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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
COMMISSION FILE NUMBER: 000-29037
EMERGE INTERACTIVE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0534535
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10315 102ND TERRACE
SEBASTIAN, FLORIDA 32958
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 589-7331
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.008
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant was approximately $88.3 million as of
March 1, 2001, based upon the closing sale price per share of the common stock
as quoted on the Nasdaq National Market. For the purposes of determining this
amount only, the Company has excluded shares of common stock held by directors,
officers, and stockholders with representatives on the board of directors whose
ownership exceeds five percent of the common stock outstanding at March 1, 2001.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or that such person
is controlled by or under common control with the registrant.
The number of shares of the registrant's common stock, $0.008 par value,
outstanding as of March 1, 2001 was 35,520,435. There were 29,825,990 shares of
Class A common stock outstanding and 5,694,445 shares of Class B common stock
outstanding as of this date.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of eMerge Interactive, Inc.'s
definitive proxy statement for its 2001 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the end
of the year covered by this Form 10-K Report are incorporated by reference into
Part III of this Report.
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EMERGE INTERACTIVE, INC.
FORM 10-K ANNUAL REPORT
(FOR FISCAL YEAR ENDED DECEMBER 31, 2000)
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 13. Certain Relationships and Related Transactions.............. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 29
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This Annual Report on Form 10-K contains statements that constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements can be identified by the use of
predictive, future tense or forward-looking terminology, such as "anticipates,"
"believes," "estimates," "expects," "intends," "may," "will" and words of
similar meaning. These statements include statements regarding, among other
things, our electronic commerce strategy, acquisition and expansion strategy,
product and service development, projected capital expenditures, liquidity and
capital, development of additional revenue sources, expansion into new market
segments, technological advancement, ability to develop "brand" awareness and
the market acceptance of the Internet as a medium of commerce. These statements
are based on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ significantly
from those described in the forward-looking statements, including the acceptance
by our customers of electronic commerce as a means of conducting business, our
ability to grow revenue, our ability to increase margins, our ability to
implement our acquisition and expansion strategy, the impact of competition on
pricing, general economic conditions, employee turnover, the impact of
litigation and other factors. Other factors that may cause such a difference
include, but are not limited to, those discussed in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Factors Affecting Our Business, Financial Condition and Results of Operation,"
as well as those discussed elsewhere in this report and as set forth from time
to time in our other public filings and public statements. Readers of this
report are cautioned to consider these risks and uncertainties and to not place
undue reliance on these forward-looking statements.
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PART I
ITEM 1. BUSINESS
ITEM 1(A). GENERAL DEVELOPMENT OF THE BUSINESS
COMPANY OVERVIEW
We are a technology company providing supply-chain management and marketing
solutions for the $40 billion U.S. beef-production industry. Our goal is to
improve the nation's beef-production process by adding previously unrealized
value to the supply chain via an information-management infrastructure, an e-
marketplace, and value-enhancing technologies. We believe that by accomplishing
our goal, we can improve the industry's productivity and profitability and help
its participants enhance beef quality, safety and market share. We offer our
products and services to cattle industry participants through our web-based
business network, our proprietary information management applications and our
direct sales force. Our current products and services include:
- Livestock procurement services consisting of on-site and on-line cattle
sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies; and
- Cattle inventory management tools.
Our business strategy is to utilize our information management, electronic
commerce and technology resources to develop and offer complementary products
and services that reduce inefficiencies throughout the cattle production chain,
improve cattle quality and improve overall productivity in the cattle industry.
Through this strategy, we intend to improve meat quality, meat safety and
to positively affect the manufacturing process in the cattle industry by adding
previously unrealized value to the nation's beef supply system. We intend to
implement this strategy through our existing CattleinfoNet business network,
which is comprised of our information-management infrastructure, an electronic
commerce platform and value enhancing technologies. As an integral part of our
strategy, we intend to enhance the effectiveness and scope of our CattleinfoNet
business network by acquiring and developing a network of Interactive Marketing
Facilities.
We believe that a network of Interactive Marketing Facilities will allow us
to more accurately gather, track and analyze information through our information
management infrastructure, more productively operate our electronic commerce
platform and more uniformly implement and monitor our technologies. As a result,
we believe that by combining our CattleinfoNet business network with a network
of Interactive Marketing Facilities we will be able to more effectively and
rapidly reduce the inefficiencies in the cattle industry and provide ranchers
and producers with increased product quality, consistency, yield and safety.
THE ONLINE LIVESTOCK OPPORTUNITY
We believe that the production chain of the cattle industry, which includes
cattle producers, feedlots, packers and suppliers, contains inefficiencies that
reduce animal health and value. These inefficiencies, which include excessive
animal transportation and handling, result in additional transaction costs and
reduced beef quality. Further, we believe that inadequate access to current and
accurate data and a lack of integrated information management tools have limited
the ability of industry participants to optimize their operating results and
performance.
Due to its functionality, scalability and accessibility, the Internet is
emerging as a single destination for commerce and information related to the
livestock industry. Many of the variables that affect beef quality and cattle
performance can be addressed by using the Internet's open architecture,
universal accessibility and ability to provide more timely and comprehensive
information. We believe the Internet can create a more efficient marketplace for
the exchange of cattle by directly connecting buyers and sellers and providing
information related to the cattle for sale.
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THE EMERGE INTERACTIVE SOLUTION
We offer commerce, information and technology to cattle industry
participants. Our complementary products and services are designed to reduce
inefficiencies throughout the cattle production chain, improve cattle quality
and improve overall productivity in the cattle industry. Our current products
and services, which can be accessed through our CattleInfoNet.com website,
include the following:
- Interactive Marketplace Cattle (formerly known as Cyberstockyard.com) is
our online cattle sales and auction service that allows our customers to
participate in our live cattle sales and auctions. We believe that use of
our online cattle sales and auction services provides 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.
- Interactive Manager, which combines our Feedlot Information Systems and
Professional Cattle Consultants services, is our comprehensive online
cattle information management service. This product is designed to assist
in the effective daily management of our customers' cattle operations.
Using our proprietary information management application, we gather raw
daily operating data from our feedlot customers via 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.
We disseminate this customized information back to that customer over the
Internet on a daily basis.
- Cattlelog is our online animal-tracking and information management system
which provides users with the ability to electronically identify and
track individual animals from conception through harvest. This system
uses electronic ID and permanent ear tags which are embedded with
microchips and tied to unique identification numbers. We use a range of
tools to build, communicate, and analyze each animal's history, including
hand held personal digital assistants (PDAs) for field use, chuteside
computers to automatically gather data on parameters from weight to
temperature, and desk-top PDAs which link offices with our other products
and services.
Through Interactive Manager, we also provide our subscribing 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
and operational performance benchmarking against other feedlots in our
database as well as monthly market analysis.
- Interactive Marketplace Products is our online procurement service that
allows our customers to purchase cattle-related products and services
from a list of third-party suppliers. Currently, our customers are able
to purchase through our CattleInfoNet.com website pharmaceutical, farm
equipment, and office supplies as well as apparel products.
- Current industry news, commodities pricing, weather coverage and an
online community to facilitate the exchange of information among
livestock producers, feedlots and packers.
COMPANY BACKGROUND
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
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veterinarians to visualize small differences in the surface temperature of
horses, and therefore identify heat, a common sign of inflammation associated
with injury at early stages.
To expand our product base, in July 1998, we licensed a portfolio of
patents from a division of the Canadian government relating to the application
of infrared technology to the animal science field and a restorative feed
supplement called NutriCharge. Under this agreement, we began 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.
Subsequent to discontinuing production of the AMIRIS system, we embarked
upon a series of acquisitions and transactions during 1999 and 2000, which were
aimed at increasing our presence and market share within the cattle industry.
The discussion of these acquisitions are incorporated by reference under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as set forth in Item 7 of this Form 10-K Report.
In February 2000, we completed our initial public offering ("IPO") of
7,175,000 common shares and a private placement of 500,000 common shares, which
generated net proceeds of $107.1 million. Subsequent to our offering,
approximately $12.8 million of the proceeds were used to pay amounts due to
related parties and Turnkey Computer Systems, $37.7 million was used for
acquisitions of other businesses, and $16.3 million was used for capital
expenditures.
In December 2000, we determined that the additional resources required to
successfully commercialize our Nutricharge and infrared imaging products were
not warranted given our current operating environment and business strategies.
Accordingly, we determined during this period that it was no longer feasible to
continue offering these products.
ITEM 1(B). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information for the Company's two operating segments for the three-year
period ended December 31, 2000, is contained in Note 9 to the Consolidated
Financial Statements on page F-15.
ITEM 1(C). NARRATIVE DESCRIPTION OF BUSINESS
INDUSTRY BACKGROUND
Beef Industry
According to the National Cattlemen's Beef Association, or NCBA, the cattle
industry is the largest single segment of the American agricultural economy. The
U.S. Department of Agriculture reports that sales of cattle accounted for
approximately $34 billion in 1998. On an annual basis, the U.S. beef production
industry spends over $6 billion for feed and, based on our estimates,
approximately $600 million for medication. At the retail level, the cattle
industry generates over $51 billion in sales of beef. Furthermore, the NCBA
estimates that worldwide cattle production is three times greater than U.S.
production.
Industry Participants
The U.S. beef production chain can be classified into three primary
segments: producers, feedlots, and packers.
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Producers
According to the NCBA, there are approximately one million producers
comprised of ranchers and small farm owners who breed and raise cattle. Most of
the producers are independently owned and are dispersed throughout the United
States. Each year these producers market approximately 35 million head of cattle
that are eventually harvested for food, of which approximately 27 million are
processed through feedlots. These cattle, raised for 12-18 months in an average
herd size of approximately 35 head, are often located in different geographic
regions, aggregated into larger herds and then sold to centralized feedlots to
increase their weight and value.
Feedlots
Feedlots typically purchase cattle weighing 300 to 900 pounds and manage
the health and growth of the cattle for a period of 110 to 250 days. We estimate
that during this time, each animal is fed on average 20-30 lbs. of grain per
day. There are approximately 700 major feedlot operations concentrated in 10
Midwestern states. These feedlots can manage from 4,000 to 115,000 head of
cattle at any given time. After reaching a weight of approximately 900 to 1,400
pounds, the animal is typically sold to a packer for harvesting.
Packers
Packers usually hold the cattle for 2 to 24 hours before harvesting and
fabricating them for sale and eventual consumption. In addition to processing
beef, packers inspect beef for cleanliness in preparation for quality grading.
There are currently 64 major beef packing operations in the United States, which
in total process approximately 35 million head of cattle into roughly 25 billion
pounds of beef annually. Approximately 82% of the beef processed in the United
States is processed by beef packing operations owned by IBP, Inc., Cargill,
ConAgra, Inc., and Farmland Industries, Inc
LIMITATIONS OF THE CURRENT SYSTEM
The current cattle production chain contains a number of inefficiencies
that reduce livestock quality and increase cost. These inefficiencies include
multiple transaction costs, exposure to stress and disease, and the loss of
important feeding and medication information.
INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS
As cattle move through the beef production chain, from an individual
producer's ranch to a feedlot to a meat packing facility, the cattle may be
bought, sold and transported three or four times. Due to the highly fragmented
nature of the cattle producer segment, the majority of cattle are sold through
traditional livestock sales and auctions, which bring together regional buyers
and sellers. The cattle are then sold either directly to feedlots or sold once
again to larger buyers and then onto feedlots. Typically, cattle sales and
auctions are hosted at sale barns, where livestock brokers act as agents in the
buying and selling of animals. The livestock broker is paid a fee or commission
each time an individual lot of cattle is bought or sold. As a result of the
geographic dispersion of producers and sale barns, buyers often purchase cattle
from livestock brokers without having the opportunity to visually survey the
cattle. In addition, this current method of exchange does not facilitate easy
access to real-time price information or a geographically broad marketplace for
the product.
REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND
PROFITABILITY
The combination of the method of exchange used in traditional cattle sales
and auctions and the fragmentation of the producer segment of the industry
results in the repetitive transportation and handling of cattle. As cattle are
moved from one environment to another throughout the production chain, they are
commingled multiple times and can be exposed to contagious diseases. In
addition, the transportation, handling and commingling of cattle often results
in a predictable stress response, which 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
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conducted by researchers at Texas A&M University estimated that sick animals
yield approximately $80 per head less than comparable healthy animals, which
represents a significant loss based on the average value cited by the U.S.
Department of Agriculture of $600 per head.
THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
We believe that industry participants generally collect and analyze
information on cattle that go through the beef production process inconsistently
and in a manual and time-consuming manner. Due to the nature of data collection
and dissemination, cattle industry participants are unable to exchange critical
information in an efficient and timely manner to optimize performance and beef
quality. We believe that businesses in the cattle industry have not maximized
the use of information to effectively address health, quality and performance
issues.
Producers
Cattle producers typically do not receive data related to the weight of
their animals upon arrival to and departure from feedlots or the quality grades
of their animals, making herd management difficult. Animal-specific health and
medication information is generally not passed on to subsequent buyers at or
prior to the feedlot, which may result in unnecessary additional medication.
Feedlots
Feedlots are the primary source of information currently used in livestock
management. As a general practice, information is collected manually on a daily
basis and subsequently entered into multiple information systems that are
typically not integrated. Given the time-intensive nature of aggregating data
under the current process, it is difficult to collect, analyze and interpret
this data in a meaningful way. Historically, feedlots collect and share
industry-wide information for benchmarking and performance purposes by
submitting reports to data warehouse services that aggregate and disseminate the
combined results in monthly reports. Although these data warehouse services are
valuable as general strategic and analytical tools, because of the delay in
disseminating the information, they are less effective for daily cattle
management decisions, such as decisions relating to feed and medication.
Packers
Packers, at the end of the cattle production chain, collect critical
carcass and quality information such as weight, dimension, yield and meat
quality grade after the animal is harvested. However, we believe that only a
portion of cattle harvested were purchased based on these measures. Therefore,
feedlots receive carcass and quality data on a limited number of harvested
cattle. The remaining harvested cattle are sold to packers based strictly on
live weight, and consequently very little health and quality data is provided to
feedlots or producers on these cattle.
We believe improved information flow between and within the three main
groups of industry participants can significantly enhance product quality. There
is currently no network or method for compiling and communicating information
rapidly throughout all stages of the cattle production chain. Product
performance information gathered by packers and feedlots will help refine and
improve handling practices earlier in the production chain. Information relating
to an animal's medical history will minimize redundant medication. In addition,
we believe that information about an animal's genealogy disseminated by
producers and feedlots will enable more accurate differentiation among breeds of
cattle at the packer level and a more easily implemented quality branding
strategy at the retail level. Finally, information linking handling, feeding and
medication techniques and the ensuing performance results, gathered and
disseminated on a daily basis by feedlots, can help the entire segment rapidly
adopt best practices.
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OUR PRODUCTS AND SERVICES
Our on-line products and services can be accessed through our CattleInfoNet
web site and are described below:
THE EMERGE MARKETPLACE
CATTLEINFONET.COM
- Industry news
- Regional weather
- Commodity pricing
- Expert corner
- Reports online
- Links to industry information
INTERACTIVE MARKETPLACE MANAGEMENT INFORMATION SOLUTIONS
Interactive Marketplace for Cattle Interactive Manager
- - Cattle sales - Feedlot specific content
- - Cattle auctions - Daily performance data
- - Order fulfillment - Web-enabled with graphical user
interface
- Analytical services
Interactive Marketplace for Products - Regional feedlot benchmarking data
- - Products from 3rd party suppliers
- - Animal health products Cattlelog
- - Equipment
- - Office supplies Specialized Database Services
- - Apparel
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 commodities
pricing. Also through this site, customers can access our Interactive
Marketplaces to purchase or sell cattle or procure cattle-related products and
services. Our customers can also access through this site the feedyard
information management tools offered by our Interactive Manager application.
INTERACTIVE MARKETPLACE
Interactive Marketplace Cattle is our online cattle sales and auction
service. Accessed through our CattleInfoNet.com website, 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.
Cattle Brokering
We have developed a detailed posting and transaction process for our
on-line brokering services 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 verify all cattle offered for sale through CattleInfoNet.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
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purchase and either have our system automatically search for a match or have our
brokers source cattle to match their order. After identifying particular cattle
to purchase, our customers can complete the transaction on-line or through
e-mail or the telephone. Once cattle have been purchased, we manage the shipment
logistics through our sales and customer service organization. In addition to
our on-line brokering services, we also purchase and resale cattle through an
integrated network of order buyers and sales representatives.
Cattle Auctions
In addition to our brokering service, we offer cattle for sale through our
online video auctions and traditional sale barn auctions. We offer a mock
auction to help our customers get acquainted with the auction process. We have
developed a system that allows participants to place bids real-time or have our
system automatically bid in increments up to a predetermined limit. Once a bid
is accepted, the purchaser is notified online. Our customer service team then
follows-up by telephone and e-mail with specific shipment logistics regarding
the cattle.
We believe that because online procurement results in fewer cattle
shipments and less handling, transaction costs are reduced and animals arrive at
their destination healthier and less stressed, thereby increasing the value of
the animals. We also believe that online cattle procurement creates a medium for
obtaining access to market pricing from various buyers and sellers located
throughout the United States. We believe that this may eventually reduce the
amount of commission fees paid by the cattle industry as a whole, and thereby
reduce the cost to produce cattle. Through this comprehensive online
marketplace, we also have the ability to sell products and services that are
designed to improve productivity within the livestock industry.
MANAGEMENT INFORMATION SOLUTIONS
Interactive Manager
Interactive Manager provides customers daily information services. This
secure proprietary information management application is delivered via a
web-based application service provider (ASP) model 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.
Interactive Manager 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 Interactive Manager. In addition, our staff provides valuable analysis and
interpretation of the information contained in the database.
Through Interactive Manager, we also 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
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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.
TECHNOLOGY 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 $4.2 million during the
year ended December 31, 1999 and approximately $7.7 million for the year ended
December 31, 2000 were related to technology and development spending. We intend
to continue to invest in technology and development and focus on recruitment of
experienced scientists, engineers and developers. Our current technology and
development activities are primarily focused on developing additional
information technologies to complement our products and services for the cattle
industry.
We have entered into a cooperative research and development agreement with
the USDA Agricultural Research Service and Iowa State University of Science and
Technology, in which we have been granted exclusive rights and responsibilities
for product development and commercialization of technology developed and
patented by them for the detection of small, diluted quantities of mammalian
fecal matter on animal carcasses. We will provide design and engineering
expertise. When commercialized, we believe that this technology may reduce
safety inspection and processing costs at packing plants while reducing e-coli
contamination risks. The parties to the agreement may only terminate in the
event of a breach by another party. In connection with this agreement, we have
also entered into an exclusive license agreement with Iowa State University for
patent rights relating to the research and development agreement. Under the
license agreement, we have the right to make or have made, use, sell, offer to
sell and import products using technical data and information owned by the Iowa
State University Research Foundation, or ISURF. The license agreement applies to
all present and future patents, patent applications and inventions relating to
meat and carcass inspection technology. In exchange for the license, we paid a
license fee in the amount of $10,000. We will also pay a royalty of six percent
of the net sales of any licensed products. If we sublicense the technology, we
will also pay ISURF 50% of any fees paid to us by the sublicensees. Currently,
there are no licensed products and we have not made any royalty payments to
date. The license will expire when the last of the patents covered by the
license expire, unless we terminate earlier.
SALES AND MARKETING
Sales
Our sales organization is structured around a direct sales team and an
electronic commerce sales team. We have a staff of account managers who are
responsible for sales of products and services through our electronic commerce
platform to feedlot and packer customers in given geographic territories. We
have a staff of cattle buying representatives who, along with independent buyer
representatives with whom we have entered into relationships, are responsible
for obtaining inventory for livestock sales from producers. We also have a team
dedicated to increase advertising revenue and third party products to our
electronic commerce offering.
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Marketing
We seek to establish broad customer awareness of our technologies, products
and services within the industries we serve. Our marketing efforts include
direct advertising through trade journals and press releases coordinated by our
communications group. 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 customer focus is the 350 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. During 2000, we
internet-enabled, with our Interactive Manager service, 331 feedyards across the
country, which represented 60% of the feedyard capacity in the United States. We
also offer our products and services to participants throughout the cattle
production chain.
CUSTOMER SERVICE
Currently our order entry, e-commerce transactions and hardware and
software support functions are conducted at our Sebastian, Florida facility. Our
current field support organization is based in Dodge City, 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 site uses multiple front-end web servers and several databases
located at a specialized computer center hosting facility. We have implemented
scalable web site management, search, customer interaction, transaction
processing and fulfillment services and systems. Our web site and extranet
provide customization, interactivity and performance required for
business-to-business electronic commerce. We utilize applications for:
- Accepting and validating customer orders;
- Placing and managing orders with suppliers and manufacturers;
- Notifying and updating customer order status;
- Management of shipment of products; and
- Viewing specialized web application information developed for the cattle
industry.
All sensitive data communication between remotely located computers uses
secure socket layer, or SSL, or other encryption technology. This allows the
transfer of local feedlot data from our main databases which use Sun E450
clustered servers.
Data Collection
The data collection system for our Interactive Manager system gathers
information from feedlot accounting, feedbunk and hospital systems. This
information is extracted through specialized interfaces and is encrypted and
transmitted securely to our main storage database. 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 our
subscriber feedlots.
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Data Display
External connections to view data are made via the Internet through a
standard browser to connect to our CattleInfoNet.com web site. A secure login is
required for full access to our Interactive Marketplace Cattle, Interactive
Marketplace Products, and Interactive Manager products. 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 currently have a number of pending U.S.
and foreign patent applications, issued patents or patent license agreements
relating to:
- Systems and methods for early detection of inflammation;
- Feedlot information systems and methods;
- Livestock management systems and methods;
- Methods of enhancing growth in birds;
- Methods and apparatus for live video auctions;
- Automated smart syringe system;
- Methods and systems to detect contaminated fowl eggs;
- Animal health certification and sale process system; and
- System and method for detection of fecal contamination on a carcass.
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. Our ability to protect our
proprietary rights is subject to certain risks and uncertainties, including
those set forth in "Factors Affecting Our Business, Financial Condition, and
Results of Operations" within Item 7 of this report.
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. Although we
believe we have a strong position, we cannot be assured that we will be able to
ultimately overcome any such challenge. If we are unsuccessful we may be
required to cease using the eMerge marks at a future date.
COMPETITION
In the cattle sales and auction services market, we compete against
traditional cattle auction services, as well as video cattle auction providers
and other online cattle auction services. Currently, the majority of cattle and
calf sales transactions occur through auctions held at traditional sale barns.
These sale barn operations are
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highly fragmented and vary in size. We believe that the primary competitive
factors in the cattle sales and auction services market include:
- Availability and quality of inventory;
- Pricing;
- Reliability of service;
- Efficiency;
- Brand awareness;
- Customer service; and
- Convenience and ease of use.
We believe that we compete based on these factors, particularly due to our
access to inventory, our focus on ensuring quality and reliability, the brand
awareness developed through our comprehensive solution and the convenience and
ease of use of our Web site.
We compete against other companies in the information services segment,
including established cattle and livestock information services. We also face
competition from cattle industry product manufacturers who use information
technology to promote the effectiveness of their products. These services are
often provided in connection with the sale of products to industry participants.
In addition, providers of software to feedlots also offer information services
to their feedlot customers. We believe that the primary competitive factors in
the information services market include:
- Breadth of available data;
- Quality of analyses;
- Timeliness of information;
- Brand recognition;
- Value-added consulting services; and
- Convenience and ease of use.
We believe that we compete based on these factors particularly due to the
size and quality of our proprietary database, the timeliness of our service
offerings, the expertise of our professionals and the convenience and ease of
use of our Web sites.
Our current competitors may include large companies that have substantially
greater market presence, brand-name recognition and financial resources than we
do. Some of our smaller competitors may also enjoy greater recognition and close
relationships within a particular community.
EMPLOYEES
As of December 31, 2000, we employed a total of 282 persons, 278 of whom
work with us on a full-time basis. We are not subject to any collective
bargaining agreements and we believe that our relationship with our employees is
good.
ITEM 1(D). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company does not have foreign sales and does not believe geographic
sales are significant to obtain an understanding of its business operations
during the three-year period ended December 31, 2000.
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ITEM 2. PROPERTIES
The location and general description of our properties as of March 1, 2001,
are as follows:
CORPORATE HEADQUARTERS
Our corporate facility is currently located at 10315 102nd Terrace in
Sebastian, Florida, where we occupy approximately 17,000 square feet of office,
administrative, and data center space. We sublease our facilities from XL
Vision, which leases the entire facility from XL Realty, Inc., a subsidiary of
Safeguard. Our lease for this facility expired on January 1, 2001, and we
continue to lease the facility on a month-to-month basis while we actively seek
alternate locations for our corporate headquarters.
OTHER FACILITIES
We maintain sales and support offices in Meade and Dodge City, Kansas;
Weatherford, Oklahoma; Broomfield, Colorado; Austin, Texas; Louisville,
Kentucky; and Sioux Falls, South Dakota. We also maintain cattle assimilation
and auction facilities which are located in Lexington and Providence, Kentucky;
Okolona, Mississippi; Gaffney, South Carolina; and in San Saba, Brownwood,
Mason, Chilton and Laredo, Texas.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in a lawsuit filed by Central Biotech,
Inc. on January 12, 2000 in the Queen's Bench Judicial Centre of Regina,
Province of Saskatchewan, Canada. The complaint alleges that we 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.
In 2000, our motion to dismiss the case based on jurisdiction and venue was
denied at the trial court level in Saskatchewan, as was the similar motion by
co-defendant E-Y Laboratories. Both defendants have appealed that decision, and
are in the process of presenting their position to the appeals court. We
continue to believe that the matter should be dismissed, but it is not possible
to predict whether the appellate court in Canada will reverse the lower court
decision. If the case is not dismissed, it will proceed in Canada. We believe
the case to be without merit and intend to defend it vigorously.
We are involved in various other claims and legal actions arising in the
ordinary course of business. Our opinion is that the ultimate disposition of
these matters will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades in the Nasdaq National Market under the symbol
"EMRG". Prior to our February 4, 2000, IPO there was no established public
trading market for any of our securities. The price range per share reflected in
the table below is the highest and lowest sale price for our stock as reported
by the Nasdaq National Market during each quarter our common stock has been
publicly traded.
FISCAL QUARTER ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
------------------ -------- ------------- ------------
(FEB. 4 - MAR. 31)
Price range per share:
Low......................................... $25.00 $ 8.56 $15.00 $ 2.88
High........................................ $70.50 $30.19 $31.00 $16.50
As of March 1, 2001, the last reported sale price for our common stock on
the Nasdaq National Market was $4.63 per share and we had 626 registered holders
of record of our common stock.
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
Concurrent with our IPO on February 4, 2000, we issued 18,123,953 shares of
common stock upon the conversion of Series A, Series B, Series C, and Series D
preferred stock. At the time of conversion, there were 6,443,606 shares of
Series A, 2,400,000 shares of Series B, 1,100,000 shares of Series C and
4,555,556 shares of Series D preferred stock outstanding. Each share of
outstanding preferred stock converted into 1.25 shares of Class A common stock
at the completion of our IPO, except for Series D shares which converted into
1.25 shares of Class B common stock.
On May 1, 2000, we purchased certain tangible and intangible assets in
connection with the acquisition of the rollover business of Eastern Livestock,
Inc. ("Eastern"). As part of the exchange, we issued 1,215,913 shares of our
Class A common stock with an aggregate value of $14.5 million.
On July 24, 2000, we purchased certain tangible and intangible assets in
connection with the acquisition of Ed Edens Farms ("Edens"). As part of the
exchange, we issued 83,858 shares of our Class A common stock with an aggregate
value of $1.0 million.
On August 18, 2000, we purchased certain tangible and intangible assets in
connection with the acquisition of LeMaster Livestock, Inc. ("LeMaster"). As
part of the exchange, we issued 125,819 shares of our Class A common stock with
an aggregate value of $2.2 million.
On August 28, 2000, we purchased certain intangible assets in connection
with the acquisition of Mountain Plains Video Contract Auction ("Mountain
Plains"). As part of the exchange, we issued 12,743 shares of our Class A common
stock with an aggregate value of $250,000.
On August 31, 2000, we purchased certain tangible and intangible assets in
connection with the acquisition of McMahan Order Buying Company ("McMahan"). As
part of the exchange, we issued 104,392 shares of our Class A common stock with
an aggregate value of $1.8 million.
On September 1, 2000, we purchased certain tangible and intangible assets
in connection with the acquisition of RPT Land & Cattle Company ("Thigpen"). As
part of the exchange, we issued 89,585 shares of our Class A common stock with
an aggregate value of $2.0 million.
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On November 24, 2000, we purchased certain tangible and intangible assets
in connection with the acquisition of Hefley Order Buying Company ("Hefley"). As
part of the exchange, we issued 10,190 shares of our Class A common stock with
an aggregate value of $100,000.
On December 4, 2000, we purchased certain tangible and intangible assets in
connection with the acquisition of J&L Livestock Company ("Jansma"). As part of
the exchange, we issued 331,620 shares of our Class A common stock with an
aggregate value of $2.0 million.
Pursuant to our 1996 and 1999 Equity Compensation Plans, we granted options
to purchase a total of 1,785,926 shares of common stock to our employees and
certain other individuals in the year ended December 31, 2000, at a weighted
average exercise price of $16.57 per share. In the year ended December 31, 2000,
there were 257,656 shares purchased pursuant to option exercises at an average
exercise price of $1.23 per share.
All of the above referenced shares were issued pursuant to an exemption by
reason of Section 4(2) of the Securities Act of 1933. Shares issued in
connection with option exercises were issued pursuant to an exemption by reason
of Rule 701 and Section 4(2) of the Securities Act of 1933. The sales were made
without general solicitation or advertising. Each purchaser represented that he,
she, or it was acquiring the shares without a view to distribute and was
afforded an opportunity to review all documents and ask questions of our
officers pertaining to matters they deemed material to an investment in our
Class A common stock.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 2000, we commenced an initial public offering of our common
stock. Our registration statement on Form S-1 (File No. 333-89815) covering the
offering of 7,175,000 shares was declared effective on February 3, 2000. Adams,
Harkness & Hill, Inc., First Union Securities, Inc. and FAC Equities were the
managing underwriters of the offering. As part of the offering, we sold
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 sold 694,000 of its eMerge Interactive shares to its
shareholders. In addition, we issued 500,000 shares of class A common stock at
$15.00 per share in a private placement that was completed simultaneously with
the offering.
The net proceeds from the offering and the private placement after
deducting discounts, commissions, management fees, finder's fees and expenses
was $107.1 million. We have used $12.8 million of the proceeds from this
offering for payments to related parties and Turnkey Computer Systems, Inc.,
$37.7 million for acquisitions, $16.3 million for capital expenditures, and the
remainder for general working capital purposes. None of the foregoing expenses
or remaining payments constituted direct or indirect payments to our directors,
officers, general partners or their associates or to persons owning 10% or more
of any class of our equity securities or to our affiliates.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
All business activities from inception through December 31, 1996, related
to the transportation segment, which was disposed of in January 1999. As a
result, we have not included operations data for the year ended December 31,
1996.
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The financial information set forth below may not be indicative of our
future performance and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and Notes thereto which are included in
this Form 10-K Report.
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999 2000
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................................................. $ -- $ 1,792 $ 43,783 $803,020
Cost of revenue......................................... -- 2,623 43,517 793,860
------- ------- -------- --------
Gross profit (loss)..................................... -- (831) 266 9,160
Operating expenses:
Selling, general & administrative..................... 567 3,484 9,864 26,963
Technology & development.............................. 667 1,047 4,156 7,688
Depreciation & amortization........................... 122 238 1,563 10,053
Impairment & related charges.......................... -- -- -- 2,491
------- ------- -------- --------
Total operating expenses...................... 1,356 4,769 15,583 47,195
Interest expense/other income, net...................... (141) (332) (288) 4,815
------- ------- -------- --------
Loss from continuing operations......................... $(1,497) $(5,932) $(15,605) $(33,220)
======= ======= ======== ========
Loss from continuing operations per common share --
basic and diluted..................................... $ (3.91) $ (1.36) $ (3.11) $ (1.05)
======= ======= ======== ========
Weighted average number of common shares outstanding --
basic and diluted..................................... 382 4,357 6,795 31,687
======= ======= ======== ========
The following table summarizes our balance sheet data for the periods
indicated:
AS OF DECEMBER 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------ ------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................. $ 2 $ -- $ -- $12,316 $ 42,812
Total assets................................... 260 2,165 6,602 25,762 148,552
Total indebtedness............................. 3,636 8,040 5,572 13,620 1,537
Total stockholders' equity (deficit)........... (3,457) (6,875) 3 8,891 130,077
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUE RECOGNITION
We generate the majority of our revenue from cattle sales transactions
where we act as either a principal or agent in the purchase and sale of cattle.
For cattle sales transactions where we are the principal in the arrangement, we
purchase cattle from the seller, record the cattle as inventory until delivered
to an accepted buyer and are exposed to inventory, credit and market risk that
results from the transaction. In these types of transactions, we record the
gross revenue earned and related product costs incurred. For cattle sales
transactions in which we act as an agent, we sell cattle consigned to us on a
commission basis, where we are subject to inventory and credit risk, or we sell
cattle on a fee basis. In both types of transactions, we record the commission
or fee earned as revenue. For all other products and services we offer, we act
as a principal to the transaction and gross revenue and related product cost are
recognized as products are shipped or services are provided.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 was followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101," in March 2000 and by Staff
Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements"
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("SAB 101B"), in June 2000. In October 2000, the SEC issued a Frequently Asked
Questions and Answers document to provide additional guidance. These documents
summarize certain views of the SEC regarding applying generally accepted
accounting principles to revenue recognition in financial statements. The SEC
has provided this guidance due, in part, to the large number of revenue
recognition issues that registrants encounter. We believe that our current
revenue recognition policies comply with SAB 101.
ACQUISITIONS
In February 1999, we purchased substantially all of the assets of CIN, LLC,
a company which collected, analyzed and distributed information for use in the
cattle industry, for an aggregate purchase price of approximately $2.3 million.
The purchase price consisted of 750,000 shares of our class A common stock
valued at $720,000, the assumption of $812,000 of liabilities, a cash payment of
$358,000, an agreement to pay the first $350,000 from Internet sales of
third-party products over the Web site and transaction costs of $57,000.
In March 1999, we purchased all of the outstanding stock of Cyberstockyard,
Inc., a company selling cattle and other products through auction software over
the Internet for approximately $542,000. The purchase price consisted of 250,000
shares of our class A common stock valued at $450,000, the assumption of $90,000
of liabilities and transaction costs of $2,000.
In May 1999, we purchased substantially all of the assets of Professional
Cattle Consultants, L.L.C. for an aggregate purchase price of approximately $1.8
million. The purchase price consisted of $1.8 million of cash, the assumption of
$3,000 of liabilities and transaction costs of $25,000. The primary asset of
Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and
market information and analysis. For the past 26 years, Professional Cattle
Consultants, L.L.C. has collected a variety of performance and other data from
its subscribers' feedlot operations and provided subscribers with periodic
analyses of certain performance characteristics of their feedlot operations and
comparative analysis related to the performance of feedlots within their
regions.
In August 1999, we acquired 19% of the common stock of Turnkey Computer
Systems, Inc., ("Turnkey") 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, $1.4
million of cash and $23,000 of transaction costs. In connection with this
investment, we obtained the exclusive right to provide cattle sales and auction
services and feed sales services to customers of Turnkey through Turnkey's
system. This right will expire in August 2019. If we reach a specified level of
revenue per feedlot and that feedlot is a customer of Turnkey, we will pay a fee
to Turnkey. In October 2000, we acquired an additional 11% of the common stock
of Turnkey for $1.3 million in cash. We now have direct ownership in 30% of the
issued and outstanding capital stock of Turnkey.
In May 2000, we purchased certain tangible and intangible assets associated
with the rollover business of Eastern for (i) $17.0 million in cash, (ii)
1,215,913 shares of our common stock valued at $14.5 million and (iii) $4.5
million in cash to be paid one year after the closing date or earlier upon
certain events occurring. Eastern's rollover business engages in the buying of
cattle for immediate or short-term resale through its integrated network of
order buyers and sales representatives.
In June 2000, we purchased W.P. Land and Livestock, Inc., d/b/a Jordan
Cattle Auction ("Jordan"), and its related real estate for $6.4 million in cash.
Jordan engages in the business of purchasing and reselling of cattle through its
auction facilities which are located in San Saba, Brownwood, and Mason, Texas.
In July 2000, we purchased Edens and its related real estate for (i) $2.3
million in cash, and (ii) 83,858 shares of our common stock valued at $1.0
million. Edens engages in the buying of cattle for immediate or short-term
resale through its facility located in Okolona, Mississippi.
In August 2000, we purchased LeMaster and its related real estate for
(i)$3.1 million in cash, (ii) 125,819 shares of our common stock valued at $2.2
million, and (iii) $300,000 in cash to be paid one year after the closing date
or earlier based upon the occurrence of certain events. LeMaster engages in the
buying of cattle for immediate or short-term resale through its facility located
in Gaffney, South Carolina.
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In August 2000, we purchased Mountain Plains for (i) $750,000 in cash, and
(ii) 12,743 shares of our common stock valued at $250,000. Mountain Plains
provides video auction services to sellers of cattle and generates commissions
from the sellers upon the sale of their cattle through an affiliated auction
facility located in Billings, Montana.
In August 2000, we purchased McMahan for (i) $1.8 million in cash, (ii)
104,392 shares of our common stock valued at $1.8 million, and (iii) $10,000 in
cash to be paid in January 2001. McMahan engages in the buying of cattle for
immediate or short-term resale.
In September 2000, we purchased Thigpen and its related real estate for (i)
$3.3 million in cash, and (ii) 89,585 shares of our common stock valued at $2.0
million. Thigpen engages in the buying of cattle for immediate or short-term
resale through its facility located in Chilton, Texas.
In November 2000, we purchased Hefley for (i) $300,000 in cash, and
(ii)10,190 shares of our common stock valued at $100,000. Hefley engages in the
buying of cattle for immediate or short-term resale.
In December 2000, we purchased Jansma for (i) $2.3 million in cash, and
(ii) 331,620 shares of our common stock valued at $2.0 million. Jansma engages
in the buying of cattle for immediate or short-term resale.
All acquisitions were accounted for under the purchase method of
accounting, except for Turnkey, which was accounted for using the equity method
subsequent to the October 2000 transaction. The results of operations of the
acquired entities are included in our consolidated statements of operations
since their respective dates of purchase. All goodwill and intangible assets
associated with these acquisitions were being amortized over five years on a
straight-line basis, except for the goodwill related to the Turnkey acquisition,
which is being amortized over ten years on a straight-line basis.
Through these acquisitions, we have significantly increased our capacity to
market cattle throughout the United States. Because of the significance of these
acquisitions and the resulting additions to our products and services, our
historical financial results may not be indicative of our future performance.
We have incurred significant net losses since our inception. At December
31, 2000, we had an accumulated deficit of $65.5 million. The net losses and
accumulated deficit resulted from our lack of substantial revenues prior to
fiscal year 2000, increased costs associated with the significant personnel
infrastructure required to support our growing business and other costs incurred
for the development and marketing of our products. We have only recently begun
to generate significant revenue and have yet to achieve profitability. We may
never be able to generate or sustain significant profitability, nor may we be
able to sustain our current revenue growth.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 2000
Revenue increased from $43.8 million for the year ended December 31, 1999
to $803.0 million for the year ended December 31, 2000. Revenue from cattle
sales increased from $42.2 million for the year ended December 31, 1999 to
$800.9 million for the year ended December 31, 2000. This increase reflects a
higher volume of cattle sales transactions brought about primarily through our
acquisition activities. During the fiscal year ended December 31, 2000, we sold
approximately 1.7 million head of cattle versus 82,500 head sold in the
comparable prior year period. Revenue from other products and services increased
by 134% from $1.6 million for the year ended December 31, 1999 to $2.1 million
for the year ended December 31, 2000. This increase is due primarily to
incremental revenues of approximately $900,000 derived from subscriptions to our
comparative feedlot analysis and market information services, the addition of
advertising revenue, and sales of cattle-related products. The increased revenue
derived from other products and services was partially offset by a decline of
approximately $400,000 in sales of our equine imaging systems and related
inventory and relatively flat Nutricharge sales. In December 2000, we determined
that the additional resources required to successfully commercialize our
Nutricharge and infrared imaging products were not warranted given our current
operating environment and business strategies. Accordingly, we determined during
this period that it was no longer
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feasible to continue offering these products. We expect that cattle revenue will
continue to account for the majority of our revenue base for the foreseeable
future.
Cost of revenue consists primarily of the direct cost to acquire cattle,
cattle-related products, and equine imaging systems components. In addition,
cost of revenue also includes the indirect overhead costs, such as support
personnel, facilities costs, telecommunication charges and depreciation, that
are associated with supporting our expanding base of on-line products and
services and with the production of the equine imaging system. With the higher
volumes of cattle sales transactions generated in fiscal year 2000, cost of
revenue attributed to cattle sales increased from $41.7 million for the year
ended December 31, 1999 to $791.5 million for the year ended December 31, 2000.
Cost of revenue attributed to other products and services increased by 132% from
$1.8 million for the year ended December 31, 1999 to $2.3 million for the year
ended December 31, 2000. This increase is due principally to higher indirect
overhead and an increase in cattle-related product costs. Higher costs of
revenue for other products and services were partially offset by a reduction in
costs associated with our equine imaging systems. We generated a gross profit of
$266,000 and $9.2 million for the year ended December 31, 1999 and 2000,
respectively. The increase in gross profit is due primarily to the increase in
cattle revenue as cost of goods did not increase in proportion to the increase
in revenue.
Selling, general and administrative expenses increased 273% from $9.9
million for the year ended December 31, 1999 to $27.0 million for the year ended
December 31, 2000.
Our selling expenses consist primarily of salaries and related benefit
costs for sales and marketing personnel, recruiting and relocation charges,
consulting fees, travel, telephone and advertising and trade shows. Selling
expenses increased 284% from $6.7 million for the year ended December 31, 1999
to $19.0 million for the year ended December 31, 2000, and included non-cash
compensation charges of $1.3 million associated with employee separations during
the second quarter of fiscal year 2000. The remaining increase in sales and
marketing expenses is due primarily to costs associated with expanding the
number of personnel within the organization, most notably from salaries and
wages, as well as higher telephone, travel and advertising costs. These expenses
were partially offset by reductions in bonus and consulting charges. We expect
these costs to continue to increase as we continue to pursue additional sales
and marketing opportunities.
Our general and administrative expenses consist primarily of salaries and
related benefit costs for executive, administrative, and finance personnel,
insurance program charges, travel and professional service fees. General and
administrative expenses increased 250% from $3.2 million for the year ended
December 31, 1999 to $8.0 million for the year ended December 31, 2000. The
increase is primarily due to costs associated with expanding the number of
personnel within the organization, most notably from salaries and wages,
increased acquisition activity, which also brought about a rise in property and
insurance costs, and higher legal, investor relations and travel expenses, which
were required to support and grow our publicly-held business. We expect these
expenses to continue to increase as additional acquisitions are made, personnel
are hired, and expenses are incurred to support future growth.
Our technology and development expenses consist primarily of salaries and
related benefit costs, payments to outside consultants, and project material
costs. Our expenses increased 183% from $4.2 million for the year ended December
31, 1999 to $7.7 million for the year ended December 31, 2000. This increase was
primarily due to costs associated with expanding the number of personnel within
the organization, most notably from salaries and wages. In addition, increased
spending for consultants and materials and supplies was required to integrate
and expand our growing product lines such as our online cattle sales and auction
software and Interactive Manager software (formerly referred to as Feedlot
Information System software). We expect to continue to incur costs to develop
and commercialize new products, expand our offerings and adapt our technologies
to new markets.
Depreciation and amortization expense increased 631% from $1.6 million for
the year ended December 31, 1999 to $10.1 million for the year ended December
31, 2000. The increase was primarily related to higher amortization charges
resulting from business acquisitions completed in 2000. Increases in capital
spending to support our infrastructure build-up also drove higher depreciation
during 2000. We expect both
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depreciation and amortization will continue to increase for the foreseeable
future as new projects are placed into service and the newly-acquired businesses
begin their first full year of operation under our ownership.
We recorded impairment and related charges of $2.5 million during December
2000 to write-off the remaining net book values of accounts receivable,
inventories, intangibles and fixed assets, and accrue for outstanding
commitments that were associated with our Nutricharge and Infrared imaging
products. Based on an assessment of our current operating environment, the
resources required to successfully commercialize these products and our business
strategies, we determined during this period that it was no longer feasible to
continue offering these products. The impairment charge primarily related to the
write-off of $2.0 million in remaining net book values of intangible assets.
Interest and other income (expense), net rose from ($288,000) for the year
ended December 31, 1999 to $4.8 million for the year ended December 31, 2000.
This increase was primarily due to increased interest income generated by
short-term investments and a reduction in interest expense on related party debt
that was repaid following our initial public offering. Currently, we invest the
majority of our cash balances in debt instruments of high-quality corporate
issuers. Included in interest and other income (expense), net is $1.8 million of
imputed interest income recognized in 2000 from a $23.0 million note receivable
due from Internet Capital Group. The note receivable was executed in connection
with an October 1999 securities purchase agreement and was paid in full in
November 2000.
Due to the losses incurred, we did not recognize income tax expense for the
year ended December 31, 1999 and 2000. As of December 31, 2000, we had
approximately $56.0 million of federal income tax loss carry forwards that can
be used to offset future taxable income. Our tax loss carry forwards begin to
expire in 2012 and we are not currently aware of any limitation on our ability
to offset future taxable income.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1999
Revenue increased from $1.8 million for the year ended December 31, 1998 to
$43.8 million for the year ended December 31, 1999. Revenue from cattle sales
increased to $42.2 million for the year ended December 31,1999. There was no
revenue from cattle sales in 1998. Revenue from other products decreased by 11%
from $1.8 million for the year ended December 31, 1998 to $1.6 million for the
year ended December 31, 1999. This decrease was due primarily to lower revenue
from sales of our equine imaging systems reflecting a decline in units sold.
Increased sales of NutriCharge and the sale of subscriptions to our comparative
feedlot analysis and market information service partially offset the decline in
revenue from equine camera sales. As previously indicated, we determined during
December 2000 that it was no longer feasible to continue offering our
Nutricharge and Infrared Imaging products.
Cost of revenue consisted 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, and supplies, which
were primarily associated with the production of equine imaging systems. Direct
costs attributed to cattle sales were $41.7 million for the year ended December
31, 1999. There were no direct costs from cattle sales in 1998. Costs attributed
to other products decreased by 32% from $2.6 million for the year ended December
31, 1998 to $1.8 million for the year ended December 31, 1999. This decrease was
due principally to the decline in unit sales of equine imaging systems and
associated reductions in manufacturing overhead. We generated a gross loss of
$831,000 for the year ended December 31, 1998 and a gross profit of $266,000 for
the year ended December 31, 1999. The change from a gross loss to a gross profit
was due primarily to the increase in cattle revenue, while cost of goods,
principally manufacturing overhead, did not increase in proportion to the
increase in revenue.
Selling, general and administrative expenses increased 283% from $3.5
million for the year ended December 31, 1998 to $9.9 million for the year ended
December 31, 1999.
Selling expenses consisted primarily of salaries and related benefit costs,
commissions for sales and marketing personnel, consulting fees, travel and
entertainment, advertising and trade shows. Selling expenses increased 319% from
$2.1 million for the year ended December 31, 1998 to $6.7 million for the year
ended December 31, 1999. The increase was due primarily to expenses associated
with expanding the number of
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personnel from 11 people at December 31, 1998 to 35 people at December 31, 1999
and higher consulting, travel and advertising costs to effect our business
strategy.
Our general and administrative expenses consisted primarily of salaries,
bonuses and related benefit costs for executives and administrative personnel
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 provided us
with management consultation, investor relations, financial management, human
resource management, legal services, insurance programs, and administrative
services. We paid a fee calculated pursuant to a formula that was based on a
percentage of our revenue, not to exceed $300,000 annually. The fee was not due
until we achieved positive cash flow from operations. The agreement extended
through December 31, 2002 and continues unless terminated by either party.
During April 2000, the administrative services agreement with Safeguard was
terminated. In October 2000, the agreement with XL Vision was amended to change
the methodology for calculating fees due under the agreement. Presently,
administrative services fees are based upon an estimate of hours spent by XL
Vision personnel in support of our business. These estimates are reviewed
periodically by both parties and adjusted when necessary to reflect actual
services rendered.
As of December 31, 1999, we had not paid any amounts due to XL Vision and
Safeguard under these agreements. As of December 31, 1999 we owed XL Vision and
Safeguard approximately $45,000 and $56,000, respectively, under these
agreements. In addition, under a direct charge administrative services agreement
dated April 14, 1997, XL Vision also provided us with management services on a
time and materials basis. This agreement continued on a month-to-month basis,
and was terminated during December 1999. As of December 31, 1999, we owed XL
Vision $1,635,000 under this agreement. The amounts due under these agreements
at December 31, 1999 were repaid in February 2000 following the completion of
our IPO.
General and administrative expenses increased 229% from $1.4 million for
the year ended December 31, 1998 to $3.2 million for the year ended December
31,1999. The increase was primarily due to increased expenses associated with
expanding the number of personnel from 4 people at December 31, 1998 to 10
people at December 31, 1999 and increased legal and travel expenses required to
support and grow our business.
Our technology and development expenses consisted of salaries and related
benefit costs, payments to outside consultants, and material costs for prototype
imaging systems. Our expenses increased 420% from $1.0 million for the year
ended December 31, 1998 to $4.2 million for the year ended December 31, 1999.
This increase in expenses was primarily due to increased consulting costs, an
increase in personnel, and increased spending for materials and supplies. The
increase in expenses was required to integrate and expand our product lines such
as our online cattle sales and auction software, Feedlot Information System
software, and continued development efforts on imaging systems.
Depreciation and amortization expense increased 657% from $238,000 for the
year ended December 31, 1998 to $1.6 million for the year ended December 31,
1999. The increase was primarily related to higher amortization charges
resulting from three business combinations completed in 1999 and acquisitions of
proprietary licenses made during July 1998.
Interest expense/other income, net decreased by 13% from $332,000 for the
year ended December 31, 1998 to $288,000 for the year ended December 31, 1999.
This decrease was primarily due to a lower average level of borrowing
accompanied by an increase in interest income. Included in interest and other
income (expense), net was $373,000 of imputed interest income recognized in 1999
from a $23.0 million note receivable due from Internet Capital Group. The note
receivable was executed in connection with an October 1999 securities purchase
agreement and was paid in full in November 2000.
Due to the losses incurred, we did not have any income tax expense for the
year ended December 31, 1998 or the year ended December 31, 1999. As of December
31, 1999 we had approximately $28.0 million of federal income tax loss carry
forwards that can be used to offset future taxable income. Our tax loss carry
forwards begin to expire in 2012 and we are not currently aware of any
limitation on our ability to offset future taxable income.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the quarters ended March 31, June 30, September 30, and
December 31, 1999, and March 31, June 30, September 30, and December 31, 2000.
The information for each quarter has been prepared on substantially the same
basis as the audited statements included in other parts of this Form 10-K Report
and, in the opinion of management, include all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and the results of the interim
periods are not indicative of results of any future period.
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue................................. $ 605 $ 1,973 $15,761 $25,444 $38,553 $160,416 $277,351 $326,700
Cost of revenue......................... 455 2,143 15,685 25,235 38,201 158,952 273,645 323,062
Operating expenses...................... 2,054 3,649 4,592 5,287 7,045 11,271 12,274 16,605
Interest/other income, net.............. (120) (155) (168) 155 1,141 1,869 1,290 515
------- ------- ------- ------- ------- -------- -------- --------
(Loss) from continuing operations....... $(2,024) $(3,974) $(4,685) $(4,923) $(5,552) $ (7,938) $ (7,278) $(12,452)
======= ======= ======= ======= ======= ======== ======== ========
(Loss) from continuing operations per
common share -- basic and diluted...... $ (0.33) $ (0.58) $ (0.67) $ (1.48) $ (0.24) $ (0.23) $ (0.21) $ (0.36)
======= ======= ======= ======= ======= ======== ======== ========
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. During February 2000, we completed our initial
public offering of 7,175,000 common shares and a private placement of 500,000
common shares, which generated net proceeds of $107.1 million. Subsequent to the
offering, approximately $12.8 million of the proceeds were used to pay amounts
due to related parties and Turnkey Computer Systems, $37.7 million was used for
acquisitions of other businesses, and $16.3 million was used for capital
expenditures. We believe that the net proceeds from the offering, together with
our existing cash and cash equivalents, will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months
under our current business plan, which may change. To the extent we are required
to raise additional capital, we may need to issue additional equity securities
or incur additional debt. If additional funds are raised through the issuance of
equity securities, our existing shareholders may experience significant
dilution. Furthermore, additional financing may not be available when needed or,
if available, such financing may not be on terms favorable to us. If such
financing is not available when required or is not available on acceptable
terms, we may be unable to continue to expand our business, take advantage of
business opportunities or respond to competitive pressures. In addition, we may
be unable to further develop or enhance our products and services. Any of these
events could have a material adverse effect on our business, financial condition
or results of operations.
As of December 31, 2000, our primary source of liquidity consisted of cash
and highly liquid, high quality debt instruments. Our intent is to make such
funds, which have maturities of less than three months, readily available for
operating purposes. At December 31, 2000, we had cash, cash equivalents, and
restricted cash, primarily certificates of deposit, totaling $44.3 million
compared to $12.3 million at December 31, 1999. Subsequent to December 31, 2000,
we closed on the acquisitions of Bluegrass Stockyards, Runnells-Peters Cattle
Company, and Pennell Cattle Company that required the use of approximately $4.2
million of cash. In addition, we also paid the former shareholders of Eastern
$2.3 million in cash during February 2001 pursuant to the asset purchase
agreement dated May 1, 2000.
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 $8.9 million in 1998, $15.6 million in 1999 and $30.7 million in 2000. Cash
used in operating activities consisted primarily of net operating losses and
increases in trade accounts receivable offset in part by increases in accounts
payable and accrued liabilities. Due to the seasonality associated with our
business, cash used in operating activities was greatest during the third and
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fourth quarters of 2000 when accounts receivable and inventory balances were at
their highest levels during the year.
Net cash used in investing activities was $892,000 in 1998, $1.6 million in
1999 and $56.8 million in 2000. Our investing activities included the
acquisitions of Eastern, Jordan, Edens, LeMaster, Mountain Plains, McMahan,
Thigpen, Hefley and Jansma for a combined $37.7 million and capital expenditures
of $16.3 million. We expect continued acquisition activity and capital
expenditures for the foreseeable future as we continue to effect our business
strategy. However, we expect future spending on acquisitions and capital
expenditures to be at a lower rate than experienced during 2000.
Net cash provided by financing activities was $9.8 million in 1998, $29.5
million in 1999 and $118.0 million in 2000. Cash provided by financing
activities prior to 2000 consisted primarily of the sale of our stock and
borrowings from Internet Capital Group, XL Vision and Safeguard. In 2000, net
cash provided by financing activities was primarily generated from our initial
public offering and private placement, which raised net proceeds of $107.1
million, as well as the receipt of $23.0 million from Internet Capital Group in
full settlement of a note receivable executed in October 1999. These amounts
were partially offset by related party payments of $10.4 million to Safeguard
Scientifics, Inc. and $1.5 million to XL Vision and the repayment of a $900,000
note payable due to Turnkey Computer Systems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("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. SFAS No. 133 was amended by SFAS No.
137 in June 1999 to require implementation of the standard beginning January 1,
2001. SFAS No. 133 was amended further by SFAS No. 138 in June 2000. The
adoption of SFAS No. 133, as amended, is not expected to have a material impact
on the results of our operations, financial position or cash flows.
In the ordinary course of our business, we enter into purchase and sale
contracts for cattle that require delivery at a future date. We believe that
these transactions fall under the "normal purchases and normal sales" exception
described within SFAS No. 133, as amended. We also enter into a limited number
of cattle futures transactions. Currently, we do not maintain the documentation
required by the standard to qualify for hedge accounting with respect to cattle
futures transactions. Accordingly, if SFAS No. 133, as amended, was adopted as
of December 31, 2000, we would have recorded a charge to operations of
approximately $233,000.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
In addition to the other information included in this report and our other
public filings and releases, the following factors should be considered while
evaluating our business, financial condition, results of operations and
prospects:
We have a limited operating history and unproven business model. As a result,
we may not be able to accurately predict future results and our business
strategy may not be successful.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which to evaluate our business. In addition, our business strategy and
revenue model has changed significantly during the past 18 months. Our limited
operating history, combined with our 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;
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- develop and upgrade our products and technologies more effectively and
rapidly than our competitors; and
- successfully implement our acquisition, sales and marketing strategies.
We have a history of net losses and expect to continue to incur net losses for
the foreseeable future. If we continue to incur net losses, our business may
not ultimately be financially viable.
We have incurred significant net losses since inception. We reported a net
loss of approximately $15.6 million for the year ended December 31, 1999, or 36%
of total revenue, and a net loss of approximately $33.1 million for the year
ended December 31, 2000, or 4% of total revenue. As of December 31, 2000, we had
accumulated net losses totaling approximately $65.5 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 and execute on our business strategies. Our
revenue may not grow or may not even continue at its current level and, as a
result, our financial condition and results of our operations may be harmed and
our business may not be financially viable in the future.
To achieve profitability, we must successfully address the following risks:
- lack of wide-scale commercial acceptance of our Internet cattle sales and
services;
- failure to expand the number of livestock industry participants currently
using our network;
- failure to obtain access to data from feedlots to adequately address the
information needs of our customers;
- inability to respond promptly to competitive and industry 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 cattle sales 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 cattle sales market, has only recently developed, and its
continued development is subject to substantial uncertainty. To date, we have
not realized adequate revenues and gross margins from this market to achieve
profitability. We cannot be assured that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based products and services. We do not know if our target customers
will use the Internet as a regular 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 year December 31, 2000, we relied on cattle sales for over 99% of
our revenue and we expect to rely on the success of our 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 is
critical to our ability to obtain future revenue. To date, we have not achieved
enough revenues from internet-based cattle sales 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. In addition, as the result of our
dependence on cattle sales, if the demand for beef declines, the demand for our
products and services would likely decline, and our results of operations would
be harmed.
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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. In connection with a number of our acquisitions we hire key employees.
The businesses we have acquired generally are critical to our current business
operations and growth strategy.
Our 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 are unable to manage our growth effectively, our business may be harmed.
We cannot assure that we will be able to effectively or successfully manage
our growth. If we are unable to manage our growth effectively, our business
operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. 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.
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 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. 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, there is generally frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
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employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
We typically assume the ownership of cattle sold through our Internet cattle
marketplace and are subject to the risk of loss while we hold title and market
risk.
In the sales transactions conducted through our Internet cattle sales and
auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume the risk of
liability, loss and deterioration in value of the cattle during that period. As
a result, our business may be harmed.
We depend on our key employees for our success. The loss of any of these
persons could harm our ability to compete.
The loss of the services of any key person 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 expect our quarterly operating results to fluctuate. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock could decline.
We expect that our revenue and operating results will vary in the future as
a result of a number of factors. Our quarterly results of operations may not
meet the expectations of securities analysts and investors, which could cause
the price of our common stock to decline. Our operating results in the future
may not follow any prior trends and should not be relied upon 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; and
- continued purchases by our existing customers.
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 continues to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. Generally, a higher number of cattle are
sold to feedlots during the third and fourth quarters as compared to the first
and second quarters of each calendar year. Therefore, a greater number of sales
transactions occur during these two calendar quarters.
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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, and cattle inventory
management tools. 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.
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. Despite the measures we intend to take to enhance our
Internet security, our infrastructure is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If our security measures are
circumvented, proprietary information could be misappropriated or our operations
could be interrupted. Security breaches that result in access to confidential
information could expose us to a risk of loss or liability. If we do not
adequately address these concerns or face any claims in connection with a breach
of security, our business, financial condition and operating results could be
harmed.
We could face liability for information retrieved from or transmitted through
our Web sites, which could result in high litigation or insurance costs.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we carry
general liability insurance, our insurance may not cover claims of these types
or may not be adequate to cover us for all liability that may be imposed.
Government regulation and legal uncertainties could result in additional
burdens to doing business on the Internet.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional costs on conducting business over the Internet or
impose additional restrictions on our ability to conduct our business
operations. In 1998, the Internet Tax Freedom Act placed a three-year moratorium
on state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes that discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
26
30
Internet Capital Group and Safeguard will be able to control matters requiring
stockholder approval.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities. Internet Capital Group and Safeguard together have the
power to vote approximately 57% (as of March 1, 2001) of the aggregate number of
votes to which the holders of our common stock are entitled. As a result, these
stockholders will be able to control all matters requiring stockholder approval.
In addition, currently five of the eight members of our board of directors
also serve as directors and/or officers of Internet Capital Group and Safeguard.
Internet Capital Group has the right to elect two directors to our board. Under
the joint venture agreement, Safeguard and Internet Capital Group have agreed to
vote for two designees of Safeguard and two designees of Internet Capital Group
in all future elections of directors. Internet Capital Group and Safeguard will
therefore have the ability to significantly influence our management.
Our common stock price is likely to be highly volatile.
The market price of our common stock, like the market for Internet-related
and technology companies in general, has been and will likely continue to be
highly volatile. Any significant fluctuations in the future might result in a
material decline in the market price of our common stock. These fluctuations may
be caused by factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- conditions or trends in the cattle industry;
- new sales formats of new products or services;
- changes in or failure by us to meet financial estimates of securities
analysts;
- conditions or trends in the Internet industry;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2000, we had cattle futures contracts with purchase
commitments of $1.6 million and sales commitments of $12.7 million. The contract
lives are generally less than six months. Any change in the value of the futures
contracts is generally balanced by an offsetting position in the cash market
prices of the delivered livestock.
Our exposure to market risk relates to changes in interest rates and their
potential impact on our investment portfolio. We invest in marketable debt
securities that meet high credit quality standards and limit our credit exposure
to any one issue, issuer and type of investment. As of December 31, 2000, our
investments consisted of $15.3 million in cash equivalents with maturities of
less than three months and $1.5 million in certificates of deposit with a
maturity of less than six months. Due to the short-term nature of our investment
portfolio, a 10 percent increase or decrease in interest rates would not have a
material effect on our results of operations or the fair value of our portfolio.
The impact on our future results of operations and the future value of our
portfolio will depend largely on the gross amount of our investments.
27
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We incorporate by reference the consolidated financial statements of the
Company and supplementary data as a separate section of this Form 10-K Report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference the information contained under the captions
"Election of Directors", "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Executive Compensation" and "Summary Compensation Table" in our
Definitive Proxy Statement relative to our annual meeting of shareholders on May
24, 2001, to be filed within 120 days after the end of the year covered by this
Form 10-K Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the captions
"Executive Compensation" and "Summary Compensation Table" in our Definitive
Proxy Statement relative to our annual meeting of shareholders on May 24, 2001,
to be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our
Definitive Proxy Statement relative to our annual meeting of shareholders on May
24, 2001, to be filed within 120 days after the end of the year covered by this
Form 10-K Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference the information contained under the caption
"Certain Relationships and Related Transactions" in our Definitive Proxy
Statement relative to our annual meeting of shareholders on May 24, 2001, to be
filed within 120 days after the end of the year covered by this Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
28
32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED WITH THIS FORM 10-K REPORT
1. The Consolidated Financial Statements and Schedules listed below are
located after the signature page beginning on page F-1:
DESCRIPTION PAGE
----------- --------
Independent Auditors Report................................. F-1
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000.......................... F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-5
Notes to Consolidated Financial Statements.................. F-7
2. Financial Statement Schedules are not required or the information
required to be included therein is reflected in the Consolidated Financial
Statements.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation of
eMerge Interactive (Exhibit 3.1)(1)
3.2 -- Amended and Restated Bylaws of eMerge Interactive (Exhibit
3.2)(1)
10.1 -- Amended and Restated 1996 Equity Compensation Plan (Exhibit
10.1)(1)
10.2 -- 1999 Equity Compensation Plan (Exhibit 10.2)(1)
10.3 -- Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada (Exhibit 10.3)(1)
10.4 -- Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999 (Exhibit
10.4)(1)
10.5 -- Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
(Exhibit 10.5)(1)
10.6 -- Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain (Exhibit
10.6)(1)
10.7 -- Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz (Exhibit
10.7)(1)
10.8 -- Stockholders Agreement dated July 29, 1998 among eMerge
Interactive, and individuals designated as the former
shareholders of STS Agriventures, Ltd. (Exhibit 10.8)(1)
10.9 -- Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust (Exhibit 10.9)(1)
10.10 -- Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc. (Exhibit
10.10)(1)
10.11 -- Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc. (Exhibit
10.11)(1)
10.12 -- Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
(Exhibit 10.12)(1)
29
33
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13 -- Letter of Agreement dated January 12, 2000 between eMerge
Interactive and Southern States, Cooperative, Inc. (Exhibit
10.13)(1)
10.14 -- Subscription Agreement letter for purchase of Series B
Junior Preferred Stock (Exhibit 10.14)(1)
10.15 -- Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock) (Exhibit 10.15)(1)
10.16 -- Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc. (Exhibit 10.16)(1)
10.17 -- Registration Rights Agreement dated July 18, 1997 (Exhibit
10.17)(1)
10.18 -- Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999 (Exhibit 10.18)(1)
10.19 -- Stockholders' and Registration Rights Agreement dated
February 24, 1999 (Exhibit 10.19)(1)
10.20 -- Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1000 (Exhibit 10.20)(1)
10.21 -- (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999 (Exhibit 10.21(a))(1)
(b) Second Amended Revolving Note dated October 25, 1999
(Exhibit 10.21(b))(1)
(c) Third Amended Revolving Note dated December 6, 1999
(Exhibit 10.21(c))(1)
(d) Fourth Amended Revolving Note dated January 31, 2000
(Exhibit 10.21(d))(1)
10.22 -- Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive (Exhibit 10.22)(1)
10.23 -- Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled) (Exhibit
10.23)(1)
10.24 -- Term note dated October 25, 1999 from eMerge Interactive to
Safeguard (Exhibit 10.24)(1)
10.25 -- Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled) (Exhibit
10.25)(1)
10.26 -- Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholder's Agreement (Exhibit 10.26)(1)
10.27 -- Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997 (Exhibit 10.27)(1)
10.28 -- Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company (Exhibit
10.28)(1)
10.29 -- Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc. (Exhibit 10.29)(1)
10.30 -- Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc. (Exhibit 10.30)(1)
10.31 -- Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc. (Exhibit
10.31)(1)
10.32 -- Cooperative Research and development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated on
Meat dated August 4, 1999 (Exhibit 10.32)(1)
10.33 -- Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999
(Exhibit 10.33)(1)
30
34
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.34 -- Term Note and Pledge Agreement dated January 28, 2000
between eMerge and Charles Abraham (Exhibit 10.34)(1)
10.35 -- Agreement for the Purchase and Sale of Assets, dated April
20, 2000 (Exhibit 2.1)(2)
10.36 -- Registration Rights and Restricted Stock Agreement, dated
May 1, 2000 (Exhibit 2.2)(2)
10.37 -- Supply and Support Agreement, dated May 1, 2000 (Exhibit
2.3)(2)
10.38 -- Cattle Purchase Contract Agreement, dated May 1, 2000
(Exhibit 2.4)(2)
10.39 -- Agreement for the Purchase and Sale of Assets, dated April
21, 2000 (Exhibit 2.5)(2)
10.40 -- Contract for Sale and Purchase of Real Estate, dated April
21, 2000 (Exhibit 2.6)(2)
10.41 -- Supplement to Common Stock Purchase Agreement dated October
1, 2000, between eMerge Interactive, Inc., Turnkey Computer
Systems, Inc., Stephen W. Myers, Don Flynt, and Carey
Coffman*
23.1 -- Consent of KPMG LLP*
- ---------------
* Filed herewith.
(1) Incorporated by reference from exhibit shown in parentheses contained in the
Company's Registration Statement on Form S-1 (No. 333-89815), filed with the
Commission.
(2) Incorporated by reference from the exhibit shown in parentheses contained in
the Company's Current Report on Form 8-K dated May 5, 2000, filed with the
Commission.
31
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 2, 2001
eMerge Interactive, Inc.
By: /s/ CHARLES L. ABRAHAM President Chief Executive Officer and Director
------------------------------------------------- (Principal Executive Officer)
Charles L. Abraham
/s/ T. MICHAEL JANNEY Vice President and Chief Financial Officer
------------------------------------------------- (Principal Financial and Accounting Officer)
T. Michael Janney
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the date indicated.
NAME CAPACITY DATE
- ----------------------------------------------------- -------------------------------- --------------
/s/ CHARLES L. ABRAHAM President, Chief Executive April 2, 2001
- ----------------------------------------------------- Officer and Director (Principal
Charles L. Abraham Executive Officer)
/s/ T. MICHAEL JANNEY Vice President and Chief April 2, 2001
- ----------------------------------------------------- Financial Officer (Principal
T. Michael Janney Financial and Accounting
Officer)
/s/ JOHN S. SCOTT Chairman of the Board April 2, 2001
- -----------------------------------------------------
John S. Scott
/s/ DOUGLAS A. ALEXANDER Director April 2, 2001
- -----------------------------------------------------
Douglas A. Alexander
/s/ CHRISTOPHER J. DAVIS Director April 2, 2001
- -----------------------------------------------------
Christopher J. Davis
/s/ JAMES P. EBZERY Director April 2, 2001
- -----------------------------------------------------
James P. Ebzery
/s/ THOMAS C. LYNCH Director April 2, 2001
- -----------------------------------------------------
Thomas C. Lynch
Director April 2, 2001
- -----------------------------------------------------
John W. Poduska
/s/ THOMAS L. TIPPENS Director April 2, 2001
- -----------------------------------------------------
Thomas L. Tippens
32
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
eMerge Interactive, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of eMerge
Interactive, Inc. and subsidiaries as of December 31, 1999 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
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 auditing standards generally
accepted in the United States of America. 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. and subsidiaries at December 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Orlando, Florida
January 26, 2001
F-1
37
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,316,497 $ 42,811,572
Trade accounts receivable, less allowance for doubtful
accounts of $75,000 in 1999 and $167,937 in 2000........ 1,144,133 12,141,867
Inventories (note 3)...................................... 1,201,203 3,704,250
Cattle deposits........................................... 473,859 2,185,670
Prepaid expenses.......................................... 71,078 1,070,674
Net assets of discontinued operations (note 13)........... 297,003 --
Other current assets...................................... 136,349 697,536
Due from related parties (note 8)......................... -- 3,479,492
------------ ------------
Total current assets................................ 15,640,122 66,091,061
Property, plant and equipment, net (note 4)................. 1,895,754 20,567,939
Capitalized offering costs.................................. 447,644 --
Investment in Turnkey Computer Systems, Inc. (note 6)....... 1,822,833 3,010,603
Intangibles, net of accumulated amortization of $1,177,996
in 1999 and $8,131,310 in 2000 (note 12).................. 5,955,360 57,377,620
Restricted cash............................................. -- 1,505,000
------------ ------------
Total assets........................................ $ 25,761,713 $148,552,223
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligation (note
14)..................................................... $ 82,320 $ 216,516
Note payable (note 6)..................................... 500,000 --
Accounts payable.......................................... 1,187,900 9,509,316
Accrued liabilities:
Purchase consideration (note 12)........................ -- 4,800,000
Salaries and benefits................................... 967,749 850,533
Other................................................... 818,041 1,124,649
Advance payments from customers........................... 222,750 663,850
Due to related parties (note 8)........................... 12,053,715 1,219,417
------------ ------------
Total current liabilities........................... 15,832,475 18,384,281
Capital lease obligation, excluding current installments
(note 14)............................................... 224,068 90,820
Note payable (note 6)..................................... 400,000 --
------------ ------------
Total liabilities................................... 16,456,543 18,475,101
------------ ------------
Commitments and contingencies (note 14)
Redeemable Class A common stock, issued and outstanding
62,500 shares in 1999 and 0 shares in 2000 (note 6)....... 414,339 --
------------ ------------
Stockholders' equity (notes 7, 8, 11, 12 and 15):
Preferred stock, $.01 par value, authorized 15,000,000
shares:
Series A preferred stock, (aggregate involuntary
liquidation preference of $8,030,675 in 1999 and $0 in
2000), designated 6,500,000 shares, issued and
outstanding 6,443,606 shares in 1999 and 0 shares in
2000................................................... 64,436 --
Series B junior preferred stock, (aggregate involuntary
liquidation preference of $5,281,316 in 1999 and $0 in
2000), designated 2,400,000 shares, issued and
outstanding 2,400,000 in 1999 and 0 shares in 2000..... 24,000 --
Series C preferred stock, (aggregate liquidation
preference of $5,891,781 in 1999 and $0 in 2000),
designated 1,300,000 shares, issued and outstanding
1,100,000 in 1999 and 0 shares in 2000................. 11,000 --
Series D preferred stock, (aggregate liquidation
preference of $41,823,749 in 1999 and $0 in 2000),
designated 4,555,556 shares, issued and outstanding
4,555,556 shares in 1999 and 0 shares in 2000.......... 45,556 --
Common stock, $.008 par value, authorized 100,000,000
shares:
Class A common stock, designated 92,711,110 shares,
issued and outstanding 7,046,444 shares in 1999 and
29,445,228 shares in 2000.............................. 56,372 235,561
Class B common stock, designated 7,288,890 shares, no
shares issued and outstanding in 1999, 5,694,445 shares
issued and outstanding in 2000......................... -- 45,556
Additional paid-in capital.................................. 62,312,315 195,347,598
Accumulated deficit......................................... (32,375,926) (65,511,023)
Subscription receivable from Internet Capital Group, Inc.
(note 8).................................................. (21,188,320) --
Unearned compensation (note 11)............................. (58,602) (40,570)
------------ ------------
Total stockholders' equity.......................... 8,890,831 130,077,122
------------ ------------
Total liabilities and stockholders' equity.......... $ 25,761,713 $148,552,223
============ ============
See accompanying notes to consolidated financial statements.
F-2
38
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
----------- ------------ ------------
Revenue (including sales to related parties of
approximately $0 in 1998 and 1999 and $226,070,000
in 2000) (note 8)................................... $ 1,792,471 $ 43,783,124 $803,019,933
Cost of revenue (including purchases from related
parties of approximately $0 in 1998 and 1999 and
$54,082,000 in 2000) (note 8)....................... 2,623,447 43,517,459 793,859,657
----------- ------------ ------------
Gross profit (loss)............................ (830,976) 265,665 9,160,276
----------- ------------ ------------
Operating expenses:
Selling, general and administrative (note 8)........ 3,484,127 9,863,828 26,962,953
Technology and development.......................... 1,047,122 4,155,896 7,687,563
Depreciation and amortization of intangibles........ 237,943 1,563,247 10,053,344
Impairment and related charges (note 5)............. -- -- 2,491,486
----------- ------------ ------------
Total operating expenses.................... 4,769,192 15,582,971 47,195,346
----------- ------------ ------------
Operating loss.............................. (5,600,168) (15,317,306) (38,035,070)
----------- ------------ ------------
Related party interest expense........................ (331,594) (764,042) (119,018)
Interest and other income, net (including related
party interest of $373,320 in 1999 and $1,811,680 in
2000)............................................... -- 475,642 5,011,587
Equity income (loss) in unconsolidated investee....... -- -- (77,230)
----------- ------------ ------------
Loss from continuing operations before
income taxes.............................. (5,931,762) (15,605,706) (33,219,731)
Income tax expense (benefit) (note 10)................ -- -- --
----------- ------------ ------------
Loss from continuing operations............. (5,931,762) (15,605,706) (33,219,731)
Income (loss) from operations of discontinued
transportation segment.............................. (1,808,951) 10,420 84,634
Loss on disposal of transportation segment............ (91,415) -- --
----------- ------------ ------------
Net loss.................................... $(7,832,128) $(15,595,286) $(33,135,097)
=========== ============ ============
Net loss attributable to common stockholders (note
8).................................................. $(7,832,128) $(21,133,237) $(33,135,097)
=========== ============ ============
Net loss from continuing operations per common share--
basic and diluted................................... $ (1.36) $ (3.11) $ (1.05)
=========== ============ ============
Net loss per common share -- basic and diluted........ $ (1.80) $ (3.11) $ (1.05)
=========== ============ ============
Weighted average number of common shares outstanding--
basic and diluted................................... 4,356,926 6,794,755 31,686,845
=========== ============ ============
See accompanying notes to consolidated financial statements.
F-3
39
eMERGE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1998, 1999 AND 2000
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C
-------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------- ---------- -------
Balances at December 31, 1997............................... 6,443,606 $64,436 -- $ -- -- $ --
Contribution of debt to equity by XL Vision, Inc. (note 8).. -- -- -- -- -- --
Issuance of Series B preferred stock in exchange for
contribution of debt to equity by XL Vision, Inc. at $2.00
per share (note 8)......................................... -- -- 2,400,000 24,000 -- --
Issuance of 2,587,500 shares of Class A common stock in
connection with Nutri-Charge transaction................... -- -- -- -- -- --
Contribution of put rights by XL Vision, Inc................ -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------
Balances at December 31, 1998............................... 6,443,606 64,436 2,400,000 24,000 -- --
Issuance of 1,000,000 shares of Class A common stock in
connection with business combinations (note 12)............ -- -- -- -- -- --
Issuance of Series C preferred stock at $5.00 per share..... -- -- -- -- 1,100,000 11,000
Issuance of Series D preferred stock at $9.00 per share,
including >beneficial conversion feature (note 8).......... -- -- -- -- -- --
Beneficial conversion feature (note 8)...................... -- -- -- -- -- --
Issuance of warrant (note 8)................................ -- -- -- -- -- --
Exercise of stock options for cash (note 11)................ -- -- -- -- -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc....... -- -- -- -- -- --
transaction (note 6)
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Unearned compensation (note 11)............................. -- -- -- -- -- --
Amortization of unearned compensation (note 11)............. -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------
Balances at December 31, 1999............................... 6,443,606 64,436 2,400,000 24,000 1,100,000 11,000
Conversion of Series A preferred stock for 8,054,508 shares
of Class A common stock (note 7)........................... (6,443,606) (64,436) -- -- -- --
Conversion of Series B preferred stock for 3,000,000 shares
of Class A common stock (note 7)........................... -- -- (2,400,000) (24,000) -- --
Conversion of Series C preferred stock for 1,375,000 shares
of Class A common stock (note 7)........................... -- -- -- -- (1,100,000) (11,000)
Conversion of Series D preferred stock for 5,694,445 shares
of Class B common stock (note 7)........................... -- -- -- -- -- --
Sale of Class A common stock in connection with initial
public offering (note 7)................................... -- -- -- -- -- --
Issuance of 1,974,120 shares of Class A common stock in.....
connection with business combinations (note 12)............ -- -- -- -- -- --
Exercise of stock options for cash (note 11)................ -- -- -- -- -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc.
transaction (note 6)....................................... -- -- -- -- -- --
Extinguishment of Turnkey's put right for 62,500 shares of
Class A common stock (note 6).............................. -- -- -- -- -- --
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- -- -- -- --
Collection of note receivable from Internet Capital Group,
Inc. (note 8).............................................. -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Unearned compensation (note 11)............................. -- -- -- -- -- --
Amortization of unearned compensation (note 11)............. -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------
Balances at December 31, 2000............................... -- $ -- -- $ -- -- $ --
========== ======= ========== ======== ========== =======
PREFERRED STOCK COMMON STOCK COMMON STOCK
SERIES D CLASS A CLASS B
-------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- -------- --------- -------
Balances at December 31, 1997............................... -- $ -- 3,258,125 $ 26,065 -- $ --
Contribution of debt to equity by XL Vision, Inc. (note 8).. -- -- -- -- -- --
Issuance of Series B preferred stock in exchange for
contribution of debt to equity by XL Vision, Inc. at $2.00
per share (note 8)......................................... -- -- -- -- -- --
Issuance of 2,587,500 shares of Class A common stock in
connection with Nutri-Charge transaction................... -- -- 2,587,500 20,700 -- --
Contribution of put rights by XL Vision, Inc................ -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
---------- ------- ---------- -------- --------- -------
Balances at December 31, 1998............................... -- -- 5,845,625 46,765 -- --
Issuance of 1,000,000 shares of Class A common stock in
connection with business combinations (note 12)............ -- -- 1,000,000 8,000 -- --
Issuance of Series C preferred stock at $5.00 per share..... -- -- -- -- -- --
Issuance of Series D preferred stock at $9.00 per share,
including >beneficial conversion feature (note 8).......... 4,555,556 45,556 -- -- -- --
Beneficial conversion feature (note 8)...................... -- -- -- -- -- --
Issuance of warrant (note 8)................................ -- -- -- -- -- --
Exercise of stock options for cash (note 11)................ -- -- 200,819 1,607 -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc....... -- -- -- -- -- --
transaction (note 6)
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Unearned compensation (note 11)............................. -- -- -- -- -- --
Amortization of unearned compensation (note 11)............. -- -- -- -- -- --
---------- ------- ---------- -------- --------- -------
Balances at December 31, 1999............................... 4,555,556 45,556 7,046,444 56,372 -- --
Conversion of Series A preferred stock for 8,054,508 shares
of Class A common stock (note 7)........................... -- -- 8,054,508 64,436 -- --
Conversion of Series B preferred stock for 3,000,000 shares
of Class A common stock (note 7)........................... -- -- 3,000,000 24,000 -- --
Conversion of Series C preferred stock for 1,375,000 shares
of Class A common stock (note 7)........................... -- -- 1,375,000 11,000 -- --
Conversion of Series D preferred stock for 5,694,445 shares
of Class B common stock (note 7)........................... (4,555,556) (45,556) 5,694,445 45,556
Sale of Class A common stock in connection with initial
public offering (note 7)................................... -- -- 7,675,000 61,400 -- --
Issuance of 1,974,120 shares of Class A common stock in.....
connection with business combinations (note 12)............ -- -- 1,974,120 15,792 -- --
Exercise of stock options for cash (note 11)................ -- -- 257,656 2,061 -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc.
transaction (note 6)....................................... -- -- -- -- -- --
Extinguishment of Turnkey's put right for 62,500 shares of
Class A common stock (note 6).............................. -- -- 62,500 500 -- --
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- -- -- -- --
Collection of note receivable from Internet Capital Group,
Inc. (note 8).............................................. -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Unearned compensation (note 11)............................. -- -- -- -- -- --
Amortization of unearned compensation (note 11)............. -- -- -- -- -- --
---------- ------- ---------- -------- --------- -------
Balances at December 31, 2000............................... -- $ -- 29,445,228 $235,561 5,694,445 $45,556
========== ======= ========== ======== ========= =======
ADDITIONAL NOTE RECEIVABLE
PAID-IN ACCUMULATED FROM INTERNET
CAPITAL DEFICIT CAPITAL GROUP, INC.
------------ ------------ -------------------
Balances at December 31, 1997............................... $ 1,982,986 $ (8,948,512) $ --
Contribution of debt to equity by XL Vision, Inc. (note 8).. 7,500,000 -- --
Issuance of Series B preferred stock in exchange for
contribution of debt to equity by XL Vision, Inc. at $2.00
per share (note 8)......................................... 4,776,000 -- --
Issuance of 2,587,500 shares of Class A common stock in
connection with Nutri-Charge transaction................... 2,049,300 -- --
Contribution of put rights by XL Vision, Inc................ 340,000 -- --
Net loss.................................................... -- (7,832,128) --
------------ ------------ -----------
Balances at December 31, 1998............................... 16,648,286 (16,780,640) --
Issuance of 1,000,000 shares of Class A common stock in
connection with business combinations (note 12)............ 1,162,000 -- --
Issuance of Series C preferred stock at $5.00 per share..... 5,489,000 -- --
Issuance of Series D preferred stock at $9.00 per share,
including >beneficial conversion feature (note 8).......... 40,967,503 -- (20,815,000)
Beneficial conversion feature (note 8)...................... (5,523,612) -- --
Issuance of warrant (note 8)................................ 3,325,553 -- --
Exercise of stock options for cash (note 11)................ 185,798 -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc....... (14,339) -- --
transaction (note 6)
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- (373,320)
Net loss.................................................... -- (15,595,286) --
Unearned compensation (note 11)............................. 72,126 -- --
Amortization of unearned compensation (note 11)............. -- -- --
------------ ------------ -----------
Balances at December 31, 1999............................... 62,312,315 (32,375,926) (21,188,320)
Conversion of Series A preferred stock for 8,054,508 shares
of Class A common stock (note 7)........................... -- -- --
Conversion of Series B preferred stock for 3,000,000 shares
of Class A common stock (note 7)........................... -- -- --
Conversion of Series C preferred stock for 1,375,000 shares
of Class A common stock (note 7)........................... -- -- --
Conversion of Series D preferred stock for 5,694,445 shares
of Class B common stock (note 7)........................... -- -- --
Sale of Class A common stock in connection with initial
public offering (note 7)................................... 107,095,713 -- --
Issuance of 1,974,120 shares of Class A common stock in..... -- --
connection with business combinations (note 12)............ 23,870,385
Exercise of stock options for cash (note 11)................ 316,078 -- --
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc.
transaction (note 6)....................................... (5,060) -- --
Extinguishment of Turnkey's put right for 62,500 shares of
Class A common stock (note 6).............................. 418,899 -- --
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- -- (1,811,680)
Collection of note receivable from Internet Capital Group,
Inc. (note 8).............................................. -- -- 23,000,000
Net loss.................................................... -- (33,135,097) --
Unearned compensation (note 11)............................. 1,339,268 -- --
Amortization of unearned compensation (note 11)............. -- -- --
------------ ------------ -----------
Balances at December 31, 2000............................... $195,347,598 $(65,511,023) $ --
============ ============ ===========
UNEARNED
COMPENSATION TOTAL
------------ ------------
Balances at December 31, 1997............................... $ -- $ (6,875,025)
Contribution of debt to equity by XL Vision, Inc. (note 8).. -- 7,500,000
Issuance of Series B preferred stock in exchange for
contribution of debt to equity by XL Vision, Inc. at $2.00
per share (note 8)......................................... -- 4,800,000
Issuance of 2,587,500 shares of Class A common stock in
connection with Nutri-Charge transaction................... -- 2,070,000
Contribution of put rights by XL Vision, Inc................ -- 340,000
Net loss.................................................... -- (7,832,128)
----------- ------------
Balances at December 31, 1998............................... -- 2,847
Issuance of 1,000,000 shares of Class A common stock in
connection with business combinations (note 12)............ -- 1,170,000
Issuance of Series C preferred stock at $5.00 per share..... -- 5,500,000
Issuance of Series D preferred stock at $9.00 per share,
including >beneficial conversion feature (note 8).......... -- 20,198,059
Beneficial conversion feature (note 8)...................... -- (5,523,612)
Issuance of warrant (note 8)................................ -- 3,325,553
Exercise of stock options for cash (note 11)................ -- 187,405
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc....... -- (14,339)
transaction (note 6)
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- (373,320)
Net loss.................................................... -- (15,595,286)
Unearned compensation (note 11)............................. (72,126) --
Amortization of unearned compensation (note 11)............. 13,524 13,524
----------- ------------
Balances at December 31, 1999............................... (58,602) 8,890,831
Conversion of Series A preferred stock for 8,054,508 shares
of Class A common stock (note 7)........................... -- --
Conversion of Series B preferred stock for 3,000,000 shares
of Class A common stock (note 7)........................... -- --
Conversion of Series C preferred stock for 1,375,000 shares
of Class A common stock (note 7)........................... -- --
Conversion of Series D preferred stock for 5,694,445 shares
of Class B common stock (note 7)........................... -- --
Sale of Class A common stock in connection with initial
public offering (note 7)................................... -- 107,157,113
Issuance of 1,974,120 shares of Class A common stock in..... -- 23,886,177
connection with business combinations (note 12)............
Exercise of stock options for cash (note 11)................ -- 318,139
Accretion of redemption value of Class A common stock issued
in connection with the Turnkey Computer Systems, Inc.
transaction (note 6)....................................... -- (5,060)
Extinguishment of Turnkey's put right for 62,500 shares of
Class A common stock (note 6).............................. -- 419,399
Accretion to redemption value of note receivable from
Internet Capital Group, Inc. (note 8)...................... -- (1,811,680)
Collection of note receivable from Internet Capital Group,
Inc. (note 8).............................................. -- 23,000,000
Net loss.................................................... -- (33,135,097)
Unearned compensation (note 11)............................. (1,339,268) --
Amortization of unearned compensation (note 11)............. 1,357,300 1,357,300
----------- ------------
Balances at December 31, 2000............................... $ (40,570) $130,077,122
=========== ============
See accompanying notes to consolidated financial statements.
F-4
40
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
----------- ------------ ------------
Cash flows from operating activities:
Net loss............................................ $(7,832,128) $(15,595,286) $(33,135,097)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 438,576 1,770,571 10,097,449
Accretion to redemption value of note
receivable.................................. -- (373,320) (1,811,680)
Noncash compensation........................... -- -- 1,339,268
Impairment and related charges................. -- -- 2,491,486
Equity loss in unconsolidated investee......... -- -- 77,230
Amortization of unearned compensation.......... -- 13,524 18,032
Changes in operating assets and liabilities:
Trade accounts receivable, net................. (368,421) (759,162) (10,997,734)
Inventories.................................... (70,594) (494,646) (1,815,598)
Cattle deposits..................................... -- (473,859) (1,711,811)
Prepaid expenses and other assets.............. 5,805 (179,590) (1,574,805)
Net assets of discontinued operations.......... (1,140,425) -- 297,003
Due from related parties, net.................. -- -- (2,591,157)
Accounts payable and accrued liabilities....... 27,368 249,916 8,182,420
Advance payments from customers................ -- 222,750 441,100
----------- ------------ ------------
Net cash used in operating activities....... (8,939,819) (15,619,102) (30,693,894)
----------- ------------ ------------
Cash flows from investing activities:
Investment in Turnkey Computer Systems, Inc......... -- (22,833) (1,265,000)
Business combinations, net of cash acquired......... -- (1,799,263) (37,693,635)
Proceeds from discontinued operations............... -- 1,927,230 --
Purchases of intangibles............................ (431,923) (25,002) --
Purchases of investment securities.................. -- -- (1,505,000)
Purchase of property, plant and equipment........... (460,290) (1,672,461) (16,341,271)
----------- ------------ ------------
Net cash used in investing activities....... (892,213) (1,592,329) (56,804,906)
----------- ------------ ------------
Cash flows from financing activities:
Net borrowings (payments) from (to) related
parties.......................................... 9,447,030 6,866,381 (11,722,633)
Payment on note payable............................. -- (500,000) (900,000)
Proceeds from capital lease financing............... 440,832 -- --
Payments on capital lease obligations............... (55,962) (78,482) (306,388)
Offering costs...................................... -- (447,644) (7,577,420)
Net proceeds from issuance of preferred stock....... -- 23,500,000 23,000,000
Net proceeds from issuance of common stock.......... -- 187,405 115,500,316
----------- ------------ ------------
Net cash provided by financing activities... 9,831,900 29,527,660 117,993,875
----------- ------------ ------------
Net change in cash.......................... (132) 12,316,229 30,495,075
Cash and cash equivalents, beginning of period........ 400 268 12,316,497
----------- ------------ ------------
Cash and cash equivalents, end of period.............. $ 268 $ 12,316,497 $ 42,811,572
=========== ============ ============
F-5
41
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
1998 1999 2000
----------- ------------ ------------
Supplemental disclosures:
Cash paid for interest.............................. $ 23,594 $ -- $ 359,721
Non-cash investing and financing activities:
Issuance of Class A common stock in connection
with business combinations (note 12)........... -- 1,170,000 23,886,177
Liabilities incurred in connection with business
combinations (note 12)......................... -- -- 4,800,000
Issuance of Class A common stock and note payable
in connection with Turnkey Computer Systems,
Inc. transaction (note 6)...................... 1,800,000 --
---
Conversion of Series A, B, and C preferred stock
and redeemable Class A common stock into Class
A common stock................................. -- -- 513,775
Conversion of Series D preferred stock into Class
B common stock................................. -- -- 45,556
Contribution of debt to equity by XL Vision,
Inc............................................ 7,500,000 -- --
Issuance of preferred stock in exchange for
contribution of debt to equity by XL Vision,
Inc............................................ 4,800,000 -- --
Issuance of Class A common stock in connection
with Nutri-charge transaction.................. 2,070,000 -- --
Contribution of put rights by XL Vision, Inc..... 340,000 -- --
Extinguishment of Turnkey Computer Systems, Inc.
put right (note 6 )............................ -- -- 414,339
Capital lease for computer equipment............. -- -- 307,336
Accretion to redemption value of Class A common
stock in connection with Turnkey Computer
Systems, Inc. transaction (note 6)............. -- 14,339 5,060
See accompanying notes to consolidated financial statements.
F-6
42
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
(1) ORGANIZATION
(A) OVERVIEW
eMerge Interactive, Inc. (the "Company"), a Delaware corporation, was
incorporated in September 1994 as Enhanced Vision Systems, a wholly-owned
subsidiary of XL Vision, Inc. ("XL Vision"). The Company changed its name to
eMerge Vision Systems, Inc. in July 1997 and to eMerge Interactive, Inc. in June
1999.
The Company provides supply chain management and marketing solutions for
the U.S. beef production industry through an electronic information management
system and an e-marketplace. The Company owns and operates multiple livestock
marketing and order buying facilities, which are located in several major cattle
producing states, and its current products and services are designed to create
an efficient market for the purchase and sale of cattle and improve overall
quality and productivity in the cattle industry.
The Company operates entirely within the cattle marketplace. However, the
contribution margins associated with cattle sales and the related prospects for
this portion of the Company's business differ from the rest of the Company's
cattle-related product offerings. Accordingly, the Company's reportable segments
consist of cattle sales and other products and services.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Cyberstockyard, Inc. ("Cyberstockyard"), a
Mississippi corporation, eMerge San Saba, Inc., eMerge Okolona, Inc. and eMerge
Gaffney, Inc., all Delaware corporations. All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company's investment
in Turnkey Computer Systems, Inc. ("Turnkey") is included in the accompanying
consolidated financial statements using the equity method of accounting.
Accordingly, the Company's share of Turnkey's earnings and losses is reflected
in the caption "equity income (loss)" in the consolidated statements of
operations. The Company's carrying value of Turnkey includes the unamortized
excess of the cost of the Company's interest in Turnkey over its equity in the
underlying net assets determined at the date of acquisition. This excess is
amortized on a straight-line basis over 10 years and the related amortization is
also included in "equity income (loss)" in the consolidated statements of
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts on deposit with financial
institutions and investments with maturities of 90 days or less. For the
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments with maturities of 90 days or less to be cash equivalents.
(B) INVENTORIES
Inventories are stated at the lower of cost or market and consist primarily
of stocker cattle awaiting immediate resale. All cattle are acquired in groups
and the costs of cattle are accumulated by groups rather than individual animal.
Actual market prices could be materially different from the carrying cost at the
time the cattle are sold.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Equipment
under capital leases is stated at the present value of future minimum lease
payments. Estimated useful lives range from 15 to 20 years for buildings and
improvements, 3 to 5 years for computer equipment and software, 2 to 7 years for
furniture, fixtures, and equipment, and 5 years for vehicles. Leasehold
improvements and equipment under capital leases are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life of the
assets.
F-7
43
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(D) CAPITALIZED SOFTWARE COSTS
The Company accounts for the software components of its websites in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Accordingly, certain costs to
develop internal-use computer software are capitalized after the Company has
completed a preliminary project assessment and management, with relevant
authority, commits to funding the related software project and it is probable
that the project will be completed and the software will be used to perform the
function intended. The costs capitalized by the Company relate principally to
the Company's internet site development and will be amortized to operations over
the assets' estimated useful life of 3 years upon completion of the application
development stage.
(E) INTANGIBLES
Intangibles consist principally of goodwill, which is the excess of the
purchase price over the net tangible assets of businesses acquired. Intangibles
are stated at amortized cost and are amortized on a straight-line basis over the
estimated useful lives of the assets, which range from 3 to 5 years.
(F) IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". In the event that facts and circumstances indicate that the
carrying amount of long-lived assets may be impaired, the recoverability of the
assets to be held and used is measured by comparing the carrying amount of the
assets to the future net cash flows expected to be generated by those assets. If
this review indicates that the assets will not be recoverable, the carrying
amount of the Company's assets would be reduced to their estimated fair value.
(G) INVESTMENT SECURITIES
As of December 31, 2000, the Company held approximately $15.3 million of
highly liquid debt instruments with maturities of 90 days or less included in
cash equivalents and $1,505,000 in certificates of deposit with maturities of
180 days or less included in restricted cash. The Company accounts for all of
these investments in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As of December 31, 2000, all of the
Company's debt instruments and investments were classified as held-to-maturity
and their amortized cost approximated fair value due to their short term nature.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade accounts receivable,
restricted cash, amounts due to and from related parties, accounts and notes
payable, and accrued liabilities approximates their fair value at December 31,
1999 and 2000, due to the short-term maturity of these instruments.
(I) REVENUE RECOGNITION
The Company generates the majority of its revenue from cattle sales
transactions where it acts as either a principal or agent in the purchase and
sale of cattle. For cattle sales transactions where the Company is the principal
in the arrangement, the Company purchases cattle from the seller, records the
cattle as inventory until delivered to an accepted buyer and is exposed to both
the inventory and credit risk that results from the transaction. In these types
of transactions, the Company records the gross revenue earned and related
product costs incurred. For cattle sales transactions in which the Company acts
as an agent, the Company sells cattle consigned to it on a commission basis,
where it is subject to inventory and credit risk, or the Company sells cattle on
a fee basis. For all other products and services offered by the Company, the
Company acts as a principal to the transaction and gross revenue and related
product cost are recognized as products are shipped or services are provided.
F-8
44
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 was followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101," in March 2000 and by Staff
Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements" ("SAB 101B"), in June 2000. In October 2000, the SEC
issued a Frequently Asked Questions and Answers document to provide additional
guidance. These documents summarize certain views of the SEC regarding applying
generally accepted accounting principles to revenue recognition in financial
statements. The SEC has provided this guidance due, in part, to the large number
of revenue recognition issues that registrants encounter. Management believes
that its current revenue recognition policies comply with SAB 101.
(J) INCOME TAXES
The asset and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for
operating losses and tax credit carryforwards and for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to the taxable income in 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 the results of
operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets unless it
appears more likely than not that such assets will be realized.
(K) STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation,". As permitted by SFAS No. 123, the Company measures compensation
cost in accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related interpretations and
elects to provide the pro-forma net income and earnings per share disclosures
required by the standard. Accordingly, no accounting recognition is given to
stock options issued to employees that are granted at fair market value or
above. Stock options issued to non-employees are recorded at fair value at the
date of grant. Fair value is determined using the Black-Scholes method and the
expense is amortized over the vesting period.
(L) NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share," by dividing the net loss allocable to common stockholders (net loss
less accretion related to redeemable Class A common stock and beneficial
conversion feature related to Series D preferred stock) by the weighted average
number of shares of common stock outstanding less the shares of redeemable Class
A common stock. The Company's stock options (1,632,500 shares at December 31,
1998, 2,769,116 shares at December 31, 1999 and 4,167,127 shares at December 31,
2000) and convertible preferred stock (8,843,606 shares at December 31, 1998,
14,499,162 shares at December 31, 1999 and 0 shares at December 31, 2000), have
not been used in the calculation of diluted net 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 loss per share allocable to common
stockholders are equal.
Pursuant to 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 anticipated effective date
of an IPO, are required 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 income (loss) per share. The Company had no such issuances for the periods
presented.
(M) HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("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
F-9
45
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivatives), and for hedging activities. SFAS No. 133 was amended by SFAS No.
137 in June 1999 to require implementation of the standard beginning January 1,
2001. SFAS No. 133 was amended further by SFAS No. 138 in June 2000. The
adoption of SFAS No. 133, as amended, is not expected to have a material impact
on the Company's results of operations, financial position or cash flows.
In the ordinary course of business, the Company enters into purchase and
sale contracts for cattle that require delivery at a future date. Management
believes that these transactions fall under the "normal purchases and normal
sales" exception described within SFAS No. 133, as amended. The Company also
enters into a limited number of cattle futures transactions. Currently, the
Company does not maintain the documentation required by the standard to qualify
for hedge accounting with respect to cattle futures transactions. Accordingly,
if SFAS No. 133, as amended, was adopted as of December 31, 2000, the Company
would have recorded a charge to operations of approximately $233,000.
(N) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The Company had no such transactions, events or
circumstances during 1998, 1999 or 2000. Thus, comprehensive loss is the same as
net loss for 1998, 1999 and 2000.
(O) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
results of operations, financial position, and various disclosures. Actual
results could differ from those estimates.
(P) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 financial
statements in order to conform to 2000 classifications. The changes had no
effect on previously reported operations.
(3) INVENTORIES
Inventories consist of:
1999 2000
---------- ----------
Raw materials............................................... $ 658,454 $ 121,219
Work-in-process............................................. 139,187 --
Cattle...................................................... 403,562 3,315,407
Other....................................................... -- 267,624
---------- ----------
$1,201,203 $3,704,250
========== ==========
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
1999 2000
---------- -----------
Land....................................................... $ -- $ 496,960
Buildings and improvements................................. -- 3,558,251
Computer equipment and software............................ 1,343,139 16,609,735
Furniture, fixtures and equipment.......................... 1,339,506 2,493,238
Leasehold improvements..................................... 80,430 268,956
Vehicles................................................... 54,717 54,717
---------- -----------
2,817,792 23,481,857
Less accumulated depreciation and amortization............. 922,038 2,913,918
---------- -----------
Property, plant and equipment, net......................... $1,895,754 $20,567,939
========== ===========
F-10
46
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets under capital lease amounted to $440,832 and $411,415 as of December
31, 1999 and 2000, respectively. Accumulated amortization for assets under
capital lease totaled approximately $239,200 and $56,857 as of December 31, 1999
and 2000, respectively.
(5) IMPAIRMENT AND RELATED CHARGES
In the fourth quarter of 2000, the Company determined it was no longer
feasible to continue offering its Nutricharge and Infrared imaging products.
Accordingly, the Company recorded an impairment charge of $2,292,819 to
write-off the remaining net book values of accounts receivable, intangibles,
fixed assets, and inventories associated with these products. Estimated future
cash flows related to accounts receivable, intangibles, fixed assets and
inventories indicated that an impairment of the full value had occurred. The
Company also recorded a provision for $198,667 in connection with various
Nutricharge commitments, which is included in impairment and related charges in
the consolidated statement of operations.
(6) INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
During August 1999, the Company purchased 19% of the common stock
outstanding of Turnkey Computer Systems, Inc. ("Turnkey") for $1,822,833, and
carried the investment at cost until October 2000 since the Company did not have
significant influence over the investee. In connection with this investment, the
Company issued 62,500 shares of redeemable Class A common stock valued at
$400,000, and executed a $1,400,000 note payable to Turnkey. A $500,000 payment
was made in December 1999 and $500,000 was due in 2000 and $400,000 was due in
2001 pursuant to the terms of the note. The common stock purchase agreement with
Turnkey contained a put right which allowed Turnkey the one-time right to put to
the Company its redeemable Class A common shares for a fixed purchase price of
$500,000. The redeemable Class A common stock was classified outside of
stockholders' equity as of December 31, 1999, with the difference between the
carrying amount and the redemption amount of $500,000 accreted to redeemable
Class A common stock as a charge to additional paid-in capital using the
effective interest method.
During February 2000, the Company completed an initial public offering
("IPO") and repaid the remaining balance due on the note payable to Turnkey. In
addition, Turnkey exercised its one-time right under the common stock purchase
agreement and put to the Company 62,500 shares of its redeemable Class A common
stock in exchange for 62,500 shares of Class A common stock.
During October 2000, the Company purchased an additional 11% of the common
stock outstanding of Turnkey for $1,265,000 in cash. The Company now has direct
ownership in 30% of the issued and outstanding capital stock of Turnkey and
accounts for this investment under the equity method. The amount by which the
Company's carrying value exceeds its share of the underlying net assets of
Turnkey, $2,725,697 as of October 1, 2000, is amortized on a straight-line basis
over 10 years ($68,142 in 2000) and adjusts the Company's share of Turnkey's
earnings or losses.
(7) EQUITY
COMMON STOCK
The Company has authorized the issuance of 100,000,000 shares of common
stock.
Class A -- The Company has designated 92,711,110 shares as Class A common
stock. Holders of Class A common stock are entitled to one vote for each share.
Class B -- The Company has 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
The Company has authorized the issuance of 15,000,000 shares of preferred
stock and has 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
F-11
47
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding except for Series D shares which are convertible at the IPO price
into shares of class B common stock. Preferred stock is automatically converted
into common stock upon a qualified initial public offering (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 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 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 until the date of distribution of available assets or (b) the
amount which would be distributed if all the preferred stock of the Company were
converted to Class B common stock prior to liquidation. Series D shares are on
parity with Series A and C shares except as to voting rights. Series D
stockholders are entitled to two and one-half votes per share.
INITIAL PUBLIC OFFERING
During February 2000, the Company completed an IPO and private placement of
7,675,000 shares of common stock which generated net proceeds of $107.1 million,
after deducting approximately $8 million for underwriting discounts, commissions
and other offering costs. Concurrent with the IPO, the Company converted all
14,499,162 shares of its then outstanding preferred stock into 12,429,508 shares
of Class A common stock and 5,694,445 shares of Class B common stock.
(8) RELATED PARTY TRANSACTIONS
Amounts due from related parties consist of:
1999 2000
----------- ----------
Eastern Livestock, Inc...................................... $ -- $2,424,264
Employees and shareholders' related businesses.............. -- 1,055,228
----------- ----------
$ -- $3,479,492
=========== ==========
Amounts due to related parties consist of:
1999 2000
----------- ----------
XL Vision................................................... $ 1,668,317 $ 313,009
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc..... 10,385,398 12,115
Eastern Livestock, Inc...................................... -- 321,362
Employees and shareholders' related businesses.............. -- 572,931
----------- ----------
$12,053,715 $1,219,417
=========== ==========
F-12
48
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has both cattle sales and purchase transactions with Eastern
Livestock, Inc., certain employees and shareholders' related businesses in the
ordinary course of business. These sales and purchases are made on trade
accounts with the same credit terms as the Company's other customers and
suppliers. Cattle sales to related parties amounted to $0 in 1998, $0 in 1999
and $226,070,000 in 2000. Cattle purchases from related parties amounted to $0
in 1998, $0 in 1999 and $54,082,000 in 2000.
AMOUNTS DUE TO XL VISION
Amounts due to XL Vision consist of:
Balance as of December 31, 1997............................. $ 8,029,995
Allocation of costs and funding of working capital to the
Company................................................ 9,120,441
Interest charges on technology transferred................ 308,000
Contribution of debt to equity............................ (7,500,000)
Contribution of debt to equity in exchange for Series B
Preferred stock........................................ (4,800,000)
-----------
Balance as of December 31, 1998............................. 5,158,436
Allocation of costs and funding of working capital to the
Company................................................ (3,771,964)
Interest charges on technology transferred................ 281,845
-----------
Balance as of December 31, 1999............................. 1,668,317
Allocation of costs to the Company........................ 827,155
Interest credits on technology transferred................ (62,106)
Repayment of working capital, technology fee and interest
charges................................................ (2,120,357)
-----------
Balance as of December 31, 2000............................. $ 313,009
===========
TECHNOLOGY FEE
The Company entered into an agreement during July 1997 with XL Vision for
the transfer of certain technology used by the Company in the sale of its
products in exchange for a $4,400,000 note payable. The transfer was accounted
for as a distribution to XL Vision since 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 approximately
$308,000 in 1998, $281,800 in 1999, and $0 in 2000. The Company repaid the
balance outstanding on the note, including interest thereon, upon completion of
its IPO in February 2000.
DIRECT CHARGE FEE
The Company entered into an agreement during April 1997 with XL Vision to
provide personnel and other services for a fee, which is based upon actual hours
incurred. Costs allocated to or service fees charged by XL Vision were
approximately $460,000 in 1998, $455,000 in 1999 and $0 in 2000. A portion of
the fees in 1998 was allocated to the discontinued transportation segment. The
Company terminated this agreement with XL Vision effective December 31, 1999.
ADMINISTRATIVE SERVICES FEE
The Company entered into an agreement during December 1997 with XL Vision
to provide administrative support services such as management consulting,
investor relations, legal and accounting services. The amounts due under this
agreement are payable monthly to XL Vision and Safeguard Scientifics, Inc.
("Safeguard"), a shareholder of XL Vision, and were originally based upon an
aggregate of 1.5% of gross revenues, with a maximum fee not to exceed $300,000
per annum. During August 1999, the agreement was amended such that the
administrative services fee was applied to net contribution margin on cattle
sales and gross revenue for all other sales. In April 2000, the agreement with
Safeguard was terminated and the agreement with XL Vision was amended again such
that the administrative services fee charged to the Company is based upon an
estimate of hours spent by XL Vision personnel in support of the Company.
Administrative service fees were approximately $37,200 in 1998, $53,200 in 1999
and $87,500 in 2000.
F-13
49
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases equipment under capital lease, effective April 20, 1998,
with an affiliated entity, XL Realty, Inc. The Company subsequently purchased
the equipment in February 2000. Interest expense was approximately $23,600 in
1998, $27,400 in 1999 and $3,000 in 2000.
The Company subleases its corporate facilities from XL Vision, which leases
the facility from XL Realty, Inc. Rent expense varies based upon space occupied
by the Company and includes charges for base rent, repairs and maintenance,
telephone and networking expenses, real estate taxes and insurance. Rent expense
was approximately $1,129,000 in 1998, $985,000 in 1999 and $706,500 in 2000.
NOTES PAYABLE TO SAFEGUARD DELAWARE, INC.
On July 21, 1999, the Company obtained a $3,000,000 revolving note payable
from Safeguard Delaware, Inc. ("Safeguard"). The revolving note payable, as
amended, bore an interest rate at prime plus 1% and was paid in full in February
2000.
In August, September, and October 1999, the Company signed a series of
demand notes 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 payable. The note bore an interest rate at prime plus 1% and was
paid in full in February 2000.
Interest expense was approximately $0 in 1998, $454,800 in 1999 and
$116,000 in 2000.
SALE OF SERIES D PREFERRED STOCK
On October 27, 1999, the Company issued 4,555,556 shares of Series D
preferred stock and a warrant to acquire 1,138,889 shares of Class B common
stock to Internet Capital Group, Inc. ("ICG"), an affiliate of Safeguard. The
shares of Series D preferred stock were converted into 1.25 shares of Class B
common stock concurrent with the Company's IPO in February 2000. The warrant is
exercisable at the Company's IPO price of $15 per share and expires on November
16, 2002. In return for these instruments, the Company received cash of
$18,000,000 in November 1999 and a $23,000,000 non-interest bearing note
receivable due on October 27, 2000. Imputed interest on the note receivable was
9.5% and amounted to $2,185,000 over the life of the note ($373,320 in 1999 and
$1,811,680 in 2000).
The net consideration of $38,815,000 was allocated to the warrant and
preferred stock. The warrant was valued at $3,325,553 using the Black-Scholes
method and assumed a strike price of $11.20, an expiration of three years, 90%
volatility, and a 5.8% risk-free interest rate. The remaining proceeds were
allocated to preferred stock at $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 then fair value of the common stock
($7.20), multiplied by the number of Class B common shares into which the
preferred stock was convertible (5,694,445). The resulting value of the
beneficial conversion feature was $5,523,612.
As of December 31, 1999, the note receivable was shown as a reduction of
stockholders' equity, net of imputed interest. Interest income has been accreted
over the life of the note using the effective interest method and the value of
the warrant was credited to additional paid-in capital. The beneficial
conversion feature was credited to preferred stock and a corresponding charge
was made to additional paid-in capital upon issuance. The beneficial conversion
feature increased net loss available to common stockholders in 1999.
(9) SEGMENT INFORMATION
The Company's reportable segments consist of cattle sales and other
products and services. The gross profit (loss) associated with cattle sales and
the related prospects for this portion of the Company's business differs from
the rest of the Company's products and service offerings.
F-14
50
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes revenue, cost of revenue and gross profit (loss)
information related to the Company's two operating segments:
1998 1999 2000
---------- ----------- ------------
REVENUE:
Cattle........................................ $ -- $42,191,884 $800,894,461
Other......................................... 1,792,471 1,591,240 2,125,472
---------- ----------- ------------
Total................................. $1,792,471 $43,783,124 $803,019,933
========== =========== ============
COST OF REVENUE:
Cattle........................................ $ -- $41,746,723 $791,516,506
Other......................................... 2,623,447 1,770,736 2,343,151
---------- ----------- ------------
Total................................. $2,623,447 $43,517,459 $793,859,657
========== =========== ============
GROSS PROFIT (LOSS):
Cattle........................................ $ -- $ 445,161 $ 9,377,955
Other......................................... (830,976) (179,496) (217,679)
---------- ----------- ------------
Total................................. $ (830,976) $ 265,665 $ 9,160,276
========== =========== ============
The Company's assets and other statement of operations data are not
allocated to a segment.
(10) INCOME TAXES
Deferred tax assets and liabilities have been determined based upon the
differences between the financial statement amounts and the tax bases of assets
and liabilities as measured by enacted tax rates expected to be in effect when
these differences are expected to reverse. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the realization of
future taxable income during the periods in which those temporary differences
become deductible. Management considers past history, the scheduled reversal of
taxable temporary differences, projected future taxable income, and tax planning
strategies in making this assessment. As of December 31, 2000 and 1999,
management believes it is more likely than not that the Company's net deferred
tax asset will not be realized. Significant components of the Company's deferred
income tax assets and liabilities are as follows:
1999 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards........................ $ 10,903,000 $ 22,310,000
Amortization of acquired technology from XL Vision (note
8)................................................... 1,500,000 1,341,000
Research and experimentation tax credit carryforward.... 740,000 1,390,000
Intangibles............................................. -- 2,988,000
Other................................................... 853,000 469,000
------------ ------------
13,996,000 28,498,000
Deferred tax liability:
Property, plant and equipment........................... -- (470,000)
Valuation allowance....................................... (13,996,000) (28,028,000)
------------ ------------
Net deferred tax assets......................... $ -- $ --
============ ============
The Company has available at December 31, 2000 for federal income tax
purposes, unused net operating loss carryforwards of approximately $56,000,000
which may be applied against future taxable income and expire in years beginning
in 2012. The Company also has approximately $1,390,000 in research and
experimentation credits carryforwards. The research and experimentation credits,
which begin to expire in 2012, can also be used to offset future regular tax
liabilities. A valuation allowance for deferred tax assets is provided when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
F-15
51
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the "expected" tax benefit (computed by applying the
federal corporate income tax rate of 34 percent to the loss before income taxes)
and the actual tax benefit is primarily due to the effect of the valuation
allowance.
(11) 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 1996 Plan authorizes grants of shares or options to purchase
up to 2,168,750 shares of authorized but unissued common stock. Stock options
granted under the 1996 Plan have a maximum term of ten years and vesting
schedules are determined at the discretion of the Compensation Committee of the
Board of Directors on the effective date of grant. In May 1999, the 1996 Plan
was terminated with respect to the issuance of new grants.
In May 1999, the Company's stockholders approved the 1999 equity
compensation plan (the "1999 Plan"), which reserved 2,500,000 shares of
authorized, unissued shares of common stock for issuance to employees, advisors,
and non-exempt members of the Board of Directors. Stock options granted under
the 1999 Plan have a maximum term of ten years and vesting schedules are
determined at the discretion of the Compensation Committee on the effective date
of grant.
In July 2000, the Company's stockholders approved an amendment to the 1999
Plan to increase the number of shares available for grant to 4,000,000 shares.
A summary of stock option transactions follows:
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE PRICE AVERAGE CONTRACTUAL
SHARES PER SHARE EXERCISE PRICE LIFE (IN YEARS)
--------- --------------- --------------- ---------------
Balance outstanding, December 31,
1997............................ 338,125 $ 0.80 $ 0.80 9.64
========= ============== ====== ====
Granted......................... 1,692,500 0.80 - 1.60 0.84
Cancelled....................... (398,125) 0.80 0.80
--------- -------------- ------
Balance outstanding, December 31,
1998............................ 1,632,500 $ 0.80 - 1.60 $ 0.84 9.48
========= ============== ====== ====
Granted......................... 1,415,250 1.60 - 11.20 4.96
Exercised....................... (200,819) 0.80 0.93
Cancelled....................... (77,815) 0.80 - 01.60 1.35
--------- -------------- ------
Balance outstanding, December 31,
1999............................ 2,769,116 $ 0.80 - 11.20 $ 2.93 9.01
========= ============== ====== ====
Granted......................... 84,000 3.08 - 6.81 6.02
1,580,426 10.56 - 25.84 14.48
121,500 42.00 - 62.38 51.02
Exercised....................... (257,656) 0.80 - 6.40 1.23
Cancelled....................... (130,259) 0.80 - 18.81 7.68
--------- -------------- ------
Balance outstanding, December 31,
2000............................ 4,167,127 $ 0.80 - 62.38 $ 8.73 8.60
========= ============== ====== ====
At December 31, 1998, 1999, and 2000, there were 414,375, 761,045 and
1,325,831 shares exercisable, respectively, at weighted average exercise prices
of $0.82, $1.68, and $2.72, respectively.
At December 31, 1998, 1999, and 2000, there were 511,250, 1,597,875, and
1,399,405 shares available for grant, respectively.
F-16
52
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of stock options, calculated on the date of
grant using the Black-Scholes option pricing model, was $0.08 in 1998, $1.47 in
1999, and $12.82 in 2000. The following weighted average assumptions were used
to determine fair value:
1998 1999 2000
---- ---- ----
Expected volatility......................................... 0% 0% 100%
Dividend yield.............................................. 0% 0% 0%
Risk-free interest rate..................................... 4.73% 4.99% 5.97%
Expected life in years...................................... 5.57 6.75 5.00
As prescribed by SFAS No. 123, no volatility was assumed for options issued
through the Company's IPO, due to the use of the Minimum Value Method of
computation.
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 grant date. The Company applies the accounting
principles of APB 25 for issuances to directors and employees and, accordingly,
has not recognized compensation expense in the consolidated statements of
operations through December 31, 1998.
In March 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 grant date and is amortizing the unearned
compensation to earnings over the vesting period. Compensation expense related
to the grant of these options totaled $13,524 in 1999 and $18,032 in 2000, and
is included in selling, general, and administrative expenses within the
consolidated statements of operations.
In May 2000, the Company accelerated vesting of 93,750 stock options and
recognized compensation expense of $1,339,268. This amount is included in
selling, general, and administrative expenses within the consolidated statements
of operations.
If the Company had elected to adopt the optional recognition provisions of
SFAS No. 123 for its stock option plans, net loss and net loss per share would
have been changed to the pro forma amounts indicated below:
1998 1999 2000
----------- ------------ ------------
Net loss as reported.......................... $(7,832,128) $(15,595,286) $(33,135,097)
Pro forma net loss............................ $(7,865,031) $(16,049,980) $(37,700,645)
Net loss per share as reported -- basic and
diluted..................................... $ (1.80) $ (2.30) $ (1.05)
Pro forma net loss per share -- basic and
diluted..................................... $ (1.81) $ (2.36) $ (1.19)
F-17
53
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) BUSINESS COMBINATIONS
The following table presents information about acquisitions by the Company
in the years ended December 31, 1999, and 2000. All acquisitions were accounted
for under the purchase method of accounting and their results of operations
included in the consolidated statements of operations since their respective
dates of acquisition.
AMORT.
ACQUISITION PURCHASE SHARES SHARE PERIOD
DATE PRICE ISSUED VALUE INTANGIBLES (YRS.)
----------- ----------- --------- ----------- ----------- ------
2000 ACQUISITIONS
Eastern Livestock, Inc.(1)... 5/00 $36,209,507 1,215,913 $14,500,000 $36,140,850 5
Jordan Cattle Auction(2)..... 6/00 6,452,132 -- -- 3,899,980 5
Ed Edens Farms(1)............ 7/00 3,324,840 83,858 1,000,000 2,219,325 5
LeMaster Livestock,
Inc.(1).................... 8/00 5,662,007 125,819 2,240,000 5,216,146 5
Mountain Plains Video
Auction(3)................. 8/00 1,053,763 12,743 250,000 1,053,763 5
McMahan Order Buying
Company(1)................. 8/00 3,642,362 104,392 1,812,500 3,638,860 5
RPT Land & Cattle
Company(1)................. 9/00 5,372,505 89,585 2,000,000 4,618,000 5
Hefley Order Buying
Company(1)................. 11/00 411,488 10,190 100,000 411,488 5
J&L Livestock Company(1)..... 12/00 4,355,027 331,620 2,000,000 4,019,085 5
1999 ACQUISITIONS
Cattleman's Information
Network (CIN)(4)........... 2/99 $ 2,296,610 750,000 $ 720,000 $ 2,176,368 5
Cyberstockyard, Inc.(5)...... 3/99 542,265 250,000 450,000 527,274 3
Professional Cattle
Consultants(6)............. 5/99 1,827,861 -- -- 1,587,791 4-5
- ---------------
(1) Engages in buying cattle for immediate or short-term resale.
(2) Engages in buying and selling of cattle through three auction facilities.
(3) Provides video auction services to sellers of cattle and generates
commissions from the sellers upon the sale of their cattle through an
affiliated auction facility.
(4) Supplies its cattle feedlot customers with access to its performance
measurements database.
(5) Buys and sells cattle through its proprietary internet auction software.
(6) Provides comparative analysis and market information to the feedlot
industry.
Pursuant to asset purchase agreements with shareholders of Eastern
Livestock, Inc. and LeMaster Livestock, Inc., the Company has amounts due as of
December 31, 2000 totaling $4,800,000 which represent additional purchase
consideration payable in 2001.
In connection with the acquisitions of Hefley Order Buying Company and J&L
Livestock Company, certain stockholders are entitled to receive contingent
consideration based on achievement of specified milestones. If distributed, the
fair value of such consideration, which is payable in a combination of cash and
stock, will be recorded as additional goodwill.
Management is primarily responsible for estimating the fair value of the
assets acquired, and has conducted due diligence in determining the fair value.
Management has made estimates and assumptions that affect the reported amounts
of assets, liabilities, and expenses resulting from such acquisitions. Actual
results could differ from those amounts.
F-18
54
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited proforma financial information presents the
combined results of operations of eMerge, and the acquisitions included in the
table above, as if the acquisitions occurred on January 1, 1999, after giving
effect to certain adjustments, including amortization of goodwill. The unaudited
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had these entities constituted a single
entity during such periods.
1999 2000
-------------- --------------
Revenue............................................ $1,100,980,060 $1,431,263,247
Net loss........................................... $ (20,950,144) $ (35,247,815)
Net loss attributable to common shareholders....... $ (26,488,095) $ (35,247,815)
Net loss per common share.......................... $ (2.99) $ (1.08)
(13) 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. In 1998, the Company
recognized a loss of $1,808,951 from operations of the discontinued segment and
a loss of $91,415 on the disposal of the segment. The Company recognized income
from the discontinued segment of $10,420 in 1999 and $84,634 in 2000. Net assets
of the discontinued operations segment totaled $297,003 at December 31, 1999 and
$0 at December 31, 2000.
(14) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain property and equipment under various operating
and capital lease arrangements that expire in various years through 2006. Future
minimum lease payments under scheduled capital and operating leases that have
initial or remaining noncancelable terms in excess of one year are as follows:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
2001...................................................... $ 271,317 $ 271,000
2002...................................................... 95,759 259,000
2003...................................................... -- 240,000
2004...................................................... -- 235,000
2005...................................................... -- 117,000
Thereafter................................................ -- 6,000
----------- ----------
Total minimum payments.......................... 367,076 $1,128,000
==========
Amount representing interest.............................. (59,740)
-----------
Obligation under capital leases........................... 307,336
Obligation due within one year............................ (216,516)
-----------
Long-term obligation under capital leases............... $ 90,820
===========
Rental expense under these operating leases was $71,400 in 1999 and
$175,200 in 2000.
LEGAL PROCEEDINGS
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 the Company
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.
F-19
55
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, the Company's motion to dismiss the case based on jurisdiction and
venue was denied at the trial court level in Saskatchewan, as was the similar
motion by co-defendant E-Y Laboratories. Both defendants have appealed that
decision, and are in the process of presenting their position to the appeals
court. Management continues to believe that the matter should be dismissed, but
it is not possible to predict whether the appellate court in Canada will reverse
the lower court decision. If the case is not dismissed, it will proceed in
Canada. Management believes the case to be without merit and intends to defend
it vigorously.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
ROYALTY
In connection with the Company's investment in Turnkey, the Company
obtained a right to provide cattle sales, auction services and feed sale
services to customers of Turnkey through August 2019. If specified levels of
revenue for Turnkey's feedlot customers are met, the Company will pay a fee to
Turnkey. No fees were due to Turnkey in 1998, 1999 or 2000.
OTHER COMMITMENTS
During the ordinary course of business, the Company enters into purchase
and sale contracts (including futures contracts) for cattle that require
delivery at a future date. As of December 31, 2000, there were commitments to
purchase and sell cattle of approximately $45,542,000 and $23,456,000,
respectively. These commitments were at a market or market-derived price at the
time of delivery and expire typically within three to six months.
(15) SUBSEQUENT EVENTS
ACQUISITIONS
On January 2, 2001, the Company closed on an Agreement for the Purchase and
Sale of Assets with Bluegrass Stockyards ("Bluegrass") and its shareholders. In
connection with this purchase, the Company acquired all of the tangible and
intangible property of Bluegrass relating to its business of purchasing and
reselling cattle through its auction facility. The purchase price for these
assets was $1,500,000 in cash. Concurrent with the purchase and sale of assets,
the Company also closed on a Contract for Sale and Purchase of Real Estate with
the shareholders of Bluegrass. The Company purchased land and buildings used in
the above described business for a purchase price of $2,000,000 in cash. The
acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of net assets acquired of approximately
$2,164,800 was recorded as intangibles and is being amortized over five years.
On January 2, 2001, the Company closed on an Agreement for the Purchase and
Sale of Assets with Runnells-Peters Cattle Company ("Runnells-Peters") and its
shareholders for the purchase of certain tangible and intangible assets.
Runnells-Peters engages in the buying of cattle for immediate or short-term
resale. The purchase price for these assets consisted of (i) $500,000 in cash
and (ii) 136,986 shares of eMerge's common stock valued at $500,000. The
acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of net assets acquired of approximately
$1,018,400 was recorded as intangibles and is being amortized over five years.
On January 2, 2001, the Company closed on an Agreement for the Purchase and
Sale of Assets with Pennell Cattle Company ("Pennell") and its sole shareholder
for the purchase of certain tangible and intangible assets. Pennell engages in
the buying of cattle for immediate or short-term resale. The purchase price for
these assets consisted of (i) $187,500 in cash and (ii) 51,370 shares of
eMerge's common stock valued at $187,500. The acquisition was accounted for as a
purchase and the estimated excess of the purchase price over the fair value of
net assets acquired of approximately $395,200 was recorded as intangibles and is
being amortized over five years.
F-20
56
EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRUCTURING
On January 18, 2001, the Company announced plans to realign its corporate
operations in connection with the decision to discontinue support of its
Nutricharge and Infrared Imaging products. The Company expects to record a
restructuring charge during the first quarter of 2001 of approximately $700,000
primarily to reflect employee severance and related benefit costs.
F-21
57
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation of
eMerge Interactive (Exhibit 3.1)(1)
3.2 -- Amended and Restated Bylaws of eMerge Interactive (Exhibit
3.2)(1)
10.1 -- Amended and Restated 1996 Equity Compensation Plan (Exhibit
10.1)(1)
10.2 -- 1999 Equity Compensation Plan (Exhibit 10.2)(1)
10.3 -- Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada (Exhibit 10.3)(1)
10.4 -- Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999 (Exhibit
10.4)(1)
10.5 -- Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
(Exhibit 10.5)(1)
10.6 -- Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain (Exhibit
10.6)(1)
10.7 -- Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz (Exhibit
10.7)(1)
10.8 -- Stockholders Agreement dated July 29, 1998 among eMerge
Interactive, and individuals designated as the former
shareholders of STS Agriventures, Ltd. (Exhibit 10.8)(1)
10.9 -- Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust (Exhibit 10.9)(1)
10.10 -- Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc. (Exhibit
10.10)(1)
10.11 -- Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc. (Exhibit
10.11)(1)
10.12 -- Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
(Exhibit 10.12)(1)
10.13 -- Letter of Agreement dated January 12, 2000 between eMerge
Interactive and Southern States, Cooperative, Inc. (Exhibit
10.13)(1)
10.14 -- Subscription Agreement letter for purchase of Series B
Junior Preferred Stock (Exhibit 10.14)(1)
10.15 -- Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock) (Exhibit 10.15)(1)
10.16 -- Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc. (Exhibit 10.16)(1)
10.17 -- Registration Rights Agreement dated July 18, 1997 (Exhibit
10.17)(1)
10.18 -- Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999 (Exhibit 10.18)(1)
10.19 -- Stockholders' and Registration Rights Agreement dated
February 24, 1999 (Exhibit 10.19)(1)
10.20 -- Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1000 (Exhibit 10.20)(1)
10.21 -- (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999 (Exhibit 10.21(a))(1)
(b) Second Amended Revolving Note dated October 25, 1999
(Exhibit 10.21(b))(1)
(c) Third Amended Revolving Note dated December 6, 1999
(Exhibit 10.21(c))(1)
(d) Fourth Amended Revolving Note dated January 31, 2000
(Exhibit 10.21(d))(1)
10.22 -- Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive (Exhibit 10.22)(1)
58
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.23 -- Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled) (Exhibit
10.23)(1)
10.24 -- Term note dated October 25, 1999 from eMerge Interactive to
Safeguard (Exhibit 10.24)(1)
10.25 -- Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled) (Exhibit
10.25)(1)
10.26 -- Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholder's Agreement (Exhibit 10.26)(1)
10.27 -- Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997 (Exhibit 10.27)(1)
10.28 -- Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company (Exhibit
10.28)(1)
10.29 -- Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc. (Exhibit 10.29)(1)
10.30 -- Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc. (Exhibit 10.30)(1)
10.31 -- Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc. (Exhibit
10.31)(1)
10.32 -- Cooperative Research and development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated on
Meat dated August 4, 1999 (Exhibit 10.32)(1)
10.33 -- Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999
(Exhibit 10.33)(1)
10.34 -- Term Note and Pledge Agreement dated January 28, 2000
between eMerge and Charles Abraham (Exhibit 10.34)(1)
10.35 -- Agreement for the Purchase and Sale of Assets, dated April
20, 2000 (Exhibit 2.1)(2)
10.36 -- Registration Rights and Restricted Stock Agreement, dated
May 1, 2000 (Exhibit 2.2)(2)
10.37 -- Supply and Support Agreement, dated May 1, 2000 (Exhibit
2.3)(2)
10.38 -- Cattle Purchase Contract Agreement, dated May 1, 2000
(Exhibit 2.4)(2)
10.39 -- Agreement for the Purchase and Sale of Assets, dated April
21, 2000 (Exhibit 2.5)(2)
10.40 -- Contract for Sale and Purchase of Real Estate, dated April
21, 2000 (Exhibit 2.6)(2)
10.41 -- Supplement to Common Stock Purchase Agreement dated October
1, 2000, between eMerge Interactive, Inc., Turnkey Computer
Systems, Inc., Stephen W. Myers, Don Flynt, and Carey
Coffman*
23.1 -- Consent of KPMG LLP*
- ---------------
* Filed herewith.
(1) Incorporated by reference from exhibit shown in parentheses contained in the
Company's Registration Statement on Form S-1 (No. 333-89815), filed with the
Commission.
(2) Incorporated by reference from the exhibit shown in parentheses contained in
the Company's Current Report on Form 8-K dated May 5, 2000, filed with the
Commission.