- ---------- ------
Balance outstanding, December 31,
1997.............................. 338,125 0.80 0.80 9.64
====
Granted........................... 1,692,500 0.80-1.60 0.84
Canceled.......................... (398,125) 0.80 0.80
--------- ---------- ------
Balance outstanding, December 31,
1998.............................. 1,632,500 0.80-1.60 .84 9.48
====
Granted........................... 1,010,250 1.60-7.20 2.58
Exercised......................... (112,069) 0.80 0.80
Canceled.......................... (42,187) 0.80-1.60 1.04
--------- ---------- ------
Balance outstanding, September 30,
1999.............................. 2,488,494 $0.80-7.20 $ 1.54 9.08
========= ========== ====== ====
</TABLE>
At December 31, 1997, 1998 and September 30, 1999, there were 76,719,
414,375 and 716,369 shares exercisable, respectively at weighted average
exercise prices of $0.80, $0.82 and $1.06, respectively.
At December 31, 1997 and 1998 and September 30, 1999, 99,375, 511,250 and
747,250 shares were available for grant, respectively.
F-17
<PAGE> 98
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The per share weighted-average fair value of stock options granted was $0
in 1996, $0 in 1997, $0.08 in 1998 and $0.84 in 1999 on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Volatility.................................... 0% 0% 0% 0%
Dividend paid................................. 0% 0% 0% 0%
Risk-free interest rate....................... 6.35% 6.11% 4.73% 4.99%
Expected life in years........................ 5.77 6.75 5.57 6.75
</TABLE>
No volatility was assumed due to the use of the Minimum Value Method of
computation for options issued by the Company as a private entity as prescribed
by SFAS No. 123.
All stock options granted, except as noted in the paragraph below, have
been granted to directors or employees with an exercise price equal to the fair
value of the common stock at the date of grant. The Company applies APB Opinion
No. 25 for issuances to directors and employees in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements through December 31, 1998.
On March 19, 1999, the Company granted 360,625 stock options with an
exercise price of $1.60 and a fair value of $1.80. The Company recorded $72,126
of unearned compensation at the date of grant and is amortizing the unearned
compensation over the vesting period. Compensation expense amounted to $9,017
for the nine months ended September 30, 1999.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss as reported...... $(1,719,492) $(5,483,623) $(7,832,128) $(10,672,185)
=========== =========== =========== ============
Pro forma net loss........ $(1,719,492) $(5,483,623) $(7,865,031) $(10,887,665)
=========== =========== =========== ============
Net loss per share, as
reported:
Basic and diluted....... $ (9.24) $ (14.34) $ (1.80) $ (1.59)
=========== =========== =========== ============
Pro forma net loss per
share:
Basic and diluted....... $ (9.24) $ (14.34) $ (1.81) $ (1.62)
=========== =========== =========== ============
</TABLE>
F-18
<PAGE> 99
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Due to related parties consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
XL Vision............................... $8,029,995 $5,158,436 $ 6,057,978
Safeguard Scientifics, Inc. and
Safeguard Delaware, Inc................. 10,309 28,898 7,347,979
---------- ---------- -----------
$8,040,304 $5,187,334 $13,405,957
========== ========== ===========
</TABLE>
AMOUNTS DUE TO XL VISION
<TABLE>
<S> <C>
Amounts due to XL Vision consist of:
Balance as of December 31, 1996............................. $ 3,636,494
Allocation of costs and funding of working capital to
the Company........................................... 6,318,405
Technology transfer fee................................ 4,400,000
Interest charges on technology transferred............. 141,167
Proceeds from Series A Preferred Stock................. (6,443,606)
Issuance of Class A common stock....................... (22,465)
-----------
Balance as of December 31, 1997........................... 8,029,995
Allocation of costs and funding of working capital to
the Company........................................... 9,120,441
Interest charges on technology transferred............. 308,000
Contribution of debt to equity......................... (7,500,000)
Contribution of debt to equity in exchange for Series B
Preferred Stock....................................... (4,800,000)
-----------
Balance as of December 31, 1998........................... 5,158,436
Allocation of costs and funding of working capital to
the Company........................................... 668,542
Interest charges on technology transferred............. 231,000
-----------
Balance as of September 30, 1999.......................... $ 6,057,978
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$2,690,900 in 1996, $6,239,600 in 1997, $12,782,400 in 1998 and $7,342,435 in
1999.
On January 1, 1999, the Company signed a revolving promissory note with XL
Vision for up to $3,000,000. The revolving promissory note bears interest at the
prime rate plus 1% and is due in full when the Company completes an IPO or sells
all of its assets or stock.
F-19
<PAGE> 100
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE PAYABLE TO SAFEGUARD DELAWARE, INC.
On July 21, 1999, the Company obtained a $3,000,000 revolving note payable
from Safeguard Delaware, Inc ("Safeguard"). The revolving note payable, as
amended, bears interest payable monthly at the prime rate plus 1% and is due
December 31, 1999.
In August, September and October 1999, the Company signed demand notes with
interest payable monthly at the prime rate plus 1% with Safeguard for
$2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled
in October 1999, in exchange for a $7,050,000 note due in full on October 25,
2000, the repayment of a promissory note issued concurrently with the sale of
Series D preferred stock or an IPO, whichever is earlier.
TECHNOLOGY FEE
On July 15, 1997, the Company entered into an agreement with XL Vision for
the transfer of certain technology that is used by the Company in the sale of
its products for a $4,400,000 note payable. The transfer was accounted for as a
distribution to XL Vision as it represented amounts paid for an asset to an
entity under common control in excess of the cost of such asset. The note
payable bears interest at 7% per annum. Interest expense was $141,167 in 1997,
$308,000 in 1998 and $231,000 in 1999.
DIRECT CHARGE FEE
Prior to April 1, 1997 personnel, and other services were provided by XL
Vision and the costs were allocated to the Company. The Company believes that
the allocation method used by XL Vision was reasonable. Effective April 1, 1997,
the Company entered into a direct charge fee agreement with XL Vision which
allows for cost-based charges based upon actual hours incurred. Costs allocated
by or service fees charged by XL Vision were approximately $468,000 in 1996,
$720,000 in 1997, $460,000 in 1998 and $390,000 in 1999. A portion of the fees
in 1998 and 1999 and all of the costs and fees in 1996 and 1997 were allocated
to the discontinued transportation segment.
ADMINISTRATIVE SERVICES FEE
Effective December 15, 1997, the Company entered into an agreement which
requires accrual of an administrative services fee based upon a percentage of
gross revenues. The fee for administrative support services, including
management consultation, investor relations, legal services and tax planning, is
payable monthly to XL Vision and Safeguard Scientifics, Inc., the largest
shareholder of XL Vision, based upon an aggregate of 1.5% of gross revenues with
such service fees to be not more than $300,000 annually. Effective August 17,
1999, the agreement was amended such that the administrative services fee is
applied to net contribution margin on cattle sales and gross revenue for all
other sales. The fee is accrued monthly but is only payable in months during
which the Company has achieved positive cash flow from operations. The agreement
extends through December 31, 2002 and continues thereafter unless terminated by
any party. Administrative service fees were approximately $10,300 in 1997,
$37,200 in 1998 and $43,500 in 1999.
F-20
<PAGE> 101
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases equipment under a capital lease, effective April 20,
1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments,
including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000,
$92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was
$23,594 in 1998 and $20,627 in 1999.
The Company rents its facility from XL Vision. Rent expense varies based on
space occupied by the Company and includes charges for base rent, repairs and
maintenance, telephone and networking expenses, real estate taxes and insurance.
Rent expense is approximately $68,000 in 1996, $354,000 in 1997, $1,129,000 in
1998, and $528,000 in 1999.
LICENSE AGREEMENT WITH XL VISION, INC.
In February 1999, the Company signed a license agreement with XL Vision,
granting XL Vision a license to use Company software for the limited purpose of
evaluating whether the software could provide the basis for a new company that
would operate in the agricultural industry. The license agreement terminated on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license agreement. In addition, XL Vision is obligated to give the
Company at least 25% of the new company. The Company is obligated to transfer
all amounts up to 25% of the company to Lost Pelican, LLC.
(11) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously required. The management approach requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker. The Company's chief
operating decision-maker receives revenue and contribution margin (revenue less
direct costs and excluding overhead) by source, and all other statement of
operations data and balance sheet on a consolidated basis. The Company's
reportable segments consist of cattle sales and animal sciences products and
services. While the Company operates entirely in the animal science marketplace,
the contribution margin associated with cattle sales and the related prospects
for this portion of the Company's business differ from the rest of the Company's
product offerings.
F-21
<PAGE> 102
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes revenue, cost of revenue and gross profit and
contribution margin information related to the Company's two operating segments:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, 1998 1998 1999
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Cattle.................... $ -- $ -- $17,022,862
Animal sciences......... 1,792,471 1,106,452 1,315,783
---------- ---------- -----------
Total............ $1,792,471 $1,106,452 $18,338,645
========== ========== ===========
Cost of revenue:
Direct costs:
Cattle............. $ -- $ -- $16,860,452
Animal sciences.... 900,824 603,410 492,115
---------- ---------- -----------
Total direct
costs.......... 900,824 603,410 17,352,567
Unallocated overhead.... 1,722,623 1,025,347 929,763
---------- ---------- -----------
Total............ $2,623,447 $1,628,757 $18,282,330
========== ========== ===========
Gross profit (loss):
Contribution margin:
Cattle............. $ -- $ -- $ 162,410
Animal sciences.... 891,647 503,042 823,668
---------- ---------- -----------
Total............ 891,647 503,042 986,078
Unallocated
overhead........... (1,722,623) (1,025,347) (929,763)
---------- ---------- -----------
Gross profit
(loss)......... $ (830,976) $ (522,305) $ 56,315
========== ========== ===========
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(12) DISCONTINUED OPERATIONS
In December 1998, the Company's Board of Directors decided to dispose of
its transportation segment. The Company's AMIRIS thermal imaging system, which
was the sole product sold in the transportation segment, was sold on January 15,
1999 to Sperry Marine, Inc. for approximately $1,900,000. The Company received
$200,000 of cash at closing and collected an additional $1,388,000 through
September 30, 1999. The remaining balance of approximately $312,000 is expected
to be collected by December 31, 1999. The Company is entitled to a royalty of 8%
of net AMIRIS system sales, up to a maximum royalty of $4.3 million over a four
year period or up to a maximum royalty of $5.0 million, if $4.3 million is not
received within four years.
F-22
<PAGE> 103
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Accounts receivable................ $ 145,500 $ 381,435 $ 419,784
Inventory, net..................... 1,076,043 2,020,625 123,093
Property and equipment, net........ 22,650 134,098 --
Intangibles, net................... 94,444 61,108 36,106
Accounts payable................... (271,833) (80,510) (63,647)
Accrued liabilities including
provision for operating loss
during phase out period of
$72,667 in 1998 and $18,748 in
1999............................. -- (231,415) (125,000)
---------- ---------- ---------
Net assets....................... $1,066,804 $2,285,341 $ 390,336
========== ========== =========
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
VOLUNTARY EMPLOYEE SAVINGS 401(k) PLAN
The Company established a voluntary employee savings 401(k) plan in 1997
which is available to all full time employees 21 years or older. The plan
provides for a matching by the Company of the employee's contribution to the
plan for 50% of the first 6% of the employee's annual compensation. The
Company's matching contributions were $6,300 in 1996, $38,195 in 1997, $62,108
in 1998 and $54,229 in 1999.
ROYALTIES
In connection with the NutriCharge license, the Company is obligated to a
royalty of 5% of gross revenues from the sale of NutriCharge products and
infrared technology related to the Company's Canadian license agreement.
The Company is also obligated to a royalty of 6% of net revenues from
product or services related to technology patented by Iowa State University.
(14) SUBSEQUENT EVENTS
SALE OF SERIES D PREFERRED STOCK
On October 27, 1999, the Company agreed to issue 4,555,556 shares of Series
D preferred stock and a warrant to acquire 1,138,889 shares of Class B common
stock. Each share of Series D preferred stock is convertible into 1.25 shares of
Class B common stock at any time at the option of the holder or immediately upon
an IPO. The warrant is exercisable at the Company's IPO price. In the event the
Company does not complete an IPO, the warrant is exercisable at $9.00 after
November 16, 2000 or earlier if the Company has an equity financing of not less
that $20,000,000 from private investors. The warrant expires on November 16,
2002. In return for these instruments, the Company received $18,000,000 of cash
in November 1999 and a $23,000,000 non-interest, bearing note receivable due on
October 27, 2000. Imputed interest at 9.5% amounts to $2,185,000 over the life
of the note.
F-23
<PAGE> 104
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net consideration of $38,815,000 was allocated to the warrant and
preferred stock as follows. The warrant was valued at $3,325,553 using the
Black-Scholes method and assuming a strike price of $11.20, expiration of three
years, 90% volatility, and 5.8% interest. The remaining proceeds were allocated
to preferred stock and amounted to $7.79 per preferred share ($6.23 per common
share). The beneficial conversion feature was calculated as the difference
between the conversion price ($6.23) and the fair value of the common stock
($7.20) multiplied by the number of Class B common shares into which the
preferred stock is convertible (5,694,445) and amounts to $5,523,612.
The note receivable will be shown as a reduction of stockholders' equity,
net of imputed interest. Interest income will be accreted over the life of the
note using the effective interest method. The value of the warrant will be
credited to additional paid-in capital. The beneficial conversion feature will
be credited to preferred stock with a corresponding charge to additional paid-in
capital at issuance. The beneficial conversion feature will reduce net income
available to common shareholders.
STOCK SPLIT
On December 6, 1999, the Board of Directors of the Company authorized a
five-for-four stock split. The stock split has been reflected in these financial
statements as if it had occurred on the first day of the first period presented.
LEGAL PROCEEDING (UNAUDITED)
The Company has been named as a defendant in a lawsuit filed 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. were each subject to confidentiality agreements with the
plaintiff, and subsequently engaged in discussions concerning a potential
business arrangement in violation of such agreements. The complaint asserts
damages, including punitive damages, from the defendants in the aggregate amount
of $18 million (Canadian dollars), as well as injunctive relief. Although the
Company has not yet completed its assessment of these claims, the Company
believes that there are a number of substantive and procedural defenses that
exist and intends to defend these claims vigorously.
F-24
<PAGE> 105
eMERGE INTERACTIVE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
LOST PELICAN, L.L.C.
eMerge --------------------------------------
INTERACTIVE, PRO FORMA
INC. HISTORICAL ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $ 1,792,471 $ 157,692 $ -- $ 157,692
Cost of revenue................................ 2,623,447 25,736 -- 25,736
----------- --------- --------- ----------
Gross profit (loss)........................ (830,976) 131,956 -- 131,956
----------- --------- --------- ----------
Operating expenses:
Selling, general and administrative.......... 3,659,810 231,883 435,274(4a) 667,157
Research and development..................... 1,109,382 341,588 -- 341,588
----------- --------- --------- ----------
Total operating expenses................... 4,769,192 573,471 435,274 1,008,745
----------- --------- --------- ----------
Profit (loss) from continuing operations... (5,600,168) (441,515) (435,274) (876,789)
Other income................................... -- 245 -- 245
Interest expense............................... (331,594) (20,077) -- (20,077)
----------- --------- --------- ----------
Profit (loss) from continuing operations
before income taxes...................... (5,931,762) (461,347) (435,274) (896,621)
Income tax expense (benefit)................... -- -- -- --
----------- --------- --------- ----------
Profit (loss) from continuing operations... $(5,931,762) $(461,347) $(435,274) $ (896,621)
=========== ========= ========= ==========
Profit (loss) from continuing operations per
common share -- basic and diluted............ $ (1.36)
===========
Weighted average number of common shares
outstanding -- basic and diluted............. 4,356,926
===========
<CAPTION>
QDD INVESTMENT COMPANY, L.L.C.
-------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA COMBINED
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenue........................................ $332,730 $ -- $332,730 $ 2,282,893
Cost of revenue................................ 152,158 -- 152,158 2,801,341
-------- --------- --------- -----------
Gross profit (loss)........................ 180,572 -- 180,572 (518,448)
-------- --------- --------- -----------
Operating expenses:
Selling, general and administrative.......... 162,428 325,790(4b) 488,218 4,815,185
Research and development..................... -- -- -- 1,450,970
-------- --------- --------- -----------
Total operating expenses................... 162,428 325,790 488,218 6,266,155
-------- --------- --------- -----------
Profit (loss) from continuing operations... 18,144 (325,790) (307,646) (6,784,603)
Other income................................... 36,548 -- 36,548 36,793
Interest expense............................... (1,927) 1,927(4c) -- (351,671)
-------- --------- --------- -----------
Profit (loss) from continuing operations
before income taxes...................... 52,765 (323,863) (271,098) (7,099,481)
Income tax expense (benefit)................... -- -- -- --
-------- --------- --------- -----------
Profit (loss) from continuing operations... $ 52,765 $(323,863) $(271,098) $(7,099,481)
======== ========= ========= ===========
Profit (loss) from continuing operations per
common share -- basic and diluted............ $ (1.39)
===========
Weighted average number of common shares
outstanding -- basic and diluted............. 5,106,926(4d)
===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-25
<PAGE> 106
eMERGE INTERACTIVE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
eMerge LOST PELICAN, L.L.C.
INTERACTIVE, ----------------------------------------------
INC. HISTORICAL
------------- -----------------
NINE MONTHS FOR THE PERIOD
ENDED JANUARY 1, 1999-
SEPTEMBER 30, FEBRUARY 23, PRO FORMA PRO
1999 1999 ADJUSTMENTS FORMA
------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue................................. $ 18,338,645 $ 11,758 $ -- $ 11,758
Cost of revenue......................... 18,282,330 4,176 -- 4,176
------------ --------- -------- ---------
Gross profit (loss)................. 56,315 7,582 -- 7,582
------------ --------- -------- ---------
Operating expenses:
Selling, general and administrative... 7,539,689 182,814 65,590(4a) 248,404
Research and development.............. 2,756,262 35,596 -- 35,596
------------ --------- -------- ---------
Total operating expenses............ 10,295,951 218,410 65,590 284,000
------------ --------- -------- ---------
Profit (loss) from continuing
operations........................ (10,239,636) (210,828) (65,590) (276,418)
Other Income............................ 15,655
Interest expense........................ (458,624) (11,619) -- (11,619)
------------ --------- -------- ---------
Profit (loss) from continuing
operations before income taxes.... (10,682,605) (222,447) (65,590) (288,037)
Income tax expense (benefit)............ -- -- -- --
------------ --------- -------- ---------
Profit (loss) from continuing
operations........................ $(10,682,605) $(222,447) $(65,590) $(288,037)
============ ========= ======== =========
Profit (loss) from continuing operations
per common share -- basic and
diluted............................... $ (1.59)
============
Weighted average number of common shares
outstanding -- basic and diluted...... 6,709,854
============
<CAPTION>
QDD INVESTMENT COMPANY, L.L.C.
---------------------------------------------
HISTORICAL
----------------
FOR THE PERIOD
JANUARY 1,
1999- PRO FORMA PRO PRO FORMA
MAY 19, 1999 ADJUSTMENTS FORMA COMBINED
---------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenue................................. $154,901 $ -- $154,901 $ 18,505,304
Cost of revenue......................... 67,752 -- 67,752 18,354,258
-------- --------- --------- ------------
Gross profit (loss)................. 87,149 -- 87,149 151,046
-------- --------- --------- ------------
Operating expenses:
Selling, general and administrative... 79,683 124,067(4b) 203,750 7,991,843
Research and development.............. -- -- -- 2,791,858
-------- --------- --------- ------------
Total operating expenses............ 79,683 124,067 203,750 10,783,701
-------- --------- --------- ------------
Profit (loss) from continuing
operations........................ 7,466 (124,067) (116,601) (10,632,655)
Other Income............................ 15,655
Interest expense........................ (1,272) 1,272(4c) -- (470,243)
-------- --------- --------- ------------
Profit (loss) from continuing
operations before income taxes.... 6,194 (122,795) (116,601) (11,087,243)
Income tax expense (benefit)............ -- -- -- --
-------- --------- --------- ------------
Profit (loss) from continuing
operations........................ $ 6,194 $(122,795) $(116,601) $(11,087,243)
======== ========= ========= ============
Profit (loss) from continuing operations
per common share -- basic and
diluted............................... $ (1.62)
============
Weighted average number of common shares
outstanding -- basic and diluted...... 6,854,298
============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-26
<PAGE> 107
eMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(1) OVERVIEW
The pro forma condensed combined financial statements are unaudited and
give effect to the acquisition of Lost Pelican L.L.C. (formerly CIN, LLC) d/b/a
Cattlemen's Information Network ("Lost Pelican") on February 24, 1999, the
acquisition of QDD Investment Company L.L.C. d/b/a Professional Cattle
Consultants ("QDD") on May 19, 1999 and the issuance of Series "C" preferred
stock by eMerge Interactive, Inc. (the "Company") on May 4, 1999, a portion of
the proceeds of which were used to acquire QDD.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1998 is based on the historical financial statements of
the Company, Lost Pelican and QDD, giving effect to the transactions under the
purchase method of accounting and the assumptions and adjustments discussed
below. The pro forma condensed combined statement of operations for the nine
months ended September 30, 1999 is based on the historical financial statements
of the Company, Lost Pelican (for the period from January 1, 1999 to February
23, 1999, date prior to acquisition) and QDD (for the period from January 1,
1999 to May 19, 1999, date prior to acquisition), giving effect to the
transactions under the purchase method of accounting and the assumptions and
adjustments discussed below. The Company's purchase of Cyberstockyard, Inc. on
March 29, 1999 is not included because the pro forma effects are not
significant. The pro forma adjustments give effect to the transactions as if
they occurred as of January 1, 1998 for both periods presented.
These unaudited pro forma financial statements may not be indicative of the
results of operations that actually would have occurred if the combination had
been in effect on January 1, 1998 or which may be obtained in the future. The
pro forma financial statements should be read in conjunction with the audited
financial statements of the Company, Lost Pelican and QDD contained elsewhere
herein.
(2) ACQUISITION OF LOST PELICAN
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of Lost Pelican for $2,296,610. The purchase
price for the assets consisted of 750,000 shares of the Company's Class A common
stock valued at $720,000, the assumption of $812,021 of liabilities, a cash
payment due in October 1999 of $357,816, and an agreement to pay the first
$350,000 from Internet sales of third party products over the Company's Web site
and transaction costs of $56,773.
(3) ACQUISITION OF QDD
On May 19, 1999, the Company acquired substantially all of the tangible and
intangible assets of QDD for a cash payment of $1,800,000, an assumption of
$2,361 of liabilities and transaction costs of $25,000.
(4) PRO FORMA ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1998 and the nine months ended September 30, 1999
combines the
F-27
<PAGE> 108
eMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
statements of operations of the Company, Lost Pelican and QDD. In combining the
companies, the pro forma adjustments reflect the following:
(a) Record amortization of goodwill ($415,274 in 1998 and $62,576 in 1999)
and non-compete agreements ($20,000 in 1998 and $3,014 in 1999) for
Lost Pelican over estimated useful lives of five years.
(b) Record amortization of goodwill ($300,790 in 1998 and $114,547 in 1999)
and non-compete agreements ($25,000 in 1998 and $9,520 in 1999) for QDD
over estimated useful lives of five years and four years, respectively.
(c) To eliminate interest on debt of QDD not acquired of $1,927 in 1998 and
$1,272 in 1999.
(d) Record the issuance of 750,000 shares of Class A common stock in
connection with Lost Pelican transaction.
There is no income tax effect on the above pro forma adjustments due to
the full valuation allowance on net deferred tax assets.
F-28
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
To the Board of Members
Lost Pelican, L.L.C.:
We have audited the accompanying balance sheets of Lost Pelican, L.L.C.
(d/b/a Cattlemen's Information Network) as of December 31, 1997 and 1998 and the
related statements of operations, members' equity (deficit) and cash flows for
each of the two years ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 1 to the financial statements, on February 23, 1999,
Lost Pelican, L.L.C. sold substantially all of its assets and trade names to
eMerge Interactive, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lost Pelican, L.L.C. at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for each of the two years ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
April 13, 1999
F-29
<PAGE> 110
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ FEBRUARY 23,
1997 1998 1999
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ -- $ -- $ 737
Trade accounts receivable, net of
allowance for uncollectible accounts of
$-0-, $9,135, and $8,500 as of December
31, 1997 and 1998 and February 23,
1999, respectively..................... -- 8,548 6,497
--------- ----------- -----------
Total current assets.............. -- 8,548 7,234
Property and equipment, net (notes 3 and
5)........................................ 1,288 102,233 105,247
--------- ----------- -----------
Total assets...................... $ 1,288 $ 110,781 $ 112,481
========= =========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit (note 4)................... $ -- $ 293,983 $ 267,109
Current installments of long-term debt
(note 5)............................... 60,544 91,471 241,950
Accounts payable.......................... 7,991 3,710 1,518
Accrued liabilities....................... 2,614 15,481 18,646
--------- ----------- -----------
Total current liabilities......... 71,149 404,645 529,223
Long-term debt, excluding current
installments (note 5)..................... -- 112,944 109,854
--------- ----------- -----------
Total liabilities................. 71,149 517,589 639,077
--------- ----------- -----------
Commitment (note 6)
Subsequent event (note 8)
Members' equity (deficit) (note 7):
Unit capital.............................. 879,419 1,003,819 1,106,478
Accumulated deficit....................... (949,280) (1,410,627) (1,633,074)
--------- ----------- -----------
Total members' equity (deficit)... (69,861) (406,808) (526,596)
--------- ----------- -----------
Total liabilities and members'
equity (deficit)................ $ 1,288 $ 110,781 $ 112,481
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 111
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD
DECEMBER 31, NINE MONTHS JANUARY 1, 1999
--------------------- ENDED THROUGH
1997 1998 SEPTEMBER 30, 1998 FEBRUARY 23, 1999
--------- --------- ------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue...................... $ 43,672 $ 157,692 $ 68,415 $ 11,758
Cost of revenue.............. 13,789 25,736 10,804 4,176
--------- --------- --------- ---------
Gross profit............ 29,883 131,956 57,611 7,582
Selling, general and
administrative............. 377,504 231,883 179,939 182,814
Research and development..... 124,043 341,588 227,773 35,596
--------- --------- --------- ---------
Profit (loss) from
operations............ (471,664) (441,515) (350,101) (210,828)
Other income (expense):
Other income............... -- 245 90 --
Interest expense........... (4,764) (20,077) (15,178) (11,619)
--------- --------- --------- ---------
Net other income
(expense)............. (4,764) (19,832) (15,088) (11,619)
--------- --------- --------- ---------
Net profit (loss)....... $(476,428) $(461,347) $(365,189) $(222,447)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 112
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
UNIT CAPITAL
------------------------- ACCUMULATED
UNITS AMOUNT DEFICIT TOTAL
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1997........... 600,000 $ 473,380 $ (472,852) $ 528
Non-cash contribution of services by
members (note 7)...................... -- 222,557 -- 222,557
Cash contribution by majority members
(note 7)............................ -- 183,482 -- 183,482
Net profit (loss)..................... -- -- (476,428) (476,428)
------- ---------- ----------- ---------
Balances at December 31, 1997......... 600,000 879,419 (949,280) (69,861)
Non-cash contribution of services by
members (note 7).................... -- 39,583 -- 39,583
Cash contribution by majority members
(note 7)............................ -- 84,817 -- 84,817
Net profit (loss)..................... -- -- (461,347) (461,347)
------- ---------- ----------- ---------
Balances at December 31, 1998......... 600,000 1,003,819 (1,410,627) (406,808)
Non-cash contribution of services by
members (unaudited) (note 7)........ -- 102,659 -- 102,659
Net profit (loss) (unaudited)......... -- -- (222,447) (222,447)
------- ---------- ----------- ---------
Balances at February 23, 1999
(unaudited)......................... 600,000 $1,106,478 $(1,633,074) $(526,596)
======= ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 113
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
DECEMBER 31, NINE MONTHS JANUARY 1, 1999
--------------------- ENDED THROUGH
1997 1998 SEPTEMBER 30, 1998 FEBRUARY 23, 1999
--------- --------- ------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net profit (loss).................. $(476,428) $(461,347) $(365,189) $(222,447)
Adjustments to reconcile net
profit (loss) to net cash used
in operating activities:
Non-cash contribution of
service by members........... 222,557 39,583 -- 102,659
Depreciation................... 322 26,606 17,826 9,964
Provision for doubtful
accounts..................... -- 9,135 -- --
Changes in operating assets and
liabilities:
Trade accounts receivable.... -- (17,683) -- 2,051
Accounts payable............. 7,991 (4,281) 9,491 (2,192)
Accrued royalties............ 2,320 6,054 --
Accrued liabilities.......... 294 6,813 18,178 3,165
--------- --------- --------- ---------
Net cash provided by (used
in) operating
activities................ (242,944) (395,120) (319,694) (106,800)
--------- --------- --------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (1,610) (127,551) (73,713) (12,978)
--------- --------- --------- ---------
Cash flows from financing
activities:
Net borrowings under line of
credit agreements.............. -- 293,983 117,513 (26,874)
Proceeds from long-term debt..... 60,544 547,834 547,834 150,000
Repayments of long-term debt..... -- (403,963) (396,340) (2,610)
Proceeds from capital
contributions.................. 183,482 84,817 124,400 --
--------- --------- --------- ---------
Net cash provided by
financing activities...... 244,026 522,671 393,407 120,516
--------- --------- --------- ---------
Net increase (decrease) in
cash...................... (528) -- -- 738
Cash -- beginning of period........ 528 -- -- --
--------- --------- --------- ---------
Cash -- end of period.............. $ -- $ -- $ -- $ 738
========= ========= ========= =========
Supplemental disclosure:
Cash paid for interest........... $ 2,444 $ 14,023 $ 10,204 $ 11,619
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 114
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO FEBRUARY 23, 1999, THE SIX MONTHS ENDED
JUNE 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH FEBRUARY 23, 1999 IS
UNAUDITED)
(1) ORGANIZATION
Lost Pelican, L.L.C. (the "Company") was formed on April 1, 1996 as
Cattlemen's Management Network as a limited liability company under the laws of
the state of Kansas and its affairs are governed by its Limited Liability
Company Agreement (the "Agreement"). The Company's income and losses are
allocated in accordance with the terms of the Agreement. On December 21, 1998,
the Company changed its name to CIN L.L.C. On February 24, 1999, the Company
changed its name to Lost Pelican, L.L.C. and sold its assets and trade names
("CIN" and "Cattlemen's Information Network") to eMerge Interactive, Inc.
("eMerge").
Prior to formation as an L.L.C., the Company's business was financed and
operated by Cattle Management Health Network, "CMHN", which was owned by the
majority members of the Company. The primary business of the Company is selling
access to its cattle feedlot performance measurements database.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using accelerated methods over the estimated useful lives
of the assets.
(b) REVENUE RECOGNITION
The Company recognizes revenue in accordance with the terms of the sale or
contract, generally as services are provided.
(c) INCOME TAXES
As a limited liability Company, the Company is classified as a partnership
for income tax purposes and is not directly subject to U.S. federal and most
state income taxes, including Kansas state income tax.
(d) USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
(e) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, line of credit, long term
debt, accounts payable and accrued liabilities reflected in the financial
statements approximates fair value
F-34
<PAGE> 115
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
due to the short-term maturity of these instruments or the interest rate fairly
reflects the credit risk.
(f) INTERIM FINANCIAL INFORMATION
The financial statements as of February 23, 1999 and for the periods ended
September 30, 1998 and February 23, 1999 are unaudited but reflect only normal
and recurring adjustments which are, in the opinion of management, necessary for
the fair presentation of financial position and results of operations. Operating
results for the periods ended September 30, 1998 and February 23, 1999 are not
necessarily indicative of the results that may be expected for the full year.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ FEBRUARY 23, ESTIMATED
1997 1998 1999 USEFUL LIVES
------ -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Office and computer equipment....... $1,610 $125,770 $138,748 5 - 7 years
Purchased software.................. -- 3,391 3,391 3 years
------ -------- --------
1,610 129,161 142,139
Less accumulated depreciation....... 322 26,928 36,892
------ -------- --------
Property and equipment, net......... $1,288 $102,233 $105,247
====== ======== ========
</TABLE>
(4) LINE OF CREDIT
During 1998, the Company entered into a $300,000 line of credit agreement,
guaranteed by the principal shareholders, with a bank that expires on September
15, 1999. Under the agreement, principal is payable on September 15, 1999, and
interest is payable monthly at 9.5%. Outstanding borrowings under this agreement
were $293,983 as of December 31, 1998 and $267,109 (unaudited) as of February
23, 1999.
F-35
<PAGE> 116
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- FEBRUARY 23,
1997 1998 1999
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Kansas Technology Enterprise
Corporation, including interest at 10% (see
note 6)....................................... $60,544 $ 60,544 $ 60,544
Variable rate note payable in monthly
installments of $3,814, including interest at
prime plus 1% (9.25% at December 31, 1998)
through October 1, 2002; secured by equipment... -- 143,871 141,260
Variable rate note payable, interest payable
monthly at 9.5% through September 15, 1999;
secured by equipment.......................... -- -- 150,000
------- -------- --------
60,544 204,415 351,804
Less current installments....................... 60,544 91,471 241,950
------- -------- --------
Long-term debt, excluding current
installments.................................. $ -- $112,944 $109,854
======= ======== ========
</TABLE>
The aggregate maturities of long-term debt for each of the four years
subsequent to December 31, 1998 are as follows: 1999, $91,471; 2000, $36,856;
2001, $40,413; and 2002, $35,675.
(6) COMMITMENT
ROYALTY AGREEMENT
On September 6, 1996, the Company entered into a funding agreement with
Kansas Technology Enterprise Corporation (KTEC) for the development of a cattle
management network (the "Product"). The Company received $60,544 under this
agreement. Under the terms of this agreement, the Company will pay KTEC a
royalty of 3% on gross sales of the Product, until the award amount of $60,544
plus interest at 10% per annum is repaid. Interest begins to accrue on the date
KTEC makes its last payment on the project. Once the original obligation is met,
the Company will pay KTEC a royalty of 1% on future gross sales of the product
up to an additional $60,544 in royalty payments.
If the Company licenses, sells, or otherwise transfers the rights to
manufacture the Product to another Kansas firm, such that the primary point of
activity occurs in Kansas, the Company shall pay KTEC: (1) twenty five percent
of the proceeds of such sale, up to the award amount of $60,544 plus interest at
10%; and (2) an ongoing royalty on gross sales of the Product up to an
additional $60,544 in royalty payments. In the event such transfer of the
Product within Kansas involves the exchange of other assets or is unsuitable to
this type of repayment structure, then repayment terms may be subject to
renegotiation.
If the Company: (1) commercializes the Product out-of-state such that no
management, marketing or production activity occurs in Kansas; or (2) sells,
transfers, licenses, or otherwise disposes of the rights to the Product
out-of-state, such that no management,
F-36
<PAGE> 117
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
marketing or production activity occurs in Kansas, the Company shall pay KTEC:
(1) within thirty (30) days of such transfer, the award amount of $60,544 plus
interest at 10%; and (2) an ongoing royalty of 2% on gross sales up to an
additional $90,816. If significant benefits to Kansas can occur as a result of
such out-of-state transfer, this repayment obligation may be subject to
renegotiation. The Company does note anticipate the acquisition by eMerge
Interactive, Inc. (eMerge) as described in note 8 to impact the agreement with
KTEC.
(7) MEMBERS' EQUITY
Since inception of the Company, the Company's majority members have
contributed approximately $383,000 in services and paid expenses on behalf of
the business from other sources totaling approximately $503,000. Non-cash
contributions totaled $222,557 in 1997, $39,583 in 1998 and $102,659 (unaudited)
in 1999 and cash contributions totaled $183,482 in 1997, $84,817 in 1998 and $0
(unaudited) in 1999.
(8) SUBSEQUENT EVENT
On February 24, 1999, the Company assets were acquired by eMerge for
750,000 shares of eMerge's Class A common stock, $383,000 in cash, assumption of
liabilities of $600,000 and a commitment to pay $350,000 of the first net sales
of CIN products.
F-37
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Board of Members
QDD Investment Company, L.L.C.:
We have audited the accompanying balance sheet of QDD Investment Company,
L.L.C. (d/b/a Professional Cattle Consultants, L.L.C.) as of December 31, 1998,
and the related statements of operations, members' equity and cash flows, for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on May 19, 1999, QDD
Investment Company, L.L.C. sold substantially all of its assets and trade names
to eMerge Interactive, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QDD Investment Company,
L.L.C. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Oklahoma City, Oklahoma
July 7, 1999
F-38
<PAGE> 119
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets -- trade accounts receivable, net......... $ 18,872 $ 46,875
-------- --------
Computer software and hardware:
Software (note 1)...................................... 182,394 220,825
Hardware............................................... 45,480 51,995
-------- --------
Total computer software and hardware, at
cost......................................... 227,874 272,820
Less accumulated depreciation and amortization......... 10,330 13,901
-------- --------
Net computer software and hardware............. 217,544 258,919
-------- --------
Total assets................................... $236,416 $305,794
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 29,135 $ 25,319
Related party payable (note 5)......................... 12,000 14,000
Notes payable (note 3)................................. 34,930 74,930
-------- --------
Total current liabilities...................... 76,065 114,249
Members' equity (note 4)................................. 160,351 191,545
Commitments and contingencies (notes 5, 6 and 8).........
-------- --------
Total liabilities and members' equity.......... $236,416 $305,794
======== ========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 120
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, NINE MONTHS ENDED THROUGH
1998 SEPTEMBER 30, 1998 MAY 19, 1999
------------ ------------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Service revenue..................... $332,730 $245,298 $154,901
-------- -------- --------
Operating expenses:
Cost of services.................. 152,158 128,398 67,752
General and administrative (note
4)............................. 162,428 102,138 79,683
-------- -------- --------
Total operating
expenses................ 314,586 230,536 147,435
-------- -------- --------
Operating income.......... 18,144 14,762 7,466
Other income (expense):
Advertising income (note 2)....... 36,548 27,000 --
Interest expense.................. (1,927) (1,110) (1,272)
-------- -------- --------
Net income................ $ 52,765 $ 40,652 $ 6,194
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 121
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1997.................................. $ 68,586
Net income.................................................. 52,765
Non-cash contribution of services by members (note 4)..... 39,000
--------
Balance, December 31, 1998.................................. 160,351
Net income (unaudited).................................... 6,194
Non-cash contributions of services by members (note 4)
(unaudited)............................................ 25,000
--------
Balance, May 19, 1999 (unaudited)........................... $191,545
========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 122
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, NINE MONTHS ENDED THROUGH
1998 SEPTEMBER 30, 1998 MAY 19, 1999
------------ ------------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 52,765 $ 40,652 $ 6,194
Adjustments to reconcile net income
to net cash provided by operating
activities:
Non-cash contribution of services
by members..................... 39,000 30,000 25,000
Depreciation and amortization
expense........................ 7,035 5,276 3,571
Changes in operating assets and
liabilities:
Accounts receivable............ 778 3,339 (28,003)
Accounts and related party
payable..................... 17,101 16,601 (1,816)
--------- -------- --------
Net cash provided by
operating activities...... 116,679 95,868 4,946
--------- -------- --------
Cash used in investing activities --
purchases of computer software and
hardware............................ (141,631) (95,868) (44,946)
--------- -------- --------
Cash flows from financing activities:
Payments on notes payable........... (10,000) (10,000) --
Borrowings on notes payable......... 34,952 10,000 40,000
--------- -------- --------
Net cash provided by
financing activities...... 24,952 -- 40,000
--------- -------- --------
Net increase in cash.................. -- -- --
Cash at beginning of period........... -- -- --
--------- -------- --------
Cash at end of period................. $ -- $ -- $ --
========= ======== ========
Supplemental cash flow information:
Cash payments of interest........... $ 1,927 $ 1,110 $ 1,272
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 123
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO MAY 19, 1999 OR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH MAY 19, 1999 IS
UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
QDD Investment Company, L.L.C. (the Company) is a provider of performance
measurement information related to the United States cattle feedyard industry.
The Company's customers consist primarily of cattle feedyards located in the
United States, and to a lesser extent, other organizations involved in the
United States cattle industry.
In May 1999, the Company changed its name to QDD Investment Company, L.L.C.
On May 19, 1999, the Company sold substantially all of its assets and trade
names ("Professional Cattle Consultants, L.L.C." and "PCC") to eMerge
Interactive, Inc. ("eMerge") for $1,800,000 in cash. eMerge also assumed certain
of the Company's liabilities.
In the opinion of management, the accompanying unaudited financial
statements as of May 19, 1999 and for the nine months ended September 30, 1998
and for the period January 1, 1999 through May 19, 1999, reflect adjustments
(all of which were normal and recurring) which, in the opinion of management,
are necessary for a fair statement of the financial position and results for the
interim periods presented.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(b) COMPUTER SOFTWARE AND HARDWARE
Computer software and hardware is recorded at cost. Depreciation and
amortization of computer hardware and software is calculated using the
straight-line method over periods ranging from five to seven years.
In late 1997, the Company engaged a third party to develop and install a
performance measurement system. Costs related to the design, configuration,
coding, installation and testing of the system have been capitalized; all other
costs have been expensed. The Company plans to begin using the new performance
measurement system in late 1999.
The Company reviews long-lived assets, including computer software, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
F-43
<PAGE> 124
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts receivable and accounts
payable, related party payable and notes payable approximate fair value because
of the short maturity of those instruments.
(d) REVENUE RECOGNITION
The Company recognizes revenue as services are provided.
(e) ADVERTISING INCOME
In 1998, the Company contracted with an organization which placed
advertising on the Company's monthly and semi-annual newsletters for a fee of
$36,000. The contract terminated in December 1998 and was not renewed.
(f) INCOME TAXES
As a limited liability company, the Company is not directly subject to
income taxes. Income taxes, if any, are payable by the Company's members.
(g) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) on January 1, 1998. SFAS No.
130 establishes standards for reporting and display of "comprehensive income"
and its components in a set of financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company had no items of
comprehensive income as defined by SFAS No. 130 not included in the accompanying
statements of operations; therefore, statements of comprehensive income have not
been presented in the accompanying financial statements.
F-44
<PAGE> 125
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) NOTES PAYABLE
Notes payable at December 31, 1998 and May 19, 1999 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Term loan from a bank, bearing interest at 9.5%;
principal and interest are due on September 30, 1999
(maturity date)(a)..................................... $20,035 $ --
Term loan from a bank, bearing interest at 10%; principal
and interest are due on February 5, 1999 (maturity
date)(a)................................................. 14,895 --
Term loan from a bank, bearing interest at 10%; principal
and interest are due on July 15, 1999 (maturity
date)(a)............................................... -- 74,930
------- -------
$34,930 $74,930
======= =======
</TABLE>
- -------------------------
(a) On January 22, 1999, the Company renegotiated its two term notes, resulting
in the conversion of the two notes into a single term note, additional
borrowings, changing the maturity date and increasing the interest rate. The
term note is unsecured; however, it is guaranteed by a manager and owner of
the Company.
(4) MEMBERS' EQUITY
The Company operates as a limited liability company organized in the State
of Oklahoma until February 14, 2097, unless sooner terminated. Members' equity
is allocated to the members in accordance with the operating agreement of the
Company based on each members' capital account and each member's liability is
limited to its capital account.
During the year ended December 31, 1998, the nine months ended September
30, 1998 and for the period January 1, 1999 through May 19, 1999, the Company's
members contributed $39,000, $30,000 (unaudited), and $25,000 (unaudited),
respectively, in services to the Company. Services contributed on behalf of the
Company by its members are recorded as expenses and non-cash contributions in
the accompanying financial statements.
(5) RELATED PARTY TRANSACTIONS
The Company leases office space and equipment from one of its managers and
owners. The Company leases the space and equipment on a month-to-month basis.
Rent expense totaled $12,000 for the year ended December 31, 1998, $9,000 for
the nine months ended September 30, 1998 and $5,000 (unaudited) for the period
January 1, 1999 through May 19, 1999. Outstanding at December 31, 1998 and May
19, 1999 was $12,000 and $14,000 (unaudited), respectively, due to the manager
and owner of the Company for unpaid rent.
F-45
<PAGE> 126
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LEASE OBLIGATIONS
The Company leases office equipment and a vehicle under operating leases,
which expire over the next two years. Rent expense approximated $11,000 for the
year ended December 31, 1998, $8,000 for the nine months ended September 30,
1998 and $5,000 (unaudited) for the period January 1, 1999 through May 19, 1999.
Future minimum lease payments under noncancellable operating leases will
approximate $12,000 and $2,500 in 1999 and 2000, respectively. As discussed in
note 5, the Company also leases office space from a related party.
(7) BUSINESS SEGMENT INFORMATION
The Company manages its business by services it provides, which resulted in
one operating segment during the year ended December 31, 1998 and for the period
January 1, 1999 through May 19, 1999. The Company is a provider of performance
measurement information related to the United States cattle feedyard industry.
All of the Company's revenues for the year ended December 31, 1998 and for
the period January 1, 1999 through May 19, 1999, were derived from customers in
the United States. One customer accounted for 38% of the Company's revenues for
the year ended December 31, 1998, and 34% (unaudited) and 38% (unaudited) of the
Company's revenues for the nine months ended September 30, 1998 and for the
period January 1, 1999 through May 19, 1999, respectively. The same customer
accounted for none and 95% (unaudited) of the Company's trade accounts
receivable balance at December 31, 1998 and May 19, 1999, respectively.
(8) YEAR 2000 RISKS
Existing computer programs of many businesses were developed with a
two-digit year identification without consideration of the upcoming change in
the century or millennium in the year 2000. The Company is in the process of
addressing its year 2000 readiness. In late 1997, the Company engaged a third
party to develop a new performance measurement system to replace its outdated
system and to handle the year 2000 issue. Final testing and use of the new
system is expected to occur in mid 1999.
Failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the year 2000 problem, resulting in part from the uncertainty of the
year 2000 readiness of third party suppliers, vendors and customers, the Company
is unable to determine at this time whether the consequences of year 2000
failures will have a material impact on the Company's results of operations,
liquidity and financial condition. The Company believes that, upon completion of
the new system, the possibility of interruptions of material consequences to
normal operations will be reduced. The Company is relying on the new system to
be year 2000 compliant and has not developed a contingency plan to minimize any
potential disruptions which could occur because of the year 2000.
F-46
<PAGE> 127
8,000,000 SHARES
[MERGE INTERACTIVE GLOBE LOGO]
CLASS A COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
FEBRUARY 4, 2000
