-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjFrAeQHQ/lDYnuDLZnP7nqIUYF4xpUNM77cGcfxZ/wBH3ALuiYsRUA7YRMV9Y/6 xXy2ZnQfge2PUgDhkWkonQ== 0000893220-99-001214.txt : 19991028 0000893220-99-001214.hdr.sgml : 19991028 ACCESSION NUMBER: 0000893220-99-001214 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 32 FILED AS OF DATE: 19991027 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGE INTERACTIVE INC CENTRAL INDEX KEY: 0001092605 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 650534535 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-89815 FILM NUMBER: 99735465 BUSINESS ADDRESS: STREET 1: 10315 102ND TERRACE CITY: SEBASTIAN STATE: FL ZIP: 32958 BUSINESS PHONE: 5615897331 MAIL ADDRESS: STREET 1: 10315 102ND TERRACE CITY: SEBASTIAN STATE: FL ZIP: 32958 S-1 1 FORM S-1 / EMERGE INTERACTIVE, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ eMerge INTERACTIVE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3698 65-0534535 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
10315 102ND TERRACE SEBASTIAN, FL 32958 561/589-7331 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ CHARLES L. ABRAHAM CHIEF EXECUTIVE OFFICER eMerge INTERACTIVE, INC. 10315 102ND TERRACE SEBASTIAN, FL 32958 561/589-7331 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: JAMES A. OUNSWORTH, ESQUIRE N. JEFFREY KLAUDER, ESQUIRE PHILIP P. ROSSETTI, ESQUIRE SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP HALE AND DORR LLP 800 THE SAFEGUARD BUILDING 1701 MARKET STREET 60 STATE STREET 435 DEVON PARK DRIVE PHILADELPHIA, PA 19103-2921 BOSTON, MA 02109 WAYNE, PA 19087 215/963-5694 617/526-6000 610/293-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.01 per share..... $86,750,000 $24,117 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. Underwriters may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting offers to buy these securities in any state in which the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 27, 1999 SHARES [LOGO] eMERGE INTERACTIVE, INC. CLASS A COMMON STOCK ------------------------ This is an initial public offering of class A common stock of eMerge Interactive, Inc. We are offering shares of class A common stock in this offering and several stockholders identified in this prospectus are selling an additional shares. As part of this offering, we are offering shares of our class A common stock at the public offering price to shareholders of Safeguard Scientifics, Inc., one of our principal stockholders, that owned at least 100 shares of common stock of Safeguard as of October 20, 1999. Safeguard or its designees will purchase any shares of our class A common stock that are not purchased by Safeguard shareholders under the directed share subscription program. Safeguard is an underwriter with respect to the shares offered by us to the shareholders of Safeguard. Safeguard is not an underwriter with respect to any other shares offered by us and is not included in the term underwriter as used elsewhere in this prospectus. See the section entitled Plan of Distribution -- Directed Share Subscription Program. We expect the initial public offering price will be between $ and $ per share. Prior to this offering, there has been no public market for the class A common stock. We have applied to list the class A common stock on the Nasdaq National Market under the symbol EMRG. ------------------------ INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE THE SECTION ENTITLED RISK FACTORS STARTING ON PAGE 9 TO READ ABOUT RISKS THAT YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR CLASS A COMMON STOCK. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------
PER SHARE TOTAL Underwritten Public Offering --------- -------- Public Offering Price.................................. $ $ Underwriting Discounts................................. $ $ Proceeds to eMerge Interactive......................... $ $ Proceeds to Selling Stockholders....................... $ $
PER SHARE TOTAL Directed Share Subscription Program --------- -------- Public Offering Price.................................. $ $ Management Fee......................................... $ $ Proceeds to eMerge Interactive......................... $ $
TOTAL Aggregate Offering Proceeds -------- Proceeds to eMerge Interactive from Underwritten Public Offering and Directed Share Subscription Program..... $
At our request, the underwriters have reserved shares of our class A common stock for sale at the public offering price to our employees, directors and other persons with relationships with us. See the section entitled Plan of Distribution for more information. The underwriters have an option to purchase additional shares of class A common stock from us at the initial public offering price to cover any over-allotments of shares. ------------------------ ADAMS, HARKNESS & HILL, INC. FIRST UNION SECURITIES, INC. FAC/EQUITIES PROSPECTUS DATED 3 You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our class A common stock. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 9 Forward-Looking Statements.................................. 20 Use of Proceeds............................................. 21 Dividend Policy............................................. 21 Capitalization.............................................. 22 Dilution.................................................... 24 Selected Consolidated Financial Data........................ 25 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 33 Management.................................................. 48 Related Party Transactions.................................. 54 Principal and Selling Stockholders.......................... 57 Description of Capital Stock................................ 61 Shares Eligible for Future Sale............................. 64 Plan of Distribution........................................ 66 Legal Matters............................................... 69 Experts..................................................... 69 Additional Information...................................... 70 Index to Financial Statements............................... F-1
------------------------- Until , all dealers that buy, sell or trade in our class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to its unsold allotments or subscriptions. ------------------------- We maintain a Web site at www.emergeinteractive.com, which includes information relating to eMerge Interactive. Information contained on our Web site does not constitute a part of this prospectus. Cyberstockyard(TM) and NutriCharge(TM) are trademarks of eMerge Interactive. This prospectus also contains trademarks and tradenames of other companies. 4 PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read the entire prospectus before making a decision to invest. eMerge INTERACTIVE, INC. OVERVIEW We are a leading business-to-business electronic commerce company combining content, community and transaction services to create an online marketplace for the cattle industry. We offer our comprehensive cattle solution through our Internet-based information and transaction platform, our Web-enabled private network, and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. Our family of integrated Web sites and Web-enabled private network provide: - Livestock procurement services consisting of cattle sales and auctions; - Customer-specific daily feedlot operations analysis, comparative cattle industry analysis and benchmarking studies; - Cattle inventory management tools; and - Livestock health management and quality enhancement products. THE ONLINE LIVESTOCK OPPORTUNITY We believe that the production chain of the cattle industry, which includes cattle producers, feedlots, packers and suppliers, contains inefficiencies that reduce animal health and value. These inefficiencies, which include excessive animal transportation and handling, result in additional transaction costs and reduced beef quality. Further, the lack of integrated management information systems and limited access to current and accurate data and day-to-day management tools have resulted in sub-optimal cattle performance. Due to its functionality, scalability and accessibility, the Internet is emerging as a single destination for commerce and information related to the livestock industry. Many of the variables that affect beef quality can be addressed by the Internet's open architecture, universal accessibility and ability to provide more timely and comprehensive information. According to Forrester Research, business-to-business electronic commerce in the United States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003. OUR SERVICES Our suite of complementary products and services is designed to reduce inefficiencies throughout the cattle production chain and therefore improve cattle quality and overall productivity. We currently conduct live cattle sales and auctions over our Web site. Additionally, through our online and Web-enabled management information solutions we offer customers detailed pricing, operations and benchmarking data on the cattle industry. Further, our customers can track and monitor the performance of their cattle, manage their daily business operations and access our other online products and services designed to enhance overall cattle quality. 3 5 OUR SOLUTION We offer commerce, information and technology to cattle industry participants. The key features of our solution include: - Online cattle sales and auction service, which reduce the overall handling of cattle, thereby reducing costs and improving quality; - Management information solutions that provide a broad range of data and analyses to help industry participants improve cattle management. Our information solutions include general industry information such as current industry news, commodities pricing and weather updates, as well as personalized information based upon customers' individual preferences and geographic location. In addition, we use our proprietary centralized database to provide our customers with feed performance benchmarking services, daily business management and monthly market analysis; - Diagnostic and therapeutic technologies and products designed for livestock, such as our restorative feed supplement product, NutriCharge; and - An online community designed to facilitate the exchange of information among livestock producers, feedlots and packers, which includes access to our in-house cattle industry experts. OUR STRATEGY Our strategy is to expand upon our position as a leading online business-to-business solution for livestock-related commerce, content and community. Key components of our strategy include: - Leverage our position as a leading provider of online commerce, content and community in the cattle industry to build demand for our products, services and solutions; - Expand community loyalty by offering comprehensive operational and industry content; - Leverage our strong customer relationships and industry expertise to further establish our online marketplace; - Develop additional products and services to complement our existing offerings; and - Expand our suite of offerings to new international markets and other segments of the livestock industry. We are a Delaware corporation originally incorporated on September 12, 1994 under the name Enhanced Vision Systems, Inc. On June 11, 1999, we changed our name to eMerge Interactive, Inc. Our principal executive offices are located at 10315 102nd Terrace, Sebastian, Florida 32958 and our telephone number is 561-589-5310. 4 6 THE OFFERING Class A common stock offered by: eMerge Interactive.......................... shares The Selling Stockholders.................... shares Common stock to be outstanding after the offering......................................... shares Use of proceeds.................................. For repayment of debt, working capital and general corporate purposes, including sales and marketing expenditures, research and development expenditures and capital expenditures. See the section entitled Use of Proceeds. Proposed Nasdaq National Market symbol........... EMRG In addition to the shares of common stock to be outstanding after this offering, there are: - 2,012,170 shares of class A common stock issuable upon the exercise of outstanding options granted under our equity compensation plans as of October 20, 1999 at a weighted average exercise price of $2.03 per share, of which options to purchase 577,095 shares of class A common stock were exercisable at a weighted average exercise price of $1.32 per share; - 572,300 additional shares of class A common stock available for issuance under our 1996 and 1999 equity compensation plans as of October 20, 1999; and - 911,111 shares of class B common stock issuable on the exercise of a warrant that will be exercisable upon consummation of this offering at an exercise price equal to the initial public offering price. For a description of our equity compensation plans, please see the section entitled Management -- Equity Compensation. 5 7 THE DIRECTED SHARE SUBSCRIPTION PROGRAM As part of this offering, we are offering shares of our class A common stock to shareholders of Safeguard Scientifics, Inc. that owned at least 100 common shares of Safeguard on October 20, 1999 in a directed share subscription program. The program is described in greater detail in the section of this prospectus entitled Plan of Distribution -- Directed Share Subscription Program. Unless otherwise noted, the information in this prospectus takes into account the conversion of preferred stock into shares of common stock, which will automatically occur immediately before this offering is completed. The outstanding shares of series A preferred stock, series B preferred stock and series C preferred stock will convert into shares of class A common stock and the outstanding shares of series D preferred stock will convert into shares of class B common stock. All shares offered by this prospectus are shares of class A common stock. The holders of class A common stock are entitled to one vote per share. Holders of our class B common stock are entitled to two and one-half votes per share. Unless otherwise indicated, the references to common stock in this prospectus refer to both our class A and class B common stock. The references to Safeguard in this prospectus refer to Safeguard Scientifics, Inc. and its affiliates. The information throughout this prospectus also assumes that all of the shares offered in the directed share subscription program are purchased by shareholders of Safeguard Scientifics, Inc. and that the underwriters will not exercise their over-allotment option. Please see the section entitled Capitalization for more information regarding the outstanding shares of eMerge Interactive common stock and options to purchase eMerge Interactive common stock. 6 8 SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes consolidated statements of operations data for our business. The pro forma consolidated statements of operations data gives effect to our acquisition of CIN, LLC and Professional Cattle Consultants, L.L.C. as if we had consummated these acquisitions at the beginning of each period. Cyberstockyard, Inc. is not included because the pro forma effects are not significant. Business activities related to our continuing operations began in 1997. The historical data for the six months ended June 30, 1998 and 1999 and the pro forma data for the year ended December 31, 1998 and the six months ended June 30, 1999 are unaudited.
SIX MONTHS YEAR ENDED SIX MONTHS ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, ----------------- ----------------- 1998 1999 1997 1998 1998 1999 PRO FORMA PRO FORMA ------- ------- ------- ------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue............................. $ -- $ 1,792 $ 664 $ 2,578 $ 2,283 $ 2,745 Cost of revenue..................... -- 2,623 1,037 2,768 2,801 2,840 Operating expenses.................. 1,356 4,769 1,877 5,519 6,266 6,007 Interest expense/other income, net............................... 141 332 162 289 315 300 Profit (loss) from continuing operations........................ $(1,497) $(5,932) $(2,412) $(5,998) $(7,099) $(6,402) ======= ======= ======= ======= ======= ======= Profit (loss) from continuing operations per common share -- basic and diluted........ $ (4.89) $ (1.70) $ (0.93) $ (1.15) $ (1.74) $ (1.18) ======= ======= ======= ======= ======= ======= Weighted average number of common shares outstanding -- basic and diluted........................... 306 3,486 2,607 5,223 4,086 5,403 ======= ======= ======= ======= ======= =======
The following table summarizes our unaudited balance sheet data as of June 30, 1999. The pro forma consolidated balance sheet data give effect to: - The issuance of 4,555,556 shares of series D preferred stock, which will automatically convert into shares of our class B common stock immediately prior to the consummation of the offering, and a warrant to purchase 911,111 shares of class B common stock at an exercise price equal to the initial public offering price, for $38.8 million under a securities purchase agreement dated October 27, 1999, and the application of a portion of the proceeds from that agreement to repay indebtedness to XL Vision of approximately $4.5 million; and - The automatic conversion of all outstanding shares of series A, series B and series C preferred stock into shares of our class A common stock, which will occur immediately prior to the consummation of the offering. The pro forma as adjusted consolidated balance sheet data below give effect to: - The events described in the two preceding paragraphs; and - The sale of shares of class A common stock in this offering and our application of the estimated net proceeds from the sale of these shares, as described in the section entitled Use of Proceeds. 7 9
JUNE 30, 1999 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------- --------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash........................................... $ 663 $14,163 Total assets................................... 11,928 25,428 Total indebtedness............................. 8,443 3,943 Total stockholders' equity..................... 777 18,777
Total indebtedness includes amounts due to XL Vision totaling $8.0 million. We intend to use a portion of the net proceeds from this offering to pay in full amounts due to XL Vision and Safeguard. As of September 30, 1999, approximately $6.0 million was still owed to XL Vision, of which we intend to pay $4.5 million with the net proceeds from the sale of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock to Internet Capital Group, Inc.; the remaining $1.5 million will be paid with a portion of the net proceeds from this offering. The principal amount owed to Safeguard as of October 20, 1999 was approximately $7.1 million, and is to be repaid with the net proceeds of this offering. 8 10 RISK FACTORS You should carefully consider the risks described below before investing in our class A common stock. The risks and uncertainties described below may not be the only risks that we face. The factors discussed below may harm our business, financial condition and results of operations and could result in a complete loss of your investment. RISKS RELATED TO OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY IN OUR CURRENT LINE OF BUSINESS AND FACE SIGNIFICANT RISKS TYPICAL OF EARLY STAGE COMPANIES, WHICH COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We commenced operations in 1994 and commercially released our initial product in November 1997. Accordingly, we have only a limited operating history upon which you can evaluate our business. In addition, our business strategy and revenue model have changed significantly during the past year. Prior to this change, we generated revenue primarily from the sale and licensing of our AMIRIS product, a maritime navigational thermal imaging system. We have sold the AMIRIS product line and have changed our business strategy to focus on business-to-business Internet commerce for the livestock industry. We only recently launched our commercial Web site for the cattle industry in August 1999. Our limited operating history, combined with our recent shift in business strategy, makes predicting our future results of operations difficult. Our new business model has not been tested and, accordingly, we cannot be certain that our business strategy will be successful. Specific uncertainties relating to our new business model include our ability to: - Achieve acceptance of our Web site as a marketplace for electronic commerce; - Expand the number of feedlots that utilize our services; - Develop and upgrade our products and technologies more effectively and rapidly than our competitors; and - Successfully implement our sales and marketing strategy. THE INTERNET LIVESTOCK PRODUCTS AND SERVICES MARKET IS NEW AND UNCERTAIN AND OUR BUSINESS MAY NOT DEVELOP AS WE ANTICIPATE. The Internet market for livestock products and services has not yet developed, and its development is subject to substantial uncertainty. We cannot assure you that this market will develop as we expect, if at all. Our revenue model depends on the commercial acceptance of our Internet-based products and services. We do not know if our target customers will use the Internet as a means of purchasing products and services. Even if potential customers choose to purchase livestock products and services over the Internet, they may not choose our online services to do so. If the market for livestock products and services over the Internet does not develop as we anticipate, our business and the results of our operations will be harmed. WE RECENTLY COMPLETED SIGNIFICANT BUSINESS ACQUISITIONS AND WE MAY MAKE ACQUISITIONS OF OTHER BUSINESSES AND TECHNOLOGIES IN THE FUTURE, WHICH MAY BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS AND MAY DISRUPT OR NEGATIVELY IMPACT OUR BUSINESS. We recently made, and will continue to make, investments in and acquisitions of complementary companies, technologies and assets. We acquired substantially all of the assets of CIN, LLC in February 1999, and Professional Cattle Consultants, L.L.C. in May 1999. 9 11 We also acquired all of the issued and outstanding stock of Cyberstockyard, Inc. in March 1999. If we fail to successfully integrate the operations of these companies, or any companies acquired in the future, with our business, we may not be able to operate efficiently or profitably and our business and the results of our operations would be harmed. These acquisitions may result in: - Difficulties in assimilating technologies, products, personnel and operations; - Diversion of our management's attention; - Entering markets in which we have no or limited prior experience; - Loss of key employees of acquired organizations; and - Capital requirements in excess of what we anticipate. In the future, acquiring companies, assets or technologies may also require us to make cash payments, assume debt, incur large write-offs related to intangible assets and issue equity, which will dilute ownership interest. IF OUR ONLINE CATTLE SALES AND AUCTION SERVICES DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS WILL BE HARMED. We will rely on the success of our online cattle sales and auction services for a substantial portion of our revenue for the foreseeable future. As a result, our ability to achieve commercial acceptance of our cattle sales and auction services is critical to our ability to obtain future revenue. Any failure to successfully gain commercial acceptance of these services would harm our business and the results of our operations. WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE. IF WE CONTINUE TO INCUR LOSSES, OUR FINANCIAL CONDITION MAY BE HARMED AND OUR BUSINESS WILL NOT ULTIMATELY BE FINANCIALLY VIABLE. We have incurred significant net losses since inception. We reported a net loss of approximately $5.5 million for the year ended December 31, 1997 and approximately $7.8 million for the year ended December 31, 1998. We expect to continue to incur significant losses in the future. As of June 30, 1999, we had accumulated net losses totaling approximately $22.8 million. Our revenue may not grow or may not even continue at its current level and, as a result, the results of our operations may be harmed and our business may not be financially viable in the future. To achieve profitability we must, among other things: - Gain commercial acceptance of our online cattle sales and auction services; - Continue to expand the number of livestock industry participants using our network; - Continue to obtain access to data from feedlots to adequately address the information needs of our customers; - Respond to competitive developments; - Increase our brand recognition; - Successfully introduce new products and services; and - Continue to upgrade and enhance our technologies to accommodate expanded product and service offerings and increased customer traffic. If we are unable to achieve any of these goals, our business may be harmed. 10 12 A DECLINE IN THE DEMAND FOR BEEF OR A DECLINE IN THE PRICE OF HIGH QUALITY BEEF RELATIVE TO LOWER QUALITY BEEF COULD HARM OUR BUSINESS. We currently derive a majority of our revenue from products and services relating to the sale of cattle. If the demand for beef declines, the demand for our products and services would likely decline, and our results of operations would be harmed. Furthermore, sales of NutriCharge are dependent on the price of high grade beef relative to lower grade beef. The economic benefit to a customer of using NutriCharge is based on receiving a substantial premium for higher quality beef over lower grade beef. Because NutriCharge is designed to counteract the negative effects of animal stress on the quality of beef, if the price of high quality beef declines relative to that of lower grade beef, our sales of NutriCharge could decline and our results of operations could be harmed. IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE HARMED. We seek to grow by increasing transaction and subscription volume, adding new products and services and by hiring additional employees. This growth is likely to place a significant strain on our resources and systems. As we continue to increase the scope of our operations, we will need an effective planning and management process to implement our business strategy successfully and we will need to implement new and improve existing systems, procedures and controls. We will also need to expand, train and manage our workforce. We cannot assure you that we will be able to effectively or successfully manage our growth. We depend upon XL Vision for accounting, management and administrative resources. We are currently in the process of establishing our own corporate infrastructure. If our management team fails to manage this growth effectively, successfully establish our corporate infrastructure or if there are unanticipated costs or delays in the improvement and implementation of new and existing systems, procedures and controls, our business and financial condition may be harmed. IF WE ARE UNABLE TO CREATE, DEVELOP, LICENSE AND PROTECT PROPRIETARY CONTENT, TECHNOLOGIES AND INTELLECTUAL PROPERTY, OUR BUSINESS AND COMPETITIVE POSITION WILL BE HARMED. ANY LITIGATION RELATING TO OUR INTELLECTUAL PROPERTY COULD BE COSTLY AND COULD PREVENT US FROM SELLING OUR PRODUCTS AND SERVICES IN THE FUTURE. Proprietary rights are important to our success and our competitive position. We protect our intellectual property through a combination of patent, copyright, trade secret and trademark law and confidentiality agreements with third parties. We currently have three pending U.S. patent applications and 31 pending U.S. trademark applications. We cannot guarantee that any of our pending patent or trademark applications will be approved. Even if they are approved, the patents or trademarks may be challenged by other parties or invalidated. In addition, we depend upon our proprietary database of industry and client information to provide our clients with our information services. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and technology or obtain access to our confidential proprietary database. Other parties may also breach confidentiality agreements and other protective contracts. We may not become aware of these breaches or have adequate remedies available. In addition, effective copyright, patent and trademark protection may be unavailable in certain countries to which we might expand our operations. In technology markets generally, there is frequent and substantial intellectual property litigation. We may be subject to legal proceedings and claims, including claims that we infringe third-party proprietary rights. While we are not aware of any patents, copyrights or other rights that would prevent us from manufacturing and commercializing our products or 11 13 services in the United States and abroad, there can be no assurance that other parties will not assert infringement claims against us. There also can be no assurance that former employers of our present and future employees will not claim that our employees have improperly disclosed confidential or proprietary information to us. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of our personnel. WE TYPICALLY ASSUME THE OWNERSHIP OF CATTLE SOLD THROUGH OUR INTERNET CATTLE MARKETPLACE AND ARE SUBJECT TO THE RISK OF LOSS WHILE WE HOLD TITLE. In the sales transactions conducted through our Internet cattle sales and auction services network, we typically purchase the cattle from the seller and then resell the cattle to the buyer. In this process, we assume title to the cattle for up to 48 hours. As a result, we assume all risk relating to the cattle during that period, including that the cattle sale may not be completed as anticipated. Although we review the background and credit history of our customers, we cannot assure you that we will receive full and timely payment in each instance. If the buyer does not accept the cattle, we may not be able to sell the cattle to other buyers on the same terms, and our profitability may be harmed. If the cattle suffer from health deterioration or weight loss while in our ownership, the purchasers may assert claims against us. Our business and financial condition may be harmed if we have to defend any claims or pay any refunds. If the cattle are destroyed while we have ownership, we may be held responsible for the loss or may be obligated to purchase additional cattle to fulfill our delivery commitments. As a result, our business may be harmed. WE RELY ON TECHNOLOGY LICENSED FROM THE CANADIAN GOVERNMENT, THE LOSS OF WHICH MAY HARM OUR ABILITY TO SELL OUR NUTRICHARGE PRODUCT. We incorporate technology licensed exclusively from the Canadian government under a portfolio of patents relating to animal food science technology into our NutriCharge product. We may also incorporate some of this technology into future infrared products that we may develop. The license agreement expires in July 2018. The Canadian government can terminate the license agreement prior to its expiration if we breach a material term of the license agreement and fail to cure such breach, commence bankruptcy or insolvency proceedings or assign the license agreement without the Canadian government's prior written consent. If the license is terminated, we must return all acquired confidential information, including all licensed technologies, to the Canadian government and pay all costs due under the agreement. In such event, it may be impossible to develop or otherwise obtain rights to equivalent noninfringing technology. Our inability to maintain this license on commercially favorable terms or to replace the technology if the license is terminated may harm our ability to sell our NutriCharge product and future infrared products that may be developed. WE HAVE SELECTED ARCHER-DANIELS-MIDLAND COMPANY AS OUR CURRENT SINGLE SOURCE OF SUPPLY FOR THE BASE COMPONENTS OF NUTRICHARGE. IF THIS RELATIONSHIP IS TERMINATED OR IF ARCHER-DANIELS-MIDLAND COMPANY IS UNABLE TO MEET OUR NEEDS ON A TIMELY BASIS, WE MAY INCUR SIGNIFICANT COSTS WHILE SEEKING AN ALTERNATIVE SOURCE OF SUPPLY AND MAY SUFFER DELAYS IN DELIVERING OUR PRODUCTS, WHICH COULD HARM OUR BUSINESS AND THE RESULTS OF OUR OPERATIONS. We currently have a toll processing agreement with a division of Archer-Daniels-Midland Company, or ADM, to provide us with the base components for NutriCharge. The agreement expires in August 2000, and will be automatically renewed. If ADM fails to meet its obligations under the agreement and does not supply us in a timely fashion, we will be delayed in shipping products to our customers. If ADM terminates our relationship without 12 14 giving us the required 90 days' notice, we could experience a significant delay in providing NutriCharge as we seek other suppliers. As a result, we may realize reduced revenue during this period and may lose NutriCharge customers. In addition, we may incur significant costs while seeking an alternative source of supply. If we are delayed in delivering or are unable to deliver products to our customers, our business, financial condition and operating results would be adversely affected. WE DEPEND ON OUR KEY EMPLOYEES FOR OUR SUCCESS. THE LOSS OF ANY OF THESE PERSONS COULD HARM OUR ABILITY TO COMPETE. Our success depends on the continued services of our key senior management, technical and sales personnel. The loss of the services of any of these persons could harm our business, including our ability to compete effectively. Our performance also depends on our ability to attract, retain and motivate key officers and employees. We may be unable to retain our employees or to attract, assimilate and retain other qualified employees with relevant livestock and electronic commerce industry skills in the future. If we fail to attract, retain and motivate qualified employees, our business will be harmed. WE MAY FACE COSTLY PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT AWARDS AGAINST US OR IMPAIR OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND SERVICES. We may face product liability claims in connection with the sale and use of our current and future products and services. We do not maintain product liability insurance. A successful product liability claim brought against us could harm our financial condition and reputation in the industry. Even if unsuccessful, a product liability claim could result in costly litigation and divert management's attention and resources. WE EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE. We expect that our revenue and operating results will vary in the future as a result of a number of factors, many of which are beyond our control. Therefore, you should not rely on period-to-period comparisons of results of operations as an indication of our future performance. Our operating results in the future may not follow any prior trends. You should not rely on our historical results as an indication of future results. The factors that affect our quarterly operating results include: - Demand for our products and services; - Our ability to retain existing customers and attract new customers; - Product and price competition; - Our ability to develop and market new and enhanced products and services on a timely basis; - The introduction of new or enhanced Web sites, products and services by us or our competitors; - Continued purchases by our existing customers; and - Significant downturns in our targeted markets. As a result of these factors, our annual or quarterly results of operations may not meet the expectations of securities analysts and investors, which could cause the price of our common stock to decline. 13 15 OUR QUARTERLY RESULTS COULD FLUCTUATE AS A RESULT OF SEASONAL FLUCTUATIONS IN THE CATTLE INDUSTRY. The cattle industry has historically experienced, and may continue to experience, seasonal fluctuations. These seasonal patterns may cause quarterly fluctuations in our operating results. In particular, a disproportionate number of cattle are placed on feed during the third and fourth quarter of each calendar year. Due to our limited operating history and the recent changes in our business as a result of acquisitions, it is difficult to predict the effect that this seasonal pattern will have on our revenue and quarterly operating results. FAILURE OF OUR COMPUTER SYSTEMS TO PROPERLY RECOGNIZE THE YEAR 2000 COULD DISRUPT THE OPERATION OF OUR BUSINESS AND TECHNICAL SYSTEMS. Many currently installed computer systems are not capable of accepting four digit entries to distinguish 21st century dates from 20th century dates. As a result, prior to January 1, 2000, computer systems and software used by many companies may need to be modified or upgraded to process information correctly or risk system failure or miscalculations causing disruptions of normal business activities. Based on our assessment to date, we believe our software and products are year 2000 compliant; that is, they are capable of accurately distinguishing 21st century dates from 20th century dates. However, we face the risk that systems which we depend on to conduct our operations are not year 2000 compliant and we are currently attempting to identify specific areas of risk for remediation. Our potential areas of exposure include products purchased from other parties, computers, software, telephone systems and other equipment used internally. If our remedial efforts are not successful or if distributors, suppliers and other parties with which we conduct business do not successfully address such issues, we could be unable to deliver services to our customers, and our business, operating results and financial position could be materially and adversely affected. OUR SECURITY SYSTEMS AND BACK-UP MECHANISMS ARE UNPROVEN, AND THEREFORE ARE VULNERABLE TO DAMAGE OR INTERRUPTION WHICH WOULD HARM OUR ABILITY TO RELIABLY SERVICE OUR CUSTOMERS. Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, earthquakes, telecommunications failures, system failures, Internet brownouts, computer viruses, electronic break-ins and similar disruptions. We have experienced minor system interruptions in the past and may experience them again in the future. Any substantial interruptions could result in the loss of data and could impair our ability to provide our products and services to customers and to generate revenues. Presently, we do not have a formal disaster recovery plan in effect. We are currently evaluating our business interruption insurance to determine whether we have sufficient coverage to compensate us for losses that may occur if any of our Internet-based services are interrupted. 14 16 RISKS RELATED TO THE INTERNET IF ELECTRONIC COMMERCE DOES NOT CONTINUE TO GROW AS EXPECTED, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED. Our long-term success depends on widespread market acceptance of the Internet and online commercial services as a medium for commerce. A number of factors could prevent such acceptance, including: - The early stage of the Internet; - The lack of continued development of the Internet's technological infrastructure; and - Consumer concern about the security of electronic commerce transactions. If the Internet commerce market does not grow or grows more slowly than anticipated, our business, financial condition and results of operations will be harmed. IF THE INTERNET OR OUR WEB SITES AND SYSTEMS CANNOT SUPPORT THE GROWTH IN ELECTRONIC COMMERCE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED. If the Internet fails to evolve to support growth in electronic commerce, our business, financial condition and results of operations will be harmed. Specifically, we would be harmed if: - The network infrastructure necessary to sustain substantial growth in usage of the Internet is not adequately developed and cannot process a growing number of transactions; and - The availability of telecommunication services is insufficient or telecommunication services do not evolve promptly to support real-time interactions with customers. We may also need to devote substantial resources to updating our Web sites and online services to support the growth of online commerce. If we fail to adapt our products and services, we may be incompatible with new technologies or be unable to accommodate new users. RISKS ASSOCIATED WITH THE SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT OUR ELECTRONIC COMMERCE BUSINESS. We believe that concern regarding the security of confidential information transmitted over the Internet, such as credit card numbers and proprietary data, may prevent many potential customers from engaging in online transactions. We intend to use authentication technology, which requires passwords and other information to prevent unauthorized persons from accessing a customer's information, or encryption, which transforms information into a code designed to be unreadable by third parties, to protect confidential information. In addition, despite the measures we intend to take, our infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If our security measures are circumvented, proprietary information could be misappropriated or our operations could be interrupted. Security breaches that result in access to confidential information could expose us to a risk of loss or liability. If we do not adequately address these concerns or face any claims in connection with a breach of security, our business, financial condition and operating results could be harmed. 15 17 WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED THROUGH OUR WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS. As a publisher and distributor of online content, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that we publish or distribute on our Web sites. Claims have been successfully brought against online services. Although we carry general liability insurance, our insurance may not cover claims of these types or may not be adequate to cover us for all liability that may be imposed. Any imposition of liability could negatively impact our reputation and result in increased insurance costs. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL BURDENS TO DOING BUSINESS ON THE INTERNET. The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws including those governing intellectual property, privacy, libel and taxation apply to the Internet. In 1998, the Internet Tax Freedom Act placed a three-year moratorium on state and local taxes on Internet access, except for taxes imposed prior to October 1, 1998, and on taxes which discriminate against online commerce. However, Congress may not renew this legislation in 2001 and state and local governments would be able to impose Internet-specific taxes on goods purchased electronically, in addition to taxes that are otherwise imposed on sales transactions. In addition, laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could increase the costs of communicating on the Web and adversely affect the demand for our products and services and thereby harm our business, results of operations and financial conditions. A number of laws and regulations may also be adopted covering e-commerce issues such as user privacy, pricing, content, copyrights, distribution, antitrust matters, taxation and quality of products and services. Several telecommunications carriers have asked the Federal Communications Commission to regulate telecommunications connections to the Internet, which could result in higher costs of doing business over the Internet. Legislation of these kinds could hinder growth in the use of the Internet generally and decrease the acceptance of the Internet as a communications and commercial medium. Due to the global nature of the Internet, it is possible that governments of foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities and we may incur significant costs to comply with foreign laws. Furthermore, the European Union recently adopted a directive addressing data privacy that may result in limits on the collection and use of user information. In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet. Our business, results of operations and financial condition could be harmed by the adoption or modification of laws or regulations relating to the Internet. THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES, WHICH COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE. Competition for Internet products and services and electronic commerce is intense. We expect that competition will continue to intensify. Barriers to entry are minimal, and competitors can launch new Web sites at a relatively low cost. Our competitors may develop Internet products or services that are superior to, or have greater market acceptance, than 16 18 our solutions. If we are unable to compete successfully against our competitors, our business, financial condition and operating results will be harmed. RISKS RELATED TO THE OFFERING INTERNET CAPITAL GROUP, SAFEGUARD AND XL VISION WILL BE ABLE TO CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL AND MAY VOTE AGAINST MATTERS THAT YOU VOTE IN FAVOR OF OR MAY VOTE IN FAVOR OF MATTERS THAT YOU VOTE AGAINST. Internet Capital Group and Safeguard are affiliated entities and Safeguard and XL Vision are affiliated entities. Following the closing of this offering, Internet Capital Group, Safeguard and XL Vision together will have the power to vote approximately % of the aggregate number of votes to which the holders of our common stock are entitled. In addition, Safeguard and Internet Capital Group are parties to a joint venture agreement under which they have agreed to use their best efforts to vote together on matters submitted to stockholders for approval. As a result, these stockholders will be able to control all matters requiring stockholder approval. These stockholders may have interests that differ from yours. Matters that typically require stockholder approval include: - Election of directors; - Approval of a merger or consolidation; and - Approval of a sale of all or substantially all of our assets. Currently, one member of our board of directors is an officer of Safeguard and a director of both Internet Capital Group and XL Vision, one member of our board of directors is an executive officer of Safeguard, one member of our board of directors is the Chief Executive Officer and the Chairman of the Board of XL Vision, one member of our board of directors is a director of XL Vision and Safeguard and one member of our board of directors is an executive officer of Internet Capital Group. In addition, Internet Capital Group has the right to elect another director to our board. Under the joint venture agreement, Safeguard and Internet Capital Group have agreed to vote for two designees of Safeguard and two designees of Internet Capital Group in all future elections of directors. Safeguard, XL Vision and Internet Capital Group will therefore have the ability to significantly influence our management. The concentration of ownership may delay, deter or prevent acts that would result in a change of control, which could reduce the market price of our common stock. WE WILL HAVE BROAD DISCRETION IN USE OF THE PROCEEDS FROM THIS OFFERING AND THEREFORE MAY USE THE PROCEEDS FOR PURPOSES NOT CURRENTLY CONTEMPLATED BY US AND FOR WHICH YOU DO NOT AGREE, SUCH AS ACQUISITIONS. Our primary purpose for this offering is to create a public market for our common stock. We plan to use the proceeds from this offering to repay outstanding debt relating to a recent acquisition and for working capital and general corporate purposes. We may also use the proceeds in future strategic acquisitions of, or investments in, businesses that offer products, services and technologies that further our ability to provide products and services to businesses or increase our ability to sell our products and offer services to new markets. Until the need arises to use the proceeds from this offering, we plan to invest the net proceeds in investment grade, interest-bearing securities. We will have broad discretion in how we use the proceeds of this offering and you will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. 17 19 THE SALE OF OUTSTANDING SHARES IN THE MARKET BY OUR EXISTING STOCKHOLDERS IN THE FUTURE MAY ADVERSELY AFFECT OUR STOCK PRICE. If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market following the offering, then the market price of our common stock could fall. Of the shares that will be outstanding on the consummation of this offering: - The shares offered through this prospectus will be freely tradable in the public market; - Approximately additional shares may be sold after the expiration of 180-day lock-up agreements; and - Approximately additional shares may be sold on the exercise of stock options or warrants after the expiration of the 180-day lock-up agreements. WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD NEGATIVELY IMPACT THE VALUE OF YOUR INVESTMENT. Prior to this offering, there has been no public market for our common stock. Accordingly, the market price of our common stock, like the market for Internet-related and technology companies in general, could be highly volatile. The initial public offering price for our shares will be determined by us and the representatives of the underwriters and may not be indicative of the price that will prevail in the public market after our shares begin trading. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially due to factors such as: - Actual or anticipated variations in quarterly operating results; - Announcements of technological innovations; - Conditions or trends in the cattle industry; - New sales formats of new products or services; - Changes in or failure by us to meet financial estimates of securities analysts; - Conditions or trends in the Internet industry; - Announcements by us or our competitors of significant acquisitions, strategic partnerships or joint ventures; - Capital commitments; - Additions or departures of key personnel; and - Sales of common stock. In addition, the U.S. stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies, particularly Internet companies. In the past, these broad market fluctuations have been unrelated or disproportionate to the operating performance of these companies. Any significant fluctuations in the future might result in a material decline in the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts the attention and resources of management, which could harm our business and operating results. 18 20 NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is substantially higher than the book value per share of our common stock. Investors purchasing our common stock in this offering will, therefore, incur immediate dilution of $ in net tangible book value per share of our common stock. This dilution figure deducts the estimated underwriting discounts and commissions and estimated offering expenses payable by us from the initial public offering price. Investors will incur additional dilution upon the exercise of outstanding stock options. OUR UNDESIGNATED PREFERRED STOCK MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING BIDS THAT MAY BE BENEFICIAL TO OUR STOCKHOLDERS. Although our outstanding preferred stock will convert to common stock when this offering is consummated, and we do not currently plan to issue any shares of preferred stock, our board of directors may issue up to 15,000,000 shares of preferred stock in one or more series. The board of directors can fix the number of shares of each class and the voting rights, preferences, limitations and special rights, if any, without any further vote or action by our stockholders. The issuance of shares of preferred stock without further action by our stockholders may delay or prevent a change in control transaction. The issuance of preferred stock may result in the loss of voting control to others. As a result, the market price of our common stock and the voting and any other rights of the holders of our common stock may be harmed. DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING BIDS WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS. Delaware law may deter potential bids for our business. We are subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. Delaware law prevents us from engaging in a business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a business combination includes a merger or consolidation involving us and the interested stockholder and the sale of more than 10% of our assets. In general, Delaware law defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Delaware law, a Delaware corporation may opt out of the anti-takeover provisions. We do not intend to opt out of these anti-takeover provisions. 19 21 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that address electronic commerce strategy, acquisition and expansion strategy, development of services, use of proceeds, projected capital expenditures, liquidity, development of additional revenue sources, development and maintenance of strategic alliances, market acceptance of the Internet, technological advancement, ability to develop brand identification and global expansion. These statements may be found in the sections of this prospectus entitled Prospectus Summary, Risk Factors, Use of Proceeds, Management's Discussion and Analysis of Financial Condition and Results of Operations, Business and in this prospectus generally. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in Risk Factors and elsewhere in this prospectus. 20 22 USE OF PROCEEDS We expect to receive approximately $ million in net proceeds from the sale of the shares of class A common stock in this offering, assuming an initial public offering price of $ per share, underwriters' discount of $ and our offering expenses of $ . We expect to receive approximately $ million in net proceeds if the underwriters' over-allotment option is exercised in full. We will not receive any proceeds from the sale of class A common stock by the selling stockholders. The primary purpose of this offering is to obtain additional capital, create a public market for the common stock and facilitate future access to public markets. We intend to use a portion of the net proceeds from this offering to pay in full amounts due to XL Vision and Safeguard. As of September 30, 1999, approximately $6.0 million was owed to XL Vision, of which we intend to pay $4.5 million with the net proceeds from the sale of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock to Internet Capital Group, Inc.; the remaining $1.5 million will be paid with a portion of the net proceeds from this offering. As of October 20, 1999, approximately $7.1 million of principal was owed to Safeguard, which we intend to repay with the proceeds of this offering. In addition, we intend to use the net proceeds of this offering for payment of a $1.4 million debt related to a 19% investment in Turnkey Computer Systems, Inc., which is due and payable upon consummation of this offering. We also intend to use the proceeds from this offering for working capital and other general corporate purposes, including: - Increased domestic and international sales and marketing expenditures; - Increased research and development expenditures; and - Capital expenditures made in the ordinary course of business. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments, oral or written, to do so. We are not currently engaged in any negotiations for any acquisition or joint venture. The amounts that we actually expend for working capital purposes will vary significantly depending on a number of factors, including future revenue growth, if any, the amount of cash we generate from operations and the progress of our product development efforts. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds in short-term interest-bearing, investment-grade securities. DIVIDEND POLICY We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying any cash dividends in the future. 21 23 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999. We present capitalization: - On an actual basis; - On a pro forma basis to give effect to: - The issuance of 4,555,556 shares of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock for $38.8 million in cash and a note receivable under a securities purchase agreement with Internet Capital Group Inc. dated October 27, 1999 and the application of a portion of the proceeds therefrom to repay indebtedness to XL Vision of approximately $4.5 million; and - The automatic conversion of all outstanding shares of series A, series B and series C preferred stock into shares of class A common stock and all outstanding shares of series D preferred stock into shares of class B common stock, which will occur immediately prior to the consummation of the offering; and - On a pro forma as adjusted basis to give effect to: - The events described in the two preceding paragraphs; and - The sale of the shares of class A common stock in this offering and application of the estimated net proceeds from the sale of these shares, as described in the section entitled Use of Proceeds, at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and our estimated offering expenses. 22 24 This table should be read in conjunction with the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes to those statements included elsewhere in this prospectus.
JUNE 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) Total indebtedness.................................. $ 8,443 $ 3,943 $ -------- -------- -------- Stockholders' equity: Preferred stock, par value $0.01 per share, 15,000,000 shares authorized: Series A preferred stock, 6,500,000 shares designated; 6,443,606 shares issued and outstanding actual and no shares issued and outstanding pro forma or pro forma as adjusted..................................... 64 -- -- Series B junior preferred stock, 2,400,000 shares designated; 2,400,000 shares issued and outstanding actual and no shares issued and outstanding pro forma or pro forma as adjusted..................................... 24 -- -- Series C preferred stock, 1,300,000 shares designated; 1,100,000 shares issued and outstanding actual; no shares issued and outstanding pro forma or pro forma as adjusted..................................... 11 -- -- Series D preferred stock, 4,555,556 shares designated; no shares issued and outstanding actual, pro forma or pro forma as adjusted... -- -- -- Common stock, par value $0.01 per share, 100,000,000 shares authorized: Class A common stock, 92,711,110 shares designated; 5,563,780 shares issued and outstanding actual; 15,507,386 shares issued and outstanding pro forma; ________ shares issued and outstanding pro forma as adjusted..................................... 56 155 Class B common stock, 7,288,890 shares designated; no shares issued and outstanding actual; 4,555,556 shares issued and outstanding pro forma and pro forma as adjusted..................................... -- 46 46 Additional paid-in capital........................ 23,458 62,227 Accumulated deficit............................... (22,768) (22,768) (22,768) Note receivable from Internet Capital Group, Inc. .......................................... -- (20,815) (20,815) Unearned compensation............................. (68) (68) (68) -------- -------- -------- Total stockholders' equity................... 777 18,777 -------- -------- -------- Total capitalization...................... $ 9,220 $ 22,720 $ ======== ======== ========
This table does not include the following: - 1,954,920 shares of class A common stock issuable upon the exercise of outstanding options granted under our equity compensation plans as of June 30, 1999 at a weighted average exercise price of $1.74 per share, of which options to purchase 398,095 shares of class A common stock were exercisable at a weighted average exercise price of $1.39 per share; - 672,800 additional shares of class A common stock available for issuance under our 1996 and 1999 equity compensation plans as of June 30, 1999; - 911,111 shares of common stock issuable on the exercise of a warrant that will be exercisable upon consummation of this offering at an exercise price equal to the initial public offering price; and - 50,000 shares of class A common stock issued in connection with our investment in Turnkey Computer Systems, Inc. on August 16, 1999. 23 25 DILUTION As of June 30, 1999, our net tangible book value on a pro forma basis giving effect to the issuance of 4,555,556 shares of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock for an aggregate of $18.0 million in cash and a note receivable on October 27, 1999 and the automatic conversion of our preferred stock into shares of our common stock, which will automatically occur immediately prior to the consummation of this offering, was approximately $12.2 million or $0.61 per share of common stock. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities. As of June 30, 1999, our net tangible book value, on a pro forma basis as adjusted for the sale of the shares of our class A common stock, based on an assumed initial public offering price of $ per share, and after deducting the underwriting discounts and commissions and our estimated offering expenses, would have been approximately $ per share. This represents an immediate increase of $ per share to existing stockholders and an immediate dilution of $ share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............ $ Pro forma net tangible book value per share at June 30, 1999....................................................... $0.61 Increase in pro forma net tangible book value per share attributable to new investors......................... ----- Pro forma net tangible book value per share after the offering................................................. ----- Dilution per share to new investors........................ $ =====
The following summarizes on a pro forma basis as of June 30, 1999 the differences between the total consideration paid and the average price per share paid by the existing stockholders and the new investors with respect to the number of shares of common stock purchased from us based on an assumed initial public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE ---------- -------- ----------- -------- -------------- Existing stockholders...... 20,062,942 $42,275,211 $2.11 New investors.............. ---------- -------- ----------- -------- Total................. ========== ======== =========== ========
The total consideration does not include the non-cash portion of the consideration for the series D preferred stock and warrant described above. The information set forth above does not include the following: - 1,954,920 shares of class A common stock issuable upon the exercise of outstanding options granted under our equity compensation plans as of June 30, 1999 at a weighted average exercise price of $1.74 per share, of which options to purchase 398,095 shares of class A common stock were exercisable at a weighted average exercise price of $1.39 per share; - 672,800 additional shares of class A common stock available for issuance under our 1996 and 1999 equity compensation plans as of June 30, 1999; - 911,111 shares of common stock issuable on the exercise of a warrant that will be exercisable upon consummation of this offering at an exercise price equal to the initial public offering price; and - 50,000 shares of class A common stock issued in connection with our investment in Turnkey Computer Systems, Inc. on August 16, 1999. 24 26 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the years ended December 31, 1997 and 1998 are derived from our consolidated financial statements which have been audited by KPMG LLP, independent certified public accountants, and are included elsewhere in this prospectus. All business activities from inception through 1996 related to the transportation business segment which was disposed of in January 1999. As a result, we have not included operations data for the years ended December 31, 1994, 1995 and 1996. We prepared the unaudited pro forma consolidated financial information for the year ended December 31, 1998 and for six months ended June 30, 1999 by combining the historical results of two of the three companies we acquired, CIN, LLC and Professional Cattle Consultants, L.L.C., with our historical results using the purchase method of accounting. Cyberstockyard, Inc. is not included because the pro forma effects are not significant. This is described in the notes accompanying the pro forma consolidated financial information included elsewhere in this prospectus. We have presented this information to give you a better picture of what our business might have looked like if we had owned CIN, LLC and Professional Cattle Consultants, L.L.C. during the periods presented. These companies may have performed differently if they had actually been combined with our operations. You should not rely on the unaudited pro forma information as being indicative of the historical results that we would have had or the future results that we will experience after the acquisitions. You should read the selected consolidated financial data together with our historical and pro forma consolidated financial statements and notes thereto and the section of the prospectus entitled Management's Discussion and Analysis of Financial Condition and Results of Operations.
SIX MONTHS YEAR ENDED ENDED YEAR ENDED SIX MONTHS DECEMBER 31, JUNE 30, DECEMBER 31, ENDED ----------------- ----------------- 1998 JUNE 30, 1999 1997 1998 1998 1999 PRO FORMA PRO FORMA ------- ------- ------- ------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue...................................... $ -- $ 1,792 $ 664 $ 2,578 $ 2,283 $ 2,745 Cost of revenue.............................. -- 2,623 1,037 2,768 2,801 2,840 Operating expenses: Selling, general and administrative........ 628 3,660 1,331 4,069 4,815 4,521 Research and development................... 728 1,109 546 1,450 1,451 1,486 Total operating expenses................. 1,356 4,769 1,877 5,519 6,266 6,007 Interest expense/other income, net........... 141 332 162 289 315 300 Profit (loss) from continuing operations..... $(1,497) $(5,932) $(2,412) $(5,998) $(7,099) $(6,402) ======= ======= ======= ======= ======= ======= Profit (loss) per common share from continuing operations -- basic and diluted.................................... $ (4.89) $ (1.70) $ (0.93) $ (1.15) $ (1.74) $ (1.18) ======= ======= ======= ======= ======= ======= Weighted average number of common shares outstanding -- basic and diluted........... 306 3,486 2,607 5,223 4,086 5,403 ======= ======= ======= ======= ======= =======
DECEMBER 31, -------------------------------------------- JUNE 30, 1994 1995 1996 1997 1998 1999 ----- ------- ------- ------- ------ -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEETS DATA: Cash.................................................. $ -- $ -- $ 2 $ -- $ -- $ 663 Total assets.......................................... -- 6 260 2,165 6,602 11,928 Total indebtedness.................................... 411 1,747 3,636 8,040 5,572 8,443 Total stockholders' equity (deficit).................. (411) (1,742) (3,457) (6,875) 3 777
25 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial information included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements as a result of many factors, including those discussed below and elsewhere in this prospectus. OVERVIEW eMerge Interactive, Inc. is a leading business-to-business electronic commerce company combining content, community and transaction services to create an online marketplace for the cattle industry. We offer our comprehensive cattle solution through our Internet-based information and transaction platform, our Web-enabled private network, and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. Our revenue is derived from sales of cattle through Cyberstockyard, NutriCharge, equine imaging systems and our management information solutions service. We were incorporated in 1994 as a subsidiary of XL Vision, Inc. to develop and commercialize infrared technology applications. XL Vision is a private company that incubates imaging-related technology companies. Our initial focus was on the transportation market in which we sold our navigational infrared imaging system, the AMIRIS system. In 1997, we expanded our infrared applications with the development of an equine imaging system used by veterinarians primarily for the early detection of health problems in horses. In July 1997, we also completed our first round of private financing and began our direct relationship with Safeguard. Safeguard, XL Vision's largest stockholder, was the largest single purchaser of our series A preferred stock. To expand our product base, in July 1998, we licensed a portfolio of patents from a division of the Canadian government relating to the application of infrared technology to the animal science field and a restorative feed supplement called NutriCharge. In order to focus on the cattle industry, we discontinued production of the AMIRIS system. In January 1999, we entered into a license agreement with Sperry Marine, Inc., a subsidiary of Litton Industries, Inc., which granted them the right to become the sole producer of the AMIRIS system. In connection with this license, we will receive a royalty of 8% of sales of the AMIRIS system up to a maximum royalty of $4.3 million over a four year period or up to a maximum royalty of $5.0 million if $4.3 million is not received within four years. Upon receipt of the maximum amount, we will transfer all rights, title and interest to the licensed intellectual property to Sperry. Results from this line of business and the related loss on disposal have been segregated from continuing operations and included in discontinued operations in our financial statements. In October 1999, we signed a securities purchase agreement with Internet Capital Group, an affiliate of Safeguard, under which Internet Capital Group will become one of our principal stockholders. Internet Capital Group is an Internet holding company that invests in business-to-business electronic commerce companies. ACQUISITIONS In February 1999, we purchased substantially all of the tangible and intangible assets of CIN, LLC. These assets included the Feedlot Information System, a proprietary, patent pending, information system for cattle feedlots. The purchase price for the assets consisted of 600,000 shares of our class A common stock valued at $720,000, the assumption of up to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and an agreement to 26 28 pay the first $350,000 from Internet sales of third-party products over the Web site. In addition, as part of this agreement, we agreed to assume a $177,000 liability related to employee bonuses and an outstanding research grant obligation. In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc. for 200,000 shares of our class A common stock valued at $450,000. Through this acquisition, we obtained Cyberstockyard.com, our online cattle sales and auction services, and related software applications. Cyberstockyard.com has been integrated into our suite of products and services. During the three months ended June 30, 1999, we began executing cattle sales utilizing Cyberstockyard.com. In May 1999, we purchased substantially all of the tangible and intangible assets of Professional Cattle Consultants, L.L.C., a leading cattle industry information resource and database for $1.8 million in cash and the assumption of approximately $30,000 in liabilities. In June 1999, we began selling comparative analysis and market information for the feedlot industry with the assets acquired from Professional Cattle Consultants, L.L.C. We have presented pro forma results of operations as if the acquisition of CIN, LLC and Professional Cattle Consultants, L.L.C. had occurred on January 1 of each period. Cyberstockyard, Inc. is not included because the pro forma effects are not significant. The pro forma loss from continuing operations for the year ended December 31, 1998 was $7.1 million compared to the actual net loss of $5.9 million. The increase in the net loss results primarily from the net losses of the acquired companies and the pro forma amortization of the intangible assets associated with these acquisitions. The pro forma loss from continuing operations for the six months ended June 30, 1999 was $6.4 million compared to the actual loss from continuing operations of $6.0 million. The increase in the loss is primarily related to the losses of the companies acquired and the pro forma amortization of the intangible assets associated with the acquisitions. As a result of these acquisitions, the products and services we currently offer and their related costs are substantially different from our historical products and services and therefore our historical financial results should not be considered indicative of future performance. We have incurred significant net losses since our inception. At June 30, 1999, we had an accumulated deficit of $22.8 million. The net losses and accumulated deficit resulted from our lack of substantial revenues, the costs of the significant personnel infrastructure and other costs incurred for the development and marketing of our initial products. We may never achieve significant revenue or profitability, or if we achieve significant revenue or profitability they may not be sustained. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 We recognize revenue in accordance with the terms of the sale or contract, generally as products are shipped or services are provided. We bear inventory risk until the sale of our products and credit risk until full payment is received from our customers. In cattle sales transactions, we purchase cattle from the seller, take title at shipment and own as inventory until delivered to and accepted by the buyer, typically a 24 to 48 hour period. We act as a principal in purchasing cattle from our suppliers and selling them to our customers so that we recognize revenue equal to the amount paid by our customers for the cattle. Gross profit on sale transactions is determined by the fee that we add to the purchase price of the cattle before we sell them. Revenue increased 288% from $664,000 for the six months ended June 30, 1998 to $2.6 million for the six months ended June 30, 1999. This increase is due primarily to the 27 29 initiation of cattle sales as a result of our acquisition of Cyberstockyard, Inc. in March 1999 and increased sales of our equine imaging systems, which we began selling in March 1998. The remainder of the increase resulted from our initial sales of NutriCharge and the sale of subscriptions to our comparative feedlot analysis and market information service. Cost of revenue consists primarily of the direct cost to acquire cattle, NutriCharge and equine imaging systems components and indirect costs such as manufacturing overhead, support personnel and site operations. Our gross loss decreased from $373,000 for the six months ended June 30, 1998 to a gross loss of $190,000 for the six months ended June 30, 1999. The decrease in gross loss is due primarily to an increase in revenue. Selling, general and administrative expenses increased 206% from $1.3 million for the six months ended June 30, 1998 to $4.1 million for the six months ended June 30, 1999. Our sales and marketing expenses consist primarily of salaries and related costs, commissions for sales and marketing personnel, advertising, travel and entertainment, trade shows and consulting fees. Our sales and marketing expenses increased 256% from $723,000 for the six months ended June 30, 1998 to $2.6 million for the six months ended June 30, 1999 due primarily to the increased staffing, related costs, advertising, and consulting costs to effect our business strategy. We expect these costs to continue to increase significantly as we continue to pursue additional sales and marketing opportunities. Our general and administrative expenses consist primarily of salaries and related costs for executives and administrative and professional service fees, including administrative support fees to XL Vision and Safeguard. General and administrative expenses increased 147% from $608,000 for the six months ended June 30, 1998 to $1.5 million for the six months ended June 30, 1999. The increase in expenses was primarily due to increases in the number of personnel required to support and grow our business. We expect these expenses to continue to increase as additional personnel are hired and additional expenses are incurred to support future growth. Our research and development expenses consist of salaries and related costs, payments to outside consultants, material costs for prototype systems and, to a lesser extent, depreciation on equipment used for development. Our expenses increased 165% from $546,000 for the six months ended June 30, 1998 to $1.5 million for the six months ended June 30, 1999 due to increased development costs associated with our integration and expansion of the products acquired through acquisitions in this period. We expect these costs to increase significantly as we plan to invest heavily to develop and commercialize new products, expand our offerings and adapt our technologies to new markets. Interest expense/other income, net increased 78% from $162,000 for the six months ended June 30, 1998 to $289,000 for the six months ended June 30, 1999. This increase was primarily due to a higher average level of borrowing. Due to the losses incurred, we did not have any income tax expense in the first six months of 1998 or the first six months of 1999. As of June 30, 1999, we had approximately $20 million of federal income tax loss carry forwards that can be used to offset future taxable income. YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 Substantially all of our 1998 revenue of $1.8 million was from the sale of equine imaging systems that we began selling in March of 1998. There was no revenue from equine imaging systems sales in 1997. 28 30 Our gross loss of $831,000 in 1998 was due primarily to a substantial increase in manufacturing overhead as we built our manufacturing infrastructure. There was no manufacturing activity related to the production of equine imaging systems in 1997. Selling, general and administrative expenses increased 483% from $628,000 in 1997 to $3.7 million in 1998. Our sales and marketing expenses increased 527% from $344,000 in 1997 to $2.2 million in 1998. The increase in these expenses was due primarily to increased staffing and related costs, advertising, travel, trade shows and consulting fees in these areas to effect our business strategy. Our general and administrative expenses increased 430% from $284,000 in 1997 to $1.5 million in 1998. The increase in these expenses from 1997 to 1998 was primarily due to increases in the number of personnel and related support costs to expand and grow our business and increased administrative support fees to XL Vision and Safeguard. Our research and development expenses increased 52% from $728,000 in 1997 to $1.1 million in 1998. This increase was driven primarily by increased staffing of research and development personnel, related costs, and depreciation of development equipment costs necessary to further develop our products. Interest expense/other income, net increased 134% from $141,000 in 1997 to $332,000 in 1998. This increase was primarily due to a higher average level of borrowing. Due to the losses incurred, we did not have any income tax expense in 1997 or 1998. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 There was no business activity in 1996 related to our equine imaging systems. All sales, cost of goods sold, general and administrative expenses, sales and marketing expenses and research and development expenses in 1996 related to our transportation segment which has been reported as a discontinued operation. Selling, general and administrative expenses were $628,000 in 1997. There was no revenue from sales of equine imaging systems or manufacturing activity related to equine imaging systems in 1997. All general and administrative expenses, sales and marketing expenses and research expenses during 1997 related to our initial activities associated with equine imaging systems. Sales and marketing expenses of $344,000 in 1997 were principally for salaries and related costs of personnel shifted from the transportation business segment to support the equine imaging system operations. Additionally we initiated spending for costs such as advertising, travel, trade shows and consulting fees. General and administrative expenses of $284,000 in 1997 were principally for salaries and related costs for executives and administrative and professional service fees including administrative support fees to XL Vision shifted from the transportation operations to support the equine imaging system operations. Research and development expenses of $728,000 in 1997 were principally for salaries and related costs of personnel shifted from the transportation business segment to support the equine imaging system development. Additionally, we initiated spending costs to develop prototype equine imaging systems. Interest expense/other income, net was $141,000 in 1997. Due to the losses incurred, we did not have any income tax expense in 1997. 29 31 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data for the quarters ended March 31, 1998, June 30, 1998, September 30, 1998, December 31, 1998, March 31, 1999 and June 30, 1999. The information for each quarter has been prepared on substantially the same basis as the audited statements included in other parts of this prospectus and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and the results of the interim periods are not indicative of results of any future period.
THREE MONTHS ENDED --------------------------------------------------------------- MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, 1998 1998 1998 1998 1999 1999 -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA Revenue.......................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 Cost of revenue.................. 459 578 649 937 540 2,228 Operating expenses............... 930 948 1,237 1,654 1,962 3,557 Interest expense/other income, net............................ 77 85 85 85 127 162 Profit (loss) from continuing operations..................... $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974) ======= ======= ======= ======= ======= ======= Profit (loss) from continuing operations per common share -- basic and diluted.............. $ (0.44) $ (0.49) $ (0.38) $ (0.43) $ (0.41) $ (0.73) ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our operating and investing cash requirements principally through private equity financings and through borrowings from XL Vision. As of October 27, 1999, we have raised approximately $27.6 million from the sale of our common stock and preferred stock, not including $18.0 million, which we expect to receive in cash, and $20.8 million, which we expect to receive one year from the date the series D preferred stock and warrant purchase is completed. At June 30, 1999, we had approximately $663,000 in cash and indebtedness to XL Vision and its affiliates of $8.4 million. We plan to repay $4.5 million of this outstanding debt balance from the cash proceeds of the sale of our series D preferred stock upon completion of the series D preferred stock and warrant purchase, which is expected to occur in November 1999. We have had significant negative cash flows from operating activities for each fiscal and quarterly period to date. Net cash used in operating activities was $1.7 million in 1996, $6.0 million in 1997, $8.9 million in 1998 and $3.0 million for the six months ended June 30, 1999. Cash used in operating activities from inception through June 30, 1999 consisted mostly of net operating losses offset by increases in accrued liabilities. Net cash used in investing activities was $157,000 in 1996, $507,000 in 1997, $892,000 in 1998, and $4.5 million for the six months ended June 30, 1999. Net cash used in investing activities in these periods consisted mostly of business acquisitions. Net cash provided by financing activities was $1.9 million in 1996, $6.5 million in 1997, $9.8 million in 1998 and $8.2 million for the six months ended June 30, 1999. Cash provided by financing activities consisted primarily of the sale of our stock and borrowings from XL Vision. 30 32 In December 1998, XL Vision agreed to cancel $7.5 million of indebtedness, and convert $4.8 million of indebtedness into 2,400,000 shares of our series B preferred stock. In May 1999, we raised $5.5 million through the issuance of 1,000,000 shares of our series C preferred stock to Safeguard and 100,000 shares of series C preferred stock to individuals. In July 1999, we obtained a revolving credit line from Safeguard evidenced by a promissory note for working capital advances associated with our cattle sales operations of up to $3.0 million. Amounts borrowed under the promissory note bear interest at the prime lending rate plus 1% and are payable on November 30, 1999. In August 1999, we entered into an agreement to acquire a 19% interest in the common stock of Turnkey Computer Systems, Inc. for a purchase price of 50,000 shares of our common stock valued at $400,000 and additional cash payments totaling $1.4 million. The cash payments are due in full upon the completion of our initial public offering or in periodic payments of $500,000 at December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31, 2001, whichever occurs first. In August 1999, we signed a demand note with Safeguard in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In September 1999, we signed a demand note with Safeguard in the principal amount of $2.0 million. The note bears interest at the prime rate plus 1% and is payable on demand. In October 1999, we signed a demand note with Safeguard in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In October, we cancelled these outstanding notes in exchange for a note in the amount of $7.1 million. The note is due in full in one year, when we complete an initial public offering or when the note issued to us in connection with the series D preferred stock is repaid, whichever occurs earlier. In October 1999, we agreed to issue 4,555,556 shares of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock to Internet Capital Group for aggregate consideration of $38.8 million, pending expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. We expect to receive $18.0 million of this amount in cash and $23.0 million in the form of a non interest-bearing promissory note, which is due one year from the date the series D preferred stock and warrant purchase are completed. Interest on the promissory note was imputed at 9.5% and amounts to $2.2 million over the life of the note. We expect to complete the series D preferred stock and warrant purchase in November 1999. We believe that our existing cash balances, together with the proceeds from the sale of series D preferred stock and the warrant to purchase class B common stock, the revolving line of credit and the net proceeds from this offering will be sufficient to meet our working capital and capital expenditures needs for the foreseeable future. YEAR 2000 COMPLIANCE We may realize exposure and risk if the systems on which we are dependent to conduct our operations are not year 2000 compliant. Our potential areas of exposure include products purchased from third parties, computers, software, telephone systems and other equipment used internally. All new programs are being tested and validated for year 2000 compliance. We expect to resolve any year 2000 compliance issues primarily through normal upgrades of our software or, when necessary, through replacement of existing software with year 2000 compliant applications. The cost of these upgrades or replacements is included in our capital expenditure budget and is less than $25,000. However, such upgrades and replacements may not be 31 33 completed on schedule or within estimated costs or may not successfully address our year 2000 compliance issues. As of June 30, 1999, we have received certification from our critical vendors and suppliers that they are either year 2000 compliant or, if they are not presently compliant, that they are taking the necessary steps and have provided a description of their plan to become year 2000 compliant before January 1, 2000. Our contingency plans related to vendors and suppliers include maintaining adequate safety stocks and developing alternative sources of supply. In the event that our production and operational facilities that support our Web sites are not year 2000 compliant, portions of our Web sites may become unavailable. We believe that we can quickly address any difficulties that may arise. In the event that our web-hosting facilities are not year 2000 compliant, our Web sites would be unavailable and we would not be able to deliver services to our users. Our contingency plans include having sufficient numbers of technical employees and consultants available in the event of a failure related to production and operational facilities. If our present efforts to address the year 2000 compliance issues are not successful, or if suppliers and other third parties with which we conduct business do not successfully address such issues, our business, operating results, financial position and cash flows could be materially and adversely affected. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No. 133, Accounting for Derivatives and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of SFAS No. 133 is not expected to have a material impact on our results of operations, financial position or cash flows. In June 1999, the FASB issued SFAS No. 137 which amended the implementation date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. MARKET RISK We had no derivative securities as of June 30, 1999. We are exposed to changes in interest rates as a result of our borrowings from XL Vision and Safeguard, which are based on the prime lending rate. A 10% increase in interest rates related to our borrowings would not have a material effect on our results of operations over the next fiscal year or the fair value of our borrowings. 32 34 BUSINESS OVERVIEW eMerge Interactive, Inc. is a leading business-to-business electronic commerce company combining content, community and transaction services to create an online marketplace for the cattle industry. We offer our comprehensive cattle solution through our Internet-based information and transaction platform, our Web-enabled private network, and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. Our family of integrated Web sites and our Web-enabled private network provide: - Livestock procurement services consisting of cattle sales and auctions; - Customer-specific daily feedlot operations analysis, comparative cattle industry analysis and benchmarking studies; - Cattle inventory management tools; and - Livestock health management and quality enhancement products. INDUSTRY BACKGROUND BEEF INDUSTRY According to the National Cattlemen's Beef Association, based on U.S. Department of Agriculture statistics, the cattle industry is the largest segment of the American agricultural economy, accounting for approximately $36 billion in reported sales of live cattle in 1997. On an annual basis, the U.S. beef production industry spends approximately $600 million in medication and $6 billion in feed. At the retail level, the cattle industry generates approximately $54 billion in sales of beef and related by-products annually. Furthermore, worldwide cattle production is three times greater than U.S. production. [PRODUCERS, FEEDLOTS, PACKERS GRAPHIC] 33 35 INDUSTRY PARTICIPANTS The U.S. beef production chain can be classified into three primary segments: producers, feedlots, and packers. Producers There are approximately one million producers comprised of ranchers and small farm owners who breed and raise cattle. Most of the producers are independently owned and are dispersed throughout the United States. Each year these producers market approximately 35 million head of cattle that are eventually harvested for food, of which approximately 27 million are processed through feedlots. These cattle, raised in an average herd size of approximately 35 head for 12-18 months, are aggregated into larger herds and sold to centralized feedlots to increase their weight and value. Feedlots Feedlots manage the health and growth of the cattle through an aggressive regimen of feeding, which is designed to prepare the cattle for harvest. There are approximately 700 major feedlot operations concentrated in 10 Midwestern states. These feedlots can manage from 4,000 to 115,000 head of cattle at any given time. Feedlots typically purchase cattle weighing 300 to 900 pounds and are then generally fed for a period of 110 to 250 days. After reaching a weight of approximately 900 to 1,400 pounds, the animal is typically sold to a packer for harvesting. Packers Packers usually hold the cattle for 2 to 24 hours before harvesting and fabricating them for sale and eventual consumption. In addition to processing beef, packers inspect beef for cleanliness in preparation for quality grading. There are currently 64 major beef packing operations in the United States, which in total process approximately 35 million head of cattle into roughly 25 billion pounds of beef annually. Approximately 82% of the beef processed in the United States is processed by beef packing operations owned by IBP, Inc., Cargill, ConAgra, Inc., and Farmland Industries, Inc. LIMITATIONS OF THE CURRENT SYSTEM The current cattle production chain contains a number of inefficiencies that reduce livestock quality and increase cost. These inefficiencies include multiple transaction costs, exposure to stress and disease, and the loss of important feeding and medication information. INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS As cattle move through the beef production chain, from an individual producer's ranch to a feedlot to a meat packing facility, the cattle may be bought, sold and transported three or four times. Due to the highly fragmented nature of the cattle producer segment, the majority of cattle are sold through traditional livestock sales and auctions, which bring together regional buyers and sellers. The cattle are then sold either directly to feedlots or sold once again to larger buyers and then onto feedlots. Typically, cattle sales and auctions are hosted at sale barns, where livestock brokers act as agents in the buying and selling of animals. The livestock broker is paid a fee or commission each time an individual lot of cattle is bought or sold. As a result of the geographic dispersion of producers and sale barns, many buyers are forced to purchase cattle from livestock brokers without having the opportunity to visually survey the cattle. In addition, this current method of exchange does 34 36 not facilitate access to real-time price information or a geographically broad marketplace for the product. REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND PROFITABILITY The combination of the method of exchange used in traditional cattle sales and auctions and the fragmentation of the producer segment of the industry results in the repetitive transportation and handling of cattle. As cattle are moved from one environment to another throughout the production chain, they are commingled multiple times and can be exposed to contagious diseases. In addition, the transportation, handling and commingling of cattle often results in a predictable stress response, which may cause significant health deterioration. However, because there is currently no convenient or cost-effective method available to measure an animal's stress level, stress is not assessed today as a meaningful measure of health. Stress and exposure to disease often result in sub-optimal performance at the feedlot and reduced beef quality. It is estimated that sick animals yield approximately $60 per head less than comparable healthy animals which represents a significant loss based on an average price of $450 per head. THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE Currently, the industry collects and analyzes information on cattle that go through the beef production process inconsistently and in a manual and time-consuming manner. Due to the nature of data collection and dissemination, cattle industry participants are unable to exchange critical information in an efficient and timely manner to optimize performance and beef quality. We believe that businesses in the cattle industry have not maximized the use of information to effectively address health, quality and performance issues. Producers Few cattle producers receive data related to the feed performance and quality grades of their animals, making herd management difficult. Animal-specific health and medication information is rarely passed on to subsequent buyers at or prior to the feedlot, often resulting in unnecessary additional medication. Feedlots Most information currently used in livestock management is gathered at the feedlot. As a general practice, information is collected manually on a daily basis and subsequently entered into multiple information systems that are typically not integrated. Given the time-intensive nature of aggregating data under the current process, it is difficult to collect, analyze and interpret this data in a meaningful way. Historically, feedlots collect and share industry-wide information for benchmarking and performance purposes by submitting reports to data warehouse services that aggregate and disseminate the combined results in monthly reports. Although these data warehouse services are valuable as general strategic and analytical tools, they are less effective in daily decision-making. Packers Packers collect critical carcass and quality information such as weight, dimension, yield and meat quality grade at the end of the cattle production chain. However, in 1997, only 47.5% of cattle harvested were purchased based on these measures. Therefore, feedlots receive carcass and quality data on less than half of harvested cattle. The remaining harvested cattle are sold to packers based strictly on live weight, and consequently very little health and quality data is provided to feedlots or producers on these cattle. 35 37 We believe improved information flow between and within the three main groups of industry participants can significantly enhance product quality. There is currently no network or method for compiling and communicating information rapidly throughout all stages of the cattle production chain. Product performance information gathered by packers and feedlots will help refine and improve handling practices earlier in the production chain. Information about production techniques and product genetics disseminated by producers and feedlots will minimize redundant medical treatments and enable more accurate brand differentiation at the retail level. Finally, information linking handling, feeding and medication techniques and the ensuing performance results, gathered and disseminated on a daily basis by feedlots, can help the entire segment rapidly adopt best practices. THE ONLINE CATTLE MANAGEMENT OPPORTUNITY We believe that the cattle industry is well-suited for Internet commerce and information sharing due to the industry's size and fragmentation and the inefficiencies associated with the current cattle production chain. The Internet's widespread and growing acceptance make it an optimal platform for business-to-business interaction. Many of the variables that affect cattle performance can be addressed by the Internet's open architecture, universal accessibility and ability to provide more timely and comprehensive information. We believe the Internet can create a more efficient marketplace for the exchange of cattle by directly connecting buyers and sellers and providing information related to the cattle for sale. According to the Gallup and Agricultural Publisher's Survey, it is estimated that over 22% of large producers in the beef industry today are using the Internet for primary information in the conduct of their daily business, and this figure is expected to increase to over 55% by the year 2001. THE eMerge INTERACTIVE SOLUTION We combine content, community and commerce to create an online marketplace for the cattle industry. We offer our comprehensive cattle solution through our Internet-based information and transaction platform, our Web-enabled private network, and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. We believe our solution provides the following benefits throughout the cattle production chain. 36 38 BENEFITS TO CATTLE INDUSTRY PARTICIPANTS
PRODUCER FEEDLOT PACKER -------- ------- ------ ONLINE CATTLE SALES AND AUCTION MARKETPLACE - ------------------------------------------------------ Broader Access to Buyers and Sellers.................. -- -- Reduced Transportation and Transaction Costs.......... -- -- Convenience and Ease of Use........................... -- -- Healthier Cattle...................................... -- -- -- Cattle Source Information............................. -- -- -- Access to Additional Products and Services............ -- -- Quality Certification................................. -- -- -- PROPRIETARY INFORMATION SERVICES AND MANAGEMENT TOOLS - ------------------------------------------------------ Performance Information............................... -- Detailed Operational Comparisons...................... -- Historical Best Practices............................. -- -- -- Analytical and Consulting Feedback.................... -- -- -- Comprehensive Content................................. -- --
THE EMERGE ONLINE CATTLE MARKETPLACE Through our Cyberstockyard.com Web site, we enable cattle producers and feedlot operators to participate in daily online sales and auctions of cattle. We believe that because online procurement results in fewer cattle shipments and less handling, transaction costs are reduced and animals arrive at their destination healthier and less stressed, thereby increasing the value of the animals. We also believe that online cattle procurement creates a powerful medium for obtaining access to national market pricing that eventually reduces the amount of commission fees paid by the cattle industry as a whole, and thereby reduces the cost to produce cattle. Through this comprehensive online marketplace, we also have the ability to sell additional products and services that are designed to improve productivity within the livestock industry. For example, to help our customers reduce the effects of pre-harvest stress in their cattle, we offer NutriCharge, our proprietary restorative feed supplement. PROPRIETARY INFORMATION SERVICES AND MANAGEMENT TOOLS We provide the cattle industry with Web-enabled software applications and management tools designed for the more efficient and profitable production of cattle. Through our integrated suite of Web sites, users can access a broad range of database services and information related to the cattle industry, including general industry news, regional weather, commodity prices and industry analyses and proprietary data. We provide our customers with monthly detailed pricing, operations and benchmarking data on the cattle industry. Further, through our information system, we collect and analyze cattle data, such as feeding and medication history from a number of our customer's disparate systems. These analyses are compiled into daily reports, which customers access through their information systems and use to improve their daily management decisions. 37 39 As part of our comprehensive solution, we also provide an online community for the cattle industry where users can actively communicate with our staff of industry experts. We believe this proactive approach can improve overall meat quality and reduce health-related losses of cattle. OUR BUSINESS STRATEGY Our objective is to expand upon our position as a leading provider of business-to-business electronic commerce products, services and solutions for the livestock industry. Our business strategy includes the following key elements: LEVERAGE OUR LEADING MARKET POSITION TO BUILD BRAND AWARENESS AND FURTHER ESTABLISH OUR ONLINE MARKETPLACE We seek to combine our industry expertise with the first Internet-enabled cattle information and commerce platform to attract industry participants to our growing online marketplace. By offering industry participants tools to make better informed purchasing decisions, improve cattle health, and operate more efficiently, we believe that we will be able to bring users to our Web sites and build loyalty and future demand for our products, services and solutions. We seek to increase the supply of cattle offered through our online marketplace by continuing to build relationships with cattle producers and to stimulate demand for our marketplace and information services by nurturing relationships with feedlots. We believe that by attracting additional industry participants to our marketplace, we will enhance the value of our online community. DRIVE COMMUNITY LOYALTY THROUGH THE USE OF MANAGEMENT INFORMATION TOOLS AND PROPRIETARY CONTENT By providing an online, comprehensive source of cattle-related news, industry data and management tools, we intend to increase our customers' daily usage of the eMerge Interactive marketplace. Our electronic commerce marketplace is prominently featured throughout our integrated Web sites that provide information and management tools to our customers. We believe our May 1999 acquisition of Professional Cattle Consultants, L.L.C., serving over 90 feedlots, provides us with a strong customer base and the credibility to develop a trading community and marketplace. Also, our Feedlot Information System, which is designed to be the principal management system for daily feedlot operations, will continuously expose feedlot managers to our online marketplace. LEVERAGE OUR STRONG CUSTOMER RELATIONSHIPS AND INDUSTRY EXPERTISE TO EXPAND OUR ONLINE COMMUNITY Historically, relationships among industry participants have played a key role in conducting business within the cattle industry. We believe that we have strong existing customer relationships with key cattle producers, feedlots and packers. Through our acquisition strategy and human resources strategy, we have acquired companies and hired individuals with long-standing expertise and relationships in the cattle industry. Our industry experts and advisers consist of veterinarians, cattle buyers, nutritionalists, data analysts, cattle producers and former feedlot managers. We seek to leverage our current customer base, existing relationships and industry expertise to attract additional industry participants. We also seek to market and sell additional products and services to our existing customers. 38 40 DEVELOP NEW PRODUCTS AND SERVICES We intend to increase revenue through offering additional products and services that complement our existing offerings. We seek to obtain new products and services through strategic acquisitions of technologies or businesses, internal development and strategic relationships. We currently have strategic relationships for the development of proprietary technology with the U.S. Department of Agriculture, Iowa State University, and the Canadian government. We also intend to invest in the research and development of new data collection systems to increase our proprietary electronic commerce offerings to the livestock industry. For example, we are developing infrared imaging solutions for use in identification of stress in live animals and fluorescence imaging for use in improving food safety through the detection of fecal contamination on beef. EXPAND INTO NEW MARKET SEGMENTS Expand Internationally We believe the international appeal of the Internet and the global demand for cattle products and services present opportunities to expand our comprehensive cattle solution globally. We intend to expand beyond the United States through strategic acquisitions or by expanding our capabilities and sales personnel into the international market. We believe opportunities exist to apply our solution in other regions of North and South America, Asia/Pacific and Europe. Extend Our Products and Services to the Retail Segment of the Beef Industry As part of our comprehensive solution, we are developing the capability to track and manage health and performance information related to individual animals from birth to harvest. The ability to trace the progress of individual cattle from the producer through the feedlot, and through grading at the packer should enable industry participants to improve health and feed management practices, lowering costs and ultimately improving product quality. In addition, this capacity to track individual cattle from producer through packer will allow our customers to verify the source, history and quality of their beef, thereby enabling them to develop a variety of brands of beef for retail purposes. Expand into other Markets Within the Livestock Industry We intend to expand our products and services into other market segments within the livestock industry. In particular, we believe that opportunities may exist to apply our integrated electronic commerce and information solution to the swine and dairy markets. THE eMerge INTERACTIVE EXPERIENCE We offer our customers a comprehensive set of Internet-based business solutions designed to address the needs of the livestock industry. Our products and services can be accessed through our family of integrated Web sites. These sites include: - CattleInfoNet.com, our platform for our comprehensive solution; - Cyberstockyard.com, our online cattle sales and auction site; and - PCC-online.com, our cattle industry-specific information Web site. In addition, through our Web-enabled private network, Feedlot Information System, we offer our feedlot customers specific daily feedlot operations analysis and management tools. 39 41 THE eMerge MARKETPLACE ---------------------------------------------------------------------------------- CATTLEINFONET.COM - Industry news - Regional weather - Commodity pricing* - Expert corner - Reports online - Links to industry information ---------------------------------------------------------------------------------- ONLINE MARKETPLACE MANAGEMENT INFORMATION SOLUTIONS Cyberstockyard.com Feedlot Information System - Cattle sales - Feedlot specific content - Cattle auctions - Daily performance data - Order fulfillment - Web-enabled with graphical user eMerge Online Store interface - eMerge branded products - Analytical services - Health products * Professional Cattle Consultants - General store * - Regional feedlot benchmarking data Specialized Database Services Advanced Commodities Content * Advanced Weather Services * ----------------------------------------------------------------------------------
* Expected to be offered in December 1999 CATTLEINFONET.COM CattleInfoNet.com is our industry-specific Web site that serves as the platform for our comprehensive solution to cattle industry participants. This site features content to facilitate cattle management, including industry news, weather and commodities pricing. Also, through this site, our customers can access Cyberstockyard.com to purchase or sell cattle, and PCC-online.com, our information resource and database. In addition, our customers can use this Web site to purchase our NutriCharge product. CYBERSTOCKYARD.COM Cyberstockyard.com is our cattle sales and auction service Web site. Through Cyberstockyard.com, our customers utilize our online listing of cattle to obtain access to inventory and national market pricing data in an efficient and effective manner. In addition, our customers can access scheduled online video cattle auctions. We transmit inventory lists with detailed product descriptions to our customers by both e-mail and facsimile and periodically post schedules for live video auctions on the Web site. Cattle Sales We have developed a detailed posting and transaction process to ensure that adequate information is provided to the purchaser prior to the transaction. We verify the identity of a purchaser through use of a secure password system and verify credit-worthiness of each participant prior to enabling access to our system. Our expert livestock brokers in the field 40 42 certify all cattle offered for sale through Cyberstockyard.com. We provide a detailed description of each lot of cattle, which can be accessed by a purchaser online. We update our inventory of cattle for sale daily and customers can review our full inventory listings. In addition, customers can post descriptions, quantity and pricing criteria for cattle they would like to purchase and our system will automatically search for a match. If a match is found, the customer is notified immediately online. If no match is found, the customer can choose to have our system perform a daily search for a match as new inventory is added to our system. Notification of a match is sent to the customer by email or facsimile. Our livestock brokers and online producers also have access to these postings and may respond with potential matches. After identifying particular cattle to purchase, our customers complete the transaction through e-mail or the telephone. Once cattle have been purchased, we manage the shipment logistics through our sales and customer service organization. Cattle Auctions In addition to our online cattle sales, we offer cattle for sale through our online video auctions. Although not necessary to facilitate cattle sales transactions, video is available to customers who have installed our satellite dish system. We offer a mock auction to help our customers get acquainted with the auction process. We have developed a system that allows participants to automatically bid in set increments up to a predetermined limit. Once a bid is accepted, the purchaser is notified online. Our customer service team then follows-up by telephone and e-mail with specific shipment logistics regarding the cattle. MANAGEMENT INFORMATION SOLUTIONS The Feedlot Information System The Feedlot Information System, our Web-enabled private network, provides feedlot customers daily information services. This secure application resides on our customers' operating systems. Our system integrates information contained in their disparate legacy systems into our database daily to create relevant customer-specific analyses and graphical presentations. Customers' information is automatically integrated into our database, analyzed and available for use on the following day. The analyses created includes information and performance data designed to assist in the effective daily management of a feedlot business. These analyses include: - Feed consumption data; - Feed-to-gain ratios; and - A comprehensive summary of health results. The Feedlot Information System also enables our customers to compare their performance against other regional and national feedlot data and provides useful proprietary content for business management decisions. Our customers can use our system to manage their feedlot operations on a real-time basis using numerous performance variables and individual parameters. Customers can also access data and product performance results posted by practicing veterinarians to further refine their business practices. All of our Internet applications are easily accessible from our Web-based Feedlot Information System. In addition, our staff provides valuable analysis and interpretation of the information contained in the database. Professional Cattle Consultants Through PCC-online.com, our Professional Cattle Consultants service, we provide our customers access to services that are based on our confidential and proprietary database of 41 43 cattle industry information. This database has been compiled over the last 26 years from over 90 different feedlots representing over 20% of the total cattle processed annually through U.S. feedlots. As part of their subscription, our customers submit information to our analysts twice per month to update our database. Each month these customers receive our Cattle Gram, a marketing report that analyzes and reports cattle market related information, and our newsletter, a feed performance report containing compiled data relating to over 100 different feed performance parameters. In our newsletter, we provide national, regional and customer-specific analyses. Customers may use a password to view these reports online or receive them via e-mail or mail. Specialized Database Services We offer specialized database management and Internet-based networking services that target specific customer requirements, including individual animal tracking through the entire production chain. We can also provide customized data management and formatting services designed to enable suppliers to better understand product performance in the field. Our analysts are available to assist customers in understanding how to derive the most value from the information being acquired. STRESS MANAGEMENT PRODUCTS AND SERVICES As part of our comprehensive solution, we offer our proprietary NutriCharge restorative feed supplement for sale to our customers through our Web sites and direct sales force. NutriCharge is designed to reduce the effects of stress on the animals caused by transportation, handling and commingling, which can result in a loss of product quality. In addition, we offer educational materials and services to assist our customers to reduce handling of animals and therefore reduce stress. EQUINE IMAGING SYSTEMS We have developed our infrared imaging thermography system and image management software for use in the equine industry. Infrared thermography is a non-invasive diagnostic imaging technique that is used to detect surface temperature differences. Our system is used by veterinarians to detect heat as one of the first indicators of inflammation or injury in horses and exotic animals and is lightweight, portable and has a high degree of resolution and sensitivity. STRATEGIC RELATIONSHIPS AND PARTNERS We have entered into agreements for the development of technology with a division of the Canadian government. Under our license agreement, we license patents and technology related to NutriCharge and our Animal Science Tracker infrared camera, which is currently under development. This agreement also gives us and the Canadian government, through the Lacombe Research Centre, the right to collaborate with the other on any project which relates to the license. Please see the section entitled Intellectual Property for a description of the license. We have entered into a Research Support Agreement with another division of the Canadian government, the Lethbridge Research Centre, under which we provide one of our infrared imaging systems and technical support in exchange for a right of first refusal to license any resulting technology on potential applications of infrared thermography to livestock. We have entered into a cooperative research and development agreement with the USDA Agricultural Research Service and Iowa State University of Science and Technology, in which we have been granted exclusive rights and responsibilities for product development 42 44 and commercialization of technology developed and patented by them for the detection of small, diluted quantities of mammalian fecal matter on animal carcasses. When commercialized, we believe that this technology may reduce safety inspection and processing costs at packing plants while reducing e-coli contamination risks. In August 1999, we entered into an agreement to acquire 19% of the common stock of Turnkey Computer Systems, Inc., the leading provider of administrative/accounting legacy systems to feedlots, for 50,000 shares of our class A common stock valued at $400,000 and future cash payments of $1.4 million. In connection with this investment, we became Turnkey's exclusive online provider of cattle and feed sales. BUSINESS ACQUISITIONS CIN, LLC In February 1999, we purchased substantially all of the assets of CIN, LLC, a company which developed, marketed, licensed and distributed software programs for use in animal food sciences markets. In connection with this acquisition, we issued 600,000 shares of our class A common stock valued at $720,000, the assumption of up to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and an agreement to pay the first $350,000 from Internet sales of third-party products over the Web site. In addition, as part of this agreement, we agreed to assume a $177,000 liability related to employee bonuses and an outstanding research grant obligation. CYBERSTOCKYARD, INC. In March 1999, we purchased all of the outstanding stock of Cyberstockyard, Inc., a company selling cattle and other products through auction software over the Internet. Cyberstockyard, Inc. was purchased for 200,000 shares of our class A common stock valued at $450,000. PROFESSIONAL CATTLE CONSULTANTS, L.L.C. In May 1999, we purchased substantially all of the assets of Professional Cattle Consultants, L.L.C. for $1.8 million in cash and the assumption of approximately $30,000 in liabilities. The primary asset of Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and market information and analysis. For the past 26 years, Professional Cattle Consultants, L.L.C. has collected a variety of performance and other data from its subscribers' feedlot operations and provided subscribers with periodic analyses of certain performance characteristics of their feedlot operations and comparative analysis related to the performance of feedlots within their regions. RESEARCH AND DEVELOPMENT We intend to continue to devote significant time and resources to enhance our current core technology to improve our existing products, expand our product line and enter into other market segments. Approximately $1.1 million during the period ended December 31, 1998 and approximately $1.5 million for the six months ended June 30, 1999 were related to research and development. As of September 30, 1999, we had 36 employees dedicated to product development. We intend to continue to invest in research and development and focus on the recruitment of experienced scientists and engineers. Our current research and development activities are primarily focused on the development of information technologies to complement our products and services for the animal sciences industry. 43 45 SALES AND MARKETING SALES Our sales organization is structured around a direct sales team and an electronic commerce sales team. We have a staff of 13 account managers who are responsible for sales of products and services through our electronic commerce platform to feedlot and packer customers in given geographic territories. We have a staff of cattle buying representatives who, along with independent buyer representatives with whom we have entered into relationships, are responsible for obtaining inventory for livestock sales from producers. We are assembling a dedicated team to increase advertising revenue and to add third party products to our electronic commerce offering. MARKETING We seek to establish broad customer awareness of our technologies, products and services within the industries we serve. Our marketing efforts include direct advertising through trade journals and press releases coordinated by our communications and public relations firm. We also participate in professional societies and university programs and have developed strategic marketing relationships with industry professionals and academic institutions. Much of the initial interest in our products and services has been created through the extensive network of relationships we have in the cattle industry as well as through our sales organization. We are developing an international marketing effort to promote our products and services worldwide. OUR CUSTOMERS Our initial customer focus is the 300 largest feedlots in the United States. These feedlots manage 20.1 million head of cattle annually, accounting for 74% of cattle processed through feedlots in the United States. Currently, our products and services reach 159 of those feedlots, which account for 33% of the total cattle harvested in the U.S. We also offer our products and services to participants throughout the cattle production chain. CUSTOMER SERVICE Our current customer service organization consists of four individuals who are responsible for delivering service to our customers. Currently our order entry, e-commerce transactions and hardware and software support functions are conducted at our Sebastian, Florida facility. Our current field support organization is based in Meade, Kansas. We have a dedicated toll free number for customer calls, which is staffed from 8:00 a.m. to 8:00 p.m. EST. INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS SYSTEM ARCHITECTURE Our Web sites use multiple front-end servers and a master database located at our Sebastian, Florida facility. We have implemented scalable Web site management, search, customer interaction, transaction processing and fulfillment services and systems. Our Web site and extranet provide customization, interactivity and performance required for business-to-business electronic commerce. We utilize applications for: - Accepting and validating customer orders; - Placing and managing orders with suppliers and manufacturers; - Notifying and updating customer order status; and 44 46 - Management of shipment of products. All data communication between remotely located computers uses secure socket layer, or SSL, encryption technology. This allows the transfer of a local database from a feedlot to our main database which uses a Sun Enterprise 4500 server. DATA COLLECTION The data collection system for our Feedlot Information System gathers information from the accounting, feedbunk and hospital systems at the feedlot. This information is compared to a local database, and the changes and additions are encrypted and transmitted securely to our main database storage along with any orders that are being processed in the off-line batch mode. Once received, we add the data to our master database for statistical analysis and generate reports for individual site locations. The results are encrypted and sent back to the individual feedlots. All confirmations of placed orders are sent back to the feedlot that generated the order. Professional Cattle Consultants data is collected on a monthly basis using a variety of interfaces with feedlot software vendors. Data is transmitted electronically or by hard copy. This information is then imported into the Professional Cattle Consultants architecture where it is stored and utilized as necessary. DATA DISSEMINATION The data that is sent back to the feedlots includes video data for Cyberstockyard and daily content and statistical data for our management information solutions. This information is then stored in our local databases, which function as a backup for off-line operation. Professional Cattle Consultants provides information back to feedlots on a monthly basis either through electronic mail, a password-protected Internet site, or in hard copy form. Surveys are available only in hard copy form. DATA DISPLAY AT THE FEEDLOT Our system uses a standard browser to connect to the CattleInfoNet.com Web site. A secure login is required for full access to Cyberstockyard.com, PCC-online.com and the Feedlot Information System. When logged on, the system downloads display applets, written in Java, to the user's system to display relevant information. The user can view auction videos and bid on cattle in real-time. INTELLECTUAL PROPERTY Our ability to protect and utilize our intellectual property rights is important to our continued success. We have filed applications to register Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the U.S. Patent and Trademark Office. We currently have three patent applications that are pending before the U.S. Patent and Trademark Office relating to: - Early detection of inflammation using our infrared imaging camera; - Feedlot information systems and methods; and - The cattle transaction process. The majority of our intellectual property rights are licensed to us by third parties. For example, our U.S. patents and corresponding international patent applications related to our NutriCharge products and infrared animal screening methods are licensed to us by the Canadian government under a master license agreement dated July 29, 1998. The master license provides us with an exclusive worldwide license to develop and sell products and services that utilize the inventions contained in the patents. The license continues until 45 47 July 2018 and may be renewed after that time unless the license is terminated by the Canadian government upon our breach of and failure to cure a fundamental term of the license agreement, our commencement of bankruptcy or insolvency proceedings, or the assignment of the license agreement without Canada's prior written consent. In exchange for the license, we must pay the Canadian government a royalty on revenues we receive from the sale of products and services related to the license. Our obligation to pay this royalty begins July 29, 2000. Under the master license, we must achieve milestones in order to maintain the master license. To date we are achieving all required milestones. Our U.S. patents relating to technology for detecting fecal contamination on meat carcasses during and after slaughter are licensed to us by the Iowa State University Research Foundation and the USDA under a license agreement entered into August 1999. The license provides us with an exclusive worldwide license until the patents expire on a country by country basis to develop and sell products and services that utilize the inventions contained in the patents. In exchange for the license, we are obligated to pay Iowa State University a royalty on revenues we receive from the sale of products and services related to the license. We believe our commercial success depends on our ability to protect our proprietary technology and enforce our rights in the technology we license to other parties. We currently rely on a combination of patents, copyrights and trade secrets to protect our proprietary technology. We are not aware of any patents held by others that would prevent us from manufacturing and commercializing our technology in the United States and abroad. PURCHASE AND LICENSE AGREEMENT In January 1999, we granted a license to Sperry Marine, Inc., a subsidiary of Litton Industries, Inc., to design, manufacture and assemble infrared marine systems for worldwide sale. The license is exclusive and nontransferable and applies to infrared technology that is unrelated to our products and markets. Although we have not received any royalties to date, under the agreement, we will receive a royalty of 8% of system sales up to a maximum royalty of $4.3 million over a four year period or up to a maximum royalty of $5.0 million if $4.3 million is not received within four years. Upon receipt of the maximum amount, we will transfer all rights, title and interests to the licensed intellectual property. In connection with this license agreement, we also entered into an asset purchase agreement with Sperry for the purchase of our inventory relating to the infrared systems for approximately $1.9 million. COMPETITION In the cattle sales and auction services market, we compete against traditional cattle auction services, as well as video cattle auction providers and other online cattle auction services. Currently, the majority of cattle and calf sales transactions occur through auctions held at traditional sale barns. These sale barn operations are highly fragmented and vary in size. We believe that the primary competitive factors in the cattle sales and auction services market include: - Availability and quality of inventory; - Pricing; - Reliability of service; - Efficiency; - Brand awareness; - Customer service; and 46 48 - Convenience and ease of use. We believe that we compete favorably based on these factors, particularly due to our access to inventory, our focus on ensuring quality and reliability, the brand awareness developed through our comprehensive solution and the convenience and ease of use of our Web site. We compete against other companies in the information services segment, including established cattle and livestock information services. We also face competition from cattle industry product manufacturers who use information technology to promote the effectiveness of their products. These services are often provided in connection with the sale of products to industry participants. In addition, providers of software to feedlots also offer information services to their feedlot customers. We believe that the primary competitive factors in the information services market include: - Breadth of available data; - Quality of analyses; - Timeliness of information; - Brand recognition; - Value-added consulting services; and - Convenience and ease of use. We believe that we compete favorably based on these factors particularly due to the size and quality of our proprietary database, the timeliness of our service offerings, the expertise of our professionals and the convenience and ease of use of our Web sites. Our current competitors may include large companies that have substantially greater market presence, brand-name recognition and financial resources than we do. Some of our smaller competitors may also enjoy greater recognition and close relationships within a particular community. EMPLOYEES As of September 30, 1999, we employed a total of 99 persons, including 36 persons in product development and engineering, 35 persons in marketing and sales, 18 persons in production and 10 persons in administration. We are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good. FACILITIES Our corporate facilities located in Sebastian, Florida, occupy approximately 17,000 square feet. We lease our facilities from XL Vision, which leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard, at fair market value. We currently do not have a written lease agreement. We believe that this space is adequate to support our needs for the foreseeable future. We also maintain offices in Meade, Kansas, Denver, Colorado and Weatherford, Oklahoma. 47 49 MANAGEMENT This table sets forth information with respect to our executive officers and directors as of October 27, 1999.
NAME AGE POSITION - ---- --- -------- EXECUTIVE OFFICERS AND DIRECTORS Charles L. Abraham................... 44 Chief Executive Officer and Director T. Michael Janney.................... 50 Chief Financial Officer and Treasurer Scott L. Mathews..................... 42 Chief Operating Officer Marvin L. Slosman.................... 35 Executive Vice President, Sales and Marketing John S. Scott, Ph.D.................. 48 Chairman of the Board Douglas A. Alexander................. 38 Director E. Michael Forgash................... 41 Director Thomas C. Lynch...................... 57 Director Christopher Moller, Ph.D............. 46 Director John W. Poduska, Sr., Ph.D........... 62 Director KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERTISE J. Tom Brink......................... 38 Director, Analytical Services Scott Crain, D.V.M................... 41 Executive Vice President, Professional Services Jim Gibb, Ph.D....................... 47 Director, Advanced Technologies
EXECUTIVE OFFICERS AND DIRECTORS Charles L. Abraham has served as Chief Executive Officer and as a member of the board of directors of eMerge Interactive since July 1998. From July 1997 until July 1998, Mr. Abraham was Vice President and General Manager with the Home Care Division of Nellcor Puritan Bennett Incorporated. Prior to July 1997, Mr. Abraham held several positions with General Electric Medical Systems, including Global Business Manager of the Global Vascular X-ray business located in Paris, France. T. Michael Janney has served as Chief Financial Officer and Treasurer of eMerge Interactive since November 1998. From March 1993 until October 1998, Mr. Janney was Senior Vice President and Chief Financial Officer of Datamax Corporation, a privately held company that designs, develops, manufactures and sells bar code printers worldwide. Scott L. Mathews has served as Chief Operating Officer of eMerge Interactive since April 1999. From May 1996 until April 1999, Mr. Mathews was Vice President and General Manager for Key Technology, Inc., a manufacturer of machine vision and material handling products for the food processing and pharmaceutical industries. From 1982 until 1996, Mr. Mathews held several positions with General Electric Medical Systems, including General Manager of the Global Positron Emission Tomography business located in Waukesha, Wisconsin and Uppsala, Sweden. 48 50 Marvin L. Slosman has served as the Executive Vice President, Sales and Marketing of eMerge Interactive since August 1998. From April 1996 until July 1998, Mr. Slosman was a Division Manager for Cordis, Johnson and Johnson. From 1989 until 1996, Mr. Slosman held several positions with General Electric Corporation, including Vice President at GE Capital TMS and as well as a number of positions with GE Medical Systems. Mr. Slosman currently serves on the board of directors of ReMar, Inc. John S. Scott, Ph.D. has served as Chairman of the Board of eMerge Interactive since September 1994 and has served as Chief Executive Officer and Chairman of the Board of XL Vision, Inc. since its inception in May 1993. From August 1991 until July 1993, Dr. Scott was President of Lenzar Electro-Optics, Inc., a manufacturer of imaging devices. Dr. Scott also currently serves as Chairman of the Board of ChromaVision Medical Systems, Inc. and Who?Vision Systems, Inc. Douglas A. Alexander has served as a member of the board of directors of eMerge Interactive since April 1999. Mr. Alexander is Chairman of the Board of VerticalNet, Inc., a managing director of Internet Capital Group, Inc. and serves as a director of Arbinet Communications, Inc., Blackboard Inc., ComputerJob.com, Inc., Deja.com, Inc., LinkShare Corporation, SageMaker, Inc. and Star-Cite! Solutions, Inc. Mr. Alexander co-founded Reality Online, Inc., a company that developed financial planning tools and online services aimed at the individual investor, and continued to serve as its President and Chief Executive Officer after its acquisition by Reuters Group PLC until September 1997. E. Michael Forgash has served as a member of the board of directors of eMerge Interactive since March 1999 and has held the position of Vice President at Safeguard Scientifics, Inc. since January 1998. From June 1996 until December 1997, Mr. Forgash was President and Chief Executive Officer of Creative Multimedia, an interactive marketing agency that consulted, designed and delivered Web solutions for businesses. Mr. Forgash also served as President of Continental Healthcare Systems, Inc., a leading supplier of departmental healthcare information systems and consulting in the United States and England. Mr. Forgash currently serves as a director of Internet Capital Group, Inc., US Interactive, Inc., Who?Vision Systems, Inc. and XL Vision, Inc. Thomas C. Lynch has served as a member of the board of directors of eMerge Interactive since June 1997 and currently serves as the President, Chief Operating Officer and a member of the board of directors of CompuCom, Inc. From November 1995 until October 1998, Mr. Lynch held the position of Senior Vice President at Safeguard Scientifics, Inc. From September 1994 until October 1995, Mr. Lynch was Director of the Navy Staff, where he was responsible for coordinating Navy defense issues. Prior to August 1994, Mr. Lynch held several positions in the United States Navy, including Superintendent of the U.S. Naval Academy. Christopher Moller, Ph.D. has served as a member of the board of directors of eMerge Interactive since June 1997 and is currently Managing Director of TL Ventures, a company which manages a series of private equity funds. Since 1994, Dr. Moller has served as Managing Director of Technology Leaders III and Technology Leaders II Management L.P. Dr. Moller is a director of Who?Vision Systems, Inc., Adolor Corporation and OraPharma, Inc. Dr. Moller serves on the medical advisory board of Lankenau Research Institute. John W. Poduska, Sr., Ph.D. has served as a member of the board of directors of eMerge Interactive since January 1997. Since 1992, Dr. Poduska, Sr. has served as the Chairman of Advanced Visual Systems Inc., a provider of visualization software. From December 1989 to December 1991, Dr. Poduska was President and Chief Executive Officer of Stardent Computer Inc., a computer manufacturer. Dr. Poduska is also a member of the board of directors of Safeguard Scientifics, Inc., Cambridge Technology Partners, Inc., Union Pacific Resources Group Inc. and XL Vision, Inc. 49 51 KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERIENCE J. Tom Brink has served as the Director, Analytical Services of eMerge Interactive since April 1999. Mr Brink focuses on marketing methods, feedlot and grid value and cow production costs, and has conducted extensive research on cattle markets and price cycles. His articles have been featured in many key industry publications. From November 1996 to April 1999, Mr. Brink served as the Executive Director of the American Gelbvieh Association, a leading breedvalue-based marketer of fed cattle and the largest breed-coordinated alliance in the United States. Prior to November 1996, Mr. Brink was the Director of Research of Cattle-Fax. Scott Crain, D.V.M. has served as the Executive Vice President, Professional Services of eMerge Interactive since March 1999. Dr. Crain also maintains a veterinary feedlot practice. In 1995, Dr. Crain founded CIN, LLC, a company that established an information system for the beef industry, and served as its President and Chief Executive Officer until that company was acquired by eMerge Interactive in 1999. Jim Gibb, Ph.D. has served as the Director, Advanced Technologies for eMerge Interactive since June 1999. Dr. Gibb identifies opportunities to implement and integrate new technology into eMerge Interactive's informations system. From May 1996 until June 1999, he served as the Vice President at the Center for Quality of the National Cattlemen's Beef Association. He has also served as an Assistant Professor of Beef Cattle Management at the University of Illinois, Vice President of Education and Research for the American Polled Hereford Association, Executive Director of the American Gelbvieh Association. BOARD COMMITTEES We have established an audit committee and a compensation committee. Our audit committee consists of Douglas A. Alexander, Christopher Moller, Ph.D. and John W. Poduska, Sr., Ph.D. The audit committee reviews the scope and result of the audit and other services provided by our independent auditors and reviews and evaluates our audit and internal control functions. Our compensation committee consists of John S. Scott, Ph.D., E. Michael Forgash and Thomas C. Lynch. The compensation committee evaluates and approves the compensation and benefits for our executive officers and administers our equity compensation plans and makes recommendations to the board of directors regarding such matters. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of eMerge Interactive and administering various incentive compensation and benefit plans. During the 1998 fiscal year, our compensation committee consisted of Dr. Scott and Messrs. E. Scott Blackwell and Lynch. Dr. Scott is the Chief Executive Officer and Chairman of the Board of XL Vision. Mr. Blackwell is an executive officer of XL Vision. At the end of fiscal 1998, we owed XL Vision $8.0 million. DIRECTOR COMPENSATION We reimburse each member of our board of directors for out-of-pocket expenses incurred in connection with attending board meetings. We do not pay our directors cash compensation for attending meetings of the board of directors and committee meetings. Directors are eligible to receive options to purchase common stock under our equity compensation plan. In each of October 1997 and March 1999, we granted Dr. Poduska options to purchase 25,000 shares of our common stock under our 1996 Equity 50 52 Compensation Plan at an exercise price of $1.00 and $2.00 per share, respectively. In April 1999, we granted Mr. Alexander options to purchase 80,000 shares of our common stock under our 1996 Equity Compensation Plan at an exercise price of $3.00 per share. EXECUTIVE COMPENSATION The table below sets forth information concerning the compensation we paid to our chief executive officer and a former executive officer who was paid compensation greater than $100,000 in 1998. In 1998, we did not pay any of our other executive officers salary and bonus exceeding $100,000. Mr. Abraham joined eMerge Interactive in April 1998 and is paid a base salary of $175,000 per year and a bonus of $70,000 per year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ----------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS COMPENSATION - --------------------------- ------ --------- -------- ------------ ------------ Charles L. Abraham......... 1998 $ 86,159 $35,000 600,000 $41,601 Chief Executive Officer Ottmar Dippold............. 1998 100,968 -- -- -- Former President and Chief Operating Officer
The following table sets forth information regarding options granted in 1998 to the executive officers named in the Summary Compensation Table above. Mr. Dippold was not granted any stock options during 1998. The potential realizable value is calculated based on an assumed initial public offering price of $ per share. OPTION GRANTS DURING LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SHARES PRICE APPRECIATED FOR UNDERLYING PERCENTAGE OF OPTION TERM OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION --------------------- NAME GRANTED(#) GRANTED PRICE($/SHARE) DATE 5%($) 10%($) - ---- ---------- ------------- -------------- ---------- --------- --------- Charles L. Abraham... 400,000 30.0% $1.00 7/1/08 100,000 7.6% $1.00 7/1/08 100,000 7.6% $1.00 10/30/08
The following table sets forth information concerning year end option values for fiscal 1998 for the executive officers named in the Summary Compensation Table above. There were no option exercises by these officers in fiscal 1998. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($) ------------------------------ ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ -------------- ----------- ------------- Charles L. Abraham........... 150,000 450,000 Ottmar Dippold............... 12,500 37,500
51 53 EMPLOYMENT, CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS Charles L. Abraham holds the position of Chief Executive Officer and receives an annual salary of $175,000 per year, and a bonus of up to $70,000 per year based on performance objectives established by the board of directors. Mr. Abraham will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Abraham also holds options to purchase 600,000 shares of common stock at $1.00 per share, of which 25% or 150,000 shares, vest at the grant date with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. Marvin L. Slosman holds the position of Executive Vice President, Sales and Marketing and receives an annual salary of $140,000 and a bonus of up to $56,000 based on the achievement of annual objectives. Mr. Slosman will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Slosman also holds options to purchase 125,000 shares of common stock at $1.00 per share and 25,000 shares of common stock at $3.00 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. T. Michael Janney holds the position of Chief Financial Officer and receives an annual salary of $135,000 and a bonus of up to $33,750 based on the achievement of annual objectives. Mr. Janney will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Janney also holds options to purchase 125,000 shares of common stock at $1.00 per share and 25,000 shares of common stock at $3.00 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. Scott L. Mathews holds the position of Chief Operating Officer and receives an annual salary of $160,000 and a bonus of up to $64,000 based on the achievement of annual objectives. Mr. Mathews will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Mathews also holds options to purchase 180,000 shares of our common stock at $3.00 per share. These options vest 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. EQUITY COMPENSATION AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN Our Amended and Restated 1996 Equity Compensation Plan was approved by our stockholders on January 26, 1996. The aggregate number of shares of common stock available for awards under the 1996 plan was 1,735,000 shares. No more than 500,000 shares in the aggregate may be granted to any individual in any calendar year. As of October 20, 1999, there were 1,584,470 shares issuable upon the exercise of outstanding options granted under the 1996 plan. 1999 EQUITY COMPENSATION PLAN Our 1999 Equity Compensation Plan was approved by our stockholders on May 10, 1999. The aggregate number of shares of common stock available for awards under the 1999 plan is 1,000,000 shares. No more than 500,000 shares in the aggregate may be granted to any individual in any calendar year. As of October 20, 1999, there were 427,700 shares issuable upon the exercise of outstanding options granted under the 1999 plan. 52 54 GENERAL The 1996 and 1999 equity compensation plans provide for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance units to our designated employees, advisors and consultants, and to non-employee directors. The compensation committee of the board of directors administers and interprets the plans. The compensation committee consists of two or more persons appointed by the board of directors from among its members, each of whom must be a non-employee director as defined by Rule 16b-3 under the Securities Exchange Act of 1934, and an outside director as defined by section 162(m) of the Internal Revenue Code of 1986 and related Treasury Regulations. ELIGIBILITY FOR PARTICIPATION Grants may be made to any of our employees or to employees of any of our subsidiaries, to any non-employee member of the board of directors or, under the 1999 plan, to individuals to whom an offer of employment has been extended. Key consultants and advisers who perform services for us or any of our subsidiaries are eligible if they render bona fide services, not as part of the offer or sale of securities in a capital-raising transaction. 401(k) PLAN We have adopted a tax qualified employee savings and retirement plan, the 401(k) plan, for eligible employees. We make matching contributions on behalf of all participants who have elected to make deferrals to the 401(k) plan. Any contributions to the 401(k) plan by us or by the participants are paid to a trustee. The 401(k) plan, and the accompanying trust, is intended to qualify under Section 401(k) of the Internal Revenue Code, so that contributions and income earned, if any, are not taxable to employees until withdrawn. The contributions made by us vest in increments according to a vesting schedule. At the direction of each participant, the trustee invests the contributions made to the 401(k) plan in any number of investment options. 53 55 RELATED PARTY TRANSACTIONS EQUITY AND DEBT FINANCING AGREEMENTS AND LICENSE AGREEMENT WITH XL VISION From our inception in September 1994 through June 1999, we have funded our operating and investing cash requirements principally through private placements of common stock and preferred stock and from borrowings from XL Vision. In July 1997, we signed a subordinated purchase money note with XL Vision for $4.4 million. The note bears interest at an annual rate of 7% and is due in full when we complete an initial public offering or sell all of our assets or stock. In December 1998, we issued 2,400,000 shares of series B junior preferred stock to XL Vision, one of our significant stockholders, at a purchase price of $2.00 per share in exchange for canceling debt of $4.8 million. XL Vision also canceled $7.5 million of debt as a contribution of debt to equity. The registration rights agreement executed in connection with the series A preferred stock extends to the series B junior preferred stock. See the section entitled Description of Capital Stock for a description of the registration rights agreement. The shares of series A preferred stock convert into shares of class A common stock immediately prior to completion of this offering. In January 1999, we signed a revolving promissory note with XL Vision for up to $3.0 million. The revolving promissory note bears interest at the prime lending rate plus 1% and is due in full when we complete an initial public offering or sell all of our assets or stock. In February 1999, we signed a license agreement with XL Vision, granting XL Vision a license to use our software for the limited purpose of evaluating whether the software could provide the basis for a new company that would operate in the agricultural industry. If XL Vision forms a new company, we will negotiate a long-term license agreement. In addition, XL Vision is obligated to give us at least 25% of the new company. We are obligated to transfer all amounts up to 25% of the company to Lost Pelican, LLC, formerly CIN, LLC. The license agreement terminates on November 30, 1999. EQUITY AND DEBT FINANCING AGREEMENTS WITH AFFILIATES OF SAFEGUARD SCIENTIFICS, INC. In April 1999, we signed two promissory notes, totaling $1.1 million with Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics, Inc. and the sole general partner of Safeguard XL Capital and Safeguard 99 Capital L.P., two of our significant stockholders. Safeguard Scientifics, Inc. owns a majority of the outstanding shares of preferred stock of XL Vision. These promissory notes were paid in full with the proceeds of the sale of our series C preferred stock. In May 1999, we issued 1,000,000 shares of series C preferred stock to Safeguard 99 Capital L.P., an affiliate of Safeguard Scientifics, Inc., at a price of $5.00 per share. The registration rights agreement executed in connection with the series A preferred stock extends to the series C preferred stock. The shares of series A preferred stock convert into shares of class A common stock immediately prior to completion of this offering. In July 1999, we signed a revolving promissory note with Safeguard Delaware, Inc. for up to $3.0 million. At September 30, 1999, $3.0 million had been advanced by Safeguard. The revolving promissory note bears interest at the prime lending rate plus 1%. In October 1999, we amended the note to extend the maturity date until November 30, 1999. In August 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In September 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.0 million. The note bears interest at the prime 54 56 rate plus 1% and is payable on demand. In October 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In October 1999, we cancelled these outstanding notes in exchange for a note in the amount of $7.1 million. The note bears interest at the prime rate plus 1% and is due in full in one year, when we complete an initial public offering or when Internet Capital Group repays its note to us, whichever occurs earlier. ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC. On October 27, 1999, we agreed to issue 4,555,556 shares of series D preferred stock and a warrant to purchase 911,111 shares of class B common stock for the aggregate consideration of $38.8 million to Internet Capital Group, Inc., subject to the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we expect to occur in November 1999. We will receive $18.0 million of the total purchase price in cash and $23.0 million in the form of a promissory note. The note will be due and payable one year after its issue and does not bear interest. The note is secured by 2,555,556 shares of series D preferred stock. Interest on the promissory note was imputed at 9.5% and amounts to $2.2 million over the life of the note. In connection with the issuance of the stock and the warrant, we will grant Internet Capital Group registration rights that are substantially the same as those that apply to our series A preferred stock. The series D preferred stock will automatically convert into shares of class B common stock immediately prior to completion of this offering. Class B common stock is entitled to two and one-half votes per share. The warrant expires three years from the date of issuance, and is exercisable at the initial public offering price of the class A common stock. The class B common stock automatically converts into class A common stock upon transfer by Internet Capital Group to a non-affiliated party. Douglas A. Alexander, one of our directors, is an executive officer of Internet Capital Group. E. Michael Forgash, one of our directors, is also a member of the board of directors of Internet Capital Group. Additionally, Safeguard Scientifics, Inc. beneficially owns approximately 14.3% of the outstanding shares of common stock of Internet Capital Group. Internet Capital Group and Safeguard are parties to a joint venture agreement under which each has agreed to: - Use best efforts to agree and vote on a course of action that is in the best interest of both parties in all matters submitted to the stockholders for approval; - Vote its shares for the election of two designees of Safeguard and two designees of Internet Capital Group in any election of directors of eMerge Interactive; - Offer shares of eMerge Interactive stock to the other party at the fair market price of the shares before offering the shares to any unaffiliated party, other than in a sale of all of its shares; and - Discuss its intentions with the other party before selling all of its shares to an unaffiliated party and use its best efforts to provide the other party with the opportunity to purchase or participate in the purchase of the shares. SERVICE AGREEMENTS WITH XL VISION AND SAFEGUARD SCIENTIFICS We have contractual service agreements with XL Vision and Safeguard Scientifics. Under an administrative services agreement dated December 15, 1997, as amended on August 17, 1999, XL Vision and Safeguard provide us with management consultation, investor relations, 55 57 financial management, human resource management, legal services, insurance programs, and administrative services. We pay a fee of 1.5% of the contribution margin of cattle sales, as defined in the agreement, and 1.5% for all other sales, up to $300,000 annually, which is divided equally between Safeguard and XL Vision. The fee is not due until we achieve positive cash flow from operations. The agreement extends through December 31, 2002 and continues unless terminated by either party. Under a direct charge administrative services agreement dated April 14, 1997, XL Vision also provides us with management services on a time and materials basis. This agreement continues on a month-to-month basis, and may be terminated at any time by either party. REAL ESTATE LEASE WITH XL VISION We currently lease our facilities in Sebastian, Florida from XL Vision, Inc., which leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard Scientifics, Inc. We currently do not have a written lease. We lease our facilities at fair market value. 56 58 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of eMerge Interactive's common stock as of October 27, 1999 by: - Each person or entity who is known by us to beneficially own more than 5% of eMerge Interactive's outstanding common stock; - Each of the executive officers set forth on the summary compensation table; - Each director of eMerge Interactive; - All directors and executive officers as a group; and - All other selling stockholders. In addition, we are voluntarily disclosing information for each of our other executive officers. A person has beneficial ownership of shares if the individual has the power to vote or dispose of shares. This power can be exclusive or shared, direct or indirect. In addition, a person beneficially owns shares underlying options that are presently exercisable or will become exercisable within 60 days of October 27, 1999 and shares acquirable upon conversion of our preferred stock. Applicable percentage ownership in the following table is based on 20,119,442 shares of common stock and preferred stock outstanding as of October 27, 1999, which assumes that the 4,555,556 shares of series D preferred stock issuable under our securities purchase agreement with Internet Capital Group, Inc. have been issued and converted into common stock, and shares immediately following the completion of this offering. To the extent that any shares are issued upon exercise of options, warrants or other rights to acquire eMerge Interactive's capital stock that are presently outstanding, granted in the future or reserved for future issuance under our equity plans, there will be further dilution to new public investors. Because of the disparate voting rights between the class A and class B common stock, we have also presented beneficial ownership as a percent of total voting power in the table below. The table below assumes that the underwriters have not exercised their over-allotment option. In addition, the symbol * means that the percentage is less than one percent.
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO OFFERING SHARES OF AFTER THE OFFERING ------------------------------------- CLASS A ------------------------------------- PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER ------------------------ --------- ---------- ------------ --------- --------- ---------- ------------ 5% STOCKHOLDERS: Internet Capital Group, Inc.(1)(10)........................ 6,466,667 30.7% 50.2% 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 XL Vision, Inc.(2)(3).............. 4,846,500 24.1 18.0 10315 102nd Terrace Sebastian, FL 32958 Safeguard XL Capital L.P.(4)(10)... 4,181,315 20.8 15.5 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 XL Partners, L.P.(3)............... 2,446,500 12.2 9.1 10315 102nd Terrace Sebastian, FL 32958 Safeguard 99 Capital L.P.(4)(5)(10)................... 1,340,000 6.5 4.9 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087
57 59
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO OFFERING SHARES OF AFTER THE OFFERING ------------------------------------- CLASS A ------------------------------------- PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER ------------------------ --------- ---------- ------------ --------- --------- ---------- ------------ The Biegert Family Trust(6)........ 1,000,000 5.0 3.7 c/o Judith Ackland P.O. Box 197 Shickley, NE 68436 NAMED EXECUTIVE OFFICERS AND DIRECTORS: Charles L. Abraham(9).............. 300,000 1.5 * Ottmar Dippold..................... 22,500 * * John S. Scott, Ph.D.(11)........... 20,000 * * Douglas A. Alexander............... -- * * E. Michael Forgash................. -- * * Thomas C. Lynch.................... -- * * Christopher Moller, Ph.D........... -- * * John W. Poduska, Ph.D. (9)......... 52,750 * * OTHER EXECUTIVE OFFICERS: T. Michael Janney (9).............. 37,500 * * Scott L. Mathews (9)............... 45,000 * * Marvin L. Slosman (9).............. 68,750 * * All directors and executive officers as a group (10 persons)......................... 524,000 2.6 1.9 SELLING STOCKHOLDERS: Technology Leaders II(7)........... 856,000 4.3 3.2 Technology Leaders I(8)............ 803,250 4.0 3.0 Scott Calhoun...................... 50,000 * * Richard Stanley, D.V.M.(9)......... 29,270 * *
- ------------------------- (1) The share numbers for Internet Capital Group represent 4,555,556 shares of class B common stock and a warrant to purchase 911,111 shares of class B common stock that will be acquired under a securities purchase agreement dated October 27, 1999. Holders of class B common stock are entitled to two and one-half votes per share. These numbers also include 1,000,000 shares of class A common stock that will be acquired from J Technologies, LLC under a securities purchase agreement on October 27, 1999. (2) The share numbers for XL Vision, Inc. include 500,000 shares that are subject to an option to holders of its 6% convertible subordinated notes. The options become exercisable when we complete an initial public offering, subject to restrictions. (3) XL Vision, Inc. is the sole general partner of XL Partners, L.P. Therefore, the share numbers for XL Vision include 2,446,500 shares owned by XL Partners, L.P. (4) Safeguard Delaware, Inc. holds approximately a 91.6% general partnership interest in Safeguard XL Capital L.P. and an 89.8% general partnership interest in Safeguard 99 Capital L.P. Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics, Inc., is the sole general partner of Safeguard XL Capital L.P. and Safeguard 99 Capital L.P. Safeguard Delaware, Inc. has sole authority and responsibility for all investments, voting and disposition decisions regarding such shares. The limited partnership interests are held by executives and employees of Safeguard, subject to vesting. These numbers exclude any shares that may be purchased by Safeguard Scientifics, Inc. that have not been purchased by its shareholders in the directed share subscription program. 58 60 (5) The share numbers for Safeguard 99 Capital L.P. include options to acquire 340,000 shares of our stock that are currently owned by XL Vision. These options become exercisable when we complete an initial public offering, subject to restrictions. (6) We have a proxy to vote the 1,000,000 shares owned by the Biegert Trust until the completion of the series D preferred stock and warrant purchase by Internet Capital Group. (7) Technology Leaders II Management L.P., a limited partnership, is the sole general partner of Technology Leaders II L.P. and a co-general partner of Technology Leaders II Offshore C.V. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are venture capital funds that are required by their governing documents to make all investment, voting and disposition actions in tandem. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are referred to as Technology Leaders II. Technology Leaders II Management L.P. has sole authority and responsibility for all investment, voting and disposition decisions for Technology Leaders II. The general partners of Technology Leaders II Management, L.P. are (i) Technology Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii) Robert E. Keith, Jr., Gary J. Anderson, M.D., Mark J. DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive, and (iii) four other corporations (the TLA Corporations) owned by natural persons, one of whom is a director of Safeguard. Technology Leaders II Management L.P. is managed by an executive committee, by whose decisions the general partners have agreed to be bound, which consists of nine voting members including (i) Warren V. Musser, who is a designee of Technology Leaders Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. DeNino, Dr. Moller, individually, and (iii) one designee of each of the TLA Corporations and (as a non-voting member) Clayton S. Rose. Technology Leaders Management, Inc. is the administrative manager of Technology Leaders II, subject to the control and direction of the executive committee of Technology Leaders II Management L.P. Mr. Keith is Vice Chairman of Safeguard. (8) Technology Leaders Management L.P., a limited partnership, is the sole general partner of Technology Leaders L.P. and a co-general partner of Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders Offshore C.V. are venture capital funds that are required by their governing documents to make all investment, voting and disposition actions in tandem. Technology Leaders MI Corp. is wholly-owned by Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders Offshore C.V. are referred to collectively as Technology Leaders I. Technology Leaders Management L.P. has sole responsibility for all investment, voting and disposition decisions for Technology Leaders I. The general partners of Technology Leaders Management L.P. are (i) Technology Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii) Technology Leaders Partners I, a general partnership among Technology Leaders Management, Inc. and the Managing Directors of Technology Leaders Management, Inc., other than Mark J. DeNino, and (iii) four other corporations (the TLA Corporations) owned by individuals, one of whom serves as a director of Safeguard, and three of whom are not currently otherwise affiliated with Safeguard or eMerge Interactive. Technology Leaders Management L.P. is managed by an executive committee, by whose decisions the general partners have agreed to be bound, that consists of seven voting members including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J. Anderson, M.D., each of whom are designees of Technology Leaders Management, Inc., and (ii) one designee of each of the TLA Corporations. Clayton S. Rose is a non-voting member of that executive committee. Technology Leaders Management, Inc. is the administrative manager of Technology Leaders, subject to the control and direction of the executive committee of Technology Leaders Management L.P. Mr. Musser is the chairman and Mr. Keith is president and chief executive 59 61 officer of Technology Leaders Management, Inc. and Mr. Keith, Dr. Anderson, Mr. DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive, are the managing directors of Technology Leaders Management, Inc. Mr. Keith and Dr. Anderson are former officers of Safeguard and Mr. Keith is Vice Chairman of Safeguard. (9) Includes options to purchase the following shares of class A common stock: - 270,000 shares by Mr. Abraham; - 43,750 shares by Mr. Poduska; - 37,500 shares by Mr. Janney; - 45,000 shares by Mr. Mathews - 68,750 shares by Mr. Slosman; and - 5,000 shares by Mr. Stanley. (10) Internet Capital Group and Safeguard are parties to a joint venture agreement under which they have agreed to use best efforts to agree to vote together on matters submitted to the stockholders for approval and for two designees of Safeguard and two designees of Internet Capital Group in any elections of directors. (11) John S. Scott, Ph.D. is Chief Executive Officer and Chairman of the Board of XL Vision, and disclaims beneficial ownership of the 4,846,500 shares held by XL Vision. 60 62 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, we will be authorized to issue up to 100,000,000 shares of common stock, $.01 par value per share, consisting of 92,711,110 shares of class A common stock and 7,288,890 shares of class B common stock, and 15,000,000 shares of preferred stock, $.01 par value per share. All outstanding shares of preferred stock will automatically convert into common stock immediately prior to the closing of this offering as follows: - Shares of series A, series B and series C preferred stock will convert into shares of class A common stock; and - Shares of series D preferred stock will convert into shares of class B common stock. COMMON STOCK As of October 27, 1999, there were 20,119,442 shares of common stock outstanding, assuming the conversion of the shares of preferred stock then outstanding and assuming the issuance of 4,555,556 shares of series D preferred stock and their conversion in accordance with a securities purchase agreement dated October 27, 1999. After giving effect to the sale of the shares of our class A common stock in this offering, there will be shares of common stock outstanding. Holders of class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of class B common stock are entitled to two and one-half votes for each share held of record. The shares of class A and class B common stock are identical in all other respects. The election of directors is determined by a plurality of the votes cast and, except as otherwise required by law, all other matters are determined by a majority of the votes cast. Our stockholders do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors. Holders of common stock are entitled to receive any dividends declared by the board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of outstanding shares of preferred stock. Upon the liquidation, dissolution or winding up of eMerge Interactive, the holders of common stock are entitled to receive pro-rated shares of our net assets after we have paid all debts and other liabilities. Holders of the common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock may be adversely affected by the rights of the holders of shares of any class or series of preferred stock which we may designate and issue in the future. In the event of a sale or transfer of any shares of class B common stock to a party that is not affiliated with the original purchaser, the shares will automatically convert into class A common stock. PREFERRED STOCK Under our second amended and restated certificate of incorporation, our board of directors, without further action by our stockholders, is authorized to issue up to an aggregate of 15,000,000 shares of preferred stock in one or more classes or series. Our board of directors may, without stockholder approval, issue any class or series of preferred stock with dividend rights, dividend rates, conversion rights, redemption rights, preferences on liquidation or dissolution, voting rights and any other preferences, which could adversely affect the voting power of the holders of common stock. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions or other corporate purposes, could make it more difficult for a third party to acquire, or could discourage or delay a third party from acquiring, a majority of our outstanding stock. Following this 61 63 offering, after the conversion of all outstanding shares of series A, series B, series C and series D preferred stock into common stock, there will be no shares of preferred stock outstanding. We have no plans to issue any additional shares of preferred stock. REGISTRATION RIGHTS Some holders of our class A common stock and all holders of preferred stock have been granted registration rights. Under a registration rights agreement, as amended, beginning six months after an initial public offering, the holders of series A, series B, series C and series D preferred stock can, on two occasions, demand that we register their shares, so long as the shares covered by each registration have an aggregate market value of more than $5.0 million. The holders of series A, series B, series C and series D preferred stock are also entitled to piggyback registration rights, which may be reduced at the discretion of an underwriter. Piggyback registration rights entitle stockholders to include shares in a registered public offering initiated by us. We intend to obtain a waiver of the piggyback registration rights from all of the holders of series A, series B, series C and series D preferred stock in connection with this offering, except from those participating as selling stockholders in this offering. In a stockholders' agreement, we granted the former stockholders of STS Agriventures, Ltd. and the partners of NutriCharge piggyback registration rights for their shares of our common stock. In a stockholders' and registration rights agreement, we granted CIN, LLC (now Lost Pelican, LLC) piggyback registration rights for its shares of our class A common stock. In a joinder and correction to the stockholders' and registration rights agreement, we granted the former stockholders of Cyberstockyard, Inc. piggyback registration rights for their shares of our common stock. In a common stock purchase agreement, we granted Turnkey Computer Systems, Inc. piggyback registration rights for its shares of our class A common stock, except for in an initial public offering. We intend to obtain waivers of the piggyback registration rights from these holders of class A common stock, except from those participating as selling stockholders in this offering. CERTAIN ANTI-TAKEOVER PROVISIONS Provisions of our second amended and restated certificate of incorporation and bylaws could make the acquisition of eMerge Interactive and the removal of incumbent officers and directors more difficult. These provisions are expected to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of eMerge Interactive to negotiate with us first. Our board of directors has the authority to issue and to establish the rights of substantial amounts of preferred stock without stockholder approval, upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine. This authority may be used to create voting impediments, hinder changes in control or to dilute the stock ownership of holders of common stock seeking to obtain control of eMerge Interactive. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate transactions, may have the effect of discouraging, delaying or preventing a change in control. DELAWARE ANTI-TAKEOVER LAW We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or the anti-takeover law, which regulates corporate acquisitions. The law generally 62 64 prohibits business combinations between a publicly held Delaware corporation and an interested stockholder. - An interested stockholder is a person who, together with any affiliates, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a corporation. - A business combination includes mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation. Section 203 prohibits any business combination that results in a financial benefit to an interested stockholder for three years following the date the person became an interested stockholder. WARRANTS We have agreed to issue a warrant to Internet Capital Group to purchase up to 911,111 shares of class B common stock upon the completion of the series D preferred stock purchase. The warrant will be exercisable upon the earlier of: - The consummation of this offering; - The closing date of a round of equity financing of at least $20.0 million; and - The one year anniversary of the issue date of the warrant. In the event that the warrant becomes exercisable as a result of this offering or as a result of a private equity offering, the exercise price will be equal to the offering price per share. If the warrant becomes exercisable as a result of the one year anniversary of its issue, the exercise price will be $9.00 per share. The warrant terminates on the third anniversary of its issue. The warrant is transferable, but once transferred, it will be exercisable for shares of class A common stock. LIMITATION ON LIABILITY Our second amended and restated certificate of incorporation and bylaws contain provisions relating to the limitation of liability and indemnification of directors and officers. Our amended and restated certificate of incorporation specifies that none of our directors shall be personally liable to us or our shareholders for monetary damages for a breach of fiduciary duty, except for liability: - For any breach of the duty of loyalty; - For acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law; - For the payment of unlawful dividends and other actions prohibited by Delaware General Corporation Law; and - For any transaction resulting in receipt of an improper personal benefit by the director. Our bylaws require us to indemnify our directors and officers, so long as their actions are in good faith, are in the best interests of the corporation, and are not unlawful. Our bylaws also permit us to purchase and maintain insurance on behalf of our directors, officers and agents. We intend to obtain directors' and officers' liability insurance to provide our directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey 07660. 63 65 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, there will be shares of our common stock outstanding. Of the shares which will be outstanding after the offering, the shares sold in this offering and additional shares that are eligible for resale under Rule 144(k) will be freely tradeable. RULE 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year, including an affiliate, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - One percent of the then outstanding shares of our common stock (approximately shares immediately following the offering); or - The average weekly trading volume during the four calendar weeks preceding filing of notice of such sale. After the offering, shares will be held by affiliates. For purposes of Rule 144, an affiliate of an issuer is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, such issuer. Shares held by affiliates are control securities under Rule 144 and may be sold in the public market upon the expiration of a one-year holding period under Rule 144, subject to the volume, manner of sale and other limitations of Rule 144, but may not be sold in reliance upon Rule 144(k). Shares held by persons deemed not to have been affiliates of ours at any time during the 90 days preceding a sale and who have beneficially owned the shares for at least two years are restricted securities under Rule 144 and can be sold under Rule 144(k) without regard to the volume limitations, manner of sale provisions or other limitations of Rule 144. LOCK-UP AGREEMENTS All officers and directors, and the holders of common stock and options to purchase common stock who collectively account for shares of our common stock have agreed, pursuant to lock-up agreements, that they will not offer, sell, contract to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible or exchangeable for common stock for a period of 180 days after the date of this prospectus without the prior written consent of Adams, Harkness & Hill, Inc. RULE 701 We have granted options and issued underlying shares of common stock to our employees through our equity compensation plans. Under Rule 701, non-affiliated who purchased shares upon the exercise of options granted under the plans prior to this offering are entitled to sell their shares 90 days after the date of this prospectus without having to comply with the holding period, volume limitations or other restrictions of Rule 144. Rule 701 also permits shares subject to unexercised options granted under our plans to be sold upon exercise without having to comply with the provisions of Rule 144. As of , 1999, approximately shares of common stock and shares of common stock subject to unexercised options will be eligible for sale under Rule 701 by our employees. 64 66 STOCK OPTIONS As of October 20, 1999, there were outstanding options to purchase an aggregate of 2,012,170 shares of our common stock, at a weighted average exercise price of $2.03 per share, of which 577,095 were exercisable at a weighted average of $1.32 per share. The holders of options to purchase a total of shares exercisable upon the offering have executed lock-up agreements and agreed to restrict their ability to sell or otherwise dispose of common stock acquired upon the exercise of options for 180 days after the date of this prospectus without the prior consent of Adams, Harkness & Hill, Inc. As of October 20, 1999, we had an additional 572,300 shares of common stock available for future grant under the 1996 and 1999 equity compensation plans. Prior to the expiration of the lock-up agreements, we intend to file a registration statement on Form S-8 to register the shares of common stock that may be issued pursuant to the options granted under the plans. Therefore, the shares of common stock that are acquired and offered thereafter pursuant to that registration statement may be resold in the public market without restriction or limitation, except in the case of our affiliates, who may only resell such shares in accordance with the provisions of Rule 144. WARRANTS On October 27, 1999, we agreed to issue a warrant to Internet Capital Group to purchase up to 911,111 shares of class B common stock upon completion of the series D preferred stock purchase, which we expect to occur in November 1999. This warrant will be exercisable upon closing of this offering and will expire on the third anniversary of its issuance. Internet Capital Group has agreed not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any of its shares, the warrant, or the shares acquired as a result of exercising the warrant, for 180 days after the date of this prospectus, other than through a bona fide pledge of these securities to its creditors. 65 67 PLAN OF DISTRIBUTION Of the shares offered by this prospectus, shares are being offered by means of an underwritten public offering and shares are being offered by means of a directed share subscription program to shareholders of Safeguard Scientifics, Inc., one of our principal stockholders. UNDERWRITTEN PUBLIC OFFERING Subject to the terms and conditions of an executed underwriting agreement, the underwriters named below, through their representatives Adams, Harkness & Hill, Inc., First Union Securities, Inc. and FAC/Equities, a division of First Albany Corporation, have severally agreed to purchase from eMerge Interactive the following numbers of shares of class A common stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus.
NUMBER OF SHARES OF CLASS A UNDERWRITER COMMON STOCK - ----------- ----------------- Adams, Harkness & Hill, Inc. .............................. First Union Securities, Inc. .............................. FAC/Equities, a division of First Albany Corporation....... -------- Total................................................. ========
Of the shares to be purchased by the underwriters shares will be purchased from us and shares will be purchased from the selling stockholders. None of the shares offered by the selling stockholders will be sold in the directed share subscription program. The underwriting agreement provides that the underwriters' obligation to purchase shares of class A common stock depend on the satisfaction of the conditions contained in the underwriting agreement and that, if any of the shares of class A common stock are purchased by the underwriters under the underwriting agreement all of the shares of class A common stock that the underwriters have agreed to purchase under the underwriting agreement must be purchased. The conditions to the underwriters' obligations contained in the underwriting agreement include the requirement that the representations and warranties made by us to the underwriters are true, that all of the shares offered in the directed share subscription program have been purchased, that there is no material change in the financial markets and that we deliver to the underwriters customary closing documents. The representatives of the underwriters have advised us that the underwriters propose to offer to the shares of class A common stock directly to the public at the public offering price set forth on the cover page of this prospectus, and to dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may also allow, and dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the initial offering, the underwriters may change the offering price and other selling terms. We have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to additional shares of class A common stock at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the class A common stock offered hereby. To the extent that the underwriters exercise the option, each of the underwriters will become 66 68 obligated, subject to conditions, to purchase approximately the same percentage of additional shares of class A common stock as the number of shares of class A common stock to be purchased by it in the above table bears to . We will be obligated, pursuant to the option, to sell these shares to the underwriters to the extent the option is exercised. If any additional shares of class A common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the primary shares are being offered. We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the Securities Act of 1933, as amended. Each of our officers, directors, stockholders and optionholders have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designated to, or could be expected to, result in the disposition of, any class A common stock for a period of 180 days after the effective date of the registration statement of which this prospectus is a part without the prior written consent of Adams, Harkness & Hill, Inc. The consent may be given at any time without public notice. We have entered into a similar agreement. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In order to facilitate the offering of the class A common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the class A common stock. Specifically, the underwriters may over-allot shares of the class A common stock in connection with this offering, thus creating a short position in the class A common stock for their own account. Additionally, to cover these over-allotments or to stabilize the market price of the class A common stock, the underwriters may bid for, and purchase, shares of the class A common stock in the open market. Finally, the representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of the class A common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. At our request, the underwriters have reserved approximately shares of our class A common stock for sale at the initial public offering price to our employees, directors and certain other persons with relationships to eMerge Interactive. The number of shares of our class A common stock available for sale to the general public will be reduced to the extent that such persons purchase such reserved shares. Any reserved shares which are not so orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for our class A common stock. Consequently, the initial public offering price for our class A common stock will be determined by negotiation among us and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be: - Prevailing market conditions; - Results of our operations in recent periods; - The present stage of our development; 67 69 - The market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to us; and - Estimates of our business potential. DIRECTED SHARE SUBSCRIPTION PROGRAM As part of this offering, we are offering shares of our class A common stock in a directed share subscription program to shareholders of Safeguard, one of our principal stockholders. Safeguard's shareholders may subscribe for one share of our class A common stock for every ten shares of Safeguard common stock held by them, and may not transfer the opportunity to subscribe to another person except involuntarily by operation of law. Persons who owned at least 100 shares of Safeguard common stock as of October 20, 1999 are eligible to purchase shares from us under the program. Shareholders who own less than 100 shares of Safeguard common stock will be ineligible to participate in the directed share subscription program. Safeguard or its designees will purchase from us any of the shares offered by us under the program that are not purchased by the shareholders of Safeguard. Although these shares were purchased directly from us as part of a registered offering, Safeguard is one of our affiliates and may only sell these shares in accordance with Rule 144 restrictions in subsequent registered offerings. In addition, Safeguard has agreed, subject to limited exceptions, not to offer, sell or otherwise dispose of any shares of our common stock, including shares purchased by it in the directed share subscription program, for a period of 180 days after the date of this prospectus other than in connection with this offering. Sales under the directed share subscription program will close on the closing of the sale of the other shares offered to the public. It is expected that sales under the directed share subscription program will be reflected in each purchaser's book-entry account at the Depository Trust Company, if any, shortly after the closing of these sales. After the closing of these sales, we will mail stock certificates to all purchasers who do not maintain book-entry accounts at the Depository Trust Company. Distribution of share certificates purchased through the directed share subscription program will be made to the purchasers as soon as practicable following closing of the sale of the shares to the public. Prior to this offering, Safeguard beneficially owned % of our common stock. After this offering, Safeguard will beneficially own % of our common stock, assuming that all shares are purchased by shareholders of Safeguard, and will beneficially own approximately % of our common stock assuming that none of the shares are purchased by the shareholders of Safeguard or Safeguard's designees. The purchase price under the program, whether paid by Safeguard, its shareholders or Safeguard's designees, will be the same price per share as set forth on the cover page of this prospectus. For purposes of this prospectus, when we present financial data that reflects this offering, it is assumed that all shares offered under the directed share subscription program are sold. The underwriters, as a group, will receive a percentage management fee on all shares offered through the directed share subscription program, including any shares actually purchased by Safeguard or Safeguard's designees. The management fee represents compensation for the underwriters' role as it relates to due diligence, participation in the drafting of this prospectus and general coordination of the overall offering. Safeguard will not receive any compensation from eMerge Interactive or any other person with respect to this offering, including any underwriting discounts or commissions. 68 70 The following table shows the per share and total offering price, management fee to be paid by us to the underwriters and the proceeds before expenses to us.
PER SHARE TOTAL --------- -------- Public offering price................................ $ $ Management fee....................................... $ $ Proceeds before expenses to eMerge Interactive....... $ $
The total proceeds before expenses to be received by eMerge Interactive from both the underwritten public offering and the directed share subscription program will be $ . The expenses of the directed share subscription program, exclusive of the management fee to be paid to the underwriters, are estimated at $ and are payable by us. The following table details these expenses. All amounts shown are estimates, with the exception of the Securities and Exchange Commission registration fee and the NASD filing fee. SEC registration fee........................................ $24,117 NASD filing fee............................................. 9,175 Offering agent fees......................................... 25,000 Miscellaneous...............................................
Safeguard has consented to being designated an underwriter with respect to the shares included in the directed share subscription program. Safeguard is not an underwriter with respect to the other shares offered by this prospectus. Safeguard is not included in the term underwriter as used in this prospectus. Safeguard's sole condition to purchase any shares that are not purchased by its shareholders in the direct shares subscription program is that the conditions to the underwriter's obligations have been met. This means that Safeguard will be required to purchase these shares if, and only if, the underwriters are obligated to purchase shares. Safeguard has not participated in any discussions or negotiations with the Company and the underwriters regarding the initial public offering price. Safeguard will not have any right to seek indemnification from eMerge Interactive regarding its agreement to accept underwriter liability with respect to the shares included in the directed share subscription program. LEGAL MATTERS An opinion as to the validity of the shares of class A common stock offered hereby will be provided to us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering are being passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS Our financial statements as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998 have been included in this Prospectus and the Registration Statement in reliance upon the report of KPMG LLP, independent certified public accountants and upon the authority of said firm as experts in accounting and auditing. The financial statements of Lost Pelican, L.L.C. (d/b/a Cattlemen's Information Network) as of December 31, 1997 and 1998 and for each of the years in the two-year period ended December 31, 1998 have been included in this Prospectus and the Registration Statement in 69 71 reliance upon the report of KPMG LLP, independent certified public accountants and upon the authority of said firm as experts in accounting and auditing. The financial statements of QDD Investment Company, L.L.C. (d/b/a Professional Cattle Consultants, L.L.C.) as of December 31, 1998 and for the year then ended have been included in this Prospectus and the Registration Statement in reliance upon the report of KPMG LLP, independent certified public accountants and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to eMerge Interactive and the common stock, reference is made to the registration statement and the exhibits and schedules thereto. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our SEC filings are also available to the public from the SEC's Web site at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms, and the Web site of the SEC referred to above. 70 72 INDEX TO FINANCIAL STATEMENTS eMerge INTERACTIVE, INC. Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998, June 30, 1999 (unaudited) and pro forma June 30, 1999 (unaudited).......................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999 (unaudited)........................ F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999 (unaudited)............ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999 (unaudited)........................ F-6 Notes to Consolidated Financial Statements.................. F-7 PRO FORMA FINANCIAL INFORMATION eMerge INTERACTIVE, INC. Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998........... F-21 Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 1999......... F-22 Notes to Unaudited Pro Forma Condensed Combined Financial Statements................................................ F-23 LOST PELICAN, L.L.C. (FORMERLY CIN, LLC) D/B/A CATTLEMEN'S INFORMATION NETWORK Independent Auditors' Report................................ F-25 Balance Sheets as of December 31, 1997 and 1998 and February 23, 1999.................................................. F-26 Statements of Operations for the years ended December 31, 1997 and 1998, the six months ended June 30, 1998 (unaudited), and for the period January 1, 1999 through February 23, 1999 (unaudited)............................. F-27 Statements of Members' Equity (Deficit) for the years ended December 31, 1997 and 1998 and for the period January 1, 1999 through February 23, 1999 (unaudited)................ F-28 Statements of Cash Flows for the years ended December 31, 1997 and 1997, the six months ended June 30, 1998 (unaudited), and for the period January 1, 1999 through February 23, 1999 (unaudited)............................. F-29 Notes to Financial Statements............................... F-30 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. Independent Auditors' Report................................ F-33 Balance Sheets as of December 31, 1998 and May 19, 1999 (unaudited)............................................... F-34 Statements of Operations for the year ended December 31, 1998, the six months ended June 30, 1998 (unaudited) and for the period January 1, 1999 through May 19, 1999 (unaudited)............................................... F-35 Statements of Members' Equity for the year ended December 31, 1998 and for the period January 1, 1999 through May 19, 1999 (unaudited)...................................... F-36 Statements of Cash Flows for the year ended December 31, 1998, the six months ended June 30, 1998 (unaudited) and for the period January 1, 1999 through May 19, 1999 (unaudited)............................................... F-37 Notes to Financial Statements............................... F-38
F-1 73 INDEPENDENT AUDITORS' REPORT To the Board of Directors of eMerge Interactive, Inc.: We have audited the accompanying consolidated balance sheets of eMerge Interactive, Inc. as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eMerge Interactive, Inc. at December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Orlando, Florida April 20, 1999 F-2 74 eMERGE INTERACTIVE, INC. CONSOLIDATED BALANCE SHEETS
PROFORMA JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, 1999 1997 1998 1999 (NOTE 1(b)) ------------ ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 400 $ 268 $ 663,141 $ 663,141 Trade accounts receivable................................. -- 368,421 404,504 404,504 Inventories (note 3)...................................... 635,963 706,557 739,677 739,677 Prepaid expenses.......................................... 33,642 27,837 168,382 168,382 Net assets of discontinued operations (note 12)........... 1,066,804 2,285,341 1,611,014 1,611,014 ----------- ------------ ------------ ------------ Total current assets............................... 1,736,809 3,388,424 3,586,718 3,586,718 Property and equipment, net (note 4)........................ 428,140 513,837 1,469,810 1,469,810 Capitalized offering costs.................................. -- -- 254,458 254,458 Intangibles, net (note 5)................................... -- 2,699,828 6,617,279 6,617,279 ----------- ------------ ------------ ------------ Total assets....................................... $ 2,164,949 $ 6,602,089 $ 11,928,265 $ 11,928,265 =========== ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of capital lease obligation with related party (note 9).................................. $ -- $ 79,852 $ 82,845 $ 82,845 Accounts payable.......................................... 725,369 423,946 721,024 721,024 Accrued liabilities: Salaries and benefits................................... 175,597 283,103 609,738 609,738 Other................................................... 98,704 319,989 1,376,714 1,376,714 Due to related parties (note 9)........................... 8,040,304 5,187,334 8,097,123 8,097,123 ----------- ------------ ------------ ------------ Total current liabilities.......................... 9,039,974 6,294,224 10,887,444 10,887,444 Capital lease obligation with related party, excluding current installments (note 9)............................. -- 305,018 263,489 263,489 ----------- ------------ ------------ ------------ Total liabilities.................................. 9,039,974 6,599,242 11,150,933 11,150,933 ----------- ------------ ------------ ------------ Commitments and contingencies (notes 11 and 12) Stockholders' equity (deficit) (notes 6, 8 and 12): Preferred stock, $.01 par value, authorized 15,000,000 shares: Series A preferred stock, (aggregate involuntary liquidation preference of $6,741,954 in 1997, $7,386,314 in 1998 and $7,545,198 in 1999), designated 6,500,000 shares, issued and outstanding 6,443,606 shares in 1997, 1998 and 1999. No shares designated, issued and outstanding pro forma...................... 64,436 64,436 64,436 -- Series B junior preferred stock, (aggregate involuntary liquidation preference of $-0- in 1997, $4,801,315 in 1998 and $4,919,671 in 1999), designated 2,400,000 shares, issued and outstanding -0-shares in 1997, 2,400,000 shares in 1998 and 1999. No shares designated, issued and outstanding pro forma.......... -- 24,000 24,000 -- Series C preferred stock, designated 1,300,000 shares, issued and outstanding -0- shares in 1997 and 1998 and 1,100,000 shares in 1999. No shares designated, issued and outstanding pro forma............................. -- -- 11,000 Series D preferred stock, designated 4,555,556 shares, no shares issued and outstanding in 1997, 1998 and 1999. No shares designated, issued and outstanding pro forma................................................. -- -- -- -- Common stock, $.01 par value, authorized 100,000,000 shares: Class A common stock, designated 92,711,110 shares, issued and outstanding 2,606,500 shares in 1997, 4,676,500 shares in 1998 and 5,563,780 shares in 1999 and 15,507,386 shares pro forma....................... 26,065 46,765 55,638 155,074 Class B common stock, 7,288,890 designated; no shares issued and outstanding in 1997, 1998, 1999 or pro forma................................................. -- -- -- -- Additional paid-in capital................................ 1,982,986 16,648,286 23,457,819 23,457,819 Accumulated deficit....................................... (8,948,512) (16,780,640) (22,767,944) (22,767,944) Unearned compensation..................................... -- -- (67,617) (67,617) ----------- ------------ ------------ ------------ Total stockholders' equity (deficit)............... (6,875,025) 2,847 777,332 777,332 ----------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit)........................................ $ 2,164,949 $ 6,602,089 $ 11,928,265 $ 11,928,265 =========== ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 75 eMERGE INTERACTIVE, INC CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenue................................... $ -- $ -- $ 1,792,471 $ 664,171 $ 2,578,253 Cost of revenue........................... -- -- 2,623,447 1,037,048 2,767,919 ----------- ----------- ----------- ----------- ----------- Gross profit (loss).................. -- -- (830,976) (372,877) (189,666) ----------- ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative (note 9)............................. -- 627,606 3,659,810 1,330,764 4,068,860 Research and development................ -- 727,753 1,109,382 546,604 1,450,433 ----------- ----------- ----------- ----------- ----------- Total operating expenses............. -- 1,355,359 4,769,192 1,877,368 5,519,293 ----------- ----------- ----------- ----------- ----------- Profit (loss) from continuing operations......................... -- (1,355,359) (5,600,168) (2,250,245) (5,708,959) Interest expense (note 9)................. -- (141,167) (331,594) (162,156) (288,765) ----------- ----------- ----------- ----------- ----------- Profit (loss) from continuing operations before income taxes..... -- (1,496,526) (5,931,762) (2,412,401) (5,997,724) Income tax expense (benefit) (note 7)..... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Profit (loss) from continuing operations......................... -- (1,496,526) (5,931,762) (2,412,401) (5,997,724) Discontinued operations (note 12): Income (loss) from operations of discontinued transportation segment (note 9)............................. (1,719,492) (3,987,097) (1,808,951) (1,200,370) 10,420 Loss on disposal of transportation segment.............................. -- -- (91,415) -- -- ----------- ----------- ----------- ----------- ----------- Net profit (loss).................... $(1,719,492) $(5,483,623) $(7,832,128) $(3,612,771) $(5,987,304) =========== =========== =========== =========== =========== Profit (loss) from continuing operations per common share -- basic and diluted... $ -- $ (4.89) $ (1.70) $ (0.93) $ (1.15) =========== =========== =========== =========== =========== Net profit (loss) per common share --basic and diluted............................. $ (11.55) $ (17.93) $ (2.25) $ (1.39) $ (1.15) =========== =========== =========== =========== =========== Weighted average number of common shares outstanding -- basic and diluted........ 148,877 305,818 3,485,541 2,606,500 5,223,403 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements F-4 76 eMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SERIES A SERIES B SERIES C ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------- --------- ------- --------- ------- Balance at December 31, 1995.................. -- $ -- -- $ -- -- $ -- Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... -- -- -- -- -- -- Issuance of common stock for cash at $.01 per share........................................ -- -- -- -- -- -- Exercise of stock options for cash at $.01 per share........................................ -- -- -- -- -- -- Net profit (loss)............................. -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1996................. -- -- -- -- -- -- Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... -- -- -- -- -- -- Sale of Series A preferred stock for cash at $1.00 per share (note 6)..................... 6,443,606 64,436 -- -- -- -- Transfer of technology by XL Vision, Inc. (note 9)..................................... -- -- -- -- -- -- Net profit (loss)............................. -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1997................. 6,443,606 64,436 -- -- -- -- Contribution of debt to equity by XL Vision, Inc. (note 9)................................ -- -- -- -- -- -- Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (notes 6 and 9)..................................... -- -- 2,400,000 24,000 -- -- Issuance of common stock in connection with Nutri-Charge transaction at $1.00 per share (note 5)..................................... -- -- -- -- -- -- Contribution of put rights by XL Vision, Inc. (note 5)..................................... -- -- -- -- -- -- Net profit (loss)............................. -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1998................. 6,443,606 64,436 2,400,000 24,000 -- -- Exercise of stock options for cash at $1.00 per share (note 8)........................... -- -- -- -- -- -- Issuance of common stock in connection with CIN transaction at $1.20 per share (note 12).......................................... -- -- -- -- -- -- Issuance of common stock in connection with Cyberstockyard transaction at $2.25 per share (note 12).................................... -- -- -- -- -- -- Issuance of Series C preferred stock at $5.00 per share (note 12).......................... -- -- -- -- 1,100,000 11,000 Net profit (loss)............................. -- -- -- -- -- -- Unearned compensation (note 8)................ -- -- -- -- -- -- Amortization of unearned compensation (note 8)........................................... -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at June 30, 1999..................... 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 ========= ======= ========= ======= ========= ======= COMMON STOCK COMMON STOCK CLASS A CLASS B ADDITIONAL ------------------- --------------- PAID-IN ACCUMULATED UNEARNED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION --------- ------- ------ ------ ----------- ------------ ------------ Balance at December 31, 1995.................. 1,000 $ 10 -- $ -- $ 3,816 $(1,745,397) $ -- Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... 199,000 1,990 -- -- -- -- -- Issuance of common stock for cash at $.01 per share........................................ 140,000 1,400 -- -- -- -- -- Exercise of stock options for cash at $.01 per share........................................ 20,000 200 -- -- -- -- -- Net profit (loss)............................. -- -- -- -- -- (1,719,492) -- --------- ------- ---- ---- ----------- ------------ -------- Balances at December 31, 1996................. 360,000 3,600 -- -- 3,816 (3,464,889) -- Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... 2,246,500 22,465 -- -- -- -- -- Sale of Series A preferred stock for cash at $1.00 per share (note 6)..................... -- -- -- -- 6,379,170 -- -- Transfer of technology by XL Vision, Inc. (note 9)..................................... -- -- -- -- (4,400,000) -- -- Net profit (loss)............................. -- -- -- -- -- (5,483,623) -- --------- ------- ---- ---- ----------- ------------ -------- Balances at December 31, 1997................. 2,606,500 26,065 -- -- 1,982,986 (8,948,512) -- Contribution of debt to equity by XL Vision, Inc. (note 9)................................ -- -- -- -- 7,500,000 -- -- Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (notes 6 and 9)..................................... -- -- -- -- 4,776,000 -- -- Issuance of common stock in connection with Nutri-Charge transaction at $1.00 per share (note 5)..................................... 2,070,000 20,700 -- -- 2,049,300 -- -- Contribution of put rights by XL Vision, Inc. (note 5)..................................... -- -- -- -- 340,000 -- -- Net profit (loss)............................. -- -- -- -- -- (7,832,128) -- --------- ------- ---- ---- ----------- ------------ -------- Balances at December 31, 1998................. 4,676,500 46,765 -- -- 16,648,286 (16,780,640) -- Exercise of stock options for cash at $1.00 per share (note 8)........................... 87,280 873 -- -- 86,407 -- -- Issuance of common stock in connection with CIN transaction at $1.20 per share (note 12).......................................... 600,000 6,000 -- -- 714,000 -- -- Issuance of common stock in connection with Cyberstockyard transaction at $2.25 per share (note 12).................................... 200,000 2,000 -- -- 448,000 -- -- Issuance of Series C preferred stock at $5.00 per share (note 12).......................... -- -- -- -- 5,489,000 -- -- Net profit (loss)............................. -- -- -- -- -- (5,987,304) -- Unearned compensation (note 8)................ -- -- -- -- 72,126 -- (72,126) Amortization of unearned compensation (note 8)........................................... -- -- -- -- -- -- 4,509 --------- ------- ---- ---- ----------- ------------ -------- Balances at June 30, 1999..................... 5,563,780 $55,638 -- $ -- $23,457,819 $(22,767,944) $(67,617) ========= ======= ==== ==== =========== ============ ======== TOTAL ----------- Balance at December 31, 1995.................. $(1,741,571) Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... 1,990 Issuance of common stock for cash at $.01 per share........................................ 1,400 Exercise of stock options for cash at $.01 per share........................................ 200 Net profit (loss)............................. (1,719,492) ----------- Balances at December 31, 1996................. (3,457,473) Issuance of common stock to XL Vision, Inc., for cash at $.01 per share................... 22,465 Sale of Series A preferred stock for cash at $1.00 per share (note 6)..................... 6,443,606 Transfer of technology by XL Vision, Inc. (note 9)..................................... (4,400,000) Net profit (loss)............................. (5,483,623) ----------- Balances at December 31, 1997................. (6,875,025) Contribution of debt to equity by XL Vision, Inc. (note 9)................................ 7,500,000 Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (notes 6 and 9)..................................... 4,800,000 Issuance of common stock in connection with Nutri-Charge transaction at $1.00 per share (note 5)..................................... 2,070,000 Contribution of put rights by XL Vision, Inc. (note 5)..................................... 340,000 Net profit (loss)............................. (7,832,128) ----------- Balances at December 31, 1998................. 2,847 Exercise of stock options for cash at $1.00 per share (note 8)........................... 87,280 Issuance of common stock in connection with CIN transaction at $1.20 per share (note 12).......................................... 720,000 Issuance of common stock in connection with Cyberstockyard transaction at $2.25 per share (note 12).................................... 450,000 Issuance of Series C preferred stock at $5.00 per share (note 12).......................... 5,500,000 Net profit (loss)............................. (5,987,304) Unearned compensation (note 8)................ -- Amortization of unearned compensation (note 8)........................................... 4,509 ----------- Balances at June 30, 1999..................... $ 777,332 ===========
See accompanying notes to consolidated financial statements. F-5 77 eMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net profit (loss)..................................... $(1,719,492) $(5,483,623) $(7,832,128) $(3,612,771) $(5,987,304) Adjustments to reconcile net profit (loss) to net cash used in operating activities: Depreciation and amortization......................... 1,503 122,486 438,576 107,137 865,290 Amortization of unearned compensation................. -- -- -- -- 4,509 Changes in operating assets and liabilities: Trade accounts receivable, net.................... -- -- (368,421) (109,505) (36,083) Inventories....................................... -- (635,963) (70,594) (65,822) (33,120) Prepaid expenses and other assets................. (1,304) (32,338) 5,805 13,862 (140,545) Net assets of discontinued operations............. (96,209) (853,501) (1,140,425) (1,117,505) 604,729 Accounts payable.................................. 5,675 719,694 (301,423) (348,956) 297,078 Accrued liabilities............................... 75,542 198,759 328,791 68,442 1,383,360 ----------- ----------- ----------- ----------- ----------- Net cash used by operating activities............. (1,734,285) (5,964,486) (8,939,819) (5,065,118) (3,042,086) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment................... (56,861) (506,540) (460,290) (389,559) (1,353,819) Purchase of intangibles............................... (100,000) -- (431,923) -- (3,145,297) ----------- ----------- ----------- ----------- ----------- Net cash used by investing activities............. (156,861) (506,540) (892,213) (389,559) (4,499,116) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net borrowings from related parties................... 1,889,101 3,810 9,447,030 5,032,061 2,909,789 Proceeds from capital lease financing with related party............................................... -- -- 440,832 440,832 -- Payments on capital lease obligations................. -- -- (55,962) (18,363) (38,536) Offering costs........................................ -- -- -- -- (254,458) Sale of preferred stock............................... -- 6,443,606 -- -- 5,500,000 Sale of common stock.................................. 3,590 22,465 -- -- 87,280 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities......... 1,892,691 6,469,881 9,831,900 5,454,530 8,204,075 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash................... 1,545 (1,145) (132) (147) 662,873 Cash -- beginning of period............................. -- 1,545 400 400 268 ----------- ----------- ----------- ----------- ----------- Cash -- end of period................................... $ 1,545 $ 400 $ 268 $ 253 $ 663,141 =========== =========== =========== =========== =========== Supplemental disclosures: Cash paid for interest................................ $ -- $ -- $ 23,594 $ 8,156 $ 13,752 Non-cash investing and financing activities: Transfer of technology by XL Vision, Inc. (note 9)................................................ $ -- $ 4,400,000 $ -- $ -- $ -- Contribution of debt to equity by XL Vision, Inc. (note 9).......................................... -- -- 7,500,000 -- -- Issuance of preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. (note 9).......................................... -- -- 4,800,000 -- -- Non-cash issuance of Class A common stock in connection with Nutri-Charge transaction (note 5)................................................ -- -- 2,070,000 -- -- Contribution of put rights by XL Vision, Inc. (note 5)................................................ -- -- 340,000 -- -- Issuance of Class A common stock in connection with CIN transaction (note 12)......................... -- -- -- -- 720,000 Issuance of Class A common stock with Cyberstockyard transaction (note 12)............................. -- -- -- -- 450,000
See accompanying notes to consolidated financial statements. F-6 78 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION INSOFAR AS IT RELATES TO JUNE 30, 1999 OR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (1) ORGANIZATION (a) OVERVIEW eMerge Interactive, Inc. (the "Company") is a Delaware corporation that was incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly owned subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was changed to eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge Interactive, Inc. on June 11, 1999. The Company was incorporated to develop and commercialize infrared technology focused on the transportation segment. In 1997, the Company entered a new business segment, animal sciences, by developing an infrared camera system for use primarily by veterinarians. The Company further expanded its operations in 1998 by licensing NutriCharge and infrared technology (see note 5) for commercialization. In December 1998, the Company's Board of Directors decided to dispose of the transportation segment. The Company's AMIRIS thermal imaging system, which was the sole product sold by the transportation segment, was sold on January 15, 1999. (b) BASIS OF PRESENTATION The consolidated financial statements as of December 31, 1998 include the accounts of eMerge Interactive, Inc. and its wholly-owned subsidiary, STS Agriventures, Ltd. ("STS"), a Canadian corporation. The consolidated financial statements as of June 30, 1999 include STS and another wholly-owned subsidiary, Cyberstockyard, Inc. ("Cyberstockyard"). All significant intercompany balances and transactions have been eliminated upon consolidation. The pro forma balance sheet as of June 30, 1999 assumes the conversion of all preferred stock to Class A common stock upon the Company's planned initial public offering ("IPO"). (c) MANAGEMENT'S PLANS As of June 30, 1999, the Company had a working capital deficiency of $7,300,726 and stockholders' equity of $777,332. Management expects additional working capital requirements as the Company continues its marketing and development efforts for its products. Subsequent to June 30, 1999, the Company obtained additional debt and equity financing (see note 12). Although management believes that its IPO will be successful, there can be no assurances that it will be achieved or that the Company will be successful in raising other financing. The Company anticipates that net proceeds from its planned IPO of common stock will be sufficient to satisfy its operating cash needs for at least eighteen months following the IPO. If the Company is unable to obtain sufficient additional funds, the Company may have to delay, scale back or eliminate some or all of its marketing and development activities. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) REVENUE RECOGNITION The Company recognizes revenue in accordance with the terms of the sale or contract, generally as products are shipped or services are provided. The Company bears both the inventory and credit risk with respect to sales of all of its products. In cattle sales F-7 79 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transactions, the Company purchases cattle from the seller, takes title at shipment and records the cattle as inventory until delivered to and accepted by the buyer, typically a 24 to 48 hour period. In both cattle auction and resale transactions, the Company acts as a principal in purchasing cattle from suppliers and sales to customers so that the Company recognizes revenue equal to the amount paid by customers for the cattle. (b) INVENTORIES Inventories are stated at standard cost which approximates the lower of first-in, first-out cost or market. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Amortization of equipment under capital lease is computed over the shorter of the lease term or the estimated useful life of the related assets. (d) INTANGIBLES Intangibles are stated at amortized cost. Amortization is computed using the straight-line method over the estimated useful lives of the assets. (e) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (g) USE OF ESTIMATES The preparation of the Company's consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent F-8 80 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. (h) NET PROFIT (LOSS) PER SHARE Net profit (loss) per share is computed in accordance with SFAS No. 128, "Earnings Per Share," by dividing the net profit (loss) allocable to common stockholders by the weighted average number of shares of common stock outstanding. The Company's stock options (270,500 at December 31, 1997 and 1,306,000 at December 31, 1998) and convertible preferred stock (6,443,606 at December 31, 1997 and 8,843,606 at December 31, 1998), have not been used in the calculation of diluted net profit (loss) per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net profit (loss) per share allocable to common stockholders are equal. Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 98 and SEC staff policy, all common stock and common stock equivalents issued for nominal consideration during the periods presented herein and through the filing of the registration statement for the IPO are to be reflected in a manner similar to a stock split or stock dividend for which retroactive treatment is required in the calculation of net profit (loss) per share; the Company did not have any such issuances. (i) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, trade accounts receivable, accounts payable, accrued liabilities and amounts due to related parties reflected in the consolidated financial statements approximates fair value due to the short-term maturity of these instruments. (j) INTERIM FINANCIAL INFORMATION The consolidated financial statements as of June 30, 1999 and for the periods ended June 30, 1998 and 1999 are unaudited but reflect adjustments which are, in the opinion of management, necessary for the fair presentation of financial position and results of operations. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the full year. (3) INVENTORIES Inventories consist of:
DECEMBER 31, -------------------- JUNE 30, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Raw materials........................... $346,335 $424,130 $369,372 Work-in-process......................... 289,628 282,427 370,305 -------- -------- -------- $635,963 $706,557 $739,677 ======== ======== ========
F-9 81 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) PROPERTY AND EQUIPMENT Property and equipment consists of:
DECEMBER 31, -------------------- JUNE 30, ESTIMATED 1997 1998 1999 USEFUL LIVES -------- -------- ----------- ------------ (UNAUDITED) Engineering and manufacturing equipment........................ $258,082 $366,150 $ 537,297 5 years Office and computer equipment...... 179,315 259,462 1,188,249 3 years Furniture and fixtures............. 67,282 104,706 108,484 7 years Leasehold improvements............. 46,865 46,865 80,430 7 years Automobiles........................ -- -- 54,717 5 years -------- -------- ---------- 551,544 777,183 1,969,177 Less accumulated depreciation and amortization..................... 123,404 263,346 499,367 -------- -------- ---------- Property and equipment, net........ $428,140 $513,837 $1,469,810 ======== ======== ==========
Assets under capital lease amounted to $-0-, $440,832 and $440,832 (unaudited) as of December 31, 1997, 1998 and June 30, 1999, respectively. Accumulated amortization for assets under capital lease totaled approximately $-0-, $152,300 and $217,500 (unaudited) as of December 31, 1997, 1998 and June 30, 1999, respectively. (5) INTANGIBLES Intangibles consists of:
DECEMBER 31, ------------------ JUNE 30, ESTIMATED 1997 1998 1999 USEFUL LIFE ---- ---------- ----------- ----------- (UNAUDITED) NutriCharge license................... $ -- $2,273,538 $2,273,538 10 years Infrared technology license........... -- 568,385 568,385 5 years Goodwill -- CIN (note 12)............. -- -- 2,076,368 5 years Non-compete agreement -- CIN (note 12)................................. -- -- 100,000 5 years Goodwill -- Cyberstockyard (note 12)................................. -- -- 434,981 3 years Non-compete agreement -- Cyberstockyard (note 12)............ -- -- 100,000 3 years Goodwill -- PCC -- (note 12).......... -- -- 1,503,948 5 years Non-compete agreement -- PCC (note 12)................................. 100,000 4 years ---- ---------- ---------- -- 2,841,923 7,157,220 Less accumulated amortization......... -- 142,095 539,941 ---- ---------- ---------- Intangibles, net...................... $ -- $2,699,828 $6,617,279 ==== ========== ==========
F-10 82 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On July 29, 1998, the Company acquired licenses for NutriCharge and infrared technology. The purchase price of $2,841,923 (consisting of $300,000 in cash, 2,070,000 of the Company's Class A common shares valued at $1 per share, $131,923 in acquisition costs and the estimated fair value of put rights granted by XL Vision) was allocated to the acquired NutriCharge and infrared technology licenses based on estimated fair values determined by estimated cash flows from the underlying licensed product. In connection with the transaction, XL Vision granted a put right that allows the sellers to require XL Vision to purchase up to 1,000,000 shares of the Company's Class A common stock at $3.00 per share in the event certain operating targets related to the licensed product are not met by years four through seven after the transaction. The put expires at the end of year seven after the transaction. The fair value of the put was estimated to be $340,000 and was credited to additional paid-in capital. (6) EQUITY COMMON STOCK As of December 31, 1998, the Company had authorized the issuance of 100,000,000 shares of common stock. CLASS A -- In 1999, the Company designated 92,711,110 as Class A common stock CLASS B -- In 1999, the Company designated 7,288,890 shares as Class B common stock. Holders of Class B common stock are entitled to two and one-half votes for each share. The shares of Class A and Class B are identical in all other respects. PREFERRED STOCK As of December 31, 1998, the Company had authorized the issuance of 10,000,000 shares of preferred stock and had designated 6,500,000 as Series A shares, and 2,400,000 as Series B shares. Each share of preferred stock is convertible into one share of Class A common stock at the option of the holder or upon the vote of holders of two-thirds of the respective preferred stock class outstanding except for Series D shares which is convertible at the offering price into Class B common stock. Preferred stock is automatically converted into common stock upon a qualified IPO of at least $10 million with a Company valuation of at least $30 million or upon a public rights offering of the Company to shareholders of Safeguard Scientifics, Inc. In 1999, the Company increased the authorized preferred stock to 15,000,000 shares. SERIES A -- The Series A shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $1.00 per share plus an additional $.10 per year (pro rated for partial years) from July 16, 1997 or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. The holders of Series A preferred stock are entitled to vote as a separate class to elect two directors to the Board of Directors of the Company. SERIES B -- Series B shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $2.00 per share plus an additional $.20 for each year (pro rated for partial years) from December 31, 1998 or until the date of distribution of available assets or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. Series B shares are junior to Series A, C and D shares. F-11 83 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SERIES C -- On April 15, 1999, the Company designated 1,100,000 as Series C shares (unaudited). Series C shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $5.00 per share plus an additional $.50 for each year (pro rated for partial years) from April 15, 1999 or until the date of distribution of available assets or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. Series C shares are on parity with Series A and D shares except as to voting rights. SERIES D -- On October 27, 1999, the Company designated 4,555,556 shares as Series D shares (unaudited). Series D shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $10.00 per share plus an additional $1.00 for each year (pro rated for partial years) from August 24, 1999 or until the date of distribution of available assets or (b) the amount which would be distributed if all the preferred stock of the Company were converted to Class B common stock prior to liquidation. Series D shares are on parity with Series A and C shares except as to voting rights. Series D stockholders are entitled to two and one-half votes per share. (7) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liability are as follows:
DECEMBER 31, ------------------------ 1997 1998 ---------- ---------- Deferred tax assets: Net operating loss carryforwards.......... $3,237,000 $5,967,000 Amortization of acquired technology from XL Vision (note 9)................... 1,829,000 1,704,000 Research and experimentation tax credits.............................. 294,000 448,000 Other................................... 125,000 596,000 ---------- ---------- 5,485,000 8,715,000 Less valuation allowance................ 5,370,000 8,715,000 ---------- ---------- Net deferred tax assets.............. 115,000 -- Deferred tax liability: Imputed interest........................ (115,000) -- ---------- ---------- Net deferred tax assets (liability)........................ $ -- $ -- ========== ==========
The Company has available at December 31, 1998, unused net operating loss carryforwards of approximately $15,000,000 which may be applied against future taxable income and expires in years beginning in 2010. The Company also has approximately $448,000 in research and experimentation credits carryforwards. The research and experimentation credits, which begin to expire in 2010, can also be used to offset future regular tax liabilities. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. F-12 84 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The difference between the "expected" tax benefit (computed by applying the federal corporate income tax rate of 34% to the loss before income taxes) and the actual tax benefit is primarily due to the effect of the valuation allowance. (8) STOCK PLAN In January 1996, the Company adopted an equity compensation plan (the "1996 Plan") pursuant to which the Company's Board of Directors may grant shares of common stock or options to acquire common stock to certain directors, advisors and employees. The Plan authorizes grants of shares or options to purchase up to 1,735,000 shares of authorized but unissued common stock. Stock options granted have a maximum term of ten years and have vesting schedules which are at the discretion of the Compensation Committee of the Board of Directors and determined on the effective date of the grant. A summary of option transactions follows:
WEIGHTED RANGE OF AVERAGE EXERCISE WEIGHTED REMAINING PRICES PER AVERAGE CONTRACTUAL SHARES SHARE EXERCISE PRICE LIFE (IN YEARS) --------- ---------- -------------- --------------- Balance outstanding, December 31, 1996.............................. 2,500 $ 1.00 $1.00 4.85 ==== Granted........................... 268,000 1.00 1.00 --------- ---------- ----- Balance outstanding, December 31, 1997.............................. 270,500 1.00 1.00 9.64 ==== Granted........................... 1,354,000 1.00-2.00 1.05 Canceled.......................... (318,500) 1.00 1.00 --------- ---------- ----- Balance outstanding, December 31, 1998.............................. 1,306,000 1.00-2.00 1.05 9.48 ==== Granted (unaudited)............... 743,200 2.00-8.00 2.87 Exercised (unaudited)............. (87,280) 1.00 1.00 Canceled (unaudited).............. (7,000) 1.00-2.00 1.57 --------- ---------- ----- Balance outstanding, June 30, 1999 (unaudited)....................... 1,954,920 $1.00-8.00 $1.74 9.31 ========= ========== ===== ====
At December 31, 1997, 1998 and June 30, 1999, there were 61,375, 331,500 and 398,095 (unaudited) shares exercisable, respectively at weighted average exercise prices of $1.00, $1.02 and $1.39 (unaudited), respectively. At December 31, 1997 and 1998 and June 30, 1999, 79,500, 409,000 and 672,800 (unaudited) shares were available for grant, respectively. F-13 85 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The per share weighted-average fair value of stock options granted was $0 in 1996, $0 in 1997 and $0.10 in 1998 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1996 1997 1998 ---- ---- ---- Volatility............................................ 0% 0% 0% Dividend paid......................................... 0% 0% 0% Risk-free interest rate............................... 6.35% 6.11% 4.73% Expect life in years.................................. 5.77 6.75 5.57
No volatility was assumed due to the use of the Minimum Value Method of computation for options issued by the Company as a private entity as prescribed by SFAS No. 123. All stock options granted, except as noted in the paragraph below, have been granted to directors or employees with an exercise price equal to the fair value of the common stock at the date of grant. The Company applies APB Opinion No. 25 for issuances to directors and employees in accounting for its Plan and, accordingly, no compensation cost has been recognized in the consolidated financial statements through December 31, 1998. On March 19, 1999, the Company granted 288,500 stock options with an exercise price of $2.00 and a fair value of $2.25. The Company recorded $72,126 of unearned compensation at the date of grant and is amortizing the unearned compensation over the vesting period. Compensation expense amounted to $4,509 for the six months ended June 30, 1999. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have increased to the pro forma amounts indicated below:
1996 1997 1998 ----------- ----------- ----------- Net loss as reported................... $(1,719,492) $(5,483,623) $(7,832,128) =========== =========== =========== Pro forma net loss..................... $(1,719,492) $(5,483,623) $(7,964,078) =========== =========== =========== Net loss per share, as reported: Basic and diluted.................... $ (11.55) $ (17.93) $ (2.25) =========== =========== =========== Pro forma net loss per share: Basic and diluted.................... $ (11.55) $ (17.93) $ (2.28) =========== =========== ===========
(9) RELATED PARTY TRANSACTIONS DIRECT CHARGE FEE Prior to April 1, 1997 personnel, and other services were provided by XL Vision and the costs were allocated to the Company. Effective April 1, 1997, the Company entered into a direct charge fee agreement with XL Vision which allows for cost-based charges based upon actual hours incurred. Costs allocated to or service fees charged by XL Vision were approximately $468,000 in 1996, $720,000 in 1997, $460,000 in 1998 and $270,000 (unaudited) in 1999. A portion of the fees in 1998 and all of the costs and fees in 1996 and 1997 were allocated to the discontinued transportation segment. F-14 86 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADMINISTRATIVE SERVICES FEE Effective December 15, 1997, the Company entered into an agreement which requires accrual of an administrative services fee based upon a percentage of gross revenues. The fee for administrative support services, including management consultation, investor relations, legal services and tax planning, is payable monthly to XL Vision and Safeguard Scientifics, Inc., the largest shareholder of XL Vision, based upon an aggregate of 1.5% of gross revenues with such service fees to be not more than $300,000 annually. Effective August 17, 1999, the agreement was amended such that the administrative services fee is applied to net contribution margin on cattle sales and gross revenue for all other sales. The fee is accrued monthly but is only payable in months during which the Company has achieved positive cash flow from operations. The agreement extends through December 31, 2002 and continues thereafter unless terminated by any party. Administrative service fees were approximately $10,300 in 1997, $37,200 in 1998 and $58,300 (unaudited) in 1999. TECHNOLOGY FEE On July 15, 1997, the Company entered into an agreement with XL Vision for the transfer of certain technology that is used by the Company in the sale of its products for a $4,400,000 note payable. The transfer was accounted for as a distribution to XL Vision as it represented amounts paid for an asset to an entity under common control in excess of the cost of such asset. The note payable bears interest at 7% per annum. Interest expense was $141,167 in 1997, $308,000 in 1998 and $275,012 (unaudited) in 1999. LEASE The Company leases equipment under a capital lease, effective April 20, 1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments, including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000, $92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was $23,594 in 1998 and $13,753 (unaudited) in 1999. The Company has a verbal lease with XL Vision for its facilities. Rent expense varies based on space occupied by the Company. Rent expense is $ in 1996, in 1997, $ in 1998, and $ (unaudited) in 1999. F-15 87 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AMOUNTS DUE TO XL VISION, INC. Amounts due to XL Vision consist of: Balance as of December 31, 1996............................. $ 3,636,494 Allocation of costs and funding of working capital to the Company........................................... 6,318,405 Technology transfer fee................................ 4,400,000 Interest charges on technology transferred............. 141,167 Proceeds from Series A Preferred Stock................. (6,443,606) Issuance of Class A common stock....................... (22,465) ----------- Balance as of December 31, 1997............................. 8,029,995 Allocation of costs and funding of working capital to the Company........................................... 9,120,441 Interest charges on technology transferred............. 308,000 Contribution of debt to equity......................... (7,500,000) Contribution of debt to equity in exchange for Series B Preferred Stock....................................... (4,800,000) ----------- Balance as of December 31, 1998............................. 5,158,436 Allocation of costs and funding of working capital to the Company (unaudited)............................... 2,586,320 Interest charges on technology transferred (unaudited)........................................... 275,012 ----------- Balance as of June 30, 1999 (unaudited)..................... $ 8,019,768 ===========
The average outstanding balance due to XL Vision was approximately $2,690,900 in 1996, $6,239,600 in 1997, $12,782,400 in 1998 and $7,235,600 (unaudited) in 1999. AMOUNTS DUE TO SAFEGUARD SCIENTIFICS, INC. As of December 31, 1997, December 31, 1998 and the six months ended June 30, 1999, the Company owed Safeguard Scientifics, Inc. $10,309, $28,898 and $77,355 (unaudited), respectively. (10) SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, which requires the reporting of segment information using the "management approach" versus the "industry approach" previously required. The management approach requires the Company to report certain financial information related to continuing operations that is provided to the Company's chief operating decision-maker. The Company's chief operating decision-maker receives revenue and contribution margin (revenue less direct costs and excluding overhead) by source, and all other statement of operations data and balance sheet on a consolidated basis. The Company's reportable segments consist of cattle sales and animal sciences products and services. While the Company operates entirely in the animal science marketplace, the contribution margin associated with cattle sales and the related prospects for this portion of the Company's business differ from the rest of the Company's product offerings. F-16 88 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes revenue and contribution margin information related to the Company's two operating segments:
SIX MONTHS YEAR ENDING ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- Revenue: Cattle........................ $ -- 1,740,955 Animal sciences............... 1,792,471 837,298 ---------- --------- Total................. $1,792,471 2,578,253 ========== ========= Direct costs: Cattle........................ $ -- 1,729,029 Animal sciences............... 900,824 343,880 ---------- --------- $ 900,824 2,072,909 ========== ========= Contribution margin: Cattle........................ $ -- 11,926 Animal sciences............... 891,647 493,418 ---------- --------- Total................. $ 891,647 505,344 ========== =========
The Company's assets, and other statement of operations data are not allocated to a segment. (11) COMMITMENTS AND CONTINGENCIES VOLUNTARY EMPLOYEE SAVINGS 401(k) PLAN The Company established a voluntary employee savings 401(k) plan in 1997 which is available to all full time employees 21 years or older. The plan provides for a matching by the Company of the employee's contribution to the plan for 50% of the first 6% of the employee's annual compensation. The Company's matching contributions were $6,300 in 1996, $38,195 in 1997, $62,108 in 1998. ROYALTIES In connection with the NutriCharge license, the Company is obligated to a royalty of 5% of gross revenues from the sale of NutriCharge products and infrared technology related to the Company's Canadian license agreement. The Company is also obligated to a royalty of 6% of net revenues from product or services related to technology patented by Iowa State University. (12) SUBSEQUENT EVENTS On January 1, 1999, the Company signed a revolving promissory note with XL Vision for up to $3,000,000. The revolving promissory note bears interest at the prime rate plus 1% and is due in full when the Company completes an IPO or sells all of its assets or stock. F-17 89 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DISCONTINUED OPERATIONS In December 1998, the Company's Board of Directors decided to dispose of its transportation segment. The Company's AMIRIS thermal imaging system, which was the sole product sold in the transportation segment, was sold on January 15, 1999 to Sperry Marine, Inc. for approximately $1,900,000. The Company received $200,000 of cash at closing and will receive the balance upon receipt of the inventory by Sperry Marine, Inc. The Company is entitled to a royalty of 8% of net AMIRIS system sales, up to a maximum royalty of $4.3 million over a four year period or up to a maximum royalty of $5.0 million, if $4.3 million is not received within four years. Net assets of the discontinued transportation segment consist of:
DECEMBER 31, ----------------------- JUNE 30, 1997 1998 1999 ---------- --------- ----------- (UNAUDITED) Accounts receivable................... $ 145,500 381,435 1,647,040 Inventory, net........................ 1,076,043 2,020,625 72,008 Property and equipment, net........... 22,650 134,098 81,168 Intangibles, net...................... 94,444 61,108 44,440 Accounts payable...................... (271,833) (80,510) (74,894) Accrued liabilities including provision for operating loss during phase out period of $72,667 in 1998 and $18,748 (unaudited) in 1999..... -- (231,415) (158,748) ---------- --------- --------- Net assets.......................... $1,066,804 2,285,341 1,611,014 ========== ========= =========
NOTE PAYABLE TO XL VISION, INC. LICENSE In February 1999, the Company signed a license agreement with XL Vision, granting XL Vision a license to use Company software for the limited purpose of evaluating whether the software could provide the basis for a new company that would operate in the agricultural industry. The license agreement terminates on November 30, 1999. If XL Vision forms a new company, the Company will negotiate a long-term license agreement. In addition, XL Vision is obligated to give the Company at least 25% of the new company. The Company is obligated to transfer all amounts up to 25% of the company to Lost Pelican, LLC. ACQUISITIONS (UNAUDITED AFTER APRIL 20, 1999) On February 24, 1999, the Company acquired substantially all of the tangible and intangible assets of CIN, LLC d/b/a/ Cattlemen's Information Network ("CIN"). Immediately after the closing, CIN changed its name to Lost Pelican, L.L.C. The purchase price for the assets consisted of 600,000 shares of the Company's Class A common stock valued at $720,000, the assumption of up to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and an agreement to pay the first $350,000 from Internet sales of third party products over the Company's Web site. In addition, the Company agreed to assume $177,000 in liabilities related to employee bonuses and an outstanding grant F-18 90 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) obligation. CIN is in the business of selling access to its cattle feedlot performance measurements database. On March 29, 1999, the Company acquired 100% of the stock of Cyberstockyard, Inc. The purchase price consisted of 200,000 shares of the Company's Class A common stock valued at $450,000 . Cyberstockyard, Inc. is in the business of selling cattle through its proprietary auction software over the Internet. On May 19, 1999, the Company acquired substantially all of the tangible and intangible assets of PCC, LLC d/b/a Professional Cattle Consultants, L.L.C. ("PCC") for a cash payment of $1,800,000 and an assumption of approximately $30,000 of liabilities. PCC is in the business of providing comparative analysis and market information for the feedlot industry. Immediately after the closing, PCC changed its name to QDD Investment Company, L.L.C. The aggregate purchase price of the above acquisitions was approximately $4,606,600, which included related acquisition costs of approximately $97,000, was allocated as follows: Goodwill....................................... $4,015,300 Non-compete agreements......................... 300,000 Equipment...................................... 358,000 Current assets................................. 28,300 Current liabilities............................ (95,000) ---------- $4,606,600 ==========
Unaudited pro forma information for the Company as if the acquisitions above had been consummated as of January 1, 1998 and 1999 follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1999 ----------- ---------- Revenue................................... $ 1,047,996 2,800,173 =========== ========== Net profit (loss)......................... $(4,007,759) (6,402,028) =========== ========== Net profit (loss) per common share........ $ (1.18) (1.16) =========== ==========
SALE OF SERIES C PREFERRED STOCK (UNAUDITED) On May 4, 1999, the Company issued 1,100,000 shares of Series C preferred stock for $5.00 per share. STOCK PLAN (UNAUDITED) On May 10, 1999, the Company's stockholders approved the 1999 Equity Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional 1,000,000 shares of authorized, unissued shares of common stock of the Company are reserved for issuance to employees, advisors and for non-employee members of the Board of Directors. Option terms under the 1999 Plan may not exceed 10 years. F-19 91 eMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE PAYABLE TO SAFEGUARD DELAWARE, INC. (UNAUDITED) 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 in October 1999, bears interest payable monthly at the prime rate plus 1% and is due November 30, 1999. In August, September and October 1999, the Company signed demand notes with interest payable monthly at the prime rate plus 1% with Safeguard for $2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled in October 1999, in exchange for a $7,050,000 note due in full on October 25, 2000, the repayment of a promissory note issued concurrently with the sale of Series D preferred stock or an IPO, whichever is earlier. INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC. (UNAUDITED) On August 16, 1999, the Company acquired 19% of the common stock of Turnkey Computer Systems, Inc. ("Turnkey") for 50,000 shares of the Company's Class A common stock valued at $400,000 and $1.4 million in cash payable upon the earlier of the completion of the Company's IPO or $500,000 at December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31, 2001. In addition, the common stock purchase agreement with Turnkey contains a put right which allows Turnkey to have a one time right to put to the Company its 50,000 common shares with a fixed purchase price of $500,000. The put right can only be exercised upon a change in control or after December 31, 2001, if the Company has not completed an IPO. SALE OF SERIES D PREFERRED STOCK (UNAUDITED) On October 27, 1999, the Company agreed to issue 4,555,556 shares of Series D preferred stock and a warrant to acquire 911,111 shares of Class B common stock for $38,815,000. Series D preferred shares convert into Class B common stock at the offering price. The warrants are exercisable at the Company's IPO price. The Company will receive $18,000,000 in cash in November 1999 and a non-interest bearing, promissory note in the amount of $23,000,000 due on October 27, 2000. Imputed interest at 9.5% amounts to $2,185,000 over the life of the note. F-20 92 eMERGE INTERACTIVE, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
LOST PELICAN, L.L.C. eMerge -------------------------------------- INTERACTIVE, PRO FORMA INC. HISTORICAL ADJUSTMENTS PRO FORMA ------------ ---------- ----------- ---------- Revenue......................................... $1,792,471 $ 157,692 $ -- $ 157,692 Cost of revenue................................. 2,623,447 25,736 -- 25,736 ---------- --------- --------- ---------- Gross profit (loss)......................... (830,976) 131,956 -- 131,956 ---------- --------- --------- ---------- Operating expenses: Selling, general and administrative........... 3,659,810 231,883 435,274(4a) 667,157 Research and development...................... 1,109,382 341,588 -- 341,588 ---------- --------- --------- ---------- Total operating expenses.................... 4,769,192 573,471 435,274 1,008,745 ---------- --------- --------- ---------- Profit (loss) from continuing operations.... (5,600,168) (441,515) (435,274) (876,789) Other income.................................... -- 245 -- 245 Interest expense................................ (331,594) (20,077) -- (20,077) ---------- --------- --------- ---------- Profit (loss) from continuing operations before income taxes....................... (5,931,762) (461,347) (435,274) (896,621) Income tax expense (benefit).................... -- -- -- -- ---------- --------- --------- ---------- Profit (loss) from continuing operations.... (5,931,762) (461,347) (435,274) (896,621) ========== ========= ========= ========== Profit (loss) from continuing operations per common share -- basic and diluted............. $ (1.70) ========== Weighted average number of common shares outstanding -- basic and diluted.............. 3,485,541 ========== QDD INVESTMENT COMPANY, L.L.C. ------------------------------------- PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA COMBINED ---------- ----------- --------- ----------- Revenue......................................... $332,730 $ -- $332,730 $ 2,282,893 Cost of revenue................................. 152,158 -- 152,158 2,801,341 -------- --------- --------- ----------- Gross profit (loss)......................... 180,572 -- 180,572 (518,448) -------- --------- --------- ----------- Operating expenses: Selling, general and administrative........... 162,428 325,790(4b) 488,218 4,815,185 Research and development...................... -- -- -- 1,450,970 -------- --------- --------- ----------- Total operating expenses.................... 162,428 325,790 488,218 6,266,155 -------- --------- --------- ----------- Profit (loss) from continuing operations.... 18,144 (325,790) (307,646) (6,784,603) Other income.................................... 36,548 -- 36,548 36,793 Interest expense................................ (1,927) 1,927(4c) -- (351,671) -------- --------- --------- ----------- Profit (loss) from continuing operations before income taxes....................... 52,765 (323,863) (271,098) (7,099,481) Income tax expense (benefit).................... -- -- -- -- -------- --------- --------- ----------- Profit (loss) from continuing operations.... 52,765 (323,863) (271,098) (7,099,481) ======== ========= ========= =========== Profit (loss) from continuing operations per common share -- basic and diluted............. $ (1.74) =========== Weighted average number of common shares outstanding -- basic and diluted.............. 4,085,541(4d) ===========
See accompanying notes to unaudited pro forma condensed combined financial statements. F-21 93 eMERGE INTERACTIVE, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999
eMerge LOST PELICAN, L.L.C. INTERACTIVE, ---------------------------------------------- INC. HISTORICAL ------------- ----------------- SIX MONTHS FOR THE PERIOD ENDED JANUARY 1, 1999- JUNE 30, FEBRUARY 23, PRO FORMA PRO 1999 1999 ADJUSTMENTS FORMA ------------- ----------------- ----------- --------- Revenue.................................. $ 2,578,253 $ 11,758 $ -- $ 11,758 Cost of revenue.......................... 2,767,919 4,176 -- 4,176 ----------- --------- -------- --------- Gross profit (loss).................. (189,666) 7,582 -- 7,582 ----------- --------- -------- --------- Operating expenses: Selling, general and administrative.... 4,068,860 182,814 65,590(4a) 248,404 Research and development............... 1,450,433 35,596 -- 35,596 ----------- --------- -------- --------- Total operating expenses............. 5,519,293 218,410 65,590 284,000 ----------- --------- -------- --------- Profit (loss) from continuing operations......................... (5,708,959) (210,828) (65,590) (276,418) Interest expense......................... (288,765) (11,619) -- (11,619) ----------- --------- -------- --------- Profit (loss) from continuing operations before income taxes..... (5,997,724) (222,447) (65,590) (288,037) Income tax expense (benefit)............. -- -- -- -- ----------- --------- -------- --------- Profit (loss) from continuing operations......................... $(5,997,724) (222,447) (65,590) (288,037) =========== ========= ======== ========= Profit (loss) from continuing operations per common share -- basic and diluted................................ $ (1.15) =========== Weighted average number of common shares outstanding -- basic and diluted....... 5,223,403 =========== QDD INVESTMENT COMPANY, L.L.C. --------------------------------------------- HISTORICAL ---------------- FOR THE PERIOD JANUARY 1, 1999- PRO FORMA PRO PRO FORMA MAY 19, 1999 ADJUSTMENTS FORMA COMBINED ---------------- ----------- --------- ----------- Revenue.................................. $154,901 $ -- $154,901 $ 2,744,912 Cost of revenue.......................... 67,752 -- 67,752 2,839,847 -------- --------- --------- ----------- Gross profit (loss).................. 87,149 -- 87,149 (94,935) -------- --------- --------- ----------- Operating expenses: Selling, general and administrative.... 79,683 124,067(4b) 203,750 4,521,014 Research and development............... -- -- -- 1,486,029 -------- --------- --------- ----------- Total operating expenses............. 79,683 124,067 203,750 6,007,043 -------- --------- --------- ----------- Profit (loss) from continuing operations......................... 7,466 (124,067) (116,601) (6,101,978) Interest expense......................... (1,272) 1,272(4c) -- (300,384) -------- --------- --------- ----------- Profit (loss) from continuing operations before income taxes..... 6,194 (122,795) (116,601) (6,402,362) Income tax expense (benefit)............. -- -- -- -- -------- --------- --------- ----------- Profit (loss) from continuing operations......................... 6,194 (122,795) (116,601) (6,402,362) ======== ========= ========= =========== Profit (loss) from continuing operations per common share -- basic and diluted................................ $ (1.18) =========== Weighted average number of common shares outstanding -- basic and diluted....... 5,403,403(4d) ===========
See accompanying notes to unaudited pro forma condensed combined financial statements. F-22 94 eMERGE INTERACTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) OVERVIEW The pro forma condensed combined financial statements are unaudited and give effect to the acquisition of Lost Pelican L.L.C. (formerly CIN, LLC) d/b/a Cattlemen's Information Network ("Lost Pelican") on February 24, 1999, the acquisition of QDD Investment Company L.L.C. d/b/a Professional Cattle Consultants ("QDD") on May 19, 1999 and the issuance of Series "C" preferred stock by eMerge Interactive, Inc. (the "Company") on May 4, 1999, a portion of the proceeds of which were used to acquire QDD. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 1998 is based on the historical financial statements of the Company, Lost Pelican and QDD, giving effect to the transactions under the purchase method of accounting and the assumptions and adjustments discussed below. The pro forma condensed combined statements of operations for the six months ended June 30, 1999 is based on the historical financial statements of the Company, Lost Pelican (for the period from January 1, 1999 to February 23, 1999, date prior to acquisition) and QDD (for the period from January 1, 1999 to May 19, 1999, date prior to acquisition), giving effect to the transactions under the purchase method of accounting and the assumptions and adjustments discussed below. The Company's purchase of Cyberstockyard, Inc. on March 29, 1999 is not included because the pro forma effects are not significant. These unaudited pro forma financial statements may not be indicative of the results of operations that actually would have occurred if the combination had been in effect on January 1, 1998 or 1999 or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the audited financial statements of the Company, Lost Pelican and QDD contained elsewhere herein. (2) ACQUISITION OF LOST PELICAN On February 24, 1999, the Company acquired substantially all of the tangible and intangible assets of Lost Pelican. The purchase price for the assets consisted of 600,000 shares of the Company's Class A common stock valued at $720,000, the assumption of up to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and an agreement to pay the first $350,000 from Internet sales of third party products over the Company's Web site. In addition, the Company agreed to assume $177,000 in liabilities related to employee bonuses and an outstanding grant obligation. (3) ACQUISITION OF QDD On May 19, 1999, the Company acquired substantially all of the tangible and intangible assets of QDD for a cash payment of $1,800,000 and an assumption of approximately $30,000 of liabilities. (4) PRO FORMA ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999 The unaudited pro forma condensed combined statements of operations for the year ended December 31, 1998 and the six months ended June 30, 1999 combines the statements F-23 95 eMERGE INTERACTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) of operations of the Company, Lost Pelican and QDD. In combining the companies, the pro forma adjustments reflect the following: (a) Record amortization of goodwill ($415,274 in 1998 and $62,576 in 1999) and non-compete agreements ($20,000 in 1998 and $3,014 in 1999) for Lost Pelican over estimated useful lives of five years. (b) Record amortization of goodwill ($300,790 in 1998 and $114,547 in 1999) and non-compete agreements ($25,000 in 1998 and $9,520 in 1999) for QDD over estimated useful lives of five years and four years, respectively. (c) To eliminate interest on debt of QDD not acquired of $1,927 in 1998 and $1,272 in 1999. (d) Record the issuance of 600,000 shares of Class A common stock in connection with Lost Pelican transaction. There is no income tax effect on the above pro forma adjustments due to the full valuation allowance on net deferred tax assets. F-24 96 INDEPENDENT AUDITORS' REPORT To the Board of Members Lost Pelican, L.L.C.: We have audited the accompanying balance sheets of Lost Pelican, L.L.C. (d/b/a Cattlemen's Information Network) as of December 31, 1997 and 1998 and the related statements of operations, members' equity (deficit) and cash flows for each of the two years ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1 to the financial statements, on February 23, 1999, Lost Pelican, L.L.C. sold substantially all of its assets and trade names to eMerge Interactive, Inc. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lost Pelican, L.L.C. at December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the two years ended December 31, 1998 in conformity with generally accepted accounting principles. Orlando, Florida April 13, 1999 F-25 97 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) BALANCE SHEETS
DECEMBER 31, ------------------------ FEBRUARY 23, 1997 1998 1999 --------- ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash...................................... $ -- $ -- $ 737 Trade accounts receivable, net of allowance for uncollectible accounts of $-0-, $9,135, and $8,500 as of December 31, 1997 and 1998 and February 23, 1999, respectively..................... -- 8,548 6,497 --------- ----------- ----------- Total current assets.............. -- 8,548 7,234 Property and equipment, net (notes 3 and 5)........................................ 1,288 102,233 105,247 --------- ----------- ----------- Total assets...................... $ 1,288 $ 110,781 $ 112,481 ========= =========== =========== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current liabilities: Line of credit (note 4)................... $ -- $ 293,983 $ 267,109 Current installments of long-term debt (note 5)............................... 60,544 91,471 241,950 Accounts payable.......................... 7,991 3,710 1,518 Accrued liabilities....................... 2,614 15,481 18,646 --------- ----------- ----------- Total current liabilities......... 71,149 404,645 529,223 Long-term debt, excluding current installments (note 5)..................... -- 112,944 109,854 --------- ----------- ----------- Total liabilities................. 71,149 517,589 639,077 --------- ----------- ----------- Commitment (note 6) Subsequent event (note 8) Members' equity (deficit) (note 7): Unit capital.............................. 879,419 1,003,819 1,106,478 Accumulated deficit....................... (949,280) (1,410,627) (1,633,074) --------- ----------- ----------- Total members' equity (deficit)... (69,861) (406,808) (526,596) --------- ----------- ----------- Total liabilities and members' equity (deficit)................ $ 1,288 $ 110,781 $ 112,481 ========= =========== ===========
See accompanying notes to financial statements. F-26 98 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS
YEAR ENDED FOR THE PERIOD DECEMBER 31, JANUARY 1, 1999 --------------------- SIX MONTHS ENDED THROUGH 1997 1998 JUNE 30, 1998 FEBRUARY 23, 1999 --------- --------- ---------------- ----------------- (UNAUDITED) (UNAUDITED) Revenue....................... $ 43,672 $ 157,692 $ 39,130 $ 11,758 Cost of revenue............... 13,789 25,736 7,022 4,176 --------- --------- --------- --------- Gross profit............. 29,883 131,956 32,108 7,582 Selling, general and administrative.............. 377,504 231,883 136,122 182,814 Research and development...... 124,043 341,588 135,317 35,596 --------- --------- --------- --------- Profit (loss) from operations............. (471,664) (441,515) (239,331) (210,828) Other income (expense): Other income................ -- 245 -- -- Interest expense............ (4,764) (20,077) (5,792) (11,619) --------- --------- --------- --------- Net other income (expense).............. (4,764) (19,832) (5,792) (11,619) --------- --------- --------- --------- Net profit (loss)........ $(476,428) $(461,347) $(245,123) $(222,447) ========= ========= ========= =========
See accompanying notes to financial statements. F-27 99 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
UNIT CAPITAL ------------------------- ACCUMULATED UNITS AMOUNT DEFICIT TOTAL ------------ ---------- ----------- --------- Balances at January 1, 1997........... 600,000 $ 473,380 $ (472,852) $ 528 Non-cash contribution of services by members (note 7)...................... -- 222,557 -- 222,557 Cash contribution by majority members (note 7)............................ -- 183,482 -- 183,482 Net profit (loss)..................... -- -- (476,428) (476,428) ------- ---------- ----------- --------- Balances at December 31, 1997......... 600,000 879,419 (949,280) (69,861) Non-cash contribution of services by members (note 7).................... -- 39,583 -- 39,583 Cash contribution by majority members (note 7)............................ -- 84,817 -- 84,817 Net profit (loss)..................... -- -- (461,347) (461,347) ------- ---------- ----------- --------- Balances at December 31, 1998......... 600,000 1,003,819 (1,410,627) (406,808) Non-cash contribution of services by members (unaudited) (note 7)........ -- 102,659 -- 102,659 Net profit (loss) (unaudited)......... -- -- (222,447) (222,447) ------- ---------- ----------- --------- Balances at February 23, 1999 (unaudited)......................... 600,000 $1,106,478 $(1,633,074) $(526,596) ======= ========== =========== =========
See accompanying notes to financial statements. F-28 100 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS
YEARS ENDED FOR THE PERIOD DECEMBER 31, JANUARY 1, 1999 --------------------- SIX MONTHS ENDED THROUGH 1997 1998 JUNE 30, 1998 FEBRUARY 23, 1999 --------- --------- ---------------- ----------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net profit (loss)................... $(476,428) $(461,347) $(245,123) $(222,447) Adjustments to reconcile net profit (loss) to net cash used in operating activities: Non-cash contribution of service by members.................... 222,557 39,583 67,857 102,659 Depreciation.................... 322 26,606 2,053 9,964 Provision for doubtful accounts...................... -- 9,135 -- -- Changes in operating assets and liabilities: Trade accounts receivable..... -- (17,683) -- 2,051 Accounts payable.............. 7,991 (4,281) 64 (2,192) Accrued royalties............. 2,320 6,054 896 -- Accrued liabilities........... 294 6,813 132,131 3,165 --------- --------- --------- --------- Net cash provided by (used in) operating activities....... (242,944) (395,120) (42,122) (106,800) --------- --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment....................... (1,610) (127,551) (41,952) (12,978) --------- --------- --------- --------- Cash flows from financing activities: Net borrowings under line of credit agreements............... -- 293,983 -- (26,874) Proceeds from long-term debt...... 60,544 547,834 27,531 150,000 Repayments of long-term debt...... -- (403,963) -- (2,610) Proceeds from capital contributions................... 183,482 84,817 56,543 -- --------- --------- --------- --------- Net cash provided by financing activities................. 244,026 522,671 84,074 120,516 --------- --------- --------- --------- Net increase (decrease) in cash....................... (528) -- -- 738 Cash -- beginning of period......... 528 -- -- -- --------- --------- --------- --------- Cash -- end of period............... $ -- $ -- $ -- $ 738 ========= ========= ========= ========= Supplemental disclosure: Cash paid for interest............ $ 2,444 $ 14,023 $ 2,765 $ 11,619 ========= ========= ========= =========
See accompanying notes to financial statements. F-29 101 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION INSOFAR AS IT RELATES TO FEBRUARY 23, 1999, THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH FEBRUARY 23, 1999 IS UNAUDITED) (1) ORGANIZATION Lost Pelican, L.L.C. (the "Company") was formed on April 1, 1996 as Cattlemen's Management Network as a limited liability company under the laws of the state of Kansas and its affairs are governed by its Limited Liability Company Agreement (the "Agreement"). The Company's income and losses are allocated in accordance with the terms of the Agreement. On December 21, 1998, the Company changed its name to CIN L.L.C. On February 24, 1999, the Company changed its name to Lost Pelican, L.L.C. and sold its assets and trade names ("CIN" and "Cattlemen's Information Network") to eMerge Interactive, Inc. ("eMerge"). Prior to formation as an L.L.C., the Company's business was financed and operated by Cattle Management Health Network, "CMHN", which was owned by the majority members of the Company. The primary business of the Company is selling access to its cattle feedlot performance measurements database. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using accelerated methods over the estimated useful lives of the assets. (b) REVENUE RECOGNITION The Company recognizes revenue in accordance with the terms of the sale or contract, generally as services are provided. (c) INCOME TAXES As a limited liability Company, the Company is classified as a partnership for income tax purposes and is not directly subject to U.S. federal and most state income taxes, including Kansas state income tax. (d) USE OF ESTIMATES The preparation of the Company's financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. (e) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments. F-30 102 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY AND EQUIPMENT Property and equipment consists of:
DECEMBER 31, ------------------ FEBRUARY 23, ESTIMATED 1997 1998 1999 USEFUL LIVES ------ -------- ------------ ------------ (UNAUDITED) Office and computer equipment....... $1,610 $125,770 $138,748 5 - 7 years Purchased software.................. -- 3,391 3,391 3 years ------ -------- -------- 1,610 129,161 142,139 Less accumulated depreciation....... 322 26,928 36,892 ------ -------- -------- Property and equipment, net......... $1,288 $102,233 $105,247 ====== ======== ========
(4) LINE OF CREDIT During 1998, the Company entered into a $300,000 line of credit agreement, guaranteed by the principal shareholders, with a bank that expires on September 15, 1999. Under the agreement, principal is payable on September 15, 1999, and interest is payable monthly at 9.5%. Outstanding borrowings under this agreement were $293,983 as of December 31, 1998 and $267,109 (unaudited) as of February 23, 1999. (5) LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, ------------------ FEBRUARY 23, 1997 1998 1999 ------- ------- ------------ (UNAUDITED) Note payable to Kansas Technology Enterprise Corporation, including interest at 10% (see note 6)........................................ $60,544 60,544 $ 60,544 Variable rate note payable in monthly installments of $3,814, including interest at prime plus 1% (9.25% at December 31, 1998) through October 1, 2002; secured by equipment.... -- 143,871 141,260 Variable rate note payable, interest payable monthly at 9.5% through September 15, 1999; secured by equipment........................... -- -- 150,000 ------- ------- -------- 60,544 204,415 351,804 Less current installments........................ 60,544 91,471 241,950 ------- ------- -------- Long-term debt, excluding current installments... $ -- 112,944 $109,854 ======= ======= ========
The aggregate maturities of long-term debt for each of the four years subsequent to December 31, 1998 are as follows: 1999, $91,471; 2000, $36,856; 2001, $40,413; and 2002, $35,675. F-31 103 LOST PELICAN, L.L.C. D/B/A CATTLEMEN'S INFORMATION NETWORK (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (6) COMMITMENT ROYALTY AGREEMENT On September 6, 1996, the Company entered into a funding agreement with Kansas Technology Enterprise Corporation (KTEC) for the development of a cattle management network (the "Product"). The Company received $60,544 under this agreement. Under the terms of this agreement, the Company will pay KTEC a royalty of 3% on gross sales of the Product, until the award amount of $60,544 plus interest at 10% per annum is repaid. Interest begins to accrue on the date KTEC makes its last payment on the project. Once the original obligation is met, the Company will pay KTEC a royalty of 1% on future gross sales of the product up to an additional $60,544 in royalty payments. If the Company licenses, sells, or otherwise transfers the rights to manufacture the Product to another Kansas firm, such that the primary point of activity occurs in Kansas, the Company shall pay KTEC: (1) twenty five percent of the proceeds of such sale, up to the award amount of $60,544 plus interest at 10%; and (2) an ongoing royalty on gross sales of the Product up to an additional $60,544 in royalty payments. In the event such transfer of the Product within Kansas involves the exchange of other assets or is unsuitable to this type of repayment structure, then repayment terms may be subject to renegotiation. If the Company: (1) commercializes the Product out-of-state such that no management, marketing or production activity occurs in Kansas; or (2) sells, transfers, licenses, or otherwise disposes of the rights to the Product out-of-state, such that no management, marketing or production activity occurs in Kansas, the Company shall pay KTEC: (1) within thirty (30) days of such transfer, the award amount of $60,544 plus interest at 10%; and (2) an ongoing royalty of 2% on gross sales up to an additional $90,816. If significant benefits to Kansas can occur as a result of such out-of-state transfer, this repayment obligation may be subject to renegotiation. The Company does note anticipate the acquisition by eMerge Interactive, Inc. (eMerge) as described in note 8 to impact the agreement with KTEC. (7) MEMBERS' EQUITY Since inception of the Company, the Company's majority members have contributed approximately $383,000 in services and paid expenses on behalf of the business from other sources totaling approximately $503,000. Non-cash contributions totaled $222,557 in 1997, $39,583 in 1998 and $102,659 (unaudited) in 1999 and cash contributions totaled $183,482 in 1997, $84,817 in 1998 and $-0- (unaudited) in 1999. (8) SUBSEQUENT EVENT On February 24, 1999, the Company assets were acquired by eMerge for 600,000 shares of eMerge's Class A common stock, $383,000 in cash, assumption of liabilities of $600,000 and a commitment to pay $350,000 of the first net sales of CIN products. F-32 104 INDEPENDENT AUDITORS' REPORT To the Board of Members QDD Investment Company, L.L.C.: We have audited the accompanying balance sheet of QDD Investment Company, L.L.C. (d/b/a Professional Cattle Consultants, L.L.C.) as of December 31, 1998, and the related statements of operations, members' equity and cash flows, for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, on May 19, 1999, QDD Investment Company, L.L.C. sold substantially all of its assets and trade names to eMerge Interactive, Inc. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QDD Investment Company, L.L.C. as of December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Oklahoma City, Oklahoma July 7, 1999 F-33 105 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) BALANCE SHEETS
DECEMBER 31, MAY 19, 1998 1999 ------------ ----------- (UNAUDITED) ASSETS Current assets -- trade accounts receivable, net......... $ 18,872 $ 46,875 -------- -------- Computer software and hardware: Software (note 1)...................................... 182,394 220,825 Hardware............................................... 45,480 51,995 -------- -------- Total computer software and hardware, at cost......................................... 227,874 272,820 Less accumulated depreciation and amortization......... 10,330 13,901 -------- -------- Net computer software and hardware............. 217,544 258,919 -------- -------- Total assets................................... $236,416 $305,794 ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable....................................... $ 29,135 $ 25,319 Related party payable (note 5)......................... 12,000 14,000 Notes payable (note 3)................................. 34,930 74,930 -------- -------- Total current liabilities...................... 76,065 114,249 Members' equity (note 4)................................. 160,351 191,545 Commitments and contingencies (notes 5, 6 and 8)......... -------- -------- Total liabilities and members' equity.......... $236,416 $305,794 ======== ========
See accompanying notes to financial statements. F-34 106 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS
FOR THE PERIOD YEAR ENDED JANUARY 1, 1999 DECEMBER 31, SIX MONTHS ENDED THROUGH 1998 JUNE 30, 1998 MAY 19, 1999 ------------ ---------------- --------------- (UNAUDITED) (UNAUDITED) Service revenue..................... $332,730 $166,603 $154,901 -------- -------- -------- Operating expenses: Cost of services.................. 152,158 75,961 67,752 General and administrative (note 4)............................. 162,428 80,822 79,683 -------- -------- -------- Total operating expenses................ 314,586 156,783 147,435 -------- -------- -------- Operating income.......... 18,144 9,820 7,466 Other income (expense): Advertising income (note 2)....... 36,548 18,000 -- Interest expense.................. (1,927) (551) (1,272) -------- -------- -------- Net income................ $ 52,765 $ 27,269 $ 6,194 ======== ======== ========
See accompanying notes to financial statements. F-35 107 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) STATEMENTS OF MEMBERS' EQUITY Balance, December 31, 1997.................................. $ 68,586 Net income.................................................. 52,765 Non-cash contribution of services by members (note 4)..... 39,000 -------- Balance, December 31, 1998.................................. 160,351 Net income (unaudited).................................... 6,194 Non-cash contributions of services by members (note 4) (unaudited)............................................ 25,000 -------- Balance, May 19, 1999 (unaudited)........................... $191,545 ========
See accompanying notes to financial statements. F-36 108 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS
FOR THE PERIOD YEAR ENDED JANUARY 1, 1999 DECEMBER 31, SIX MONTHS ENDED THROUGH 1998 JUNE 30, 1998 MAY 19, 1999 ------------ ---------------- --------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income.............................. $ 52,765 $ 27,269 $ 6,194 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash contribution of services by members....................... 39,000 20,000 25,000 Depreciation and amortization expense.......................... 7,035 3,518 3,571 Changes in operating assets and liabilities: Accounts receivable.............. 778 2,070 (28,003) Accounts and related party payable....................... 17,101 15,887 (1,816) --------- -------- -------- Net cash provided by operating activities.................. 116,679 68,744 4,946 --------- -------- -------- Cash used in investing activities -- purchases of computer software and hardware.............................. (141,631) (68,744) (44,946) --------- -------- -------- Cash flows from financing activities: Payments on notes payable............. (10,000) (10,000) -- Borrowings on notes payable........... 34,952 10,000 40,000 --------- -------- -------- Net cash provided by financing activities.................. 24,952 -- 40,000 --------- -------- -------- Net increase in cash.................... -- -- -- Cash at beginning of period............. -- -- -- --------- -------- -------- Cash at end of period................... $ -- $ -- $ -- ========= ======== ======== Supplemental cash flow information: Cash payments of interest............. $ 1,927 $ 551 $ 1,272 ========= ======== ========
See accompanying notes to financial statements. F-37 109 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION INSOFAR AS IT RELATES TO MAY 19, 1999 OR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH MAY 19, 1999 IS UNAUDITED) (1) ORGANIZATION AND BASIS OF PRESENTATION QDD Investment Company, L.L.C. (the Company) is a provider of performance measurement information related to the United States cattle feedyard industry. The Company's customers consist primarily of cattle feedyards located in the United States, and to a lesser extent, other organizations involved in the United States cattle industry. In May 1999, the Company changed its name to QDD Investment Company, L.L.C. On May 19, 1999, the Company sold substantially all of its assets and trade names ("Professional Cattle Consultants, L.L.C." and "PCC") to eMerge Interactive, Inc. ("eMerge") for $1,800,000 in cash. eMerge also assumed certain of the Company's liabilities. In the opinion of management, the accompanying unaudited financial statements as of May 19, 1999 and for the six months ended June 30, 1998 and for the period January 1, 1999 through May 19, 1999, reflect adjustments (all of which were normal and recurring) which, in the opinion of management, are necessary for a fair statement of the financial position and results for the interim periods presented. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (b) COMPUTER SOFTWARE AND HARDWARE Computer software and hardware is recorded at cost. Depreciation and amortization of computer hardware and software is calculated using the straight-line method over periods ranging from five to seven years. In late 1997, the Company engaged a third party to develop and install a performance measurement system. Costs related to the design, configuration, coding, installation and testing of the system have been capitalized; all other costs have been expensed. The Company will begin using the new performance measurement system in the third quarter of 1999. The Company reviews long-lived assets, including computer software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. F-38 110 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (c) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's accounts receivable and accounts payable, related party payable and notes payable approximate fair value because of the short maturity of those instruments. (d) REVENUE RECOGNITION The Company recognizes revenue as services are provided. (e) ADVERTISING INCOME In 1998, the Company contracted with an organization which placed advertising on the Company's monthly and semi-annual newsletters for a fee of $36,000. The contract terminated in December 1998 and was not renewed. (f) INCOME TAXES As a limited liability company, the Company is not directly subject to income taxes. Income taxes, if any, are payable by the Company's members. (g) COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS No. 130) on January 1, 1998. SFAS No. 130 establishes standards for reporting and display of "comprehensive income" and its components in a set of financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company had no items of comprehensive income as defined by SFAS No. 130 not included in the accompanying statements of operations; therefore, statements of comprehensive income have not been presented in the accompanying financial statements. F-39 111 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) NOTES PAYABLE Notes payable at December 31, 1998 and May 19, 1999 consisted of the following:
DECEMBER 31, MAY 19, 1998 1999 ------------ ----------- (UNAUDITED) Term loan from a bank, bearing interest at 9.5%; principal and interest are due on September 30, 1999 (maturity date)(a)..................................... $20,035 -- Term loan from a bank, bearing interest at 10%; principal and interest are due on February 5, 1999 (maturity date)(a)................................................. 14,895 -- Term loan from a bank, bearing interest at 10%; principal and interest are due on July 15, 1999 (maturity date)(a)............................................... -- 74,930 ------- ------- $34,930 $74,930 ======= =======
- ------------------------- (a) On January 22, 1999, the Company renegotiated its two term notes, resulting in the conversion of the two notes into a single term note, additional borrowings, changing the maturity date and increasing the interest rate. The term note is unsecured; however, it is guaranteed by a manager and owner of the Company. (4) MEMBERS' EQUITY The Company operates as a limited liability company organized in the State of Oklahoma until February 14, 2097, unless sooner terminated. Members' equity is allocated to the members in accordance with the operating agreement of the Company based on each members' capital account and each member's liability is limited to its capital account. During the year ended December 31, 1998, the six months ended June 30, 1998 and for the period January 1, 1999 through May 19, 1999, the Company's members contributed $39,000, $20,000 (unaudited), and $25,000 (unaudited), respectively, in services to the Company. Services contributed on behalf of the Company by its members are recorded as expenses and non-cash contributions in the accompanying financial statements. (5) RELATED PARTY TRANSACTIONS The Company leases office space and equipment from one of its managers and owners. The Company leases the space and equipment on a month-to-month basis. Rent expense totaled $12,000 for the year ended December 31, 1998, $6,000 (unaudited) for the six months ended June 30, 1998 and $5,000 (unaudited) for the period January 1, 1999 through May 19, 1999. Outstanding at December 31, 1998 and May 19, 1999 was $12,000 and $14,000 (unaudited), respectively, due to the manager and owner of the Company for unpaid rent. (6) LEASE OBLIGATIONS The Company leases office equipment and a vehicle under operating leases, which expire over the next two years. Rent expense approximated $11,000 for the year ended December 31, 1998, $6,000 (unaudited) for the six months ended June 30, 1998 and $5,000 F-40 112 QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C. (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (unaudited) for the period January 1, 1999 through May 19, 1999. Future minimum lease payments under noncancellable operating leases will approximate $12,000 and $2,500 in 1999 and 2000, respectively. As discussed in note 5, the Company also leases office space from a related party. (7) BUSINESS SEGMENT INFORMATION The Company manages its business by services it provides, which resulted in one operating segment during the year ended December 31, 1998 and for the period January 1, 1999 through May 19, 1999. The Company is a provider of performance measurement information related to the United States cattle feedyard industry. All of the Company's revenues for the year ended December 31, 1998 and for the period January 1, 1999 through May 19, 1999, were derived from customers in the United States. One customer accounted for 38% of the Company's revenues for the year ended December 31, 1998, and 34% (unaudited) and 38% (unaudited) of the Company's revenues for the six months ended June 30, 1998 and for the period January 1, 1999 through May 19, 1999, respectively. The same customer accounted for none and 95% (unaudited) of the Company's trade accounts receivable balance at December 31, 1998 and May 19, 1999, respectively. (8) YEAR 2000 RISKS Existing computer programs of many businesses were developed with a two-digit year identification without consideration of the upcoming change in the century or millennium in the year 2000. The Company is in the process of addressing its year 2000 readiness. In late 1997, the Company engaged a third party to develop a new performance measurement system to replace its outdated system and to handle the year 2000 issue. Final testing and use of the new system is expected to occur in mid 1999. Failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third party suppliers, vendors and customers, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the Company's results of operations, liquidity and financial condition. The Company believes that, upon completion of the new system, the possibility of interruptions of material consequences to normal operations will be reduced. The Company is relying on the new system to be year 2000 compliant and has not developed a contingency plan to minimize any potential disruptions which could occur because of the year 2000. F-41 113 SHARES [eMerge INTERACTIVE LOGO] CLASS A COMMON STOCK ------------------------- PROSPECTUS ------------------------- ADAMS, HARKNESS & HILL, INC. FIRST UNION SECURITIES, INC. FAC/EQUITIES ------------------------- 114 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses (other than underwriting discounts and commissions and underwriters' non-accountable expense allowance) payable in connection with this offering of the rights and the sale of the Common Stock offered hereby are as follows: Securities and Exchange Commission registration fee......... $ NASD filing fee............................................. NASDAQ filing fee........................................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Blue Sky fees and expenses (including legal fees)........... Transfer agent and rights agent and registrar fees and expenses.................................................. Miscellaneous............................................... -------- Total.................................................. $ ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Certificate of Incorporation permits indemnification to the fullest extent permitted by Delaware law. The Registrant's By-laws require the Registrant to indemnify any person who was or is an authorized representative of the Registrant, and who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person was or is an authorized representative of the Registrant, against expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Registrant and, with respect to any criminal proceeding (including any action or investigation which could or does lead to a criminal proceeding) had no reasonable cause to believe such conduct was unlawful. The Registrant shall also indemnify any person who was or is an authorized representative of the Registrant, and who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person was or is an authorized representative of the Registrant against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Registrant unless and only to the extent that the Delaware Court of Chancery or the court in which such proceeding was pending shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity. Such indemnification is mandatory under the Registrant's By-laws as to expenses actually and reasonably incurred to the extent that an authorized representative of the Registrant has been successful on the merits or otherwise in defense of any proceeding or in defense of any claim, issue or matter therein. The determination of whether an individual is entitled to indemnification may be made by a II-1 115 majority of disinterested directors, independent legal counsel in a written legal opinion or the stockholders. Delaware law also permits indemnification in connection with a proceeding brought by or in the right of the Registrant to procure a judgment in its favor. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Securities and Exchange Act of 1934 and is therefore unenforceable. The Registrant expects to obtain a directors and officers liability insurance policy prior to the effective date of this Registration Statement. The underwriting agreement provides that the underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities, including liabilities under the Securities Act of 1933. Reference is made to Section 8.4 of the form of underwriting agreement which is filed as Exhibit 1.1 hereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the preceding three years, the Registrant has issued the following securities that were not registered under the Act: As of October 25, 1999, eMerge Interactive had sold to employees and certain other persons an aggregate of 5,563,780 shares of class A common stock, including class A common stock issued in connection with business acquisitions, as follows: In July 1998, eMerge Interactive issued 2,000,000 shares of class A common stock in connection with the acquisition of 100% of the partnership interests of NutriCharge, a South Dakota partnership, at a price of $1.00 per share. eMerge Interactive issued 70,000 shares of its class A common stock to the shareholders of STS Agriventures, Ltd., at a price of $1.00 per share. In February of 1999, eMerge Interactive issued 600,000 shares of class A common stock to CIN, LLC for substantially all of its assets, including CIN, LLC, at a price of $1.20 per share. eMerge Interactive issued 200,000 shares of class A common stock for 100% of the issued and outstanding stock of Cyberstockyard, Inc. on March 29, 1999, at a price of $2.00 per share. In August of 1999, eMerge Interactive issued 50,000 shares of class A common stock for 19% of the common stock of Turnkey Computer Systems, Inc. All of such sales were made under the exemption from registration provided under Section 4(2) of the Act. The issuance to the stockholders of Cyberstockyard, Inc. was also made pursuant to Rule 504 under the Act. As of October 25, 1999, eMerge Interactive had sold an aggregate of 14,499,162 shares of preferred stock, as follows: In December 1998, we issued 2,400,000 shares of series B preferred stock to XL Vision at a price equal to $2.00 per share, in exchange for the cancellation of debt. In May of 1999, we issued 1,000,000 shares of series C preferred stock to Safeguard 99 Capital L.P. and 100,000 shares to purchasers associated with Applewood Associates, L.P. at a price of $5.00 per share. In October 1999, we agreed to issue 4,555,556 shares of series D preferred stock to Internet Capital Group, Inc. at a purchase price of $9.00 per share, payable in cash and a promissory note, subject to the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In connection with the sale of preferred stock, we have also agreed to issue to Internet Capital Group a warrant to purchase up to 911,111 shares of class B common stock. All II-2 116 of such sales were made under the exemption from registration provided under Section 4(2) of the Act. Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation Plans, eMerge Interactive has granted options to purchase a total of 2,012,170 shares of common stock to its employees and certain other persons through October 20, 1999 at a weighted average exercise price of $2.03 per share. For more detailed descriptions of eMerge Interactive's Equity Compensation Plans, see the section entitled Management -- Equity Compensation in this registration statement. In granting the options and selling the underlying securities upon exercise of the options, eMerge Interactive is relying upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Act. II-3 117 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.# 3.1 Second Amended and Restated Certificate of Incorporation of eMerge Interactive.* 3.2 Amended and Restated Bylaws of eMerge Interactive.* 4.1 Form of Stock Certificate.# 5.1 Opinion of Morgan, Lewis & Bockius LLP.# 10.1 Amended and Restated 1996 Equity Compensation Plan.* 10.2 1999 Equity Compensation Plan.* 10.3 Master License Agreement dated July 29, 1998 between eMerge Interactive and Her Majesty the Queen of Canada, as represented by the Minister of Agriculture and Agri-Food Canada.+# 10.4 Administrative Services Agreement dated December 15, 1997 between eMerge Interactive, Safeguard Scientifics, Inc. and XL Vision, Inc., as amended on August 17, 1999.* 10.5 Direct Charge Administrative Services Agreement dated April 15, 1997 between eMerge Interactive and XL Vision, Inc.* 10.6 Asset Purchase Agreement dated February 24, 1999 between eMerge Interactive, CIN, LLC and Dr. Scott Crain.* 10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge Interactive, Cyberstockyard, Inc. and J. Scott Sanders, David Sanders, Scott Calhoun and Dr. Duane Pankratz.* 10.8 Stockholders Agreement dated July 29, 1998 among eMerge Interactive, STS Agriventures, Ltd, Dr. Richard Stanley, Sylvia Doerksen, Ian Turnbull, Ann Turnbull and David Robinson.# 10.9 Purchase Agreement dated July 29, 1998 among eMerge Interactive, NutriCharge, J Technologies, LLC, and the Biegert Family Irrevocable Trust.* 10.10 Asset Purchase Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc.* 10.11 Purchase and License Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc.* 10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge Interactive and Professional Cattle Consultants, L.L.C.* 10.13 Letter of Agreement dated July 1, 1999 between eMerge Interactive and Southern States.+# 10.14 Subscription Agreement letter for purchase of Series B Junior Preferred Stock.* 10.15 Preferred Stock Purchase Agreement dated April 1, 1999 (Series C Preferred Stock).* 10.16 Common Stock Purchase Agreement dated August 16, 1999 between eMerge Interactive and Turnkey Computer Systems, Inc.* 10.17 Registration Rights Agreement dated July 18, 1997.* 10.18 Stockholders Agreement dated July 29, 1998.#
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.19 Stockholders' and Registration Rights Agreement dated February 24, 1999.* 10.20 Joinder and Correction to Stockholders and Registration Rights Agreement dated March 29, 1999.* 10.21 Revolving Note dated July 21, 1999 from eMerge Interactive to Safeguard Delaware, Inc., Amended Revolving Note dated August 3, 1999 and second Amended Revolving Note dated October 25, 1999.* 10.22 Revolving Note dated January 1, 1999 from XL Vision to eMerge Interactive. 10.23 Promissory Note dated August 31, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.24 Promissory Note dated September 13, 1999 from eMerge Interactive to Safeguard Delaware, Inc.# 10.25 Promissory Note dated October 6, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.26 Stockholders Agreement dated July 18, 1997 and Joinder to Stockholders' Agreement.* 10.27 Subordinated Purchase Money Note from eMerge Interactive to XL Vision dated July 15, 1997.* 10.28 Toll Processing Agreement dated August 16, 1999 between eMerge Interactive and ADM Animal Health & Nutrition, a division of Archer-Daniels-Midland Company.+# 10.29 Term Note dated October 25, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.30 Securities Purchase Agreement dated October 27, 1999 between eMerge Interactive Technologies, LLC and Internet Capital Group, Inc.# 10.31 Registration Rights Agreement dated October 27, 1999 between eMerge Interactive and Internet Capital Group, Inc.# 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP.* 23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).# 24.1 Power of Attorney (included on signature page). 27.1 Financial Data Schedule.* 99.1 Form letter from eMerge Interactive, Inc. to holders of more than 100 shares of Safeguard Scientifics, Inc. describing the Directed Share Subscription Program.* 99.2 Form of letter from Adams, Harkness & Hill, Inc. to Safeguard Scientifics, Inc. shareholders.#
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 99.3 Form of letter from eMerge Interactive, Inc. to Brokers describing the Directed Share Subscription Program.* 99.4 Form of Subscription Form for Directed Share Subscription Program.*
- ------------------------- * Filed herewith. # To be filed by amendment. + We intend to request confidential treatment of certain provisions of this exhibit pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has been filed separately with the Securities and Exchange Commission. (b) FINANCIAL STATEMENT SCHEDULES All information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the financial statements or is not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the prospectus. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-6 120 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by Safeguard, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. II-7 121 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Sebastian, Florida on October 27, 1999. eMERGE INTERACTIVE, INC. By: /s/ CHARLES L. ABRAHAM ----------------------------------- Charles L. Abraham Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles L. Abraham and T. Michael Janney or either of them acting alone, his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him or her and in his or her name, place and stead, in any and all capacities, to sign (i) any and all amendments (including post-effective amendments) to this Registration Statement and to file the same with, all exhibits thereto, and other documents in connection therewith and (ii) any registration statement and any and all amendments thereto, relating to the offer covered hereby filed pursuant to Rule 462(b) under the Securities Act of 1933, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE(S) DATE - ---------- -------- ---- /s/ CHARLES L. ABRAHAM Chief Executive Officer October 27, 1999 - --------------------------------------------- and Director (Principal Charles L. Abraham Executive Officer) /s/ T. MICHAEL JANNEY Chief Financial Officer October 27, 1999 - --------------------------------------------- (Principal Financial T. Michael Janney and Accounting Officer) /s/ JOHN S. SCOTT Chairman of the Board October 27, 1999 - --------------------------------------------- John S. Scott, Ph.D. /s/ DOUGLAS ALEXANDER Director October 27, 1999 - --------------------------------------------- Douglas Alexander /s/ E. MICHAEL FORGASH Director October 27, 1999 - --------------------------------------------- E. Michael Forgash
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SIGNATURES TITLE(S) DATE - ---------- -------- ---- /s/ THOMAS C. LYNCH Director October 27, 1999 - --------------------------------------------- Thomas C. Lynch /s/ CHRISTOPHER MOLLER Director October 27, 1999 - --------------------------------------------- Christopher Moller, Ph.D. /s/ JOHN W. PODUSKA, SR. Director October 27, 1999 - --------------------------------------------- John W. Poduska, Sr., Ph.D.
II-9 123 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.# 3.1 Second Amended and Restated Certificate of Incorporation of eMerge Interactive.* 3.2 Amended and Restated Bylaws of eMerge Interactive.* 4.1 Form of Stock Certificate.# 5.1 Opinion of Morgan, Lewis & Bockius LLP.# 10.1 Amended and Restated 1996 Equity Compensation Plan.* 10.2 1999 Equity Compensation Plan.* 10.3 Master License Agreement dated July 29, 1998 between eMerge Interactive and Her Majesty the Queen of Canada, as represented by the Minister of Agriculture and Agri-Food Canada.+# 10.4 Administrative Services Agreement dated December 15, 1997 between eMerge Interactive, Safeguard Scientifics, Inc. and XL Vision, Inc., as amended on August 17, 1999.* 10.5 Direct Charge Administrative Services Agreement dated April 15, 1997 between eMerge Interactive and XL Vision, Inc.* 10.6 Asset Purchase Agreement dated February 24, 1999 between eMerge Interactive, CIN, LLC and Dr. Scott Crain.* 10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge Interactive, Cyberstockyard, Inc. and J. Scott Sanders, David Sanders, Scott Calhoun and Dr. Duane Pankratz.* 10.8 Stockholders Agreement dated July 29, 1998 among eMerge Interactive, STS Agriventures, Ltd, Dr. Richard Stanley, Sylvia Doerksen, Ian Turnbull, Ann Turnbull and David Robinson.# 10.9 Purchase Agreement dated July 29, 1998 among eMerge Interactive, NutriCharge, J Technologies, LLC, and the Biegert Family Irrevocable Trust.* 10.10 Asset Purchase Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc.* 10.11 Purchase and License Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc.* 10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge Interactive and Professional Cattle Consultants, L.L.C.* 10.13 Letter of Agreement dated July 1, 1999 between eMerge Interactive and Southern States.+# 10.14 Subscription Agreement letter for purchase of Series B Junior Preferred Stock.* 10.15 Preferred Stock Purchase Agreement dated April 1, 1999 (Series C Preferred Stock).* 10.16 Common Stock Purchase Agreement dated August 16, 1999 between eMerge Interactive and Turnkey Computer Systems, Inc.* 10.17 Registration Rights Agreement dated July 18, 1997.* 10.18 Stockholders Agreement dated July 29, 1998.# 10.19 Stockholders' and Registration Rights Agreement dated February 24, 1999.* 10.20 Joinder and Correction to Stockholders and Registration Rights Agreement dated March 29, 1999.*
124
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.21 Revolving Note dated July 21, 1999 from eMerge Interactive to Safeguard Delaware, Inc., Amended Revolving Note dated August 3, 1999 and second Amended Revolving Note dated October 25, 1999.* 10.22 Revolving Note dated January 1, 1999 from XL Vision to eMerge Interactive. 10.23 Promissory Note dated August 31, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.24 Promissory Note dated September 13, 1999 from eMerge Interactive to Safeguard Delaware, Inc.# 10.25 Promissory Note dated October 6, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.26 Stockholders Agreement dated July 18, 1997 and Joinder to Stockholders' Agreement.* 10.27 Subordinated Purchase Money Note from eMerge Interactive to XL Vision dated July 15, 1997.* 10.28 Toll Processing Agreement dated August 16, 1999 between eMerge Interactive and ADM Animal Health & Nutrition, a division of Archer-Daniels-Midland Company.+# 10.29 Term Note dated October 25, 1999 from eMerge Interactive to Safeguard Delaware, Inc.* 10.30 Securities Purchase Agreement dated October 27, 1999 between eMerge Interactive Technologies, LLC and Internet Capital Group, Inc.# 10.31 Registration Rights Agreement dated October 27, 1999 between eMerge Interactive and Internet Capital Group, Inc.# 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP.* 23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).# 24.1 Power of Attorney (included on signature page). 27.1 Financial Data Schedule.* 99.1 Form letter from eMerge Interactive, Inc. to holders of more than 100 shares of Safeguard Scientifics, Inc. describing the Directed Share Subscription Program.* 99.2 Form of letter from Adams, Harkness & Hill, Inc. to Safeguard Scientifics, Inc. shareholders.# 99.3 Form of letter from eMerge Interactive, Inc. to Brokers describing the Directed Share Subscription Program.* 99.4 Form of Subscription Form for Directed Share Subscription Program.*
- ------------------------- * Filed herewith. # To be filed by amendment. + We intend to request confidential treatment of certain provisions of this exhibit pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has been filed separately with the Securities and Exchange Commission. EX-3.1 2 2ND AMENDED/RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF EMERGE INTERACTIVE, INC. eMerge Interactive, Inc., a Delaware corporation, hereby certifies as follows: FIRST. The name of the corporation under which its Certificate of Incorporation was filed is Enhanced Vision Systems, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was September 12, 1994. SECOND. This Second Amended and Restated Certificate of Incorporation amends, restates and integrates the provisions of the Certificate of Incorporation of said corporation and has been duly adopted by majority vote of the holders of all of the outstanding stock entitled to vote thereon in accordance with the provisions of Sections 242 and 245 and all other applicable provisions of the General Corporation Law of the State of Delaware. THIRD. The text of the Amended and Restated Certificate of Incorporation is hereby restated to read herein as set forth in full: 1. The name of the corporation is eMerge Interactive, Inc. 2. The address of the corporation's registered office is 1013 Centre Road in the City of Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. 3. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The aggregate number of shares of all classes of stock which the Corporation shall have authority to issue 115,000,000 shares, designated as follows: (A) 100,000,000 shares of Common Stock, par value $0.01 per share, consisting of 92,711,110 shares of Class A Common Stock, par value $0.01 per share (herein called the "Class A Common Stock") and 7,288,890 shares of Class B Common Stock, par value $0.01 per share (herein called the "Class B Common Stock"). Each holder of Class A Common Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation (including election of directors other than the Series A Directors and the Series D Directors, each as hereinafter defined) and shall be entitled to one vote per share and each holder of Class B Common Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation (including election of directors other than the Series A Directors and the Series D Directors) and shall be 2 entitled to two and one-half votes per share. Each share of Class B Common Stock shall be converted automatically into one fully paid, non-assessable share of Class A Common Stock immediately prior to the earlier of (i) the transfer by the registered holder of such share of Class B Common Stock to another registered holder other than an affiliate of such holder and (ii) the filing of a registration statement with the U.S. Securities and Exchange Commission covering the share or shares of Class A Common Stock that are issuable upon the conversion of such share of Class B Common Stock. Immediately upon the effectiveness of this amendment and restatement of the Certificate of Incorporation of the Company, each share of Common Stock issued and outstanding immediately prior thereto ("Old Common Stock") shall, ipso facto and without any action on the part of the holder of shares of the Old Common Stock, be changed, converted and reclassified into one share of Class A Common Stock. (B) 15,000,000 shares of Preferred Stock, par value $0.01 per share, consisting of 6,500,000 shares of Series A Preferred Stock, par value $0.01 per share (herein called the "Series A Preferred Stock"), 2,400,000 shares of Series B Junior Preferred Stock, par value $0.01 per share (herein called the "Series B Junior Preferred Stock"), 1,300,000 shares of Series C Preferred Stock, par value $0.01 per share (herein called the "Series C Preferred Stock") and 4,555,556 shares of Series D Preferred Stock, par value $0.01 per share (herein called the "Series D Preferred Stock". The Board of Directors shall have the full authority permitted by law to divide the authorized and unissued shares of Preferred Stock into classes or series, or both, and to determine for any such class or series its designation and the number of shares of the class or series and the voting rights, preferences, limitations and special rights if any, of the shares of the class or series. *************** DESCRIPTION AND DESIGNATION OF SERIES A PREFERRED STOCK A1. DESIGNATION. A total of 6,500,000 shares of the Company's Preferred Stock shall be designated the Series A Preferred Stock. A2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series A Preferred Stock (voting as a separate class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series A Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. "Subsidiary" or "Subsidiaries" means any corporation, partnership or joint venture of which the Company and/or any of its other Subsidiaries 3 (as herein defined) directly or indirectly owns at the time at least fifty percent (50%) of the outstanding voting shares or similar interests other than directors' qualifying shares. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. A3. LIQUIDATION, DISSOLUTION OR WINDING UP. A3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series A Preferred Stock shall be on a parity with Series C Preferred Stock and Series D Preferred Stock with respect to liquidation preference. The Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock and any class or series of Preferred Stock designated in the future to be on a parity with Series A Preferred Stock with respect to liquidation preference are collectively referred to herein as a "First Priority Parity Stock". In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series A Preferred Stock, including the Series B Junior Preferred Stock, in liquidation preference (collectively referred to in this Description and Designation of Series A Preferred Stock as "Junior Stock"), and subject to the liquidation rights and preferences of any class or series of Preferred Stock designated now or in the future to be senior to, or on a parity with, the Series A Preferred Stock, including the Series C Preferred Stock and the Series D Preferred Stock, with respect to liquidation preference (collectively referred to in this Description and Designation of Series A Preferred Stock as "Senior Stock"), the holders of each share of Series A Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus or earnings ("Available Assets"), the greater of (i) an amount per share of Series A Preferred Stock equal to $1.00, plus $.10 for each year (pro rated for partial years) from July 16, 1997 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series A Preferred Stock as would have been payable had each share of 4 Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series A Preferred Stock and of any other series of Preferred Stock on parity with the Series A Preferred Stock, including the Series C Preferred Stock and the Series D Preferred Stock, with respect to liquidation preference the full amounts to which they otherwise would be entitled, the holders of Series A Preferred Stock and such other series of Preferred Stock, including the Series C Preferred Stock and the Series D Preferred Stock, shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series A Preferred Stock and such other series of Preferred Stock, including the Series C Preferred Stock and the Series D Preferred Stock, if all liquidation preference dollar amounts with respect to such shares were paid in full. A3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section A3; provided, however that, in the case of any such transaction to which the provisions of Section A5.6 also apply, the holders of a majority of the outstanding shares of Series A Preferred Stock together with First Priority Parity Stock (voting together as a single class) shall have the right to elect the benefits of the provisions of Section A5.6 hereof for all of the Series A Preferred Stock and First Priority Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section A3. The provisions of this Section A3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. A3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section A3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata 5 with respect to each series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such series and class. A4. VOTING POWER. A4.1 GENERAL. Except as otherwise required by applicable law or as otherwise provided herein, (i) each holder of Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation (including election of directors other than the Series D Directors) and shall be entitled to that number of votes equal to the largest number of whole shares of Class A Common Stock into which such holder's shares of Series A Preferred Stock could be converted, and (ii) the holders of shares of Series A Preferred Stock, Series B Junior Preferred Stock, Series C Preferred Stock, Class A Common Stock and Class B Common Stock shall vote together (or render written consents in lieu of a vote) as a single class on all matters submitted to the stockholders of the Corporation (including election of directors to the extent not otherwise expressly provided for). Each holder of Series A Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. A4.2 DIRECTOR ELECTION RIGHTS. So long as any shares of Series A Preferred Stock remain outstanding, the holders of the Series A Preferred Stock, voting as a separate class, shall have the right to elect two directors of the Corporation (the "Series A Directors"). At any annual or special meeting of the Corporation held for the purpose of electing directors, the presence in person or by proxy (or by written consent) of the holders of a majority of the outstanding shares of Series A Preferred Stock shall constitute a quorum for the election of the Series A Directors. A5. CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Class A Common Stock: A5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section 5, any shares of the Series A Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Class A Common Stock. The number of shares of Class A Common Stock which a holder of Series A Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series A Preferred Stock being converted at any time, by (ii) the rate (the "Series A Conversion Rate") equal to the quotient obtained by dividing $1.00 by the Series A Conversion Value. The "Series A Conversion Value" in effect from time to time, except as adjusted in accordance with this Section A5, shall be $1.00. A5.2 AUTOMATIC CONVERSION. 6 A5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933, as amended, (other than on Form S-4 or S-8 on any successor forms thereto) covering the offer and sale of Class A Common Stock in an underwritten public offering on a firm commitment basis in which the gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Class A Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of a public offering of at least $30,000,000, (a "Public Offering") but subject to the closing of such public offering, (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock in a rights offering to shareholders Safeguard Scientifics, Inc., but subject to the closing of such rights offering (a "Rights Offering"), or (C) upon the election, set forth in a written notice to the Corporation, of holders of at least two-thirds of the outstanding Series A Preferred Stock and First Priority Parity Stock (counted as a single Class) to convert their shares of Series A Preferred Stock and First Priority Parity Stock to Common Stock; all outstanding shares of Series A Preferred Stock shall be converted automatically into the number of fully paid, non-assessable shares of Class A Common Stock into which such shares of Series A Preferred Stock are convertible pursuant to this Section A5 as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. A5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph A5.2.1, the holders of the Series A Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Class A Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Class A Common Stock into which the shares of Series A Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series A Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. A5.3 ANTI-DILUTION ADJUSTMENTS. A5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series A Preferred Stock outstanding, issue or sell shares of its Common Stock or Common Stock Equivalents (as defined in Section A5.3.2.1 below) without consideration or at a 7 price per share or Net Consideration Per Share (as defined in Section A5.3.3 below) less than the Series A Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series A Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series A Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series A Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued.
Example: initial capital 1,000,000 initial conversion price $1.00 new shares issued 1,000,000 total new consideration $500,000 new issue price $0.50 new shares which would be issued at initial conversion price 500,000 new conversion price $0.75
The provisions of this Section A5.3.1 may be waived as to all shares of Series A Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of 8 the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series A Preferred Stock. A5.3.2 COMMON STOCK EQUIVALENTS. A5.3.2.1 GENERAL. For the purposes of this Section A5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any warrants, options, subscription or purchase rights with respect to such convertible or exchangeable securities (collectively, "Common Stock Equivalents"), shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series A Conversion Value shall be made under this Section A5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. A5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section A5.3, then, upon the effectiveness of each such change, the Series A Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section A5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series A Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series A Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series A Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series A Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series A Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series A Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series A Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. A5.3.3 NET CONSIDERATION PER SHARE. The "Net Consideration Per Share" which shall be receivable by the Corporation for any Common Stock issued upon the exercise or conversion of any Common Stock Equivalents shall be determined as follows: A5.3.3.1 The Net Consideration Per Share shall mean the amount equal to the total amount of consideration, if any, received by the Corporation for the issuance of 9 such Common Stock Equivalents, plus the minimum amount of consideration, if any, payable to the Corporation upon exercise, or conversion or exchange thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such Common Stock Equivalents were exercised, exchanged or converted. A5.3.3.2 The Net Consideration Per Share which shall be receivable by the Corporation shall be determined in each instance as of the date of issuance of Common Stock Equivalents without giving effect to any possible future upward price adjustments or rate adjustments which may be applicable with respect to such Common Stock Equivalents. A5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series A Preferred Stock. A5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section A5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section A5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. A5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS; BASKET FOR RESERVED EMPLOYEE SHARES. This Section A5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), or (B) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series A Preferred Stock. Further, this Section A5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series A Preferred Stock. 10 A5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series A Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series A Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series A Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. An "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (ii) a subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of the Common Stock. A5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section A5. A5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock could 11 have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section A5.6 and Section A3.2 apply, the holders of a majority of the outstanding shares of Series A Preferred Stock and First Priority Parity Stock (voting together as a single class) shall have the option of electing treatment for the Series A Preferred Stock and First Priority Parity Stock under this Section A5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section A3.2, and not this Section A5.6, shall apply. A5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In each case of an adjustment or readjustment of the Series A Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series A Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. A5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series A Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series A Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. The date when such written notice is received by the Corporation, together with the certificate or certificates representing the shares of Preferred Stock being converted, shall be the "Conversion Date". As promptly as practicable after the Conversion Date for the Series A Preferred Stock, the Corporation shall issue and deliver to the holder of the shares of Series A Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series A Preferred Stock in accordance with the provisions of this Section A5, and cash, as provided in Section A5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series A Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. 12 A5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series A Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series A Preferred Stock, the Corporation shall pay to the holder of the shares of Series A Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series A Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series A Preferred Stock being converted. A5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series A Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series A Preferred Stock which were not converted. A5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock (including any shares of Series A Preferred Stock represented by any warrants, options, subscription or purchase rights for Series A Preferred Stock), and if at any time the number of authorized but unissued shares of Class A Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock (including any shares of Series A Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series A Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Class A Common Stock to such number of shares as shall be sufficient for such purpose. A6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. The Corporation shall not take any corporate action or amend its Certificate of Incorporation (except to reduce the number of shares designated as Series A Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by vote or written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a single class, each share of Series A Preferred Stock to be entitled to one vote in each instance, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series A Preferred Stock. Without limiting the generality of the preceding sentence, the Corporation will not 13 amend its Certificate of Incorporation or take any other corporate action without the approval by the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a single class, if such amendment or corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of equity securities of the Corporation other than as provided for in Section 2 hereof; or (b) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series A Preferred Stock or of any class of stock ranking senior to the Series A Preferred Stock with respect to liquidation preferences, dividend rights or containing redemption rights; or (c) reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series A Preferred Stock; or (e) cancel or modify the conversion rights of the holders of Series A Preferred Stock provided for in Section A5 herein; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section A3.2 hereof. A7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the 14 Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Preferred Stock from time to time outstanding. A8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. A9. STATUS OF CONVERTED OR REPURCHASED SERIES A PREFERRED STOCK. Any share or shares of Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series A Preferred Stock, the provisions of this Series A Preferred Stock shall terminate and have no further force and effect. DESCRIPTION AND DESIGNATION OF SERIES B JUNIOR PREFERRED STOCK 15 B1. DESIGNATION. A total of 2,400,000 shares of the Company's Preferred Stock shall be designated the Series B Junior Preferred Stock B2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series B Junior Preferred Stock, Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and any other series of Preferred Stock senior to or on parity with the Series B Junior Preferred Stock with respect to liquidation preference (all voting together as a single class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series B Junior Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. B3. LIQUIDATION, DISSOLUTION OR WINDING UP. B3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series B Junior Preferred Stock shall be junior to the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred with respect to liquidation preference. Any class or series of Preferred Stock designated in the future to be on a parity with the Series B Junior Preferred Stock with respect to liquidation preference are collectively referred to herein as "Second Priority Parity Stock". In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series B Junior Preferred Stock in liquidation preference (collectively referred to in this Description and Designation of Series B Junior Preferred Stock as "Junior Stock"), and subject to the liquidation rights and preferences of the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred and any class or series of Preferred Stock designated in the future to be 16 senior to the Series B Junior Preferred Stock with respect to liquidation preference (referred to in this Description and Designation of Series B Junior Preferred Stock as "Senior Stock"), the holders of each share of Series B Junior Preferred Stock shall be entitled to be paid first out of the Available Assets, the greater of (i) an amount per share of Series B Junior Preferred Stock equal to $2.00, plus $.20 for each year (pro rated for partial years) from December 31, 1998 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series B Junior Preferred Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series B Junior Preferred Stock and of any Parity Stock the full amounts to which they otherwise would be entitled, the holders of Series B Junior Preferred Stock and Second Priority Parity Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series B Junior Preferred Stock and Parity Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. B3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section B3; provided, however that, in the case of any such transaction to which the provisions of Section B5.6 also apply, the holders of the outstanding shares of Series B Junior Preferred Stock and Second Priority Parity Stock (voting together as a single class) shall have the right by majority vote to elect the benefits of the provisions of Section B5.6 hereof for all of the Series B Junior Preferred Stock and Second Priority Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section B3. The provisions of this Section B3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. 17 B3.3 DISTRIBUTIONS OTHER THAN CASH . Whenever the distribution provided for in this Section B3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each Series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such Series and class. B4. VOTING POWER. B4.1 GENERAL. For each vote in which holders of Series B Junior Preferred Stock are entitled to participate, each share of Series B Junior Preferred Stock shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series B Junior Preferred Stock could be converted. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Series B Junior Preferred Stock shall be entitled to vote together with the Common Stock, Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors generally, but excluding election of the Series A Directors and Series D Directors). Each holder of Series B Junior Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. B5. CONVERSION RIGHTS. The holders of the Series B Junior Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Common Stock: B5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section B5, any shares of the Series B Junior Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Class A Common Stock. The number of shares of Common Stock which a holder of Series B Junior Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series B Junior Preferred Stock being converted at any time, by (ii) the rate (the "Series B Conversion Rate") equal to the quotient obtained by dividing $2.00 by the Series B Conversion Value. The "Series B Conversion Value" in effect from time to time, except as adjusted in accordance with this Section B5, shall be $2.00. B5.2 AUTOMATIC CONVERSION. 18 B5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to a Public Offering (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock in a rights offering to shareholders of Safeguard Scientifics, Inc., but subject to the closing of such rights offering, or (C) upon the election, set forth in a written notice to the Corporation, of holders of at least two-thirds of the outstanding shares of Series B Junior Preferred Stock and Parity Stock (counted as a single class) to convert their Series B Junior Preferred Stock and Second Priority Parity Stock to Common Stock; all outstanding shares of Series B Junior Preferred Stock and Second Priority Parity Stock shall be converted automatically into the number of fully paid, non-assessable shares of Class A Common Stock into which such shares of Series B Junior Preferred Stock and Second Priority Parity Stock are convertible pursuant to this Section B5 or the designation of such Second Priority Parity Stock as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. B5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph B5.2.1, the holders of the Series B Junior Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series B Junior Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series B Junior Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. B5.3 ANTI-DILUTION ADJUSTMENTS. B5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series B Junior Preferred Stock outstanding, issue or sell shares of its Common Stock or Common Stock Equivalents without consideration or at a price per share or Net Consideration Per Share less than the Series B Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series B Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series B Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) 19 Where: N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series B Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued.
Example: initial capital 1,000,000 initial conversion price $1.00 new shares issued 1,000,000 total new consideration $500,000 new issue price $0.50 new shares which would be issued at initial conversion price 500,000 new conversion price $0.75
The provisions of this Section B5.3.1 may be waived as to all shares of Series B Junior Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series B Junior Preferred Stock. B5.3.2 COMMON STOCK EQUIVALENTS. B5.3.2.1 GENERAL. For the purposes of this Section B5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common 20 Stock and the issuance of any Common Stock Equivalents, shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series B Conversion Value shall be made under this Section B5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. B5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section B5.3, then, upon the effectiveness of each such change, the Series B Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section B5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series B Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series B Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series B Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series B Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series B Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series B Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series B Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. B5.3.3 [INTENTIONALLY OMITTED] B5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series B Junior Preferred Stock. B5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section B5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section B5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value 21 as is reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. B5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS. This Section B5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), (B) to any additional shares of Common Stock which become issuable upon conversion of any other series or class of preferred stock or convertible security of the Company as a result of any anti-dilution adjustment to the conversion ratio of such series or class, or (C) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series B Junior Preferred Stock. Further, this Section B5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series B Preferred Stock. B5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series B Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series B Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series B Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. B5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series B Junior Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the 22 Corporation which they would have received had their Series B Junior Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section B5. B5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series B Junior Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series B Junior Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section B5.6 and Section B3.2 apply, the holders of the outstanding shares of Series B Junior Preferred Stock and Second Priority Parity Stock (voting together as a single class) shall have the option by majority vote to elect treatment for the Series B Junior Preferred Stock and Second Priority Parity Stock under this Section B5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section B3.2, and not this Section B5.6, shall apply. B5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY. In each case of an adjustment or readjustment of the Series B Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series B Junior Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. B5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series B Junior Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series B Junior Preferred Stock surrendered for conversion shall be accompanied by proper 23 assignment thereof to the Corporation or in blank. As promptly as practicable after the Conversion Date for the Series B Junior Preferred Stock being converted, the Corporation shall issue and deliver to the holder of the shares of Series B Junior Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series B Junior Preferred Stock in accordance with the provisions of this Section B5, and cash, as provided in Section B5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series B Junior Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. B5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series B Junior Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series B Junior Preferred Stock, the Corporation shall pay to the holder of the shares of Series B Junior Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series B Junior Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series B Junior Preferred Stock being converted. B5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series B Junior Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series B Junior Preferred Stock which were not converted. B5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Junior Preferred Stock, such number of its shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Junior Preferred Stock (including any shares of Series B Junior Preferred Stock represented by any warrants, options, subscription or purchase rights for Series B Junior Preferred Stock), and if at any time the number of authorized but unissued shares of Class A Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Junior Preferred Stock (including any shares of Series B Junior 24 Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series B Junior Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Class A Common Stock to such number of shares as shall be sufficient for such purpose. B6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. B6.1 The Corporation shall not take any corporate action or amend its Certificate of Incorporation (except to reduce the number of shares designated as Series B Junior Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by majority vote or written consent of the holders of outstanding shares of Series B Junior Preferred Stock, voting as a single class, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series B Junior Preferred Stock without similarly changing the rights, preferences, privileges of or limitations on all other classes or series of Second Priority Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend this Certificate of Incorporation or take any other corporate action without the approval of the holders of outstanding shares of Series B Junior Preferred Stock if such amendment or corporate action would: (a) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series B Junior Preferred Stock; or (b) reduce the amount payable to the holders of Series B Junior Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series B Junior Preferred Stock; or (d) cancel or modify the conversion rights of the holders of Series B Junior Preferred Stock provided for in Section B5 herein. B6.2 The Corporation shall not take any corporate action or amend its Certificate of Incorporation without the approval by majority vote or written consent of the holders of outstanding shares of Series B Junior Preferred Stock and Second Priority Parity Stock, voting together as a single class, if such corporate action or amendment would similarly change the rights, preferences, privileges of or limitations on the Series B Junior Preferred Stock and all classes or series of Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation or take any other corporate action without the approval of the holders of the outstanding shares of Series B Junior Preferred Stock and Parity Stock, voting together as a single class, if such amendment or corporate action would: 25 (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of equity securities of the Corporation other than as provided for in Section 2 hereof; or (b) [INTENTIONALLY OMITTED] (c) similarly reduce the amount payable to the holders of Series B Junior Preferred Stock and Second Priority Parity Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) similarly adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series B Junior Preferred Stock and Second Priority Parity Stock; or (e) similarly cancel or modify the conversion rights of the holders of Series B Junior Preferred Stock and Second Priority Parity Stock; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section B3.2 hereof. B7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Junior Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Series B Junior Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Series B Junior Preferred Stock from time to time outstanding. 26 B8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Series B Junior Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. B9. STATUS OF CONVERTED OR REPURCHASED SERIES B JUNIOR PREFERRED STOCK. Any share or shares of Series B Junior Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series B Junior Preferred Stock, the provisions of this Series B Junior Preferred Stock shall terminate and have no further force and effect. DESCRIPTION AND DESIGNATION OF SERIES C PREFERRED STOCK C1. DESIGNATION. A total of 1,300,000 shares of the Company's Preferred Stock shall be designated the Series C Preferred Stock. 27 C2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and any other series of Preferred Stock senior to or on parity with the Series C Preferred Stock with respect to liquidation preference (all voting together as a single class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series C Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. C3. LIQUIDATION, DISSOLUTION OR WINDING UP. C3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series C Preferred Stock shall be on a parity with the Series A Preferred Stock and the Series D Preferred Stock with respect to liquidation preference. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock, the Series B Junior Preferred Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series C Preferred Stock in liquidation preference (collectively referred to in this Description and Designation of Series C Preferred Stock as, "Junior Stock"), and subject to the liquidation rights and preferences of any class or series of Preferred Stock designated in the future to be senior to the Series C Preferred Stock with respect to liquidation preference (referred to in this Description and Designation of Series C Preferred Stock as "Senior Stock"), the holders of each share of Series C Preferred Stock shall be entitled to be paid first out of the Available Assets, the greater of (i) an amount per share of Series C Preferred Stock equal to $5.00, plus $.50 for each year (pro rated for partial years) from April 15, 1999 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of 28 the Preferred Stock), or (ii) such amount per share of Series C Preferred Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series C Preferred Stock and of any Parity Stock the full amounts to which they otherwise would be entitled, the holders of Series C Preferred Stock and First Priority Parity Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series C Preferred Stock and Parity Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. C3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section C3; provided, however that, in the case of any such transaction to which the provisions of Section C5.6 also apply, the holders of the outstanding shares of Series C Preferred Stock and First Priority Parity Stock (voting together as a single class) shall have the right by majority vote to elect the benefits of the provisions of Section C5.6 hereof for all of the Series C Preferred Stock and First Priority Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section C3. The provisions of this Section C3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. C3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section C3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation by a written resolution. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each Series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such Series and class. 29 C4. VOTING POWER. C4.1 GENERAL. For each vote in which holders of Series C Preferred Stock are entitled to participate, each share of Series C Preferred Stock shall be entitled to that number of votes equal to the largest number of whole shares of Class A Common Stock into which such holder's shares of Series C Preferred Stock could be converted. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Series C Preferred Stock shall be entitled to vote together with the Common Stock, the Series A Preferred Stock, the Series B Junior Preferred Stock, the Series D Preferred Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors generally, but excluding election of the Series A Directors and the Series D Directors). Each holder of Series C Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. C5. CONVERSION RIGHTS. The holders of the Series C Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Class A Common Stock: C5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section C5, any shares of the Series C Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Class A Common Stock. The number of shares of Class A Common Stock which a holder of Series C Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series C Preferred Stock being converted at any time, by (ii) the rate (the "Series C Conversion Rate") equal to the quotient obtained by dividing $5.00 by the Series C Conversion Value. The "Series C Conversion Value" in effect from time to time, except as adjusted in accordance with this Section C5, shall be $5.00. C5.2 AUTOMATIC CONVERSION. C5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to a Public Offering, but subject to the closing of such Public Offering (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock in a rights offering to shareholders of Safeguard Scientifics, Inc., in which the gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of the public offering of at least $35,000,000, 30 but subject to the closing of such rights offering, or (C) upon the election, set forth in a written notice to the Corporation, of holders of at least two-thirds of the outstanding shares of Series C Preferred Stock and First Priority Parity Stock (counted as a single class) to convert their Series C Preferred Stock and First Priority Parity Stock to Common Stock; all outstanding shares of Series C Preferred Stock and First Priority Parity Stock shall be converted automatically into the number of fully paid, non-assessable shares of Class A Common Stock into which such shares of Series C Preferred Stock and Parity Stock are convertible pursuant to this Section C5 or the designation of such First Priority Parity Stock as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. C5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph C5.2.1, the holders of the Series C Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series C Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series C Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. C5.3 ANTI-DILUTION ADJUSTMENTS. C5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series C Preferred Stock outstanding, issue or sell shares of its Common Stock or Common Stock Equivalents without consideration or at a price per share or Net Consideration Per Share less than the Series C Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series C Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series C Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: 31 N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series C Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued. Example: initial capital 1,000,000 initial conversion price $1.00 new shares issued 1,000,000 Total new consideration $500,000 new issue price $0.50 New shares which would be Issued at initial conversion price 500,000 new conversion price $0.75
The provisions of this Section C5.3.1 may be waived as to all shares of Series C Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series C Preferred Stock. C5.3.2 COMMON STOCK EQUIVALENTS. C5.3.2.1 GENERAL. For the purposes of this Section C5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any Common Stock Equivalents, shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series C Conversion Value shall be made under this Section 32 C5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. C5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section C5.3, then, upon the effectiveness of each such change, the Series C Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section C5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series C Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series C Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series C Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series C Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series C Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series C Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series C Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. C5.3.3 [INTENTIONALLY OMITTED] C5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series C Preferred Stock. C5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section C5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section C5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. 33 C5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS. This Section C5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), (B) to any additional shares of Common Stock which become issuable upon conversion of any other series or class of preferred stock or convertible security of the Company as a result of any anti-dilution adjustment to the conversion ratio of such series or class, or (C) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series C Preferred Stock. Further, this Section C5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series C Preferred Stock. C5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series C Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series C Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series C Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. C5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series C Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series C Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of 34 such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section C5. C5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series C Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section C5.6 and Section C3.2 apply, the holders of the outstanding shares of Series C Preferred Stock and First Priority Parity Stock (voting together as a single class) shall have the option by majority vote to elect treatment for the Series C Preferred Stock and First Priority Parity Stock under this Section C5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section C3.2, and not this Section C5.6, shall apply. C5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In each case of an adjustment or readjustment of the Series C Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series C Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. C5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series C Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series C Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. As promptly as practicable after the Conversion Date for such Series C Preferred Stock, the Corporation shall issue and deliver to the holder of the 35 shares of Series C Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series C Preferred Stock in accordance with the provisions of this Section C5, and cash, as provided in Section C5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series C Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. C5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series C Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series C Preferred Stock, the Corporation shall pay to the holder of the shares of Series C Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series C Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series C Preferred Stock being converted. C5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series C Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series C Preferred Stock which were not converted. C5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of the Series C Preferred Stock, such number of its shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series C Preferred Stock (including any shares of Series C Preferred Stock represented by any warrants, options, subscription or purchase rights for Series C Preferred Stock), and if at any time the number of authorized but unissued shares of Class A Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Preferred Stock (including any shares of Series C Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series C Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Class A Common Stock to such number of shares as shall be sufficient for such purpose. 36 C6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. C6.1 The Corporation shall not take any corporate action or amend this Certificate of Incorporation (except to reduce the number of shares designated as Series C Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by majority vote or written consent of the holders of outstanding shares of Series C Preferred Stock, voting as a single class, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series C Preferred Stock without similarly changing the rights, preferences, privileges of or limitations on all other classes or series of First Priority Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend this Certificate of Incorporation or take any other corporate action without the approval of the holders of outstanding shares of Series C Preferred Stock if such amendment or corporate action would: (a) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series C Preferred Stock; or (b) reduce the amount payable to the holders of Series C Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series C Preferred Stock; or (d) cancel or modify the conversion rights of the holders of Series C Preferred Stock provided for in Section C5 herein. C6.2 The Corporation shall not take any corporate action or amend its Certificate of Incorporation without the approval by majority vote or written consent of the holders of outstanding shares of Series C Preferred Stock and First Priority Parity Stock, voting together as a single class, if such corporate action or amendment would similarly change the rights, preferences, privileges of or limitations on the Series C Preferred Stock and all classes or series of First Priority Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation or take any other corporate action without the approval of the holders of the outstanding shares of Series C Preferred Stock and First Priority Parity Stock, voting together as a single class, if such amendment or corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or 37 shares of equity securities of the Corporation other than as provided for in Section C2 hereof; or (b) authorize, create or issue, or obligate the Corporation to authorize, create or issue, shares of any class of stock ranking senior to the Series C Preferred Stock and First Priority Parity Stock with respect to liquidation preferences or dividend rights, or containing redemption rights; or (c) similarly reduce the amount payable to the holders of Series C Preferred Stock and First Priority Parity Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) similarly adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series C Preferred Stock and First Priority Parity Stock; or (e) similarly cancel or modify the conversion rights of the holders of Series C Preferred Stock and First Priority Parity Stock; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section C3.2 hereof. C7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series C Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Series C Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Series C Preferred Stock from time to time outstanding. C8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to 38 receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Series C Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. C9. STATUS OF CONVERTED OR REPURCHASED SERIES C PREFERRED STOCK. Any share or shares of Series C Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series C Preferred Stock, the provisions of this Series C Preferred Stock shall terminate and have no further force and effect. DESCRIPTION AND DESIGNATION OF SERIES D PREFERRED STOCK D1. DESIGNATION. A total of 4,555,556 shares of the Company's Preferred Stock shall be designated the Series D Preferred Stock. D2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and any other series of Preferred Stock 39 senior to or on parity with the Series D Preferred Stock with respect to liquidation preference (all voting together as a single class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series D Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. D3. LIQUIDATION, DISSOLUTION OR WINDING UP. D3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series D Preferred Stock shall be on a parity with the Series A Preferred Stock and Series C Preferred Stock with respect to liquidation preference. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock, the Series B Junior Preferred Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series D Preferred Stock in liquidation preference (collectively, referred to in this Description and Designation of Series D Preferred Stock as "Junior Stock"), and subject to the liquidation rights and preferences of any class or series of Preferred Stock designated in the future to be senior to the Series D Preferred Stock with respect to liquidation preference (referred to in this Description and Designation of Series D Preferred Stock as "Senior Stock"), the holders of each share of Series D Preferred Stock shall be entitled to be paid first out of the Available Assets, the greater of (i) an amount per share of Series D Preferred Stock equal to $9.00, plus $1.00 for each year (pro rated for partial years) from October ___, 1999 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series D Preferred Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. 40 If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series D Preferred Stock and of any Parity Stock the full amounts to which they otherwise would be entitled, the holders of Series D Preferred Stock and First Priority Parity Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series D Preferred Stock and First Priority Parity Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. D3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section D3; provided, however that, in the case of any such transaction to which the provisions of Section D5.6 also apply, the holders of the outstanding shares of Series D Preferred Stock and First Priority Parity Stock (voting together as a single class) shall have the right by majority vote to elect the benefits of the provisions of Section D5.6 hereof for all of the Series D Preferred Stock and First Priority Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section D3. The provisions of this Section D3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. D3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section D3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each Series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such Series and class. 41 D4. VOTING POWER. For each vote in which holders of Series D Preferred Stock are entitled to participate, each share of Series D Preferred Stock shall be entitled to that number of votes equal to two and one-half times the largest number of whole shares of Common Stock into which such holder's shares of Series D Preferred Stock could be converted. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Series D Preferred Stock shall be entitled to vote together with the Common Stock, the Series A Preferred Stock, the Series B Junior Preferred Stock, the Series C Preferred Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors generally, but excluding election of the Series A Directors). Each holder of Series D Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. D4.3 DIRECTOR ELECTION RIGHTS. So long as any shares of Series D Preferred Stock remain outstanding, the holders of Series D Preferred Stock, voting as a separate class, shall have the right to elect two directors of the Corporation (the "Series D Directors"). At any annual or special meeting of the Corporation held for the purpose of electing directors, the presence in person or by proxy (or by written consent) of the holders of a majority of the outstanding shares of Series D Preferred Stock shall constitute a quorum for the election of the Series D Director. D5. CONVERSION RIGHTS. The holders of the Series D Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Class B Common Stock: D5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section D5, any shares of the Series D Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Class B Common Stock. The number of shares of Common Stock which a holder of Series D Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series D Preferred Stock being converted at any time, by (ii) a rate (the "Series D Conversion Rate") equal to the quotient obtained by dividing $9.00 by the Series D Conversion Value. The "Series D Conversion Value" in effect from time to time, except as adjusted in accordance with this Section D5, shall be $9.00. D5.2 AUTOMATIC CONVERSION. D5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to a Public Offering, subject to such Public Offering or (B) upon the election, set forth in a written notice to the Corporation of holders of two-thirds of the outstanding shares of Series D Preferred and First Priority Parity Stock (counted as a single class) to convert their shares of Series D Preferred and First Priority Parity Stock to Common Stock, all shares of Series D Preferred Stock then 42 outstanding shall be converted automatically into that number of fully paid, non-assessable shares of Class B Common Stock into which such shares of Series D Preferred Stock are convertible pursuant to this Section D5, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. D5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph D5.2.1, the holders of the Series D Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series D Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series D Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. D5.3 ANTI-DILUTION ADJUSTMENTS. D5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series D Preferred Stock outstanding, issue or sell shares of its Common Stock or Common Stock Equivalents without consideration or at a price per share or Net Consideration Per Share less than the Series D Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series D Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series D Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: N0 = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). 43 N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series D Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued. Example: initial capital 1,000,000 initial conversion price $1.00 new shares issued 1,000,000 Total new consideration $500,000 new issue price $0.50 New shares which would be Issued at initial conversion price 500,000 new conversion price $0.75
The provisions of this Section D5.3.1 may be waived as to all shares of Series D Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series D Preferred Stock. D5.3.2 COMMON STOCK EQUIVALENTS. D5.3.2.1 GENERAL. For the purposes of this Section D5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any Common Stock Equivalents, shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series D Conversion Value shall be made under this Section D5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. D5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section D5.3, then, upon the effectiveness of each such change, the Series D Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section D5.3.2.1 44 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series D Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series D Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series D Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series D Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series D Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series D Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series D Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. D5.3.3 [INTENTIONALLY OMITTED] D5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series D Preferred Stock. D5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section D5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section D5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation in a written resolution. D5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS. This Section D5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), (B) to any additional shares of Common Stock which become issuable upon conversion of any other series or class of preferred stock or convertible security of the Company as a result of any anti-dilution adjustment to the conversion ratio of such series or class, or (C) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series D Preferred Stock. Further, this Section D5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any 45 qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series D Preferred Stock. D5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Except in the case where the Series D Conversion Value is the initial offering price per share of the Company's Common Stock upon consummation of the Qualified IPO or Rights Offering, as the case may be, upon the happening of an Extraordinary Common Stock Event, the Series D Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series D Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series D Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. D5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series D Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series D Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section D5. D5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series D Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities 46 and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series D Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section D5.6 and Section D3.2 apply, the holders of the outstanding shares of Series D Preferred Stock and First Priority Parity Stock (voting together as a single class) shall have the option by majority vote to elect treatment for the Series D Preferred Stock and First Priority Parity Stock under this Section D5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section D3.2, and not this Section D5.6, shall apply. D5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In each case of an adjustment or readjustment of the Series D Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series D Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. D5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series D Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Class B Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series D Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. As promptly as practicable after the Conversion Date for such Series D Preferred Stock, the Corporation shall issue and deliver to the holder of the shares of Series D Preferred Stock being converted, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series D Preferred Stock in accordance with the provisions of this Section D5, and cash, as provided in Section D5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series D Preferred Stock shall cease and such holder shall be deemed to have become the holder of record of the shares of Class B Common Stock represented thereby. D5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of 47 Series D Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series D Preferred Stock, the Corporation shall pay to the holder of the shares of Series D Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series D Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series D Preferred Stock being converted. D5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series D Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series D Preferred Stock which were not converted. D5.11 RESERVATION OF CLASS B COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class B Common Stock, solely for the purpose of effecting the conversion of the shares of the Series D Preferred Stock, such number of its shares of Class B Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series D Preferred Stock (including any shares of Series D Preferred Stock represented by any warrants, options, subscription or purchase rights for Series D Preferred Stock), and if at any time the number of authorized but unissued shares of Class B Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series D Preferred Stock (including any shares of Series D Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series D Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Class B Common Stock to such number of shares as shall be sufficient for such purpose. D6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. D6.1 The Corporation shall not take any corporate action or amend this Certificate of Incorporation (except to reduce the number of shares designated as Series D Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by majority vote or written consent of the holders of outstanding shares of Series D Preferred Stock, voting as a single class, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series D Preferred Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend this Certificate of Incorporation or take any other corporate action without the approval of the holders of outstanding shares of Series D Preferred Stock if such amendment or corporate action would: 48 (a) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series D Preferred Stock, or series of stock ranking senior to the Series D Preferred Stock with respect to liquidation preferences of dividend rights or containing redemption rights; or (b) reduce the amount payable to the holders of Series D Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series D Preferred Stock; or (d) cancel or modify the conversion rights of the holders of Series D Preferred Stock provided for in Section D5 herein. (e) adversely affect the voting rights of the holders of Series D Preferred Stock. D6.2 The Corporation shall not amend or repeal any provision of its Certificate of Incorporation or take any corporate action if such corporate action or amendment would similarly change the rights, preferences, privileges of or limitations on the Series D Preferred Stock and all classes or series of First Priority Parity Stock without the approval by majority vote or written consent of the holders of outstanding shares of Series D Preferred Stock and First Priority Parity Stock, voting together as a single class. Without limiting the generality of the preceding sentence, the Corporation will not take any corporate action without the approval of the holders of the outstanding shares of Series D Preferred Stock and First Priority Parity Stock, voting together as a single class, if such corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of equity securities of the Corporation other than as provided for in Section D2 hereof; or (b) authorize, create or issue, or obligate the Corporation to authorize, create or issue, shares of any class of stock ranking senior to the Series D Preferred Stock and First Priority Parity Stock with respect to liquidation preferences or dividend rights, or containing redemption rights; or (c) similarly reduce the amount payable to the holders of Series D Preferred Stock and First Priority Parity Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or 49 (d) similarly adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series D Preferred Stock and First Priority Parity Stock; or (e) similarly cancel or modify the conversion rights of the holders of Series D Preferred Stock and First Priority Parity Stock; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section D3.2 hereof. D7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series D Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Series D Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Series D Preferred Stock from time to time outstanding. D8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, 50 then and in each such event the Corporation shall mail or cause to be mailed to each holder of Series D Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. D9. STATUS OF CONVERTED OR REPURCHASED SERIES D PREFERRED STOCK. Any share or shares of Series D Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series D Preferred Stock, the provisions of this Series D Preferred Stock shall terminate and have no further force and effect. 51 ************************ 5. The corporation is to have perpetual existence. 6. In furtherance of and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to make, alter or repeal the bylaws of the corporation. 7. The directors of the corporation shall be entitled to the benefits of all limitations on the liability of directors generally that are now or hereafter become available under the General Corporation Law of Delaware. Without limiting the generality of the foregoing, no director of the corporation shall be personally liable to the corporation or to any stockholder of the corporation for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. 8. Elections of directors need not be by written ballot except and to the extent provided in the bylaws of the Corporation. 9. Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. 10. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the bylaws of the corporation. 11. The Corporation shall, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify and upon request shall advance expenses to any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was or has agreed to be a director or officer of the Corporation or while a director or officer is or was serving at the request of the Corporation as a director, officer, employer or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against any and all expenses (including attorney's fees and expenses), judgments, fines, penalties and amounts paid in settlement or incurred in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require the Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Such rights arising under any bylaw, agreement, vote of directors or stockholders or otherwise and shall inure to the 52 benefit of the heirs and legal representatives of such person. Any repeal or modification of the foregoing provisions of this Article 10 shall not adversely affect any right or protection of a director or officer of this Corporation existing at the time of such repeal or modification. 12. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, eMerge Interactive, Inc. has caused this certificate to be signed by Charles Abraham, its Chief Executive Officer on the __ day of October, 1999. EMERGE INTERACTIVE, Inc. By: ------------------------------------ Charles Abraham Chief Executive Officer EX-3.2 3 AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3.2 BYLAWS OF eMERGE VISION SYSTEMS, INC. (FORMERLY) ENHANCED VISIONS SYSTEMS, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES AND FISCAL YEAR SECTION 1.01. Registered Office. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware until otherwise established by a vote of a majority of the board of directors in office, and a statement of such change is filed in the manner provided by statute. SECTION 1.02. Other Offices. The corporation may also have offices at such other places within or without the State of Delaware as the board of directors may from time to time determine or the business of the corporation requires. SECTION 1.03. Fiscal Year. The fiscal year of the corporation shall end on the 31st of December in each year. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.01. Place of Meeting. All meetings of the stockholders of the corporation shall be held at the registered office of the corporation, or at such other place within or without the State of Delaware as shall be designated by the board of directors in the notice of such meeting. SECTION 2.02. Annual Meeting. The board of directors may fix the date and time of the annual meeting of the stockholders, but if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the third Tuesday of May in such year, if not a legal holiday, and if a legal holiday then on the next succeeding business day at 10:00 o'clock A.M., and at said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. SECTION 2.03. Special Meetings. Special meetings of the stockholders of the corporation for any purpose or purposes for which meetings may lawfully be called, may be called at any time by the chairman of the board, a majority of the board of directors, the chief executive officer or the president, or at the request, in writing, of stockholders owning individually or together ten percent or more of the entire capital stock of the corporation issued and outstanding and entitled to vote. At any time, upon written request of any person or persons who have duly called a special meeting, which written request shall state the purpose or purposes of the meeting, it shall be the duty of the secretary to fix the date of the meeting to be held at such date and time as the secretary may fix, not less than ten nor more than sixty days after the receipt of the request, and to give due notice thereof. If the secretary shall neglect or refuse to fix the time and date of such meeting and give notice thereof, the person or persons calling the meeting may do so. SECTION 2.04. Notice of Meetings. Written notice of the place, date and hour of 2 every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than ten nor more than sixty days before the date of the meeting. Every notice of a special meeting shall state the purpose or purposes thereof. SECTION 2.05. Quorum, Manner of Acting and Adjournment. The holders of a majority of the stock issued and outstanding (not including treasury stock) and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the certificate of incorporation or by these bylaws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. When a quorum is present at any meeting, the vote of the holders of the majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the applicable statute, the certificate of incorporation or these bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Except upon those questions governed by the aforesaid express provisions, the stockholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum. SECTION 2.06. Organization. At every meeting of the stockholders, the chairman of the board, if there be one, or in the case of a vacancy in the office or absence of the chairman of the board, one of the following persons present in the order stated: the vice chairman, if one has been appointed, the chief executive officer or the president, the vice presidents in their order or rank, a chairman designated by the board of directors or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, a person appointed by the chairman, shall act as secretary. SECTION 2.07. Voting. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock having voting power held by such stockholder. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Every proxy shall be executed in writing by the stockholder or by his duly authorized attorney-in-fact and filed with the secretary of the corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the secretary of the corporation. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled 3 with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the secretary of the corporation. SECTION 2.08. Consent of Stockholders in Lieu of Meeting. Any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required above to the corporation, written consent, signed by a sufficient number of holders or members to take action are delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 2.09. Voting Lists. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.10. Judges of Election. All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; the vote upon any other matter need not be by ballot. In advance of any meeting of stockholders, the board of directors may appoint judges of election, who need not be stockholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the chairman of any such meeting may, and upon the demand of any stockholder or his proxy at the meeting and before voting begins shall, appoint judges of election. The number of judges shall be either one or three, as determined, in the case of judges appointed upon demand of a stockholder, by stockholders present entitled to cast a majority of the votes which all stockholders present are entitled to cast thereon. No person who is a candidate for office shall act as a judge. In case any person appointed as judge fails to appear or 4 fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. If judges of election are appointed as aforesaid, they shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there be three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any stockholder or his proxy, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. ARTICLE III BOARD OF DIRECTORS SECTION 3.01. Powers. The board of directors shall have full power to manage the business and affairs of the corporation; and all powers of the corporation, except those specifically reserved or granted to the stockholders by statute, the certificate of incorporation or these bylaws, are hereby granted to and vested in the board of directors. SECTION 3.02. Number and Term of Office. The board of directors shall consist of one or more members as determined from time to time by resolution of the board of directors. Each director shall serve until the next annual meeting of the stockholders and until his successor shall have been elected and qualified, except in the event of his death, resignation or removal. All directors of the corporation shall be natural persons, but need not be residents of Delaware or stockholders of the corporation. SECTION 3.03. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. 5 SECTION 3.04. Resignations. Any director of the corporation may resign at any time by giving written notice to the chief executive officer or the president or the secretary of the corporation. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05. Organization. At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the chief executive officer or the president, the vice presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the secretary, or, in his absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. SECTION 3.06. Place of Meeting. The board of directors may hold its meeting, both regular and special, at such place or places within or without the State of Delaware as the board of directors may from time to time appoint, or as may be designated in the notice calling the meeting. SECTION 3.07. Organization Meeting. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 3.08. Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and place as shall be designated from time to time by resolution of the board of directors. If the date fixed for any such regular meeting be a legal holiday under the laws of the State where such meeting is to be held, then the same shall be held on the next succeeding business day, not a Saturday, or at such other time as may be determined by resolution of the board of directors. At such meetings, the directors shall transact such business as may properly be brought before the meeting. SECTION 3.09. Special Meetings. Special meetings of the board of directors shall be held whenever called by the chief executive officer or the president or by two or more of the directors. Notice of each such meeting shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone) or 48 hours (in the case of notice by telegram) or five days (in the case of notice by mail) before the time at which the meeting is to be held. Each such notice shall state the time and place of the meeting to be so held. SECTION 3.10. Quorum, Manner of Acting and Adjournment. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise 6 specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board. SECTION 3.11. Executive and Other Committees. The board of directors may, by resolution adopted by a majority of the whole board, designate an executive committee and one or more other committees, each committee to consist of two or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member, and the alternate or alternates, if any, designated for such member, of any committee the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. Any such committee to the extent provided in the resolution establishing such committee shall have and may exercise all the power and authority of the board of directors in the management of the business and affairs of the corporation, including the power or authority to declare a dividend or to authorize the issuance of stock, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151 (a) of the Delaware General Corporation Law ("DGCL"), fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation under Section 251 or 252 of the DGCL, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the DGCL. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee so formed shall keep regular minutes of its meetings and report the same to the board of directors when required. SECTION 3.12. Compensation of Directors. Unless otherwise restricted by the certificate of incorporation, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of 7 attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICE - WAIVERS - MEETINGS SECTION 4.01. Notice, What Constitutes. Whenever, under the provisions of the statutes of Delaware or the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given in accordance with Section 3.09 of Article III hereof. SECTION 4.02. Waivers of Notice. Whenever any written notice is required to be given under the provisions of the certificate of incorporation, these bylaws, or by statute, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 4.03. Conference Telephone Meetings. One or more directors may participate in a meeting of the board, or of a committee of the board, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. ARTICLE V OFFICERS SECTION 5.01. Number, Qualifications and Designation. The officers of the corporation shall be chosen by the board of directors and shall be a chief executive officer and/or a president, one or more vice presidents, a secretary, a treasurer, or officers acting in such capacities and such officers as may be elected in accordance with the provisions of Section 5.03 of this Article. SECTION 5.02. Election and Term of Office. The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03 of this Article, shall be elected annually by the board of directors, and such other officer shall hold his office until his successor shall have been elected and qualified, or until his earlier resignation or 8 removal. Any officer may resign at any time upon written notice to the corporation. SECTION 5.03. Subordinate Officers, Committees and Agents. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as it deems necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as are provided in these bylaws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. SECTION 5.04. The Chairman, Vice-Chairman of the Board and Chief Executive Officer. The chairman of the board, or in his absence, the vice-chairman of the board, shall preside at all meetings of the stockholders and of the board of directors, and shall perform such other duties as may from time to time be assigned to them by the board of directors. The chairman shall have the power to sign documents and instruments on behalf of the corporation in the same manner that such power is conferred upon the president. The chief executive officer shall have all of the same powers as the president. SECTION 5.05. The Chief Executive Officer or President. The chief executive officer or the president shall perform such duties and shall have such rights and responsibilities as may from time to time be assigned to him by the board of directors. SECTION 5.06. The Vice Presidents. The vice president or vice presidents, if any, shall perform the duties of the chief executive officer or the president in his absence and such other duties as may from time to time be assigned to them by the board of directors or by the chief executive officer or the president. SECTION 5.07. The Secretary. The secretary, or an assistant secretary, shall attend all meetings of the stockholders and of the board of directors and shall record the proceedings of the stockholders and of the directors and of committees of the board in a book or books to be kept for that purpose; see that notices are given and records and reports properly kept and filed by the corporation as required by law; be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, perform all duties incident to the office of the secretary, and such other duties as may from time to time be assigned to him by the board of directors or the chief executive officer or the president. SECTION 5.08. The Treasurer. The treasurer, or an assistant treasurer, shall have or provide for the custody of the funds or other property of the corporation and shall keep a separate book account of the same to his credit as treasurer; collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; deposit all funds in his custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; whenever so required by the board of directors, render an account showing his transactions as treasurer and the financial condition of the corporation; and, in general, discharge such other duties as may from time to time be assigned to him by the board of directors of the chief executive officer or the president. SECTION 5.09. Officers' Bonds. No officer of the corporation need provide a bond to guarantee the faithful discharge of his duties unless the board of directors shall 9 by resolution so require a bond in which event such officer shall give the corporation a bond (which shall be renewed if and as required) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office. SECTION 5.10. Salaries. The salaries of the officers and agents of the corporation elected by the board of directors shall be fixed from time to time by the board of directors. ARTICLE VI CERTIFICATES OF STOCK, TRANSFER, ETC. SECTION 6.01. Issuance. Each stockholder shall be entitled to a certificate or certificate for shares of stock of the corporation owned by him upon his request therefor. The stock certificates of the corporation shall be numbered and registered in the stock ledger and transfer books of the corporation as they are issued. They shall be signed by the chief executive officer or the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be a facsimile, engraved or printed. Any of or all the signatures upon such certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. SECTION 6.02. Transfer. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. No transfer shall be made which would be inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform Commercial Code-Investment Securities. SECTION 6.03. Stock Certificates. Stock certificates of the corporation shall be in such form as provided by statute and approved by the board of directors. The stock record books and the blank stock certificates books shall be kept by the secretary or by any agency designated by the board of directors for that purpose. SECTION 6.04. Lost, Stolen, Destroyed or Mutilated Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6.05. Record Holder of Shares. The corporation shall be entitled to 10 recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 6.06. Determination of Stockholders of Record. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty or less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the DGCL, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the DGCL, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon the resolution fixing the record date is adopted, and which record date shall not be more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of the business on the day on which the board of directors adopts the resolution relating thereto. 11 ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES SECTION 7.01. Indemnification of Authorized Representatives in Third Party Proceedings. The corporation shall indemnify any person who was or is an authorized representative of the corporation, and who was or is a party or is threatened to be made a party to any corporation proceeding, by reason of the fact that such person was or is an authorized representative of the corporation, against expenses judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal third party proceeding (including any action or investigation which could or does lead to a criminal third party proceeding) had no reasonable cause to believe such conduct was unlawful. The termination of any third party proceeding by judgment, order, settlement, indictment, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal third party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 7.02. Indemnification of Authorized Representatives in Corporate Proceedings. The corporation shall indemnify any person who was or is an authorized representative of the corporation and who was or is a party or is threatened to be made a party to any corporate proceeding by reason of the fact that such person was or is an authorized representative of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such corporate action if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such corporate proceeding was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03. Mandatory Indemnification of Authorized Representatives. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any third party or corporate proceeding or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith. SECTION 7.04. Determination of Entitlement to Indemnification. Any indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative is proper in the circumstances because such person has either met the applicable standard of conduct set forth in Section 7.01 or 7.02 or has been successful on the merits or otherwise as set forth 12 in Section 7.03 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (1) By the board of directors by a majority of a quorum consisting of directors who were not parties to such third party or corporate proceeding, or (2) If such a quorum is not obtainable, or, even if obtainable, a majority vote of such quorum so directs, by independent legal counsel in a written opinion, or (3) By the stockholders. SECTION 7.05. Advancing Expenses. Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of a director by the corporation in advance of the final disposition of such third party or corporate proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article. Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of an authorized representative other than a director by the corporation in advance of the final disposition of such third party or corporate proceeding as authorized by the board of directors upon receipt of an undertaking by or on behalf of such authorized representative to repay if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article. The financial ability of any authorized representative to make a repayment contemplated by this Section shall not be a prerequisite to the making of an advance, and shall not be considered by the board of directors in determining whether to authorize advancement of expenses. SECTION 7.06. Definitions. For purposes of this Article: (1) "authorized representative" shall mean a director or officer of the corporation, or a person serving at the request of the corporation as a director, officer, or trustee, of another corporation, partnership, joint venture, trust or other enterprise; (2) "corporation" shall include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (3) "corporate proceeding" shall mean any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor or investigative proceeding by the corporation; (4) "criminal third party proceedings" shall include any action or investigation which could or does lead to a criminal third party proceeding; (5) "expenses" shall include attorney's fees and disbursements; (6) "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; 13 (7) "not opposed to the best interests of the corporation" shall include such actions taken in good faith and in a manner the authorized representative reasonably believed to be in the interest of the participants and beneficiaries of a benefit plan; (8) "other enterprises" shall include employee benefit plans; (9) "party" shall include the giving of testimony or similar involvement; (10) "serving at the request of the corporation" shall include any service as a director, officer or employee of the corporation which imposes duties on, or involves service by, such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries; and (11) "third party proceeding" shall mean any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation. SECTION 7.07. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in such a capacity, or arising out of his status as such, whether or not the corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article. SECTION 7.08. Scope of Article. The indemnification of authorized representatives and advancement of expenses, as authorized by the preceding provisions of this Article, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to the action in an official capacity and as to action in another capacity. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an authorized representative and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.09. Reliance on Provisions. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article. ARTICLE VIII GENERAL PROVISIONS SECTION 8.01. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock of the corporation, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors 14 shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 8.02. Annual Statements. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. SECTION 8.03. Contracts. Except as otherwise provided in these bylaws, the board of directors may authorize any officer or officers including the chairman and vice chairman of the board of directors, or any agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 8.04. Checks. All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors may from time to time designate. SECTION 8.05. Corporate Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 8.06. Deposits. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. SECTION 8.07. Corporate Records. At least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of and number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Every stockholder shall, upon written demand, under oath stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business, for any proper purpose, the stock ledger, books or records of account, and records of the proceedings of the stockholders and directors, and make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. Where the stockholder seeks to inspect the books and records of the corporation, other than its stock ledger or list of stockholders, the stockholder shall first establish (1) compliance with the provisions of this section respecting the form and manner of making demand for inspection of such document; and (2) that the inspection sought is for a 15 proper purpose. Where the stockholder seeks to inspect the stock ledger or list of stockholders of the corporation and has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish the inspection sought is for an improper purpose. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger and the stock list and to make copies or extracts therefrom. The court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the court may deem just and proper. SECTION 8.08. Amendment of Bylaws. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the vote of more than fifty percent of the stockholders or by a majority of the whole board of directors, when such power is conferred upon the board of directors by the certificate of incorporation, at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders of the board of directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. Sections 5.01 and 5.04 were amended by written consent of the board of Directors on July 11, 1997 EX-10.1 4 AMENDED/RESTATED 1996 EQUITY COMPENSATION PLAN 1 EXHIBIT 10.1 eMERGE VISION SYSTEMS, INC. AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN The purpose of the eMerge Vision Systems, Inc. Amended and Restated 1996 Equity Compensation Plan (the "Plan") is to provide (i) designated employees of eMerge Vision Systems, Inc. (formerly known as Enhanced Vision Systems, Inc.) (the "Company") and its subsidiaries, (ii) certain Key Advisors and advisors who perform services for the Company or its subsidiaries and (iii) non-employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance units. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company's shareholders, and will align the economic interests of the participants with those of the shareholders. 1. Administration (a) Committee. The Plan shall be administered and interpreted by a committee appointed by the Board (the "Committee"). Prior to the effective date of an initial public offering of the Company's stock as described in Section 22(b)(a "Public Offering"), the Board may exercise any power or authority of the Committee under the Plan and, in such case, references to the Committee hereunder, as they relate to Plan administration, shall be deemed to include the Board as a whole. After a Public Offering, the Committee may consist of two or more persons appointed by the Board, all of whom shall be "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and related Treasury regulations and may be "non-employee directors" as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, notwithstanding anything in the Plan to the contrary, the Board must ratify or approve any grants made to Non-Employee Directors. References in the Plan to the "Committee" shall be deemed to include the Board, with respect to ratification or approval of grants made to Non-Employee Directors. (b) Committee Authority. Except as provided in Section 6, the Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and 1 2 terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants Awards under the Plan may consist of grants of incentive stock options as described in Section 5 ("Incentive Stock Options"), nonqualified stock options as described in Section 5 and Section 6 ("Nonqualified Stock Options")(Incentive Stock Options and Nonqualified Stock Options are collectively referred to as "Options"), restricted stock as described in Section 7 (Restricted Stock"), stock appreciation rights as described in Section 8 ("SARs"), and performance units as described in Section 9 ("Performance Units") (hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the "Grant Instrument") or an amendment to the Grant Instrument. The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. 3. Shares Subject to the Plan (a) Shares Authorized. Subject to the adjustment specified below, the aggregate number of shares of common stock of the Company ("Company Stock") that may be issued or transferred under the Plan is 1,360,000 shares. 2 3 After a Public Offering, the maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual shall be 500,000 shares. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options or SARs granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, or if any shares of Restricted Stock or Performance Units are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share or the applicable market value of such Grants shall be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. 4. Eligibility for Participation (a) Eligible Persons. All employees of the Company and its subsidiaries ("Employees"), including Employees who are officers or members of the Board, and members of the Board who are not Employees ("Non-Employee Directors") shall be eligible to participate in the Plan. Key Advisors and advisors who perform services to the Company or any of its subsidiaries ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide 3 4 services and such services are not in connection with the offer or sale of securities in a capital-raising transaction. (b) Selection of Grantees. The Committee shall select the Employees, Non-Employee Directors and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, Key Advisors and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as "Grantees". 5. Granting of Options (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non-Employee Directors and Key Advisors. (b) Type of Option and Price. (i) The Committee may grant Incentive Stock Options that are intended to qualify as "incentive stock options" within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended so to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees. Nonqualified Stock Options may be granted to Employees, Non-Employee Directors and Key Advisors. (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted; provided, however, that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted and (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. (iii) If the Company Stock is publicly traded, then the Fair Market 4 5 Value per share shall be determined as follows: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant. (d) Exercisability of Options. Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument or an amendment to the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason. (e) Termination of Employment, Disability or Death. (i) Except as provided below, an Option may only be exercised while the Grantee is employed by the Company as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by the Company for any reason other than a "disability", death or "termination for cause", any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. 5 6 (ii) In the event the Grantee ceases to be employed by the Company on account of a "termination for cause" by the Company, any Option held by the Grantee shall terminate as of the date the Grantee ceases to be employed by the Company. (iii) In the event the Grantee ceases to be employed by the Company because the Grantee is "disabled", any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (iv) If the Grantee dies while employed by the Company or within 90 days after the date on which the Grantee ceases to be employed on account of a termination of employment specified in Section 5(e)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (v) For purposes of this Section 5(e), 6, 7, 8 and 9: (A) The term "Company" shall mean the Company and its parent and subsidiary corporations. (B) "Employed by the Company" shall mean employment or service as an Employee, Key Advisor or member of the Board (so that, for purposes of exercising Options and SARs and satisfying conditions with respect to Restricted Stock and Performance Units, a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor and member of the Board), unless the Committee determines otherwise. 6 7 (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (D) "Termination for cause" shall mean, except to the extent specified otherwise by the Committee, a finding by the Committee that the Grantee has breached his or her employment, service, noncompetition, nonsolicitation or other similar contract or obligation with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information. In the event a Grantee's employment is terminated for cause, in addition to the immediate termination of all Grants, the Grantee shall automatically forfeit all shares underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Grantee for such shares, and any option gain realized by the Grantee from exercising all or a portion of an Option within the two-year period prior to the event shall be paid by the Grantee to the Company. (f) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee (x) in cash, (y) with the approval of the Committee, by delivering shares of Company Stock owned by the Grantee for the period necessary to avoid a charge to the Company's earnings for financial reporting purposes (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or (z) by such other method as the Committee may approve, including after a Public Offering payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 10) at the time of exercise. (g) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of 7 8 the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). 6. Formula Option Grants to Non-Employee Directors [Intentionally Omitted] 7. Restricted Stock Grants The Committee may issue or transfer shares of Company Stock to an Employee or Key Advisor under a Grant of Restricted Stock, upon such terms as the Committee deems appropriate. The following provisions are applicable to Restricted Stock: (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Restricted Stock Grants may be issued or transferred for consideration or for no consideration, as determined by the Committee. The Committee may establish conditions under which restrictions on shares of Restricted Stock shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of time during which the Restricted Stock will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Restricted Stock Grant and the restrictions applicable to such shares. (c) Requirement of Employment. If the Grantee ceases to be employed by the Company (as defined in Section 5(e)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Restricted Stock Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. 8 9 (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Restricted Stock except to a Successor Grantee under Section 11(a). Each certificate for a share of Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Restricted Stock until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote shares of Restricted Stock and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Restricted Stock shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all Restricted Stock Grants, that the restrictions shall lapse without regard to any Restriction Period. 8. Stock Appreciation Rights (a) General Requirements. The Committee may grant stock appreciation rights ("SARs") to an Employee or Key Advisor separately or in tandem with any Option (for all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of the Grant of the Incentive Stock Option. The Committee shall establish the base amount of the SAR at the time the SAR is granted. Unless the Committee determines otherwise, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, the Fair Market Value of a share of Company Stock as of the date of Grant of the SAR. 9 10 (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of shares of Company Stock that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of shares of Company Stock. (c) Exercisability. An SAR shall be exercisable during the period specified by the Committee in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by the Company or during the applicable period after termination of employment as described in Section 5(e). A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable. No SAR may be exercised for cash by an officer or director of the Company who is subject to Section 16 of the Exchange Act, except in accordance with Rule 16b-3 under the Exchange Act. (d) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Company Stock or a combination thereof. The stock appreciation for an SAR is the amount by which the Fair Market Value of the underlying Company Stock on the date of exercise of the SAR exceeds the base amount of the SAR as described in Subsection (a). (e) Form of Payment. The Committee shall determine whether the appreciation in an SAR shall be paid in the form of cash, shares of Company Stock, or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of shares of Company Stock to be received, shares of Company Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. If shares of Company Stock are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share. 9. Performance Units (a) General Requirements. The Committee may grant performance units ("Performance Units") to an Employee or Key Advisor. Each Performance 10 11 Unit shall represent the right of the Grantee to receive an amount based on the value of the Performance Unit, if performance goals established by the Committee are met. A Performance Unit shall be based on the Fair Market Value of a share of Company Stock or on such other measurement base as the Committee deems appropriate. The Committee shall determine the number of Performance Units to be granted and the requirements applicable to such Units. (b) Performance Period and Performance Goals. When Performance Units are granted, the Committee shall establish the performance period during which performance shall be measured (the "Performance Period"), performance goals applicable to the Units ("Performance Goals") and such other conditions of the Grant as the Committee deems appropriate. Performance Goals may relate to the financial performance of the Company or its operating units, the performance of Company Stock, individual performance, or such other criteria as the Committee deems appropriate. (c) Payment with respect to Performance Units. At the end of each Performance Period, the Committee shall determine to what extent the Performance Goals and other conditions of the Performance Units are met and the amount, if any, to be paid with respect to the Performance Units. Payments with respect to Performance Units shall be made in cash, in Company Stock, or in a combination of the two, as determined by the Committee. (d) Requirement of Employment. If the Grantee ceases to be employed by the Company (as defined in Section 5(e)) during a Performance Period, or if other conditions established by the Committee are not met, the Grantee's Performance Units shall be forfeited. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. 10. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Options and other Grants paid in Company Stock, the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to 11 12 withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to an Option, SAR, Restricted Stock or Performance Units paid in Company Stock by having shares withheld up to an amount that does not exceed the Grantee's maximum marginal tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. 11. Transferability of Grants (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members or other persons or entities according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 12. Right of First Refusal Prior to a Public Offering, if at any time an individual desires to sell, encumber, or otherwise dispose of shares of Company Stock distributed to him under this Plan, the individual shall first offer the shares to the Company by 12 13 giving the Company written notice disclosing: (a) the name of the proposed transferee of the Company Stock; (b) the certificate number and number of shares of Company Stock proposed to be transferred or encumbered; (c) the proposed price; (d) all other terms of the proposed transfer; and (e) a written copy of the proposed offer. Within 30 days after receipt of such notice, the Company shall have the option to purchase all or part of such Company Stock at the same price and on the same terms as contained in such notice. In the event the Company (or a shareholder, as described below) does not exercise the option to purchase Company Stock, as provided above, the individual shall have the right to sell, encumber or otherwise dispose of his shares of Company Stock on the terms of the transfer set forth in the written notice to the Company, provided such transfer is effected within 30 days after the expiration of the option period. If the transfer is not effected within such period, the Company must again be given an option to purchase, as provided above. The Board, in its sole discretion, may waive the Company's right of first refusal pursuant to this Section 12 and the Company's repurchase right pursuant to Section 13 below. If the Company's right of first refusal or repurchase right is so waived, the Board may, in its sole discretion, pass through such right to the remaining shareholders of the Company in the same proportion that each shareholder's stock ownership bears to the stock ownership of all the shareholders of the Company, as determined by the Board. To the extent that a shareholder has been given such right and does not purchase his or her allotment, the other shareholders shall have the right to purchase such allotment on the same basis. On and after a Public Offering, the Company shall have no further right to purchase shares of Company Stock under this Section 12 and Section 13 below, and its limitations shall be null and void. 13. Purchase by the Company Prior to a Public Offering, if a Grantee ceases to be employed by the Company, the Company shall have the right to purchase all or part of any Company Stock distributed to him under this Plan at its then current Fair Market Value (as defined in Section 5(b)); provided, however, that such repurchase shall be made in accordance with applicable accounting rules to avoid adverse accounting treatment. 13 14 14. Change of Control of the Company As used herein, a "Change of Control" shall be deemed to have occurred if: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than Safeguard Scientifics, Inc. or any of its subsidiaries or affiliates, including affiliated venture funds, becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing a majority or more of the voting power of the then outstanding securities of the Company; (b) The shareholders of the Company approve (or, if shareholder approval is not required, the Board approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to a majority of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote) or where the members of the Board, immediately prior to the merger or consolidation, would not, immediately after the merger or consolidation, constitute a majority of the board of directors of the surviving corporation, (ii) the sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company; (c) Any person has commenced a tender offer or exchange offer for a majority of the voting power of the then outstanding shares of the Company. 15. Consequences of a Change of Control (a) Notice and Acceleration. Upon a Change of Control, unless the Committee determines otherwise, (i) the Company shall provide each Grantee with outstanding Grants written notice of such Change of Control, (ii) all outstanding Options and SARs shall automatically accelerate and become fully exercisable, (iii) the restrictions and conditions on all outstanding Restricted Stock shall immediately lapse, and (iv) Grantees holding Performance Units shall receive a payment in settlement of such Performance Units, in an amount determined by the Committee, based on the Grantee's target payment for the Performance Period and the portion of the Performance Period that precedes the Change of Control. 14 15 (b) Assumption of Grants. Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Options and SARs that are not exercised shall be assumed by, or replaced with comparable options or rights by, the surviving corporation. (c) Other Alternatives. Notwithstanding the foregoing, subject to subsection (d) below, in the event of a Change of Control, the Committee may take one or both of the following actions: the Committee may (i) require that Grantees surrender their outstanding Options and SARs in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options and SARs exceeds the Exercise Price of the Options or the base amount of the SARs, as applicable, or (ii) after giving Grantees an opportunity to exercise their outstanding Options and SARs, terminate any or all unexercised Options and SARs at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Change of Control or such other date as the Committee may specify. (d) Committee. The Committee making the determinations under this Section 15 following a Change of Control must be comprised of the same members as those on the Committee immediately before the Change of Control. If the Committee members do not meet this requirement, the automatic provisions of Subsections (a) and (b) shall apply, and the Committee shall not have discretion to vary them. (e) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (c) above) that would make the Change of Control ineligible for pooling of interests accounting treatment or that would make the Change of Control ineligible for desired tax treatment if, in the absence of such right, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 16. Requirements for Issuance or Transfer of Shares Limitations on Issuance or Transfer of Shares. No Company Stock shall be issued or transferred in connection with any Grant hereunder unless 15 16 and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. 17. Amendment and Termination of the Plan (a) Amendment. The Board may amend or terminate the Plan at any time; provided, however, that the Board shall not amend the Plan without shareholder approval if such approval is required by Section 162(m) of the Code. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the shareholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 17(b). The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 17(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 18. Funding of the Plan 16 17 This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 19. Rights of Participants Nothing in this Plan shall entitle any Employee, Key Advisor or other person to any claim or right to be granted a Grant under this Plan, except as provided in Section 6. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 20. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 21. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 22. Effective Date of the Plan. (a) Effective Date. Subject to the approval of the Company's shareholders, the Plan shall be effective on January 26, 1996. (b) Public Offering. The provisions of the Plan that refer to a Public Offering, or that refer to, or are applicable to persons subject to, section 16 of the Exchange Act or section 162(m) of the Code, shall be effective, if at all, upon the initial registration of the Company Stock under section 12(g) of the Exchange Act, and shall remain effective thereafter for so long as such stock is so registered. 23. Miscellaneous 17 18 (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and SARs and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of the State of Delaware. f:\partners\emerge vision\charter-corporate\amended and restated equity comp plan 6-98(1) - -------- (1) Adopted by the Board of Directors and Sole Stockholder on 1/26/96; amended by the Board on July 9, 1997 and by the stockholders on July 11, 1997; amended by the Board on 7/17/97 and by the stockholders on 7/30/97 18 EX-10.2 5 1999 EQUITY COMPENSATION PLAN 1 EXHIBIT 10.2 EMERGE VISION SYSTEMS, INC. 1999 EQUITY COMPENSATION PLAN The purpose of the eMerge Vision Systems, Inc. 1999 Equity Compensation Plan (the "Plan") is to provide (i) designated employees of eMerge Vision Systems, Inc. (the "Company") and its subsidiaries, (ii) individuals to whom an offer of employment has been extended, (iii) certain advisors who perform services for the Company or its subsidiaries, and (iv) non employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance units. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company's stockholders, and will align the economic interests of the participants with those of the stockholders. 1. Administration (a) Committee. The Plan shall be administered and interpreted by a committee appointed by the Board (the "Committee"). The Committee shall consist of two or more persons appointed by the Board, all of whom may be "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and related Treasury regulations and may be "non employee directors" as defined under Rule 16b 3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members or may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. If the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee. (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability, and (iv) deal with any other matters arising under the Plan. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. 2 All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants Awards under the Plan may consist of grants of incentive stock options as described in Section 5 ("Incentive Stock Options"), nonqualified stock options as described in Section 5 ("Nonqualified Stock Options") (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as "Options"), restricted stock as described in Section 6 (Restricted Stock"), stock appreciation rights as described in Section 7 ("SARs"), and performance units as described in Section 8 ("Performance Units") (hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the "Grant Instrument") or an amendment to the Grant Instrument. The Committee shall approve the basic form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. 3. Shares Subject to the Plan (a) Shares Authorized. Subject to the adjustment specified below, the aggregate number of shares of common stock of the Company ("Company Stock") that may be issued or transferred under the Plan is 1,000,000 shares. The maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 500,000 shares. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options or SARs granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, or if any shares of Restricted Stock or Performance Units are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the 3 price per share or the applicable market value of such Grants shall be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated by rounding any portion of a share equal to .5 or greater up, and any portion of a share equal to less than .5 down, in each case to the nearest whole number. Any adjustments determined by the Committee shall be final, binding and conclusive. 4. Eligibility for Participation (a) Eligible Persons. All employees of the Company and its subsidiaries ("Employees"), including Employees who are officers or members of the Board, individuals to whom an offer of employment has been extended ("New Hire"), and members of the Board who are not Employees ("Non Employee Directors") shall be eligible to participate in the Plan. Advisors who perform services to the Company or any of its subsidiaries ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide services and such services are not in connection with the offer or sale of securities in a capital raising transaction. (b) Selection of Grantees. The Committee shall select the Employees, New Hires, Non-Employee Directors and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, New Hires, Key Advisors, and Non Employee Directors who receive Grants under this Plan shall hereinafter be referred to as "Grantees." 5. Granting of Options (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, New Hires, Non Employee Directors, and Key Advisors. (b) Type of Option and Price. (i) The Committee may grant Incentive Stock Options that are intended to qualify as "incentive stock options" within the meaning of section 422 of the Code, Nonqualified Stock Options that are not intended so to qualify, or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees. Nonqualified Stock Options may be granted to Employees, New Hires, Non Employee Directors, and Key Advisors. 4 (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted, provided, however, that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted and (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. (iii) If the Company Stock is publicly traded, then, except as otherwise determined by the Committee, the following rules regarding the determination of Fair Market Value per share apply: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the mean between the highest and lowest quoted selling prices on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant. (d) Exercisability of Options. (i) Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument or an amendment to the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason. (ii) Notwithstanding the foregoing, the Option may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Non-Employee 5 Director, or Key Advisor to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a repurchase right in favor of the Company, with the repurchase price to be equal to the original purchase price, and any other restrictions the Committee determines to be appropriate. (e) Termination of Employment, Disability or Death. (i) Except as provided below, an Option may only be exercised while the Grantee is employed by the Company as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by the Company for any reason other than a "disability," death or "termination for cause," any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by the Company on account of a "termination for cause" by the Company, any Option held by the Grantee shall terminate as of the date the Grantee ceases to be employed by the Company. In addition to the immediate termination of all Grants, the Grantee shall automatically forfeit all shares underlying any exercised portion of an Option, upon refund by the Company of the Exercise Price paid by the Grantee for such shares. (iii) In the event the Grantee ceases to be employed by the Company because the Grantee is "disabled," any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (iv) If the Grantee dies while employed by the Company or within 90 days after the date on which the Grantee ceases to be employed on account of a termination of employment specified in Section 5(e)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. 6 (v) For purposes of Sections 5(e), 6, 7, and 8: (A) "Company," when used in the phrase "employed by the Company," shall mean the Company, its parent and any subsidiary corporation. (B) "Employed by the Company" shall mean employment or service as an Employee, Key Advisor, or member of the Board (so that, for purposes of exercising Options and SARs and satisfying conditions with respect to Restricted Stock and Performance Units, a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor, and member of the Board), unless the Committee determines otherwise. The Committee's determination as to a participant's employment or other provision of services, termination of employment or cessation of the provision of services, leave of absence, or reemployment shall be conclusive on all persons unless determined to be incorrect. (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (D) "Termination for cause" shall mean the determination of the Committee that any one or more of the following events has occurred: (1) the Grantee's conviction of any act which constitutes a felony under applicable federal or state law, either in connection with the performance of the Grantee's obligations on behalf of the Company or which affects the Grantee's ability to perform his or her obligations as an employee, board member or advisor of the Company or under any employment agreement, non-competition agreement, confidentiality agreement or like agreement or covenant between the Grantee and the Company (any such agreement or covenant being herein referred to as an "Employment Agreement"); (2) the Grantee's willful misconduct in connection with the performance of his or her duties and responsibilities as an employee, board member or advisor of the Company or under any Employment Agreement, which willful misconduct is not cured by the Grantee within 10 days of his or her receipt of written notice thereof from the Committee; (3) the Grantee's commission of an act of embezzlement, fraud or dishonesty which results in a loss, damage or injury to the Company; (4) the Grantee's substantial and continuing neglect, gross negligence or inattention in the performance of his or her duties as an employee, board member or advisor of the Company or under any Employment Agreement which is not cured by the Grantee within 10 days of his or her receipt of written notice thereof from the Committee; (5) the Grantee's unauthorized use or disclosure or any trade secret or confidential information of the Company which adversely affects the business of the Company, provided that any disclosure of any trade secret or confidential information of the Company to a third party in the ordinary course of business who signs a confidentiality 7 agreement shall not be deemed a breach of this subparagraph; (6) the Grantee's material breach of any of the provisions of any Employment Agreement, which material breach is not cured by the Grantee within 10 days of his or her receipt of a written notice from the Company specifying such material breach; or (7) the Grantee has voluntarily terminated his or her employment or service with the Company and breaches his or her non-competition agreement with the Company. (f) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee: (i) in cash, (ii) by delivering shares of Company Stock owned by the Grantee for the period necessary to avoid a charge to the Company's earnings for financial reporting purposes (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price, (iii) after a Public Offering, by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, or (iv) by such other method of payment as the Committee may approve. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 9) at the time of exercise. (g) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). 6. Restricted Stock Grants The Committee may issue or transfer shares of Company Stock to a Grantee under a Grant of Restricted Stock upon such terms as the Committee deems appropriate. The following provisions are applicable to Restricted Stock: 8 (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Restricted Stock Grants may be issued or transferred for consideration or for no consideration, as determined by the Committee. The Committee may establish conditions under which restrictions on shares of Restricted Stock shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of time during which the Restricted Stock will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Restricted Stock Grant and the restrictions applicable to such shares. (c) Requirement of Employment. If the Grantee ceases to be employed by the Company (as defined in Section 5(e)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Restricted Stock Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Restricted Stock except to a Successor Grantee under Section 10(a). Each certificate for a share of Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Restricted Stock until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote shares of Restricted Stock and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Restricted Stock shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all Restricted Stock Grants, that the restrictions shall lapse without regard to any Restriction Period. 7. Stock Appreciation Rights (a) General Requirements. The Committee may grant stock appreciation rights ("SARs") to a Grantee separately or in tandem with any Option (for 9 all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of the Grant of the Incentive Stock Option. The Committee shall establish the base amount of the SAR at the time the SAR is granted. Unless the Committee determines otherwise, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, the Fair Market Value of a share of Company Stock as of the date of Grant of the SAR. (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of shares of Company Stock that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of shares of Company Stock. (c) Exercisability. A SAR shall be exercisable during the period specified by the Committee in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by the Company or during the applicable period after termination of employment as described in Section 5(e). A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable. No SAR may be exercised for cash by an officer or director of the Company or any of its subsidiaries who is subject to Section 16 of the Exchange Act, except in accordance with Rule 16b 3 under the Exchange Act. (d) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Company Stock or a combination thereof. The stock appreciation for a SAR is the amount by which the Fair Market Value of the underlying Company Stock on the date of exercise of the SAR exceeds the base amount of the SAR as described in Subsection (a). (e) Form of Payment. The Committee shall determine whether the appreciation in a SAR shall be paid in the form of cash, shares of Company Stock, or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of shares of Company Stock to be received, shares of Company Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. If shares of Company Stock are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share. 8. Performance Units 10 (a) General Requirements. The Committee may grant performance units ("Performance Units") to a Grantee. Each Performance Unit shall represent the right of the Grantee to receive an amount based on the value of the Performance Unit, if performance goals established by the Committee are met. A Performance Unit shall be based on the Fair Market Value of a share of Company Stock or on such other measurement base as the Committee deems appropriate. The Committee shall determine the number of Performance Units to be granted and the requirements applicable to such Units. (b) Performance Period and Performance Goals. When Performance Units are granted, the Committee shall establish the performance period during which performance shall be measured (the "Performance Period"), performance goals applicable to the Units ("Performance Goals") and such other conditions of the Grant as the Committee deems appropriate. Performance Goals may relate to the financial performance of the Company or its operating units, the performance of Company Stock, individual performance, or such other criteria as the Committee deems appropriate. (c) Payment with respect to Performance Units. At the end of each Performance Period, the Committee shall determine to what extent the Performance Goals and other conditions of the Performance Units are met and the amount, if any, to be paid with respect to the Performance Units. Payments with respect to Performance Units shall be made in cash, in Company Stock, or in a combination of the two, as determined by the Committee. (d) Requirement of Employment. If the Grantee ceases to be employed by the Company (as defined in Section 5(e)) during a Performance Period, or if other conditions established by the Committee are not met, the Grantee's Performance Units shall be forfeited. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. 9. Qualified Performance Based Compensation. (a) Designation as Qualified Performance Based Compensation. The Committee may determine that Performance Units or Restricted Stock granted to an Employee shall be considered "qualified performance based compensation" under Section 162(m) of the Code. The provisions of this Section 9 shall apply to Grants of Performance Units and Restricted Stock that are to be considered "qualified performance based compensation" under Section 1 62(m) of the Code. (b) Performance Goals. When Performance Units or Restricted Stock that are to be considered "qualified performance based compensation" are granted, the Committee shall establish in writing (i) the objective performance goals that must be met in order for restrictions on the Restricted Stock to lapse or amounts to be paid under the Performance Units, (ii) the Performance 11 Period during which the performance goals must be met, (iii) the threshold, target and maximum amounts that may be paid if the performance goals are met, and (iv) any other conditions, including without limitation provisions relating to death, disability, other termination of employment or Reorganization, that the Committee deems appropriate and consistent with the Plan and Section 162(m) of the Code. The performance goals may relate to the Employee's business unit or the performance of the Company and its subsidiaries as a whole, or any combination of the foregoing. The Committee shall use objectively determinable performance goals based on one or more of the following criteria: stock price, earnings per share, net earnings, operating earnings, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, or strategic business criteria consisting of one or more objectives based on meeting specific revenue goals, market penetration goals, geographic business expansion goals, cost targets or goals relating to acquisitions or divestitures. (c) Establishment of Goals. The Committee shall establish the performance goals in writing either before the beginning of the Performance Period or during a period ending no later than the earlier of (i) 90 days after the beginning of the Performance Period or (ii) the date on which 25% of the Performance Period has been completed, or such other date as may be required or permitted under applicable regulations under Section 162(m) of the Code. The performance goals shall satisfy the requirements for "qualified performance based compensation," including the requirement that the achievement of the goals be substantially uncertain at the time they are established and that the goals be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goals have been met. The Committee shall not have discretion to increase the amount of compensation tat is payable upon achievement of the designated performance goals. (d) Maximum Payment. If Restricted Stock, or Performance Units measured with respect to the fair market value of the Company Stock, are granted, not more than 500,000 shares may be Granted to any Grantee for any Performance Period. If Performance Units are measured with respect to other criteria, the maximum amount that may be paid to an employee with respect to a Performance Period is $1,000,000. (e) Announcement of Grants. The Committee shall certify and announce the results for each Performance Period to all Grantees immediately following the announcement of the Company's financial results for the Performance Period. If and to the extent that the Committee does not certify that the performance goals have been met, the grants of Restricted Stock or Performance Units for the Performance Period shall be forfeited. 10. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages 12 paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Options and other Grants paid in Company Stock, the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to an Option, SAR, Restricted Stock or Performance Units paid in Company Stock by having shares withheld up to an amount that does not exceed the Grantee's maximum marginal tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. 11. Transferability of Grants (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members or other persons or entities according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 12. Reorganization of the Company. (a) Reorganization. As used herein, a "Reorganization" shall be deemed to have occurred if the stockholders of the Company approve (or, if stockholder approval is not required, the Board approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the stockholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such stockholders to more than 50% of all votes to which all stockholders of the surviving corporation would be 13 entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote), (ii) the sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company. (b) Assumption of Grants. Upon a Reorganization where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Options and SARs that are not exercised shall be assumed by, or replaced with comparable options or rights by, the surviving corporation. (c) Other Alternatives. Notwithstanding the foregoing, in the event of a Reorganization, the Committee may take one or both of the following actions: the Committee may (i) require that Grantees surrender their outstanding Options and SARs in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options and SARs exceeds the Exercise Price of the Options or the base amount of the SARs, as applicable, or (ii) after giving Grantees an opportunity to exercise their outstanding Options and SARs, terminate any or all unexercised Options and SARs at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Reorganization or such other date as the Committee may specify. (d) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Reorganization, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (b) above) that would make the Reorganization ineligible for pooling of interests accounting treatment or that would make the Reorganization ineligible for desired tax treatment if, in the absence of such right, the Reorganization would qualify for such treatment and the Company intends to use such treatment with respect to the Reorganization. 13. Change of Control of the Company. (a) As used herein, a "Change of Control" shall be deemed to have occurred if: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d3 under the Exchange Act), directly or indirectly, of securities of the Company representing a majority of the voting power of the then outstanding securities of the Company except where the acquisition is approved by the Board; or (ii) Any person has commenced a tender offer or exchange offer for a majority of the voting power of the then outstanding shares of the Company. 14 (b) Notice and Acceleration. Unless the Committee determines otherwise, a Change of Control shall not result in the acceleration of vesting of outstanding Options and SARs, the removal of restrictions and conditions on outstanding Restricted Stock grant, or any accelerated payments in connection with outstanding Performance Units. (c) Other Alternatives. Notwithstanding the foregoing, in the event of a Change of Control, the Committee may take one or both of the following actions: the Committee may (i) require that Grantees surrender their outstanding Options and SARs in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options and SARs exceeds the Exercise Price of the Options or the base amount of the SARs, as applicable, or (ii) after giving Grantees an opportunity to exercise their outstanding Options and SARs, terminate any or all unexercised Options and SARs at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Change of Control or such other date as the Committee may specify. (d) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (c) above) that would make the Change of Control ineligible for pooling of interests accounting treatment or that would make the Change of Control ineligible for desired tax treatment if, in the absence of such right, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 14. Right of First Refusal Prior to a Public Offering, if at any time an individual desires to sell, encumber, or otherwise dispose of shares of Company Stock distributed to him under this Plan, the individual shall first offer the shares to the Company by giving the Company written notice disclosing: (a) the name of the proposed transferee of the Company Stock; (b) the certificate number and number of shares of Company Stock proposed to be transferred or encumbered; (c) the proposed price; (d) all other terms of the proposed transfer; and (e) a written copy of the proposed offer. Within 30 days after receipt of such notice, the Company shall have the option to purchase all or part of such Company Stock at the same price and on the same terms as contained in such notice. In the event the Company (or a stockholder, as described below) does not exercise the option to purchase Company Stock, as provided above, the individual shall have the right to sell, encumber or otherwise dispose of his shares of Company Stock on the terms of the transfer set forth in the written notice to the Company, provided such transfer is effected within 30 days after the expiration of the option period. If the transfer is not effected within such period, the Company must again be given an option to purchase, as provided above. 15 The Board, in its sole discretion, may waive the Company's right of first refusal pursuant to this Section 14 and the Company's repurchase right pursuant to Section 15 below. If the Company's right of first refusal or repurchase right is so waived, the Board may, in its sole discretion, pass through such right to the remaining stockholders of the Company in the same proportion that each stockholder's stock ownership bears to the stock ownership of all the stockholders of the Company, as determined by the Board. To the extent that a stockholder has been given such right and does not purchase his or her allotment, the other stockholders shall have the right to purchase such allotment on the same basis. On and after a public offering, the Company shall have no further right to purchase shares of Company Stock under this Section 14 and Section 15 below, and its limitations shall be null and void. Notwithstanding the foregoing, the Committee may require that a Grantee execute a stockholder's agreement, with such terms as the Committee deems appropriate, with respect to any Company Stock distributed pursuant to this Plan. Such agreement may provide that the provisions of this Section 14 and Section 15 below shall not apply to such Company Stock. 15. Purchase by the Company Prior to a Public Offering, if a Grantee ceases to be employed by the Company, whether terminated for cause or voluntarily, the Company shall have the right to purchase all or part of any Company Stock distributed to him under this Plan at the exercise price paid by the Grantee (unless otherwise determined by the Board or the Committee), and in all other cases at its then current Fair Market Value (as defined in Section 5(b)); provided, however, that such repurchase shall be made in accordance with applicable accounting rules to avoid adverse accounting treatment. 16. Requirements for Issuance or Transfer of Shares (a) Stockholder's Agreement. The Committee may require that a Grantee execute a stockholder's agreement, with such terms as the Committee deems appropriate, with respect to any Company Stock distributed pursuant to this Plan. (b) Limitations on Issuance or Transfer of Shares. No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. 16 Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. 17. Amendment and Termination of the Plan (a) Amendment. The Board may amend or terminate the Plan at any time. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended in accordance with the Plan or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 18. Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 19. Rights of Grantees Nothing in this Plan shall entitle any Grantee or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 20. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards 17 or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 21. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 22. Effective Date of the Plan Subject to the approval of the Company's stockholders, the Plan shall be effective on April ___, 1999. 23. Miscellaneous (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and SARs and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b 3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. 18 (d) Public Offering. The provisions of the Plan that refer to a Public Offering, or that refer to, or are applicable to persons subject to, section 16 of the Exchange Act or section 162(m) of the Code, shall be effective, if at all, upon the initial registration of the Company Stock under section 12(g) of the Exchange Act, and shall remain effective thereafter for so long as such stock is so registered. f:\partners\emerge vision\charter-corporate\1999 equity compensation plan EX-10.4 6 ADMINISTRATIVE SERVICE AGREEMENT DATED 12/15/1997 1 EXHIBIT 10.4 ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT, dated as of this 15th day of December, 1997 by and between SAFEGUARD SCIENTIFICS, INC., a Pennsylvania corporation ("Safeguard") and XL VISION, INC., a Delaware corporation, ("XL Vision") and eMERGE VISION SYSTEMS, INC., a Delaware corporation, ("EVS"). WITNESSETH: WHEREAS, Safeguard and XL Vision are providing EVS with certain administrative support services; and WHEREAS, Safeguard, XL Vision and EVS have agreed to enter into an Administrative Services Agreement to reflect the parties' respective rights and obligations. NOW, therefore, the parties hereto, in consideration of their mutual covenants and intending to be legally bound, hereby agree as follows: 1. Safeguard and XL Vision agrees to provide (either directly or indirectly through its subsidiaries) to EVS for the term specified herein administrative support services and access to the broad management experience of the corporate management staff of Safeguard and XL vision. Such services shall be substantially those heretofore provided by Safeguard and XL Vision to EVS, including without limitation, consultation in regard to general management, investor relations, financial management, human resources management, legal services, insurance programs administration, audit administration, tax research and planning, and preparation of federal and sate income tax returns. Nothing herein shall be construed to require Safeguard or XL Vision to provide any services under this Agreement which cannot reasonably be provided by Safeguard and XL Vision's management and corporate staff. 2. In consideration of the services to be rendered by Safeguard and XL Vision under this Agreement, EVS shall pay an annual fee ("Services Fee") of 1.5% of EVS's gross revenues each year, with such Services Fee not to exceed $300,000 in any given year. This Services Fee is to be divide(f as follows: Safeguard shall receive an annual fee ("Services Fee") equal to .75 % of EVS's gross revenues each year, and XL Vision shall receive an annual fee equal to .75 % of EVS's gross revenues each year. The Services Fee shall be payable in quarterly installments within 30 days of the commencement of each quarter based on revenues from the preceding quarter and shall be subject to adjustment on the basis of the fiscal year audited financial statements of EVS; provided, however, that the Service Fee will accrue until the Company's cash flow is positive and payments of the fee will then be made as provided in this paragraph for such periods during which the cash flow remains positive. 2 3. EVS recognizes that Safeguard and XL Vision have heretofore provided, or have made arrangements for, certain other services and benefits for EVS and have incurred guarantees of certain obligations of EVS and that Safeguard and XL Vision may continue to provide, or make arrangements for, certain of such services and benefits and may incur guarantees of obligations of EVS. The foregoing may involve, among other things, various types of insurance programs; various legal, accounting and other matters requiring outside professional services or in-house services by Safeguard and XL Vision personnel (including but not limited to legal and accounting services) which are not in the ordinary course; and guarantees of obligations. To the extent Safeguard and XL Vision continue to incur obligations for EVS at EVS's request in connection with such services and benefits, EVS shall pay to Safeguard, XL Vision or to the provider of such services, in addition to the fee provided in Paragraph 2 of the Agreement, the actual and identifiable costs of such services and benefits, or in those cases where actual costs cannot be identified, EVS's proportionate share of such benefits and services, and the sums necessary to discharge, repay or to otherwise compensate Safeguard and XL Vision for any obligations incurred by Safeguard or XL Vision in connection therewith. Safeguard and XL Vision shall submit to EVS a monthly statement of all such sums due in accordance with the provisions of this Paragraph and each such statement shall be paid by EVS within 30 days after the delivery of such statement to EVS. 4. This Agreement shall be effective December 31, 1997 and shall extend through and include December 31, 2002 and shall automatically continue to be effective thereafter on an annual basis, subject to termination on the final day of any succeeding calendar year by delivery of written notice by either party to the other party no less than 90 days prior to the termination date. 5. Nothing herein shall be construed to relieve the directors or officers of EVS from the performance of their respective duties or limit the exercise of their powers in accordance with the Certificate of Incorporation or By-Laws of EVS, any applicable provisions of the Corporation Law of the State of Delaware, or otherwise. The activities of EVS shall at all times be subject to the control and direction of its Board of Directors and Officers. 6. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and may not be amended or modified except by the written agreement of the parties hereto. 7. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors. Nothing in this Agreement, expressed or implied, is intended to confer on any other person other than the parties hereto, or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 8. This Agreement and any rights or obligations pursuant hereto shall not be assignable by either party without prior written consent of the other party. 2 3 9. Nothing in this Agreement shall be deemed to constitute the parties hereto joint venturers, partners or participants in an unincorporated business or other separate entity. IN WITNESS WHEREOF, Safeguard Scientifics Inc., XL Vision, Inc. and eMERGE Vision Systems, Inc. have caused this Agreement to be executed in their respective corporate names by an officer thereunto duly authorized, all as of the date first above written. ATTEST: SAFEGUARD SCIENTIFICS, INC. /s/: Kathleen Lees By:/s/: Michael Miles - -------------------------------- -------------------------------- Name: Kathleen Lees Title: Michael Miles Title: Assistant Secretary ATTEST: XL VISION, INC. /s/: Kathleen Lees By:/s/: Gregory Haskell - -------------------------------- -------------------------------- Kathleen Lees Gregory W. Haskell Assistant Secretary President and Chief Operating Officer ATTEST: eMERGE VISION SYSTEMS, INC. /s/: Kathleen Lees By:/s/: E. Scott Blackwell - -------------------------------- -------------------------------- Name: Kathleen Lees E. Scott Blackwell Title: Assistant Secretary Chief Executive Officer 3 EX-10.5 7 DIRECT CHARGE ADMINISTRATIVE SERVICES AGREEMENT 1 EXHIBIT 10.5 DIRECT CHARGE ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT, dated as of this 15th day of April, 1997, by and between XL VISION, INC., a Delaware corporation, ("XL Vision") and ENHANCED VISION SYSTEMS, INC., a Delaware corporation, ("EVS"). WITNESSETH: WHEREAS, XL Vision is providing EVS with certain administrative support services; and WHEREAS, XL Vision and EVS have agreed to enter into an Administrative Services Agreement to reflect the parties' respective rights and obligations. NOW, therefore, the parties hereto, in consideration of their mutual covenants and intending to be legally bound, hereby agree as follows: 1. XL Vision agrees to provide (either directly or indirectly through its subsidiaries) to EVS for the term specified herein, administrative support services and access to the broad management experience of the corporate management staff of XL vision. Such services shall be substantially those heretofore provided by XL Vision to EVS, including without limitation, consultation in regard to general management, investor relations, financial management, human resources management, legal services, insurance programs administration, audit administration, tax research and planning, and preparation of federal and state income tax returns. Nothing herein shall be construed to require XL Vision to provide any services under this Agreement which cannot reasonably be provided by XL Vision's management and corporate staff. 2. In consideration of the services to be rendered by XL Vision under this Agreement, EVS shall pay to XL Vision costs which shall be based on the individual personal rates and which such hours shall be billed at the end of each month. 3. EVS recognizes that XL Vision has heretofore provided, or has made arrangements for, certain other services and benefits for EVS and has incurred certain obligations of EVS and that XL Vision may continue to provide, or make arrangements for, certain of such services and benefits and may incur guarantees of obligations of EVS. The foregoing may involve, among other things, various types of insurance programs; various legal, accounting and other matters requiring outside professional services or in-house services by XL Vision personnel (including but not limited to legal and accounting services) which are not in the ordinary course; and guarantees of obligations. To the extent XL 2 Vision continues to incur obligations for EVS at EVS's request in connection with such services and benefits, EVS shall pay to XL Vision or to the provider of such services, in addition to the fees provided in Paragraph 2 of the Agreement, the actual and identifiable costs of such services and benefits, or in those cases where actual costs cannot be identified, EVS's proportionate share of such benefits and services, and the sums necessary to discharge, repay or to otherwise compensate XL Vision for any obligations incurred by XL Vision in connection therewith. XL Vision shall submit to EVS a monthly statement of all such sums due in accordance with the provisions of this Paragraph and each such statement shall be paid by EVS within 30 days after the delivery of such statement to EVS. 4. This Agreement shall be effective April 1, 1997 and shall extend on a month to month basis. Termination of this agreement can be made by either party to the other party with no less than 30 days prior written notice. 5. Nothing herein shall be construed to relieve the directors or officers of EVS from the performance of their respective duties or limit the exercise of their powers in accordance with the Certificate of Incorporation or By-Laws of XL Vision, any applicable provisions of the Corporation Law of the State of Delaware, or otherwise. The activities of EVS shall at all times be subject to the control and direction of its Board of Directors and Officers. 6. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and may not be amended or modified except by the written agreement of the parties hereto. 7. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors. Nothing in this Agreement, expressed or implied, is intended to confer on any other person other than the parties hereto, or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 8. This Agreement and any rights or obligations pursuant hereto shall not be assignable by either party without prior written consent of the other party. 9. Nothing in this Agreement shall be deemed to constitute the parties hereto joint venturers, partners or participants in an unincorporated business or other separate entity. IN WITNESS WHEREOF, XL Vision, Inc. and ENHANCED VISION SYSTEMS, INC. have caused this Agreement to be executed in their respective corporate names by an officer thereunto duly authorized, all as of the date first above written. 2 3 ATTEST: XL VISION, INC. /s/: Kathleen Lees By:/s/: Gregory W. Haskell - ------------------ -------------------------- Kathleen Lees Gregory W. Haskell Assistant Secretary President and COO ATTEST: ENHANCED VISION SYSTEMS, INC. /s/: Kathleen Lees By:/s/: E. Scott Blackwell - ------------------ -------------------------- Kathleen Lees E. Scott Blackwell Assistant Secretary President - Chief Executive Officer 3 EX-10.6 8 ASSET PURCHASE AGREEMENT DATED FEBRUARY 24, 1999 1 Exhibit 10.6 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is made and entered into this 24th day of February, 1999 by and among eMERGE Vision Systems, Inc., a Delaware corporation ("Buyer"), CIN, LLC, a Kansas limited liability company formerly known as Cattle Management Network, L.L.C. ("Seller"), and Dr. Scott Crain ("Crain"). RECITALS A. Seller is in the business of developing, marketing, licensing, and distributing software programs for use in agriculture, veterinary medicine, and animal food sciences markets (the "Business") including the software product commonly referred to as "Industry Net" and "Beef Industry Information Integrator," Feed Yard Information System" and "Veterinary Information System" (the "Software Program"); B. Seller desires to sell, and Buyer desires to purchase, the Business and substantially all of the tangible and intangible assets used in the Business, including, but not limited to, the Software Program, on the terms and subject to the conditions set forth in this Agreement; and C. As the majority owner of Seller, owing together with his wife, approximately 81% of the equity of Seller, Crain will derive significant benefit from the transactions contemplated by this Agreement and, as a condition to Buyer entering into this Agreement, Crain is required to make certain representations, warranties, and covenants specifically provided in this Agreement. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt, sufficiency, and adequacy of which are hereby acknowledged, Seller, Crain, and Buyer agree as follows: AGREEMENTS ARTICLE I SALE AND PURCHASE OF ASSETS Effective as of the close of business on the Closing Date (as defined in Section 4.1) and subject to the terms and conditions hereof and in reliance on the representations and warranties contained herein, Seller shall sell, convey, transfer, assign, and deliver to Buyer at the Closing (as defined in Section 4.1), and Buyer shall purchase from Seller, all of the properties, business, and assets of Seller and Crain used in connection with the Business, of every kind and description, personal and mixed, tangible and intangible, wherever located (except the Excluded Assets, defined -1- 2 in Article II) (collectively, the "Purchased Assets"). Without limiting the generality of the foregoing, the Purchased Assets shall include the following: (a) all of Seller's inventory as of the Closing Date, including, without limitation: (i) computer program code (in all media) and materials, including the Software Program; (ii) computer program documentation, including user materials; (iii) all other unused or reusable materials, stores, supplies, works in progress, finished goods, product samples, packaging, and shipping materials, as listed on Schedule 1(a) hereto (collectively, the "Inventory"); (b) all technical and descriptive materials (other than Inventory) relating to the acquisition, design, development, use, or maintenance of computer code and program documentation and materials, including, but not limited to, all technical and programming notes (the "Technical Documentation"); (c) all of the rights and benefits accruing to Seller under or pursuant to any and all contracts, agreements, licenses, and other commitments and arrangements, oral or written, with any person or entity relating to the ownership, license, acquisition, design, development, distribution, marketing, use, or maintenance of computer program code, related technical or user documentation, and databases, in each case relating to or arising out of the Business, including, but not limited to: (i) licenses from third parties; (ii) development contracts, work-for-hire agreements, and consulting and employment agreements; (iii) distributorships and manufacturer's representation contracts; (iv) licenses and sublicenses to others (including without limitation the Feedyard and Veterinary Data Agreements); and (v) maintenance, support, or enhancement agreements, as listed on Schedule 1(c) hereto (collectively, the "Software Contracts"); (d) all equipment and devices (including data processing hardware and related telecommunications equipment, media, and tools) used in the Business, as listed on Schedule 1(d) hereto (the "Computer Equipment"), including, but not limited to, Seller's rights under all related warranties; (e) all equipment (other than Computer Equipment), including, but not limited to, all furniture, office equipment, and other personal property, as listed on Schedule 1(e) hereto; (f) all accounts receivable of Seller relating to the Business, arising from sales of products in the ordinary course of business as of the date of this Agreement, including all license fees and maintenance fees and charges owing or to become owing to Seller under Software Contracts, as are listed on Schedule 1(f) hereto (the "Accounts Receivable"); (g) all operating data and records of Seller related to the Business, including, but not limited to, all customer lists, vendor lists, price lists, correspondence, customer files, account histories, customer specifications, dealer and distributor lists, promotional materials, sales literature, art work, sales data, and other historical and current -2- 3 information relating to sales, financial, accounting, and credit records, correspondence, budgets, and other similar documents and records; (h) all of the rights and benefits accruing to Seller under or pursuant to the Accounts Receivable, contracts, agreements, including, but not limited to, all distributorship or sales representation agreements, licenses, leases, arrangements, commitments, and unshipped, open, and blanket purchase orders, other than the Software Contracts, and certain oral agreements to provide discounted services to feedyard customers, all as identified (and with respect to the oral agreements described in detail) on Schedule 1(h) (the "Purchased Contracts"); (i) all claims Seller may have against any person relating to or arising from the Purchased Assets, the Software Contracts, the Purchased Contracts, or the Business, including rights to recoveries for damages or defective goods, refunds, insurance claims, and causes in action; (j) all of Seller's right, title, and interest in and to the names "CIN, LLC," "Cattlemen's Information Network L.L.C.," "Cattle Management Network, LLC," "Industry Net," and "Beef Industry Information Integrator," and all variants thereof, all of Seller's right, title, and interest in and to the Internet domain name "cattleinfo.com" and all iterations or permutations thereof and the registrations therefor, any and all trademarks, service marks, trade names, and copyrights of Seller and all licenses, registrations, and applications therefor, and all other intellectual property rights, rights to the data compiled through the use of the Software Program technology, know-how, trade secrets, computer software, code, slogans, patents, formulae, processes, and other similar intangible rights relating to the Business (the "Intellectual Property"), as are listed on Schedule 1(j) hereto; and (k) all of Seller's right, title, and interest in and to the goodwill of Seller relating to the Business and all other assets of every kind and description, wherever located, used or useful in, or related to the Business. ARTICLE II EXCLUDED ASSETS Seller is not selling or assigning to Buyer, and the Purchased Assets shall not include, any of the following (collectively, the "Excluded Assets"): (a) all cash consideration to be received by Seller, and Seller's other rights, under this Agreement; -3- 4 (b) all limited liability company records, equity record books, files, and other documentation of Seller, not relating to operation of the Business or the Purchased Assets; (c) all of Seller's cash, cash equivalents, deposits in banks, securities, and prepaid and deferred items, existing on the Closing Date with respect to the Business; (d) any insurance policies relating to the Business; (e) any and all vehicles owned or used in the Business; (f) the 316-873-2181 telephone number of the Business; (g) any assets of Crain's veterinary practice or farming, ranching and cattle businesses, which items are not specifically listed on any Schedule to this Agreement listing the Purchased Assets; (h) items listed on Schedule 2; and (i) any items of the Purchased Assets that Buyer expressly elects not to accept or otherwise take. ARTICLE III PURCHASE PRICE, LIABILITIES AND OTHER RELATED MATTERS 3.1 Purchase Price. Subject to adjustment as provided herein, the purchase price (the "Purchase Price") for the Purchased Assets shall be the cash and other consideration specified in this Section 3.1 and the assumption of the Assumed Liabilities (as defined in Section 3.2). The Purchase Price shall be paid by Buyer as follows: (a) Six hundred thousand (600,000) shares of Common Stock, par value one cent ($.01) per share, of Buyer (the "Shares"), by delivery of stock certificate therefor issued in the name of Seller at the Closing; (b) Three Hundred Eighty Three Thousand Dollars ($383,000.00) on or before October 31, 1999 (the "October Payment"), subject to adjustment under Section 3.4 below, at Buyer's election by certified or cashier's check payable to the order of Seller or by wire transfer to an account designated by Seller; and (c) Three Hundred Fifty Thousand Dollars ($350,000.00) of the first net sales collected by Buyer (if any) arising from the sale of third party products by Buyer through or using the Internet within the five (5) year period from the Closing Date utilizing the Software Program, or any other technology acquired from Seller hereunder, or any -4- 5 derivatives thereof (the "Net Sales Payment"), subject to adjustment under Section 3.4 below, payable within thirty (30) days of the collection of such amounts, at Buyer's election by certified check or cashier's check payable to the order of Seller or by wire transfer to an account designated by Seller. 3.2 Assumed Liabilities. On the Closing Date, (i) Buyer shall assume and agree to pay, perform, and discharge in full when due the accounts payable and accrued expenses of Seller listed on Schedule 3.2 under the heading "Accounts Payable" and such other normal operating expenses incurred through February 26, 1999, including trade accounts payable, accrued compensation and related payroll taxes (the "Accounts Payable"), and Seller's obligations under the Software Contracts and the Purchased Contracts; and (ii) Buyer shall pay in full, at the Closing, Seller's indebtedness (including principal and interest) to Meade State Bank ("the Bank") (subsections (i) and (ii) are hereafter collectively referred to as the "Assumed Liabilities"), all as listed on Schedule 3.2 hereto; 3.3 Non-Assumption of Liabilities and Obligations of Seller. Other than the Assumed Liabilities, Buyer shall not assume or become liable for any liabilities, obligations, or commitments of Seller of any nature whatsoever, including, but not limited to (collectively, the "Excluded Liabilities"): (i) any liabilities or obligations of Seller for Federal, state, local, foreign, or other taxes, including, without limitation, income, sales, use, franchise, real or personal property, or other taxes, assessments, duties, levies, or imposts, or for any penalties or interest with respect to any of the foregoing, related to any period; (ii) any liabilities or obligations with respect of any pension, profit sharing, medical insurance, or other employee benefit plan or fringe benefit arrangement established or maintained by Seller, whether or not any such plans or benefits thereunder relate to employees who may be employed by Buyer following consummation of the transactions contemplated hereby, including, without limitation, all health insurance benefits payable with respect to costs incurred on or prior to the Closing Date, whether or not claims therefor are submitted on or prior to the Closing Date, and all disability benefits payable with respect to disabilities occurring on or prior to the Closing Date, all of which shall be paid by Seller; (iii) any liabilities or obligations whatsoever to or with respect to any employees or independent contractors of Seller, specifically including, without limitation, any obligations to pay salaries, wages, bonuses, commissions, vacation, severance, or termination pay, employee benefits, health insurance benefits, or unemployment compensation; (iv) any liabilities or obligations arising out of any workers' compensation claims relating to employment by Seller, or product liability claims for personal injury, property damage, or otherwise relating to products sold or distributed by Seller; (v) any liabilities, obligations, or commitments for product warranty or returns or exchanges of products sold or distributed by Seller prior to the Closing; (vi) any liabilities or obligations, whether or not known to Seller, based on, arising out of or otherwise in respect to any act or omission of Seller, or any other party, or any event or condition on or off any premises of Seller, occurring at any time on or prior to the Closing Date; (vii) any liabilities, obligations, or expenses to be borne by Seller in connection with this Agreement and the transactions contemplated hereby, including, but not limited to, all costs and expenses of legal counsel to Seller; (viii) any liabilities or obligations with respect to that certain Contribution Agreement dated January 15, 1997, between John F. Wilson and Cattle Management Network, L.L.C., or that certain Agreement dated December 10, 1998 between -5- 6 John F. Wilson and Cattle Management Network, L.L.C. d/b/a/ Cattle Information Network; and (ix) any other liabilities or obligations of Seller, known, unknown, fixed, contingent, accrued, absolute, or otherwise, except the Assumed Liabilities. 3.4 Adjustment of Purchase Price. A post-Closing adjustment shall be made to the Purchase Price, in the manner described below, to the extent that the Accounts Payable and the amount paid to the Bank at Closing (the "Monetary Obligations") are greater than or less than Six Hundred Thousand Dollars ($600,000.00). For that purpose, Buyer will, within sixty (60) days of the Closing Date, audit the books and records of the Business to determine the actual value of the Monetary Obligations. The value of the Monetary Obligations shall be the greater of the value as carried on the books and records of the Business as of the Closing Date, prior to any reduction thereof, and the amount paid in satisfaction of such obligations by Buyer. To the extent the Monetary Obligations exceed Six Hundred Thousand Dollars ($600,000.00), the Net Sales Payment shall be decreased on a dollar-for-dollar basis. If and to the extent the Monetary Obligations exceed Six Hundred Thousand Dollars ($600,000.00) by greater than Three Hundred Fifty Thousand Dollars ($350,000.00), the October Payment shall also be decreased, on a dollar-for-dollar basis. In the event and to the extent the Monetary Obligations are less than Five Hundred Fifty Thousand Dollars ($550,000.00), the amount of the Net Sales Payment shall be increased on a dollar-for-dollar basis. Under no circumstance shall the October Payment be increased. 3.5 Allocation of Purchase Price. The Purchase Price shall be allocated among each item, class, or category of the Purchased Assets, as mutually determined by Buyer and Seller and set forth on Schedule 3.5. Seller and Buyer shall prepare and file their respective Federal and any state or local income tax returns based on such allocation of the Purchase Price. Seller and Buyer shall prepare and file any notices or other filings required pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") and any such notices and filings shall be prepared based on such allocation of the Purchase Price. 3.6 Audit Rights. At Seller's request, during Buyer's normal business hours, from time to time before the sixth (6th) anniversary of the Closing Date, but not more often than once during any twelve (12) month period, Buyer will permit an independent firm of public accountants and auditors selected by Seller, but subject to the reasonable approval of Buyer, to audit the books and records of Buyer to verify that Buyer has paid Seller the proper payments owed pursuant to Section 3.1((c)). Seller shall bear the costs associated with such verification. ARTICLE IV THE CLOSING 4.1 Time and Place of Closing. The closing of the sale and purchase of the Business and the Purchased Assets (the "Closing") shall take place at 10:00 a.m. local time on February 22,1999 at the offices of Buyer, 10315 102nd Terrace, Sebastian, Florida, on such date as Seller and Buyer -6- 7 may mutually determine (the "Closing Date"), but in no event later than March 10, 1999, unless extended by mutual agreement. 4.2 Seller's Closing Deliveries. At the Closing, in addition to any other documents specifically required to be delivered pursuant to this Agreement, Seller shall execute and deliver, or cause to be executed and delivered, as appropriate, to Buyer the following: 4.2.1 Bill of Sale and Assignment. A bill of sale substantially in the form attached hereto as Exhibit A and such other forms of assignment, endorsements, and other good and sufficient instruments of sale, assignment, conveyance, and transfer, as may be necessary to sell, assign, transfer, and deliver the Purchased Assets. 4.2.2 Assignment and Assumption Agreement. Assignment and assumption agreement in the form attached hereto as Exhibit B, and consents of the appropriate third parties, relating to the assignment and assumption of the Software Contracts and the Purchased Contracts. 4.2.3 Assignment of Intellectual Property. Assignment agreement in the form attached hereto as Exhibit C, relating to the assignment of the Intellectual Property. 4.2.4 Certified Resolutions. Copies of the resolutions of the Manager and the members of Seller authorizing the execution, delivery, and performance of this Agreement and all related agreements, documents, and certificates, and the transactions contemplated hereby and thereby, certified as of the Closing Date by its Manager. 4.2.5 [Intentionally omitted]. 4.2.6 Stockholders' and Registration Rights Agreement. A stockholders' and registration rights agreement between Seller and Buyer with respect to the Shares, in the form attached hereto as Exhibit E (the "Stockholders' Agreement"). 4.2.7 Lease. A lease agreement between Crain and Buyer for the office facilities used by the Business located 15124 Road 18, Meade, Kansas, in the form attached hereto as Exhibit F (the "Lease"). 4.2.8 Certificate of Good Standing. Certificate of good standing of Seller issued by the Secretary of State of Kansas, dated not more than fourteen (14) days prior to the Closing Date. 4.2.9 Articles of Organization. A copy of the Articles of Organization of Seller, and all amendments thereto, certified by the Secretary of State of Kansas not more than fourteen (14) days prior to the Closing Date. 4.2.10 Manager's Certificate. A certificate of the Manager of Seller, dated as of the Closing Date, certifying a copy of the Operating Agreement of Seller and as to the incumbency and signatures of the Manager of Seller executing this Agreement and all other -7- 8 agreements, documents, or certificates contemplated or delivered under this Agreement (with such signature being certified by a member of Seller if there is only one Manager of Seller). 4.2.11 Legal Opinion. The legal opinion of counsel to Seller, in the form attached hereto as Exhibit G. 4.2.12 Lien Termination Statements. UCC-3 termination statements with respect to the liens specified in Schedule 4.2.12 hereto or a letter from the holders of such liens, in form satisfactory to Buyer, providing that upon payment of the amounts owed to each such holder, the liens will be full and adequately released. 4.2.13 Other. Such other documents and certificates required to be executed or delivered at the Closing in accordance with the terms of this Agreement or as reasonably required by Buyer or its counsel. 4.3 Buyer's Closing Deliveries. At the Closing, in addition to any other documents specifically required to be delivered pursuant to this Agreement, Buyer shall execute and deliver, as appropriate, to Seller the following: 4.3.1 Purchase Price. A stock certificate in the name of Seller representing the Shares pursuant to Section 3((b)). 4.3.2 Assignment and Assumption Agreement. Assignment and assumption agreement in the form attached hereto as Exhibit B relating to the assignment and assumption of the Software Contracts and the Purchased Contracts. 4.3.3 Stockholders' Agreement. The Stockholders' Agreement. 4.3.4 Lease. The Lease. 4.3.5 Side Letter. A side letter from XL Vision, Inc. relating to its commitment to assess the viability of spinning out the Agrivision Technology (as defined in Section 8.4), in form satisfactory to Seller. 4.3.6 Legal Opinion. The legal opinion of in-house counsel to Buyer, in the form attached hereto as Exhibit H. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER AND CRAIN Seller and Crain, jointly and severally, represent and warrant to Buyer, on and as of the date hereof and on and as of the Closing Date, as follows: -8- 9 5.1 Organization of Seller. Seller is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Kansas and is duly qualified to do business and is in good standing as a foreign limited liability company in each jurisdiction in which the character of the properties owned or held under lease by Seller or the nature of the businesses transacted by Seller requires such qualification. All of the members of Seller are as set forth on Schedule 5.1. 5.2 Power and Authority. Seller has all requisite power and authority to own, lease, and operate its properties, to conduct its business as it has been and is now being conducted, to enter into this Agreement, and all other agreements or documents to be executed or delivered in connection herewith, and, subject to any required approvals or consents by other parties to contracts to which Seller is a party (which shall be obtained by Seller prior to Closing, except the Bank which is being paid-off at the Closing by Buyer) to perform the obligations to be performed by it hereunder. All member and other actions required to be taken by or on the part of Seller to execute, deliver, and carry out the terms of this Agreement and all other agreements or documents to be executed or delivered in connection herewith, and to authorize Seller to sell, assign, transfer, convey, and deliver the Purchased Assets to Buyer, have been duly and properly taken. This Agreement and all other agreements and documents to be executed and delivered by Seller in connection herewith, when executed and delivered by all parties thereto, shall constitute the legal, valid, and binding obligations of Seller enforceable against Seller in accordance with their respective terms and this Agreement and all other agreements and documents to be executed and delivered by Crain in connection herewith, when executed and delivered by all parties thereto, shall constitute the legal, valid, and binding obligations of Crain enforceable against Crain in accordance with their respective terms. 5.3 Subsidiaries. Seller does not own, directly or indirectly, any outstanding capital stock, or securities convertible into capital stock, of any other corporation or any participating interest in any partnership, joint venture, or other business enterprise. 5.4 No Violation to Result. The execution and delivery of this Agreement and all other agreements and documents to be executed or delivered in connection herewith, and the consummation of the transactions contemplated hereby and thereby: (a) except with respect to the Bank (which is being paid-off at the Closing by Buyer), are not in violation or breach of, do not conflict with or constitute a default under, and will not accelerate or permit the acceleration of the performance required by, any of the terms of the charter documents or Operating Agreement of Seller or any note, debt instrument, security agreement, or mortgage, or any other contract or agreement, written or oral, to which Seller is a party or by which Seller or any of its properties or assets are bound; (b) will not be an event that, after notice or lapse of time or both, will result in any such violation, breach, conflict, default, or acceleration; (c) will not result in a violation under any law, judgment, decree, order, rule, regulation, or other legal requirement of any governmental authority, court or arbitration -9- 10 tribunal, whether Federal, state, or local (within the United States or otherwise) at law or in equity, and applicable to Seller or any of its properties or assets, which could have a material adverse effect on the Business; (d) will not result in the creation or imposition of any lien, option, encumbrance, security agreement, restriction, charge, or claim of any kind in favor of any third party upon any of the properties or assets of Seller; and (e) will not result in the termination of any contract, lease, or other commitment of Seller relating to the Business, including, without limitation, any of the Software Contracts and Purchased Contracts. 5.5 No Existing Defaults. Seller is not in default of, and has no notice or knowledge of any default under: (i) any of the terms of any note, debt instrument, security agreement, mortgage, or under any other commitment, contract, agreement, license, lease, or other instrument, whether written or oral, to which it is a party or by which it or any of its properties or assets is bound including, without limitation, any of the Software Contracts and Purchased Contracts; or (ii) any law, judgment, decree, order, rule, regulation, or other legal requirement of any governmental authority, court, or arbitration tribunal whether Federal, state, or local (within the United States or otherwise), at law or in equity, and applicable to it or to any of its properties or assets which could have a material adverse effect on the Business. To the best of Seller's knowledge, there exists no condition or event that, after notice or lapse of time or both, would constitute a default under any of the foregoing. 5.6 [intentionally omitted] 5.7 Adverse Changes. From January 31, 1999 to the Closing Date, the Business has been conducted only in the ordinary and regular course, and there have not been any material adverse changes in the condition (financial or otherwise), assets, liabilities, commitments, business prospects of the Business, the Purchased Assets, or the Assumed Liabilities. 5.8 Taxes. Except as provided on Schedule 5.8 hereto, Seller has prepared (or caused to be prepared) and timely and properly filed (or caused to be timely and properly filed) with the appropriate Federal, state, and local authorities (within the United States or otherwise) all tax returns, information returns, and other reports required to be filed and has paid or accrued (or caused to be paid or accrued) in full all taxes, interest, penalties, assessments, or deficiencies, if any, due to, or claimed to be due by, any taxing authority, excepting only any such taxes that are being duly and timely contested in good faith by Seller and adequately reserved on the books of Seller. Seller has not executed or filed with any taxing authority any agreement extending the period for assessment or collection of any taxes. Seller is not a party to any pending action or proceeding, nor is any such action or proceeding threatened against Seller by any governmental authority for the assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against Seller. During the course of any audit currently in process or not completed, no issues have been suggested by any representative of any governmental authority that, if asserted, would result in a proposed assessment of taxes, interest, or penalties against -10- 11 Seller. Seller has not executed or filed any consent agreement to extend the period for assessment or collection of any taxes. 5.9 Condition of Assets. All equipment and other items of tangible personal property owned, leased, or otherwise used by Seller in the Business and included in the Purchased Assets, are now and on the Closing Date shall be (i) in the possession of Seller and in useable condition. All equipment and other items of tangible personal property owned, leased, or otherwise used by Seller in the Business and included in the Purchased Assets, are located at the premises listed on Schedule 5.28.2. 5.10 Title to Assets. At the Closing, Seller shall have and shall transfer to Buyer, good and marketable title to all of the Purchased Assets, free and clear of any mortgage, pledge, lien, conditional sale or other agreement, option, encumbrance, restriction, charge, or claim of any kind, except the liens of the Bank which will be released upon satisfaction of the obligations to the Bank at Closing. There are no assets used in the operation of the Business that are not included in the Purchased Assets (except the Excluded Assets). 5.11 Inventory. Schedule 1((a)) constitutes a true and complete list of all Inventory. 5.12 Licenses and Permits. Seller possesses all material licenses and other required governmental or official approvals, permits, and authorizations, as to which the failure to so possess would have a material adverse effect on the Business, financial condition, or results of operations of Seller. All such licenses, approvals, permits, and authorizations are in full force and effect, Seller is in compliance with their requirements, and no proceedings are pending or, to the knowledge of Seller, threatened, to revoke or amend any of them. Schedule 5.12 hereto contains a complete list of all such licenses, approvals, permits, and authorizations. 5.13 Consents. Except as set forth on Schedule 5.13 hereto, no consent, approval, authorization, or pre-notification of, or declaration, filing, or registration with, any governmental or regulatory authority or any third party is required in connection with the execution, delivery, and performance of this Agreement by Seller. Except as set forth on Schedule 5.13, all of the Purchased Assets, including, but not limited to, all contracts, agreements, licenses, permits, and other rights, are assignable without the prior consent of any third party. 5.14 Intellectual Property. Schedule 1((j)) constitutes a true and complete list of all Intellectual Property. Seller or Crain owns or possesses adequate and enforceable licenses or other rights to use all of the Intellectual Property, all of which are included in the Purchased Assets and assignable to Buyer at the Closing. Seller is not in default under any such licensing or similar agreements, and has not received any notice or other knowledge of conflict with or infringement (or alleged infringement) of any rights of others and no officer, manager, employee, member, or former member of Seller, or any Person (as defined in this Section 5.14), controlling, controlled, by or under common control with Seller, has any rights in or to any of the Intellectual Property. The Intellectual Property does not infringe any proprietary right of any third party. No trade secret information has been wrongfully appropriated by any third party. To the best of Seller's knowledge, the Intellectual Property is not being infringed. Except for the payment obligations set forth under Section 10.1 of the Advanced Agricultural -11- 12 Innovation/Commercialization Fund Agreement by and between Cattle Management Network, LLC and Kansas Technology Enterprise Corporation dated as of September 6, 1996, the use in the Business of any of the Intellectual Property and other technical or proprietary data has not required and does not require the payment of any royalty or similar payment to any Person, and, on the Closing Date, Seller and Crain will transfer to Buyer good and marketable title thereto, free and clear of any claims of any kind, without the payment of any royalty or other special consideration. In addition to, and without limiting the generality of the foregoing, Seller has and shall convey to Buyer at the Closing the all of Seller's rights to use the names "CIN, LLC," "Cattlemen's Information Network L.L.C.," "Industry Net," "Beef Industry Information Integrator," "Feed Yard Information System" and "Veterinary Information System" and any names similar thereto, and the sole and exclusive rights to use the Internet domain name "cattleinfo.com" and all iterations and permutations thereof, together with all logos, slogans, trademarks, and service marks relating thereto or heretofore used by Seller in connection therewith. To the best of Seller's knowledge and except as set forth in Schedule 5.14, there are no names similar to the names specified in the prior sentence, used in the agriculture, veterinary medicine, and animal food sciences markets. Seller and Crain have at all times maintained in strictest confidence all Intellectual Property (excepting only patents, copyrights, trademarks, trade names, and service marks). Neither Seller nor Crain has received any comments from the United States Patent and Trademark Office the (the "Patent Office") with respect to the patent application referred to on Schedule 1((j)). Prior to the filing of such patent application with the Patent Office, neither Seller nor Crain made any public disclosure of any of the claims asserted thereon which would bar the patentability of the invention(s) under 35 USC Section 102. Seller or Crain owns the right to obtain, use and transfer the data compiled through the use of the Software Program and included in the Intellectual Property (the "Data") pursuant to certain Software Contracts identified in Section 1(c), and has not conveyed to any third party any interest in, the rights (including copyright rights) to the Data. The Data has been selected, coordinated, and arranged in a manner completely original with Seller. Except as identified in Schedule 5.14, Seller and/or Crain has full right and authority to use and manipulate the Data and to convey to Buyer all rights (including copyright rights) to the Data. Except as identified in Schedule 5.14, there are no Federal or state laws or regulations, or restrictions of any third party, restricting such rights to use, manipulate, or convey the Data. As used in this Agreement, the term "Person" means any individual, sole proprietorship, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, or other entity of any kind, as the context requires. 5.15 Procedures for Copyright Protection. Schedule 5.15 sets forth the form and placement of the proprietary legends and copyright notices displayed in or on the Software Program. In no instance has the eligibility of the Software Program for protection under applicable copyright law been forfeited to the public domain by omission of any required notice or any other action. 5.16 Procedures for Trade Secret Protection. Seller has promulgated and used its best efforts to enforce its trade secret protection program set forth in Schedule 5.16. Seller has no knowledge of any material violation of such program by any Person. The source code and system documentation relating to the Software Program: (i) have at all times been maintained in -12- 13 confidence by Seller and, to the best of Seller's knowledge, by any other Person who has at any time had access to such materials; and (ii) have been disclosed by Seller only to employees and consultants having a "need to know" the contents thereof in connection with the performance of their duties to Seller and who are obligated by common law or by written agreement (which agreements are being transferred to Buyer pursuant to the transactions contemplated by this Agreement) to keep such information confidential. 5.17 Personnel Agreements. Anyone, including, but not limited to, all employees, agents, consultants, and contractors, who have contributed to or participated in the conception and development of the Software Program, Technical Documentation, or Intellectual Property on behalf of Seller either: (i) have been party to a "work-for-hire" arrangement or agreement with Seller, in accordance with applicable Federal and state law, that has afforded Seller full, effective, exclusive, and original ownership of all tangible and intangible property thereby arising; or (ii) have executed appropriate instruments of assignment in favor of Seller as assignee that have conveyed, in accordance with applicable Federal and state law, to Seller full, effective, and exclusive ownership of all tangible and intangible property thereby arising. 5.18 Adequacy of Technical Documentation. The Technical Documentation includes the source code, system documentation and schematics for the Software Programs, as well as any pertinent commentary or explanation that may be necessary to render such materials understandable and usable by a trained computer programmer. The Technical Documentation also includes any programs (including compilers), "workbenches," tools, and higher level (or "proprietary") languages used for the development, maintenance, and implementation of the Software Program. 5.19 Third-Party Components in the Software Program. Seller has validly and effectively obtained the right and license to use, copy, modify, and distribute the third-party programming and materials contained in the Software Program and the Technical Documentation, pursuant to the Software Contracts identified as "licenses from third parties" in Schedule 1((c)). The Software Program and the Technical Documentation contain no other programming or materials in which any third party may claim superior, joint, or common ownership, including any right or license. The Software Program and the Technical Documentation do not contain derivative works of any programming or materials not owned in their entirety by Seller or Crain and included in the Purchased Assets. 5.20 Third-Party Interests or Marketing Rights in the Software Program. Seller has not granted, transferred, or assigned any right or interest in the Software Program, the Technical Documentation, or the Intellectual Property to any Person, except pursuant to the Software Contracts identified as "Feedyard or Veterinary Data Agreements" or "licenses and sublicenses to others" in Schedule 1((c)). Except as set forth in Schedule 1((c)), all Software Contracts identified as "licenses and sublicenses to others" in Schedule 1((c)) constitute only end-user agreements, each of which grants the end-user thereunder solely the nonexclusive right and license to use the Software Program and related user documentation, for internal purposes only, on a single central processing unit. There are no contracts, agreements, licenses, and other commitments and arrangements in effect with respect to the marketing, distribution, licensing, or -13- 14 promotion of the Software Program or any other independent salesperson, distributor, sublicensor, or other remarketer or sales organization, except for the Software Contracts identified as "distributorships and manufacturer's representation contracts" in Schedule 1((c)). 5.21 [Intentionally Omitted] 5.22 Equipment. Schedules 1((d)) and 1((e)) hereto constitutes a true and complete list of the Computer Equipment and other equipment owned by Seller or with respect to which it may have ownership rights. Each such piece of equipment is located at Seller's premises indicated on Schedule 5.28.2. 5.23 Litigation; Warranty Claims. Except as set forth on Schedule 5.23, for the ten (10) year period occurring immediately prior to the date of this Agreement, there has not been and currently there is no litigation, suit, proceeding, action, claim, or investigation, at law or in equity, pending or threatened against or affecting Seller or involving any property or assets of Seller, before any court, agency, authority, or arbitration tribunal, including, but not limited to, any claims related to the Intellectual Property, any product liability, workers' compensation or wrongful dismissal claims, or claims, actions, suits, or proceedings relating to toxic materials, hazardous substances, pollution, or the environment. Seller is not aware of any facts that might result in any such litigation, suit, proceeding, action, claim, or investigation that relates to the Purchased Assets or the transactions contemplated hereby. Seller is not subject to or in default with respect to any notice, order, writ, injunction, or decree of any court, agency, authority, or arbitration tribunal. Schedule 5.23 lists all warranty claims asserted against Seller during the three (3) year period occurring immediately prior to the date of this Agreement, relating to products sold or distributed by Seller. 5.24 Compliance with Laws. Each of Seller and the Purchased Assets are in compliance with all laws, statutes, rules, regulations, and other requirements imposed by Federal, state, local, and other governmental authorities applicable to the operation or ownership of the Business or the Purchased Assets, the noncompliance with which would have a material adverse effect on the Business. 5.25 Employee Benefits. Except as set forth on Schedule 5.25, Seller has not established or maintained or is not obligated to make contributions to or under or otherwise participate in, with respect to any current or former employee, director, or independent contractor of the Seller: (i) any equity option, restricted equity, equity appreciation rights, bonus, or other type of incentive compensation plan, program, agreement, or arrangement; (ii) any severance, pension, profit-sharing, thrift or savings, retirement, deferred compensation, employee equity ownership, employee equity purchase, or supplemental executive retirement plan, agreement, or arrangement; or (iii) any life insurance, death benefit, health and hospitalization, disability, employee assistance, education or tuition assistance, vacations benefit or fringe benefit plan, or other employee benefit plan, program, agreement, or arrangement. All such plans listed on Schedule 5.25 in which any of the Seller's employees participate (collectively, the "Employee Benefit Plans") have been operated and administered in all material respects in accordance with all applicable laws, rules, and regulations and are fully funded. Seller has no obligation or -14- 15 commitment (formal or informal) to create any new benefit plan or program, or to amend any existing Employee Benefit Plan to increase the benefits thereunder. 5.26 Employee Matters; Labor Relations. 5.26.1 Employment Agreements. None of the employees of the Business are covered by employment contracts, written or oral. None of the employees of the Business are members of any union or covered by any union contracts. Seller is not aware of any plan or solicitation of employees of the Business to form or join a union in the past two (2) years. Seller is not a party to or bound by any employment agreement (written or oral) or any collective bargaining or other labor agreement that could in any way affect Buyer, the Purchased Assets, or any employees of the Business that Buyer may hire after the Closing Date. 5.26.2 Labor Laws. With respect to Seller's employees, Seller has complied in all material respects with the Immigration Reform and Control Act of 1986, as amended, and all other applicable Federal, state, or local laws relating to the employment of labor, including, but not limited to, the provisions thereof relating to wages, non-discriminatory hiring, promotional and employment practices and procedures, collective bargaining and payment of Social Security, unemployment compensation, workers' compensation, and similar taxes, and Seller is not presently liable to any Person or governmental agency for any wage in arrears or subject to any liabilities or penalties for failure to comply with any of the foregoing laws. With respect to Seller's employees, there are no outstanding charges or claims of a material nature against Seller or any of its officers, directors, agents, or employees involving any alleged or actual violation of Seller, or, to the best of Seller's knowledge, any such Person, of any provision of the National Labor Relations Act, the Age Discrimination in Employment Act, the Equal Employment Opportunity Act of 1964, or any other Federal, state, or local law concerning equal employment opportunities, equal pay legislation, or wage and hour obligations contained in the Fair Labor Standards Act; nor, to Seller's knowledge, has there been any threat of any such claim or charge. 5.27 Insurance. Seller presently maintains and has maintained, liability (excluding product liability which Seller has never maintained), casualty, property loss, and other insurance coverage upon the properties included in the Purchased Assets and with respect to the Business, in such amounts, of such kinds, and with such insurance carriers as are indicated on Schedule 5.27 hereto. Schedule 5.27 is a true and complete list of all policies of insurance relating to the Business, the Purchased Assets, and the Assumed Liabilities, whether currently in force or otherwise applicable to any current or future liability, setting forth the type of coverage, policy number, policy periods, and the status of premiums paid thereon. 5.28 Leases, Contracts, and Other Commitments. 5.28.1 Contracts and Other Commitments. Except for the Purchased Contracts described in Schedule 1((h)) attached hereto, the Software Contracts described in Schedule 1((c)), and the Property Leases and except with respect to any Excluded Asset, Seller has no outstanding contracts or other commitments, written or oral, for the performance or receipt of services, or for the payment of monies, or for the purchase, sale, lease, license, use, or acquisition of real or personal property of any kind or character relating to the Business, the -15- 16 Purchased Assets, or the Assumed Liabilities, except for the purchase orders, sales orders, and other similar commitments incurred in the ordinary course of business which (i) in the case of contracts or commitments that involve the performance of services or the sale of products by Seller, do not involve the payment to Seller of any amount in excess of Two Thousand Five Hundred Dollars ($2,500.00) in any single case and Ten Thousand Dollars ($10,000.00) in the aggregate, (ii) in the case of contracts or commitments that involve the receipt of services or the purchase, lease, or other acquisition of property by Seller, do not involve the payment of any amount in excess of Two Thousand Five Hundred Dollars ($2,500.00) in any single case or Ten Thousand Dollars ($10,000.00) in the aggregate, and (iii) in either case, none of which, by its terms, cannot be performed within one (1) year from the date of such contract or commitment. Specifically, without limiting the generalities of the foregoing, Seller has no written or oral contract, agreement, or understanding with any sales representative, commission agent, distributor, consultant, or similar Person, nor any written or oral employment contract, agreement, or understanding with any Person, that relates to the Business, the Purchased Assets, or the Assumed Liabilities, except as may be disclosed in the attached Schedule 1((h)). 5.28.2 Property Leases. Schedule 5.28.2 identifies each of the real properties in which Seller has a valid and subsisting leasehold interest (the "Property Leases") and describes each of the Property Leases thereto. Seller does not own any real property that is used in or useful in the operation of the Business. 5.28.3 Compliance with Contracts. Seller is in compliance with the provisions of all contracts, leases, and other commitments that relate to the Business, the Purchased Assets, and the Assumed Liabilities, the noncompliance with which would have a material adverse effect on the Business, the Purchased Assets or the Assumed Liabilities, and to the best of Seller's knowledge, no default exists by any party to any such contract, lease, or commitment; furthermore, to the best of Seller's knowledge, no event has occurred that, with the passage of time or giving of notice or both, would constitute a default under any such contract, lease, or commitment, nor is Seller aware of any event or circumstance that could reasonably cause such a default or event to occur in the future. All such contracts, leases, and commitments are valid, binding, and enforceable in accordance with their terms and are in full force and effect. No outstanding purchase commitment of Seller is in excess of the normal, ordinary, and usual requirements of the Business, and no contract price in any outstanding purchase commitment of Seller is excessive of the current market prices for the relevant materials, products, commodities or services. Further, the grant of rights to use the data obtained pursuant to the Feedyard Data Agreements and Veterinary Data Agreements being transferred to Buyer are sufficient to allow manipulation of the data by the Feedyard Information System and Veterinary Information System, respectively, in their current and anticipated configurations. No outstanding sales or lease commitment by Seller in connection with the Business obligates Seller to sell or lease any products or services at a price which, in view are currently prevailing and projected costs of manufacturing, overhead and administrative and general expenses applicable thereto, would result in, when all such sales and lease commitments are taken in the aggregate, any loss. -16- 17 5.29 Accounts Receivable. Schedule 1((f)) constitutes a true and complete list of all Accounts Receivable. All Accounts Receivable arose from bona fide transactions in the ordinary course of business and are not subject to any offset, counterclaim, or set-off. 5.30 Accounts Payable. Schedule 3.2 constitutes a true and complete list of all accounts payable and accrued expenses included within the Assumed Liabilities. All such accounts payable and accrued expenses arose from bona fide transactions in the ordinary course of business. 5.31 Customers. Attached hereto as Schedule 5.31, is a complete and accurate list of Seller's feedyard and veterinary customers during the twelve (12) month period ending as of the date hereof, indicating the existing contractual arrangements, if any, with each such customer. There are no outstanding disputes with any customer listed on Schedule 5.31 and no such customer has refused to, or stated its intention not to, continue to do business with Seller or otherwise to materially change its arrangements with Seller. 5.32 Related Party Transactions. Except as set forth on Schedule 5.32 hereto, None of the members, managers, or officers of Seller: (i) are currently a party to any transaction with Seller, including, but not limited to, any contract, agreement, or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from, any such Person, or to or from any corporation, partnership, limited liability company, trust, or other entity in which any such Person owns in excess of five percent (5%) of the outstanding equity interest; (ii) own, directly or indirectly, any interest in, excepting not more than five percent (5%) equity holdings for investment purposes, securities of any publicly held or traded company; (iii) are an officer, director, employee, or consultant of any Person that is a competitor, customer, or supplier of Seller; (iv) own, directly or indirectly, in full or in part, any copyright, trademark, trade name, service mark, franchise, patent, invention, permit, license, trade secret, or confidential information that Seller is using or the use of which is necessary for the Business; or (v) have any cause of action or other claim whatsoever against, or owes any amount to Seller. 5.33 Brokers. Seller has not expressly or impliedly retained any broker, finder, investment banker, or financial advisor in connection with this Agreement or the transactions contemplated hereby. Seller has not taken any actions that will cause Buyer to incur or be required to pay, any broker, finder, investment banker, financial advisor, or similar fee in connection with this Agreement or any transaction contemplated hereby, to any Person acting as broker, finder, investment banker, financial advisor, or in any similar capacity on behalf of Seller. 5.34 Full Disclosure. No representation or warranty of Seller, and none of the information furnished by Seller or by any of the authorized managers, officers, employees, agents, accountants, or representatives of Seller, to Buyer pursuant to this Agreement (whether furnished prior to, at, or subsequent to the date hereof), or the information contained in the Schedules to this Agreement, or any other information furnished to Buyer by Seller or by any of the authorized directors, officers, employees, agents, accountants, or representatives of Seller at -17- 18 any time prior to the Closing (pursuant to the request of Buyer or otherwise), contains, or will contain, any misstatement of a material fact or omits, or will omit, any material fact required to be stated herein or therein or necessary to make all such statements and information not misleading. For purposes of this Section 5.34, all managers and officers of Seller are authorized persons. As of the Closing, there will be no material facts relating to the Purchased Assets, Assumed Liabilities, earnings, properties, or operation of the Business that have not been disclosed to Buyer in writing in this Agreement or the Schedules hereto. 5.35 Investment in Shares. Seller has such knowledge and experience in financial and business matters that it is capable of protecting its own interests in connection with the acquisition of the Shares and evaluating the merits and risks of its investment in the Shares. Seller has been provided, to its satisfaction, the opportunity to ask questions concerning the terms and conditions of its investment in the Shares, has had all such questions answered to its satisfaction, and has been supplied all additional information deemed necessary to evaluate an investment in the Shares. Seller is satisfied that, whether or not Seller has chosen to utilize it, Seller has had effective access to all material information about Buyer by reason of its relationship to Buyer or one or more of Buyer's officers, directors, or stockholders. Seller understands that an investment in the Shares involves a high degree of risk, is familiar with the type of investment that the Shares constitutes, and has reviewed the investment in the Shares with tax and legal counsel to the extent that Seller has deemed such review to be advisable. Seller is investing in the Shares solely for its own account, for investment, and not with a view to or for any distribution, resale, subdivision, or fractionalization thereof in connection with any distribution of securities within the meaning of the Securities Act of 1933, as amended (the "Act"). Seller is the sole and true party in interest and is not investing for the benefit of any other Person, nor investing in a fiduciary capacity for any other Person. Seller acknowledges that the Shares are being transferred to Seller in a private transaction, pursuant to exemptions afforded by Section 4(2) of the Act and Section 17-1262 of the Kansas Securities Act, and not registered thereunder or under the securities laws of any other state or foreign jurisdiction, and that consequently, the Shares must be held indefinitely unless they are subsequently registered under the Act, or unless an exemption from registration is available thereunder. Seller further acknowledges that Buyer has no obligation to register the Shares, except as provided in the Registration Rights Agreement, and the certificate that will be issued to Seller upon the issuance of the Shares shall contain a legend substantially in the form set forth below with reference to the necessity for compliance with Federal and state securities laws in connection with any subsequent transfer of the Shares; Seller hereby agrees to deal with these Shares only in compliance with such requirements: THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE OR OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, OR ASSIGNED EXCEPT: (i) PURSUANT TO REGISTRATIONS UNDER APPLICABLE SECURITIES LAWS; OR (ii) IF, IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION, THE PROPOSED TRANSFER MAY BE EFFECTED IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS WITHOUT REGISTRATION. -18- 19 5.36 True Copies. All documents furnished to Buyer by or on behalf of Seller are true and correct copies, and there are no amendments or modifications thereto except as set forth in such documents. 5.37 Survival of Representations and Warranties. The representations and warranties of Seller made in this Agreement are correct, true, and complete in all material aspects as of the date hereof and will be correct, true, and complete in all material aspects at the Closing Date with the same force and effect as though such representations and warranties had been made at the Closing Date, and shall survive the Closing as provided in Article IX. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller, on and as of the date hereof and on and as of the Closing Date, as follows: 6.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. 6.2 Power and Authority. Buyer has all requisite power and authority to enter into this Agreement, and all other agreements in connection herewith, and to perform the obligations to be performed by it hereunder. All corporate and other proceedings required to be taken by or on the part of Buyer to execute, deliver, and carry out the terms of this Agreement, and all other agreements or documents to be executed or delivered in connection herewith, and to perform its obligations hereunder and thereunder, have been duly and properly taken. This Agreement, and all other agreements and documents to be executed and delivered by Buyer in connection herewith when executed and delivered, constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms. 6.3 No Violation to Result. The execution and delivery of this Agreement and all other agreements and documents to be executed and delivered in connection herewith, and the consummation of the transactions contemplated hereby and thereby: (a) are not in violation or breach of, do not conflict with or constitute a default under, and will not accelerate or permit the acceleration of the performance required by, any of the terms of the charter documents or by-laws of Buyer or any note, debt instrument, security agreement, or mortgage, or any other contract or agreement, written or oral, to which Buyer is a party or by which Buyer or any of its properties or assets is bound; (b) will not be an event that, after notice or lapse of time or both, will result in any such violation, breach, conflict, default, or acceleration; and -19- 20 (c) will not result in a violation under any law, judgment, decree, order, rule, regulation or other legal requirement of any governmental authority, court, or arbitration tribunal whether Federal, state, or local (within the United States or otherwise) at law or in equity, and applicable to Buyer. 6.4 Capitalization. The authorized capital stock of Buyer immediately prior to the Closing, consists of 20,000,000 shares of Common Stock, par value one cent ($.01) per share, of Buyer (the "Common Stock"), 4,676,500 shares of which are outstanding as of the Closing, and 10,000,000 shares of Preferred Stock (the "Preferred Stock"). As of the date of the Closing, 6,500,000 shares of Preferred Stock have been designated as Series A, of which 6,443,606 shares of which are outstanding. The Shares have been duly authorized for issuance. Assuming the accuracy of the representations of Seller set forth in Section 5.35, the Shares will have been offered, issued, sold and delivered in compliance with all applicable state and federal laws concerning the issuance of securities, and when issued, will be validly issued, fully paid and non-assessable shares of Common Stock, and will not have been issued in violation of the preemptive rights of any person. Other than as described in this Section 6.4 or set forth in Schedule 6.4, there are no outstanding shares of Common Stock, Preferred Stock, or any other securities of Buyer, and except as described on Schedule 6.4 hereto, there are no options, warrants, call conversion rights, commitments, or agreements of any character to which Buyer is a party or by which Buyer may be bound that do or may obligate Buyer to issue, deliver, or sell, or cause to be issued, delivered, or sold, additional shares of Common Stock, Preferred Stock, or other securities of Buyer, or that do or may obligate Buyer to grant, extend, or enter into any such option, warrant, call conversion right, commitment, or agreement. Except as set forth in Schedule 6.4, there are no outstanding arrangements, agreements, commitments, or understandings of any kind affecting or relating to the voting, issuance, purchase, redemption, repurchase, or transfer of any capital stock or any other securities of Buyer. 6.5 Brokers. Buyer has not expressly or impliedly retained any broker, finder, investment banker, or financial advisor in connection with this Agreement or the transactions contemplated hereby. Buyer has not taken any actions that will cause Seller to incur or be required to pay, any broker, finder, investment banker, financial advisor, or similar fee in connection with this Agreement or any transaction contemplated hereby, to any Person acting as broker, finder, investment banker, financial advisor, or in any similar capacity on behalf of Buyer. ARTICLE VII FURTHER AGREEMENTS AND ASSURANCES OF SELLER 7.1 Obligations to Employees. Seller shall terminate the employment of each of its employees as of February 26, 1999. To the extent any employee of Seller rejects Buyer's offer of employment made pursuant to Section 8.3 hereof, Seller shall be responsible for, and shall pay, all amounts (excluding any amounts included in the Assumed Liabilities), including wages, salaries, bonuses, commissions, vacation pay, and severance pay, if any, and all other employee -20- 21 benefits due to any or all of Seller's employees or independent contractors. Specifically, but not in limitation of the foregoing, Seller shall be responsible for providing COBRA health continuation coverage under Section 4980B of the Code to all of its employees to the extent required by law, as well as complying with all Federal, state, and local laws, rules, and regulations promulgated thereunder, relating to the termination of employees, including, but not limited to, the Worker's Adjustment and Retraining Notification Act. Buyer does not assume and Seller shall indemnify, defend, and hold harmless Buyer against any and all obligations and responsibilities with respect to each and every employee of Seller under any employment agreement, current or future pension, retirement, deferred compensation, bonus, profit-sharing, insurance, or similar plan, agreement, arrangement, or formal or informal understanding, for the benefit of employees, in each case whether or not legally binding, that Seller maintains or ever has maintained or to which Seller contributes or ever has contributed or to which Seller is obligated to contribute including, but not limited to, the Employee Benefit Plans. Buyer shall have no liability whatsoever to employees of Seller with respect to accrued benefits under any Employee Benefit Plans for employees' service with Seller, whether or not any of such employees are offered employment by, or become employees of, Buyer. Seller shall be responsible for and shall indemnify, defend, and hold harmless Buyer against all employee benefit claims (including long-term disability and medical and hospitalization claims) of any nature whatsoever and workers' compensation claims: (a) that have arisen on or before the Closing Date for any and all employees of Seller; (b) for employees of Seller who are or become retired on or before the Closing Date with respect to disability, illness, or any other state of facts occurring before or after the Closing Date; (c) for any and all employees of Seller (or their eligible dependents) with respect to events or situations that may lead to a determination of eligibility or disability, illness, or any other state of facts occurring before the Closing Date; and (d) in respect of all of Seller's employees. Buyer shall have no liability whatsoever in respect of any of the foregoing. 7.2 Non-Disclosure and Non-Competition Relating to the Business. From and after the Closing Date, Seller and Crain shall not: (a) at any time or in any manner, either directly or indirectly, divulge, disclose, or communicate to any Person (other than Buyer's employees and representatives), except the authorized attorneys, accountants, or representatives of Seller or Crain who have a need to know in connection with their respective services for Seller or Crain, in any manner whatsoever, any Confidential Information (as defined in this Section); (b) for a period of five (5) years from and after the Closing Date, in any manner, either directly or indirectly, as an owner, partner, officer, director, consultant, agent, employee, independent contractor, or equity holder (as applicable) of any Person, engage in the business of developing, marketing, distributing, or selling services or software designed to provide information services, imaging tools, or animal supplements (except for the sale, prescription, or distribution of annual supplements in the ordinary course of a bovine and equine veterinary practice) in the markets of veterinary medicine, animal sciences, or human medicine, anywhere within the United States of America; -21- 22 (c) for a period of five (5) years from and after the Closing Date, in any manner, either directly or indirectly, solicit any employee of Buyer (or the Business) to work for any Person other than Buyer, or engage in any activity that would cause any employee to violate any agreement with Buyer, or dissuade, or attempt to dissuade, any such employee from faithfully discharging such employee's contractual and fiduciary obligations to serve Buyer's interests with undivided loyalty; and (d) induce or persuade any customer or supplier of Buyer (or the Business) to terminate its relationship with Buyer (or the Business) or to enter into any relationship with any other Person engaged in the business of developing, marketing, distributing, or selling services or software designed to provide information services, imaging tools, or animal supplements (except for the sale, prescription, or distribution of annual supplements in the ordinary course of a bovine and equine veterinary practice) in the markets of veterinary medicine, animal sciences, or human medicine, anywhere within the United States of America. Notwithstanding the foregoing, Crain shall not be deemed to be competing with the Business pursuant to his employment by Buyer and neither Seller nor Crain shall be deemed to be in violation of subsection ((b)) immediately preceding, by reason of the fact that certain employees of Crain's veterinary practice (being Crain, Dr. Nate McDonald, Cathy Rosenberry and Shane Walter) may also be employed on a shared basis with Buyer. For purposes of this Section 7.2, "Confidential Information" means any information not in the public domain concerning any matters affecting or relating to the Business, including, but not limited to, inventions, trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, source code, databases, other original works of authorship, records, ideas and research relating to design, coding, operation, use, installation, or maintenance of computer software or proposed computer software products of the Business, any portion of any reports, analyses or other materials generated or used in connection with the Business, the prices Seller obtains or has obtained from the sale of, or at which it sells or has sold, its products and services, and listings of any or all of the foregoing, in whatever form, or any other information concerning the Business without regard to whether all or any part of the foregoing matter would otherwise be deemed "confidential" or "material," the parties hereto stipulating that, as between them, the same are confidential and material and significantly affect the effective and successful conduct of the Business. If any clause or provision of this Section 7.2 be found unenforceable by a court of competent jurisdiction, then such clause or provision shall be deemed to be enforceable to the extent permitted by law and every other clause and provision shall continue in full force and effect. Seller and Crain acknowledge that the restraints imposed upon it or him, as applicable, pursuant to this Section 7.2 are no greater than is reasonably necessary to preserve and protect the assets and legitimate business interests of Buyer and that such restraints will not impose undue hardship on Seller or Crain, and that a violation of this Section by Seller or Crain would irreparably injure Buyer. Accordingly, Buyer may, in addition to pursuing its other remedies, obtain an injunction from any court having jurisdiction of the matter against Seller or Crain, as applicable, for any such violation without having to prove the inadequacies of monetary relief and no bond or other security shall be required in connection with such injunction. The agreements contained in this Section 7.2 -22- 23 shall be construed and enforced independently of any other provision of this Agreement or any other understanding or agreement between the parties, and the existence of any claim or choses of action of Seller or Crain against Buyer, of whatever nature, shall not constitute a defense to the enforcement of the agreements contained in this Section 7.2 against Seller. 7.3 Satisfaction of Excluded Liabilities. From and after the Closing Date, Seller shall pay, perform, and otherwise satisfy in full when due, all liabilities and obligations that relate to or may affect the Business or the Purchased Assets, including, but not limited to, the Excluded Liabilities, excepting only the Assumed Liabilities. 7.4 Further Assurances. From time to time after the Closing, without additional consideration, Seller shall execute and deliver all such other instruments of sale, assignment, conveyance, and transfer and shall take all such other action, as Buyer may request to more effectively transfer and vest in Buyer, and to put Buyer in possession of, any of the Purchased Assets including, but not limited to, the Intellectual Property. 7.5 Name Change. Seller shall take all necessary action to approve the withdrawal or cancellation of every registration or a limited liability company or assumed name incorporating the names "CIN, LLC," "Cattle Management Network, L.L.C.," "Cattlemen's Information Network, L.L.C.," "Industry Net," and "Beef Industry Information Integrator" in each state where Seller has registered a limited liability company or assumed name incorporating such names. Seller shall prepare and deliver to Buyer at Closing, all documentation and filings necessary to effect such actions, in forms appropriate for filing by Buyer. After the Closing Date, Seller shall refrain from using the names "CIN, LLC," "Cattle Management Network, L.L.C.," "Cattlemen's Information Network, L.L.C.," "Industry Net," and "Beef Industry Information Integrator" or any derivation thereof, except in an historical manner. 7.6 Collection of Accounts Receivable. For a period of ninety (90) days from the Closing Date, Seller shall reasonably assist Buyer in the collection of the Accounts Receivable. ARTICLE VIII FURTHER AGREEMENTS AND ASSURANCES OF BUYER 8.1 Satisfaction of Conditions by Buyer. Buyer shall not voluntarily undertake any course of action inconsistent with the satisfaction of the requirements or conditions applicable to it in this Agreement, including, but not limited to, the satisfaction of the Assumed Liabilities, and Buyer shall promptly do all such acts and take all such measures as may be appropriate to enable it to perform the obligations herein provided to be performed by it. 8.2 Buyer to Assist in Obtaining Consents. Buyer shall provide assistance, as reasonably requested by Seller, to secure consents to the assignment of any of the contracts to be assumed by Buyer hereafter. -23- 24 8.3 Employment. Buyer shall offer at-will employment effective as of March 1, 1999, subject to execution of Buyer's Non-Disclosure, Proprietary Information, Assignment And Non-Competition Agreement, to all employees of Seller set forth on Schedule 8.2. All such offers of employment shall include all benefits available to other similarly situated employees of Buyer (as determined by Buyer) and shall include participation in the Buyers health insurance without any waiting period or exclusions for preexisting conditions. For the benefit of Seller, Buyer shall offer all such employees a bonus, as specified on Schedule 8.2, payable on or before October 31, 1999, with such bonuses in the aggregate not to exceed One Hundred Seventeen Thousand Dollars ($117,000.00). 8.4 Spin Out. Buyer covenants and agrees that Buyer shall use commercially reasonable efforts to assess or cause to be assessed the viability of spinning out a portion of the Business as a separate company for the purpose of developing, marketing, and distributing software applications developed from the Software Program solely for use in the agricultural industry (being business devoted to the science and art of producing crops, but specifically excluding livestock, poultry, or any other food animals) (the "Agrivision Technology"). In the event such a spin out company is formed (the "Spin Out"), and as additional consideration for the transaction contemplated under this Agreement, the Spin Out entity shall issue to Seller shares of its common equity constituting twenty-five percent (25%) of the initial equity of the Spin Out, but in no event less than one million (1,000,000) shares of such equity. So long as Seller's ownership interest in the Spin Out remains between twenty-five percent (25%) and ten percent (10%), contemporaneously with any acquisition by XL Vision, Inc. ("XL Vision") of additional equity in the Spin Out, Seller shall be offered the opportunity to purchase an additional amount of equity on the same terms as XL Vision so that Seller may maintain a percentage ownership in the Spin Out in the same proportion as its ownership interest relates to the ownership interest of by XL Vision in the Spin Out immediately prior to such offer. Further, if Seller's ownership interest in the Spin Out falls below ten percent (10%), Buyer shall use its best commercial efforts to cause the Spin Out to grant Seller pre-emptive rights relating to capital-raising transactions (excluding, by way of example and without limitation, issuances relating to any "Excluded Transaction" as defined in the immediately following sentence. For purposes of this Section, "Excluded Transaction" shall mean the issuance of any equity securities (including any common stock, preferred stock, or other security, any security convertible into common stock, preferred stock, or other security, or any right to, or security carrying any right to, subscribe to or purchase any common stock, preferred stock, or other security): (i) to any employees, officers, or directors of, or consultants or advisors (excluding Buyer or XL Vision) to, the Spin Out or any subsidiary, pursuant to any stock purchase or stock option plan or other arrangement that has been approved by the board of directors of the Spin Out; (ii) pursuant to a merger, consolidation, acquisition, or similar business combination (for consideration other than cash); (iii) pursuant to any stock split, stock dividend, or recapitalization (assume that all shares of the same class of stock are effected in the same manner) by the Spin Out; (iv) pursuant to the conversion of any convertible equity securities or the exercise of any rights to subscribe to or purchase any equity securities; (v) pursuant to any equipment leasing arrangement or debt financing from a bank or similar financial institution; (vi) pursuant to a registration statement filed under the Act; or (vii) in connection with any strategic transaction involving the Spin Out and other entities, including (a) joint ventures, manufacturing, marketing, or distribution -24- 25 arrangements or (b) technology transfer or development arrangements, provided that such strategic transaction, and the issuance of equity securities in connection therewith, has been approved by the board of directors of the Spin Out. For so long as Crain owns at least ten percent (10%) of the Spin Out, Buyer will use its best commercial efforts to cause Crain to be elected to the Board of Directors of the Spin Out. In the event Buyer has not formed a spin out company based on the Agrivision Technology within ninety (90) days of the first anniversary of the Closing Date, Seller shall have ninety (90) days within which to request in writing that Buyer grant Seller or an entity designated by Seller, a perpetual, limited, royalty-free license to the Software Program for the sole purpose of developing, marketing, and distributing the Agrivision Technology. In consideration of such license, Buyer shall be issued equity constituting five percent (5%) of the equity of the licensee entity. ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 9.1 Survival of Representations and Warranties. Notwithstanding any other provision of this Agreement, each and every representation and warranty of Seller and Crain set forth in this Agreement or any other agreement or document executed or delivered in connection herewith, shall survive the Closing for a period of two (2) years from the Closing Date, despite any investigations made by or on behalf of any party hereto, excepting only that the representations and warranties of Seller and Crain set forth in Sections 5.2 and 5.10, shall survive the Closing without limitation, and the representations and warranties with respect to taxes set forth in Section 5.8, shall survive until the expiration of any statutes of limitation applicable with respect to such taxes, including any extensions with respect to such statutes granted by or on behalf of Seller. Notwithstanding any other provision of this Agreement, each and every representation and warranty of Buyer set forth in this Agreement or any other agreement or document executed or delivered in connection herewith, shall survive the Closing for a period of two (2) years from the Closing Date, despite any investigations made by or on behalf of any party hereto, excepting only that the representations and warranties of Buyer set forth in Section 6.2, shall survive the Closing without limitation. All of the covenants and other agreements of the parties hereto shall survive the Closing until the expiration of any statutes of limitation applicable thereto. 9.2 Indemnification. 9.2.1 By Seller and Crain. Seller and Crain, jointly and severally, hereby indemnify and agree to defend and hold Buyer and its officers, directors, shareholders, affiliates, employees, successors, and assigns (collectively, the "Buyer Indemnitees") harmless from and against any and all liabilities, losses, damages, costs, and expenses (including, without limitation, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Buyer Indemnitees because of any inaccuracy in, or breach or violation of, any of the representations, warranties, covenants, or agreements made by Seller or Crain pursuant to this Agreement or any other agreement or document executed or delivered in connection herewith, whether or not such inaccuracy, breach, or violation was known or should have been known, by -25- 26 Buyer, Seller, or Crain on the Closing Date, it being the acknowledged intention of the parties that Seller and Crain shall be completely responsible for, and Buyer shall be conclusively deemed to have relied upon, such representations, warranties, and covenants in the consummation of the purchase and sale transactions contemplated herein. In addition, Seller and Crain, jointly and severally, hereby indemnify and agree to defend and hold the Buyer Indemnitees harmless from and against any and all liabilities, lawsuits, damages, costs and expenses (including, but not limited to, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Buyer Indemnitees as a result of: (i) any and all debts, liabilities (including, but not limited to, the Excluded Liabilities set forth in Section 3.3), obligations, or commitments of Seller or Crain of any nature whatsoever, whether approved, liquidated, unliquidated, ordinary, extraordinary, absolute, contingent, unknown, known, or otherwise, except the Assumed Liabilities, which Buyer expressly agrees to assume pursuant to Section 3.2; and (ii) any and all suits, actions, or claims (including, but not limited to, product liability, patent infringement, and unfair trade practice claims) relating to the sale or any other form of transaction, or any action or inaction on the part of Seller or Crain at any time on or prior to the Closing Date, whether or not pending as of the Closing Date. 9.2.2 By Buyer. Buyer hereby indemnifies and agrees to defend and hold Seller and its officers, Manager, members, affiliates, employees, successors, and assigns (collectively, the "Seller Indemnitees") harmless from and against any and all liabilities, losses, damages, costs, and expenses (including, without limitation, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Seller Indemnitees because of any inaccuracy in, or breach or violation of, any of the representations, warranties, covenants, or agreements made by Buyer pursuant to this Agreement or any other agreement or document executed or delivered in connection herewith, whether or not such inaccuracy, breach, or violation was known or should have been known, by Buyer, Seller, or Crain on the Closing Date, it being the acknowledged intention of the parties that Buyer shall be completely responsible for, and Seller shall be conclusively deemed to have relied upon, such representations, warranties, and covenants in the consummation of the purchase and sale transactions contemplated herein. In addition, Buyer hereby indemnifies and agrees to defend and hold the Seller Indemnitees harmless from and against any and all liabilities, lawsuits, damages, costs and expenses (including, but not limited to, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Seller Indemnitees as a result of: (i) any and all debts, liabilities (including, but not limited to, the Assumed Liabilities set forth in Section 3.3), obligations, or commitments of Buyer of any nature whatsoever, whether approved, liquidated, unliquidated, ordinary, extraordinary, absolute, contingent, unknown, known, or otherwise, except the Excluded Liabilities, which Seller expressly agrees to retain and satisfy pursuant to Section 3.2; and (ii) any and all suits, actions, or claims (including, but not limited to, product liability, patent infringement, and unfair trade practice claims) relating to the sale or any other form of transaction, or any action or inaction on the part of Buyer at any time after the Closing Date. 9.2.3 DeMinimus Exclusion and Limitation of Liability. Notwithstanding either of the immediately preceding two subsections, it is understood and agreed that with respect to inaccuracies or breaches of the representations and warranties set forth in this Agreement, Seller -26- 27 and Crain or Buyer, as the case may be, shall be obligated to indemnify and hold harmless, in the case of Seller and Crain, Buyer and, in the case of Buyer, Seller, only to the extent that the aggregate sum of the liabilities, damages, costs and expenses incurred or sustained by such other with respect to all such inaccuracies or breaches shall exceed the sum of Twenty-Five Thousand Dollars ($25,000.00). The foregoing sentence is intended to be and shall be applicable solely with respect to inaccuracies or breaches of the representations and warranties set forth in this Agreement, and shall not be deemed to limit the parties' respective obligations (including indemnification obligations) with respect to any breaches or violations of any covenants or other provisions of this Agreement. Specifically, and without limiting the generality of the foregoing, the first sentence of this Section shall not be applicable to: (i) any failure by Seller to transfer any of the Purchased Assets to Buyer, to pay, perform and discharge the Excluded Liabilities, or to comply with the terms of Article 7 of this Agreement, or (ii) any failure by Buyer to pay the Purchase Price hereunder, to pay, perform and discharge the Assumed Liabilities, or to comply with the terms of Article 8 of this Agreement. Notwithstanding this Section, in no event shall the liability of Seller and Crain under this Agreement for any and all causes of action exceed Two Million Six Hundred Thousand Dollars ($2,600,000.00), in the aggregate and in no event shall the liability of Buyer under this Agreement for any and all causes of action exceed Two Million Six Hundred Thousand Dollars ($2,600,000.00), in the aggregate and including the value of the Purchase Price paid hereunder. 9.3 Set-off. Upon written notice to Seller, Buyer may set off against any and all amounts otherwise to be paid to Seller under Sections 3.1((b)) and ((c)) or otherwise, any amounts claimed in good faith to be owed to Seller by Buyer. ARTICLE X AMENDMENT; WAIVER 10.1 Amendment. This Agreement may only be amended in a writing that refers to this Agreement and is executed by the parties hereto. 10.2 Integration. This Agreement (including the Exhibits and Schedules hereto), and each agreement or document executed or delivered in connection herewith, embodies the entire agreement of the parties hereto in relation to the purchase and sale of the Purchased Assets and the other transactions contemplated herein, and supersedes all prior understandings and agreements of the parties with respect to the subject matter hereof, including, but not limited to that certain Proposal for Investment letter dated February 3, 1999, to Seller and Crain from Buyer and XL Vision. 10.3 Waiver; Remedies. No delay on the part of any party in exercising any right, power, or privilege shall operate as a waiver thereof, nor shall any waiver of any right, power, or privilege operate as a waiver of any other right, power, or privilege, nor shall any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or of any other right, power, or privilege. The rights and remedies herein provided are cumulative and are -27- 28 not exclusive of any rights or remedies that the parties otherwise may have at law or in equity, by statute or otherwise. ARTICLE XI MISCELLANEOUS 11.1 Successors, Assigns, and Third Parties. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successor and assigns; provided, however, that Seller may not make any assignment of this Agreement or any interest herein or obligation hereunder, without the prior written consent of Buyer. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any Person, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 11.2 Governing Law. This Agreement shall in all respects be interpreted, construed, and governed by and in accordance with the laws of the State of Delaware, applicable to contracts made and to be performed therein. Seller and Crain agree that any court proceedings brought by either of them against Buyer arising out of this Agreement, will only be brought in a Federal or state court located in the State of Florida, County of Indian River and in that regard each irrevocably consents to the jurisdiction and venue (and waives any inconvenient forum objection) of such Federal and state courts, for the purposes of any court proceedings brought by either of them hereunder and to accept service of process by mail. Buyer agrees that any court proceedings brought by it against either Seller or Crain arising out of this Agreement, will only be brought in a Federal or state court located in the State of Kansas, County of Sedgwick and in that regard irrevocably consents to the jurisdiction and venue (and waives any inconvenient forum objection) of such Federal and state courts, for the purposes of any court proceedings brought by it hereunder and to accept service of process by mail. 11.3 Specific Performance. The purpose of Buyer in entering this Agreement is to gain control of the Purchased Assets of the Business. Such Business and the Purchased Assets are unique and cannot be readily obtained on the open market. If Seller refuses to perform its obligations under this Agreement, Buyer shall be entitled to specific performance. In any action to enforce the provisions of this Agreement, Seller shall waive the defense that there is an adequate remedy at law. 11.4 Certain Words. Words such as "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular Section or subsection of this Agreement unless the context indicates otherwise. Wherever appropriate in the context, terms used herein in the singular also include the plural, and vice versa, and each masculine, feminine, or neuter pronoun shall also include the other genders. 11.5 Notices. Except as otherwise expressly provided herein, any notice, consent, or other communication required or permitted to be given hereunder shall be in writing and shall be -28- 29 deemed to have been given three (3) days after the date sent if sent by United States certified mail, return receipt requested, with proper postage thereon, one (1) day after the date sent if sent by overnight courier of national recognition, or when transmitted, if sent by facsimile, and shall be addressed as follows: (a) If to Buyer: eMERGE Vision Systems, Inc. 10315 102nd Terrace Sebastian, FL 32968 Attention: Charles L. Abraham Chief Executive Officer Phone Number: 561/589-5310 Facsimile Number: 561/589-3779 with a copy to: Gordon & Glickson 444 N. Michigan Avenue Suite 3600 Chicago, IL 60611 Attention: Diana J. P. McKenzie Phone Number: 312/321-1700 Facsimile Number: 312/321-9324 (b) If to Seller: CIN, LLC P.O. Box 654 Meade, KS 67864 Attention: Dr. Scott Crain Phone Number: 316-873-2181 Facsimile Number: 316-873-2182 with a copy to: Foulston & Siefkin, LLP 100 N. Broadway, Suite 700 Attention: Harvey R. Sorensen Phone: 316/267-6371 Facsimile Number: 316/267-6345 or at such other address or addresses as the party addressed may from time to time designate in writing. 11.6 Expenses. All sales and similar taxes arising out of the transfer of the Purchased Assets and the transactions contemplated hereby shall be paid by the party responsible by law for such tax. All legal, accounting, and other costs and expenses incurred in connection herewith and the transactions contemplated hereby shall be paid by the party incurring such expenses. 11.7 Confidentiality. All nonpublic information disclosed heretofore or hereafter by Buyer or Seller to the other in connection with this Agreement shall be kept confidential by such -29- 30 other, and shall not be used other than in connection with this Agreement, except to the extent it was known when received or as it is or hereafter becomes lawfully obtainable from other sources, or to the extent such duty as to confidentiality and non-use is waived, or except as may be required by court order or any governmental agency. Such obligation as to confidentiality and non-use shall survive any termination of this Agreement. 11.8 Headings. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 11.9 Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, illegal, inoperative, or unenforceable, the same shall not affect any other provision contained herein, or render the same invalid, inoperative, or unenforceable to any extent whatsoever, which provisions shall remain in full force and effect. 11.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute the same agreement. 11.11 Record Retention. The parties hereto agree to retain for a period of seven (7) years from and after the Closing, and make available to each other and their respective agents, counsel, accountants, employees or representatives, all of the books, records and documents (including records with respect to accounts receivable, accounts payable and general ledger maintained on magnetic tape or any other electronic medium) relating to Seller which existed on the date next preceding the Closing and which were in the possession of any of them. [SIGNATURE PAGE FOLLOWS] -30- 31 IN WITNESS WHEREOF, the parties have caused this Asset Purchase Agreement to be executed and delivered by its duly authorized officer as of the date first written in the Preamble to this Agreement. SELLER: CIN, LLC By: /s/: Dr. Scott Crain --------------------- Its: Manager CRAIN: Dr. Scott Crain -------------------------------- Dr. Scott Crain eMERGE Vision Systems, Inc. By: Charles L. Abraham ----------------------- Its: Chief Executive Officer ----------------------- -31- 32 LIST OF EXHIBITS AND SCHEDULES EXHIBITS Exhibit A Bill of Sale and Assignment Exhibit B Assignment and Assumption Agreement Exhibit C Assignment of Intellectual Property Exhibit D [Intentionally Omitted] Exhibit E Shareholders' Agreement Exhibit F Lease Exhibit G Legal Opinion - Seller's Counsel Exhibit H Legal Opinion - Buyer's Counsel SCHEDULES Schedule 1((a)) Inventory Schedule 1((c)) Software Contracts Schedule 1((d)) Computer Equipment Schedule 1((e)) Equipment Schedule 1((f)) Accounts Receivable Schedule 1((h)) Purchased Contracts Schedule 1((j)) Intellectual Property Schedule 2 Excluded Assets Schedule 3.2 Assumed Liabilities Schedule 3.5 Allocation of Purchase Price Schedule 4.2.12 Lien Termination Statements Schedule 5.1 Members Schedule 5.8 Taxes Schedule 5.12 Licenses and Permits Schedule 5.13 Consents Schedule 5. 14 Intellectual Property Exceptions Schedule 5.15 Copyright Protection Schedule 5.16 Trade Secret Protection Schedule 5.23 Litigation; Warranty Claims Schedule 5.25 Employee Benefit Plans Schedule 5.27 Insurance Schedule 5.28.2 Property Leases Schedule 5.31 Customers Schedule 5.32 Related Parties Schedule 6.4 Capitalization of Buyer Schedule 8.3 Employee Bonus Amounts LIST OF EXHIBITS AND SCHEDULES - PAGE 1 33 EXHIBIT A TO ASSET PURCHASE AGREEMENT BILL OF SALE AND ASSIGNMENT KNOW ALL PERSONS BY THESE PRESENTS, that CIN, LLC, a Kansas limited liability company ("Seller"), for and in consideration of the sum of Ten Dollars ($10.00), lawful money of the United States, and other good and valuable consideration to it paid by eMERGE Vision Systems, Inc., a Delaware corporation ("Buyer"), the receipt, sufficiency, and adequacy of which are hereby acknowledged, does hereby bargain, sell, assign, transfer, convey, and deliver unto Buyer and its successors and assigns, all of the Purchased Assets, as that term is defined in that certain Asset Purchase Agreement dated February __, 1999 by and among Seller, Buyer, and Dr. Scott Crain (the "Agreement"), excluding the Excluded Assets, as that term in defined in the Agreement. TO HAVE AND TO HOLD, all and singular, the Purchased Assets unto Buyer, its successors and assigns, for itself and their own use forever. AND FURTHER, Seller hereby represents and warrants to Buyer that Seller is the absolute owner of the Purchased Assets, free and clear of all liens, claims, conditional sale agreements, and encumbrances of any nature, except the liens of Meade State Bank. AND FURTHER, Seller does for itself and its successors and assigns, covenant and agree to and with Buyer, its successors and assigns, to warrant and forever defend the sale of the Purchased Assets hereby made to Buyer against all and every person or persons whomever claiming title thereto. AND FURTHER, Seller hereby covenants and agrees to execute and deliver, and to do or make or cause to be done or made, upon reasonable request by Buyer, any and all agreements, instruments, deeds, acts, or things supplemental, confirmatory, or otherwise, as may be reasonably required by Buyer for the purpose of or in connection with acquiring, or more effectively vesting, or evidencing the vesting, in Buyer, the Purchased Assets transferred, assigned, conveyed, and granted, or intended to be transferred, assigned, conveyed or granted, hereby or hereunder. EXHIBIT A - PAGE 1 34 IN WITNESS WHEREOF, Seller has caused this Bill of Sale and Assignment to be executed and delivered to Buyer by its duly authorized officer this _____ day of February, 1999. CIN, LLC By:______________________________ Its:_____________________________ As certain of the Purchased Assets may be owned by the undersigned, Dr. Scott Crain, individually or in the name of another business controlled by the undersigned, the undersigned for purposes of more fully vesting the ownership of the Purchased Assets in Buyer for the benefit of Buyer, does hereby agree to each of the agreements, covenants, and representations of Seller in this Bill of Sale and Assignment, as if the undersigned was the Seller hereunder, to the extent that any of the Purchased Asset are owned by him or another entity under his control other than Seller and conveyed hereby. ___________________________ Dr. Scott Crain EXHIBIT A - PAGE 2 35 EXHIBIT B TO ASSET PURCHASE AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Agreement") is made and entered into this _____ day of February, 1999, by and between CIN, LLC a Kansas limited liability company ("Seller") and eMERGE VISION SYSTEMS, INC., a Delaware corporation ("Buyer"). RECITALS: A. Buyer is acquiring certain assets of Seller pursuant to the terms of that certain Asset Purchase Agreement dated February __, 1999, by and among Seller, Buyer, and Dr. Scott Crain (the "Asset Purchase Agreement"). B. Seller desires to assign to Buyer all of Seller's right, title, and interest in and to those certain Software Contracts and Purchased Contracts (as those terms are defined in the Asset Purchase Agreement) and Buyer desires to assume all of Seller's obligations under the Software Contracts and Purchased Contracts. NOW, THEREFORE, in consideration of the recitals, the sale of the aforementioned assets by Seller to Buyer, and other good and valuable consideration, the receipt, sufficiency, and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. ASSIGNMENT OF SOFTWARE CONTRACTS AND PURCHASED CONTRACTS. Seller hereby transfers, assigns, and conveys as of the date hereof, all of Seller's right, title, and interest in and to the Software Contracts and the Purchased Contracts listed on Schedules 1((c)) and 1((h)) to the Asset Purchase Agreement and made a part hereof, from and after the date hereof. 2. ASSUMPTION OF SOFTWARE CONTRACTS AND PURCHASED CONTRACTS. Buyer hereby assumes and agrees to perform the obligations of Seller under the Software Contracts and Purchased Contracts, from and after the date hereof. 3. NO DEFAULTS. Seller represents and warrants to Buyer that it is not in default of any of its obligations under any of the Software Contracts or Purchased Contracts. 4. AGREEMENT BINDING; GOVERNING LAW. This Agreement shall be binding upon the parties hereto and their respective successors and assigns. This Agreement shall in all respects be interpreted, construed, and governed by and in accordance with the laws of the State of Delaware, applicable to contracts made and to be performed therein. Seller agrees that any court proceedings brought by it against Buyer arising out of this Agreement, will only be brought in a Federal or state court located in the State of Florida, County of Indian River and in EXHIBIT B - PAGE 1 36 that regard irrevocably consents to the jurisdiction and venue (and waives any inconvenient forum objection) of such Federal and state courts, for the purposes of any court proceedings brought by it hereunder and to accept service of process by mail. Buyer agrees that any court proceedings brought by it against Seller arising out of this Agreement, will only be brought in a Federal or state court located in the State of Kansas, County of Sedgwick and in that regard irrevocably consents to the jurisdiction and venue (and waives any inconvenient forum objection) of such Federal and state courts, for the purposes of any court proceedings brought by it hereunder and to accept service of process by mail. IN WITNESS WHEREOF, each of the parties has caused this Assignment and Assumption Agreement to be executed and delivered by its duly authorized officer as of the date first written in the Preamble hereof. CIN, LLC By:_________________________________________ Its:________________________________________ eMERGE VISION SYSTEMS, INC. By:_________________________________________ Its:________________________________________ As certain of the Software Contracts and the Purchased Contracts are in the name of the undersigned, Dr. Scott Crain, individually or in the name of another business controlled by the undersigned, the undersigned for purposes of more fully assigning the Software Contracts and the Purchased Contracts to Buyer and for the benefit of Buyer, does hereby agree to each of the agreements, covenants, and representations of Seller in this Assignment and Assumption Agreement Assignment, as if the undersigned was the Seller hereunder, to the extent that any of the Software Contract and Purchased Contracts are being assigned by him or an entity he controls other than Seller and conveyed hereby. __________________________________________ Dr. Scott Crain EXHIBIT B - PAGE 2 EX-10.7 9 STOCK PURCHASE AGREEMENT DATED MARCH 22, 1999 1 EXHIBIT 10.7 STOCK PURCHASE AGREEMENT BETWEEN eEMERGE VISION SYSTEMS, INC. ("Purchaser") AND CYBERSTOCKYARD, INC. (the "Company") J. SCOTT SANDERS, DAVID SANDERS, SCOTT CALHOUN AND DR. DUANE PANKRATZ (collectively, the "Seller") 2 SCHEDULES 1.1 Company Stockholders 2.1 Jurisdiction 2.6 Third Party and Government Consents 2.8(b) Cash Accounts 2.8(c) Equipment 2.8(e) Intellectual Property and Information 2.8(e)(i) Software Products 2.8(f) Copyright Notices 2.8(g) Trade Secret Policy 2.8(i) Technical Documentation 2.8(j) Software Contracts (a) Licenses from Third Parties (b) Distribution or VAR Agreements 2.8(l) Prepaid Items 2.11 Financial Statements 2.12 Permits and Approvals 2.13 Employee Benefit Plans 2.15 Hazardous Substances 2.16 Litigation; Compliance with Laws 2.17 Contracts, Leases, Etc. 2.18 Forms of Warranties and Guaranties 2.20 Insurance 2.21 Contracts with Insiders and Affiliates 2.29 No Changes 4.1(c) "Accredited Investor" Status
-2- 3 STOCK PURCHASE AGREEMENT THIS AGREEMENT made this 22nd day of March 1999 (the "Agreement") between eMERGE Vision Systems, Inc., a Delaware corporation ("Purchaser"), Cyberstockyard, Inc. a Mississippi corporation (the "Company") and J. Scott Sanders, David Sanders, Scott Calhoun and Dr. Duane Pankratz (collectively, the "Seller" and each as a "Seller"). BACKGROUND WHEREAS, the Company is engaged in engaged in the business of selling cattle and other products through its proprietary auction and other software (the "Software Programs") over the internet ("Business"). WHEREAS, Sellers collectively own 400 shares of common stock, no par value (the "Stock") of the Company, representing all of the issued and outstanding shares of capital stock of the Company. WHEREAS, Sellers desires to sell to Purchaser and Purchaser desires to purchase from Sellers the Stock at the Purchase Price (as hereinafter defined) and upon the other terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and of the mutual promises, covenants, representations and warranties made in this Agreement and other consideration, the sufficiency of which is hereby acknowledged, Purchaser, Company and Seller, intending to be legally bound, hereby agree as follows: ARTICLE I SALE AND PURCHASE OF ASSETS; TRANSACTION CONSIDERATION Section 1.1 Sale and Purchase. Subject to the terms and conditions set forth in this Agreement, and in reliance upon the joint and several representations and warranties made by the Company and each of the Sellers to the Purchaser in this Agreement, each of the Sellers shall sell to the Purchaser and the Purchaser shall purchase and receive from each of the Sellers, the number of shares of Stock set forth opposite each Seller's name in the Capitalization Table set forth on Schedule 1.1 hereto (the "Capitalization Table") in exchange for a total of 200,000 shares (the "eVS Shares") of the Purchaser's common stock, par value $0.01 (the "Purchase Price") allocated among the Sellers as set forth on Schedule 1.1. Section 1.2 Books and Records. At a closing, as defined in Section 12.1 (the "Closing"), Sellers shall cause the Company to deliver to Purchaser, or turn over to Purchaser's representatives, all minute books, stock record books and corporate seals of the Company, and the original copies of all books of account, leases, other agreements, securities, customer lists, files and other documents, instruments and papers of all kind and nature belonging to or relating -3- 4 to the business of the Company and necessary or desirable in Purchaser's judgment for the on-going conduct of the Company and its business, whether in the possession of Seller or the Company. Section 1.3 Resignations. At the Closing, Sellers shall make available to Purchaser the immediately effective written resignations of all the directors and officers of the Company. ARTICLE II REPRESENTATIONS AND WARRANTIES RESPECTING SELLER The Company and the Sellers, jointly and severally, represent and warrant to Purchaser as follows: Section 2.1 Organization and Qualification. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Mississippi and is duly qualified and in good standing as a foreign corporation authorized to transact business and to own and lease property in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties owned or leased by it requires such qualification in order to avoid liability or disadvantage. All of such jurisdictions are listed on Schedule 2.1. Section 2.2 Capitalization of the Company. The authorized capital stock of Company consists of 1,000 shares of a single class of common stock having no par value per share, of which 400 shares are issued and outstanding. The Company does not have any other authorized class or classes of securities of any kind, whether debt or equity. The Company's total outstanding capital stock consists of the Stock. All of the Stock is collectively owned by the Sellers as set forth in the Capitalization Table. All of the shares of Stock are validly issued, fully paid and non-assessable and have not been issued in violation of any applicable securities laws or of any preemptive rights or other rights to subscribe for, purchase or otherwise acquire securities. The Company does not hold any shares of its capital stock in its treasury or otherwise, and no shares of the Company's capital stock are reserved by the Company for issuance. There are no outstanding options, warrants, conversion privileges, subscription, calls, commitments or rights of any character relating to the capital stock of the Company. Section 2.3 Stock Ownership. Each Seller is the lawful owner of record and beneficially of the shares of the Stock set forth on Schedule 1.1, representing all of the issued and outstanding shares of capital stock of the Company, and has good, marketable and valid title to the Stock, free and clear of all pledges, liens, claims and encumbrances of every kind, including, without limitation, any agreements, subscriptions, options, warrants, calls, commitments or rights of any character granting to any person, firm or corporation any interest in or right to acquire from Seller at any time, or upon the happening of any event, any shares of the Stock. Sellers have full legal power and all authorization required by law to transfer and deliver the Stock in accordance with this Agreement. Upon delivery of the certificates representing the Stock to the Purchaser, together with duly executed stock powers pursuant to this Agreement, the Purchaser -4- 5 shall acquire good, marketable and valid title to the Stock, free and clear of all liens, security interests, pledges, negative pledges, encumbrances, or restrictions. Section 2.4 Due Authorization. (a) The Company. The Company's execution, delivery and performance of this Agreement and all other related agreements (the "Transaction Documents") and the consummation of the transactions contemplated hereby by the Company: (i) are within the Company's corporate powers and have been duly authorized by all necessary corporate and shareholder action on the part of the Company and (ii) do not (A) require any action by or in respect of, or filing with, any governmental or regulatory authority, (B) contravene, violate or constitute, with or without the passage of time or the giving of notice or both, a breach or default under, any requirement of law applicable to the Company or any of its properties or any contract to which the Company or any of its properties is bound or subject or (C) result in the creation of any adverse claim against or on the Stock. (b) Individual Sellers. Each Seller's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by each of the Sellers (i) are within the powers and authority of each of the Sellers and (ii) do not (A) require any action by or in respect of, or filing with, any governmental or regulatory authority, (B) contravene, violate or constitute, with or without the passage of time or the giving of notice or both, a breach or default under, any requirement of law applicable any of them or any of their respective properties or any contract to which any of them or any of their respective properties is bound or subject or (C) result in the creation of any adverse claim against or on the Stock. Section 2.5 Validity of Contemplated Transactions. Except with respect to those consents required to be obtained in connection with the following and set forth in Schedule 2.6 hereto, (all of which have been obtained) the execution, delivery and performance of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby do not and will not contravene any provision of the Articles/Certificate of Incorporation or Bylaws or other governing documents of the Company; nor violate, be in conflict with, or constitute a default under, cause the acceleration of any payments pursuant to, or otherwise impair the validity or effectiveness of any agreement, contract, indenture, lease, or mortgage, or subject any property or asset of the Company, or Seller to any indenture, mortgage, contract, commitment, or agreement, other than this Agreement, to which the Company or Seller is a party or by which the Company or any of its assets is bound; or violate any provision of law, rule, regulation, order, permit, or license to which the Company or Seller is subject. This Agreement and the Transaction Documents will, upon their execution, constitute, the valid and binding obligations of the Company and Sellers, enforceable against Company and Sellers in accordance with their terms. Section 2.6 Government and Third-Party Approvals. Except as listed on Schedule 2.6, no consent by, approval or authorization of or filing, registration or qualification with any federal, state or local authority, or any foreign governmental authority, or any corporation, person -5- 6 or other entity (including any party to any contract or agreement with Seller or Company) is required (a) for the execution, delivery or performance of the Transaction Documents by the Sellers or Company, or (b) in connection with Seller's and Company's consummation of the transactions contemplated thereby. Section 2.7. Title to Property and Related Matters. Company has good, valid and marketable title to all of its assets, whether tangible or intangible, and whether consisting of real or personal property, and all such assets are held free and clear of mortgages, liens, pledges, claims, charges, security interests or other encumbrances or limitations of any nature whatsoever. Section 2.8. Other Representations Regarding Company's Assets (a) Accounts Receivable. All of the Accounts Receivable as of January 31, 1999 (the "Preliminary Balance Sheet Date") will be reflected on the Preliminary Balance Sheet and all of the Accounts Receivable as of the Closing Date will be reflected on the Closing Date Balance Sheet. The Accounts Receivable listed on the Preliminary Balance Sheet and/or on the Closing Date Balance Sheet (i) have arisen or will arise solely in the ordinary course of business of Seller; (ii) represent or will represent, upon their creation, valid obligations due to Company and are enforceable or will, upon their creation, be enforceable in accordance with their terms; and (iii) are or upon their creation will be collectible on or before the 90th day following the Closing Date in the ordinary course of business in the aggregate recorded amounts thereof in accordance with their terms. (b) Cash Accounts. Schedule 2.8(b) lists each bank and mutual fund account and safe deposit box of Company and each person authorized to sign checks or withdraw funds from such accounts and to have access to such safe deposit boxes. (c) Equipment. The items of Equipment listed on Schedule 2.8(c) are, and on the Closing Date will be, in good working order and fit for their intended use. The Equipment includes all of the motor vehicles and other machinery and equipment currently used in the operation of the Business. (d) Real Property. Company does not own any real property. (e) Intellectual Property. Schedule 2.8(e) contains a true and complete list of all patents, trademarks, service marks, trade names, copyrights and similar intangible rights and all applications and registrations thereof owned by the Company or used by the Company including, without limitation, the Software Programs ("Intellectual Property"). In addition, Schedule 2.8(e), identifies whether each item of the Intellectual Property is owned by the Company or is possessed and used by the Company under any license, contract, agreement or other commitment, and if under any such commitment, the identity of the parties thereto, the term thereof and all amounts payable thereunder together with the payment terms therefor. The Company owns or possesses adequate and enforceable licenses or other rights to use all of the Intellectual Property. The Company is not in default under any such licensing or similar -6- 7 agreements, and has not received any notice or other knowledge of conflict with or infringement (or alleged infringement) of any rights of others and no officer, director, consultant, employee, or former director of Company, or any Person (as defined in this Section 2.8(e)), controlling, controlled, by or under common control with Company, has any rights in or to any of the Intellectual Property. The Intellectual Property does not infringe any proprietary right of any third party. No trade secret information has been wrongfully appropriated by any third party. To the best of Company's knowledge, the Intellectual Property is not being infringed. The use by the Company of any of the Intellectual Property and other technical or proprietary data has not required and does not require the payment of any royalty or similar payment to any Person, and, on the Closing Date, Company shall be able to transfer to Purchaser good and marketable title thereto, free and clear of any claims of any kind, without the payment of any royalty or other special consideration. In addition to, and without limiting the generality of the foregoing, Company has and shall be able to convey to Purchaser at the Closing the all of Company's rights to use the names "Cyberstockyard," and any names similar thereto, and the sole and exclusive rights to use the Internet domain name "cyberstockyard.com" and all iterations and permutations thereof, together with all logos, slogans, trademarks, and service marks relating thereto or heretofore used by Company in connection therewith. To the best of Company's knowledge and except as set forth in Schedule 2.8(e), there are no names similar to the names specified in the prior sentence, used in the cattle industry. Company and Mr. Sanders have at all times maintained in strictest confidence all Intellectual Property (excepting only patents, copyrights, trademarks, trade names, and service marks). Company owns the right to obtain, use and transfer the data compiled through the use of the Software Programs (the Software Programs are more fully described in Schedule 2.8(e) attached hereto) and included in the Intellectual Property (the "Data"), and has not conveyed to any third party any interest in, the rights (including copyright rights) to the Data. The Data has been selected, coordinated, and arranged in a manner completely original with Company. Company has full right and authority to use and manipulate the Data and to convey to Purchaser all rights (including copyright rights) to the Data. The Company has no contracts with its client for software maintenance except as identified in Schedule 2.8(e), there are no Federal or state laws or regulations, or restrictions of any third party, restricting such rights to use, manipulate, or convey the Data. As used in this Agreement, the term "Person" means any individual, sole proprietorship, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, or other entity of any kind, as the context requires. 2.8(f) Procedures for Copyright Protection. Schedule 2.8(f) sets forth the form and placement of the proprietary legends and copyright notices displayed in or on the Software Program. In no instance has the eligibility of the Software Program for protection under applicable copyright law been forfeited to the public domain by omission of any required notice or any other action. 2.8(g) Procedures for Trade Secret Protection. Company has promulgated and used its best efforts to enforce its trade secret protection program set forth in Schedule 2.8(g). Neither Company nor any Seller has knowledge of any material violation of such program by any Person. The source code and system documentation relating to the Software Program: (i) have at all -7- 8 times been maintained in confidence by Company and, to the best of Company's knowledge, by any other Person who has at any time had access to such materials; and (ii) have been disclosed by Company only to employees and consultants having a "need to know" the contents thereof in connection with the performance of their duties to Company and who are obligated by common law or by written agreement (which agreements are being transferred to Purchaser pursuant to the transactions contemplated by this Agreement) to keep such information confidential. 2.8(h) Personnel Agreements. Anyone, including, but not limited to, all employees, agents, consultants, and contractors, who have contributed to or participated in the conception and development of the Software Program, Technical Documentation, or Intellectual Property on behalf of Company either: (i) have been party to a "work-for-hire" arrangement or agreement with Company, in accordance with applicable Federal and state law, that has afforded Company full, effective, exclusive, and original ownership of all tangible and intangible property thereby arising; or (ii) have executed appropriate instruments of assignment in favor of Company as assignee that have conveyed, in accordance with applicable Federal and state law, to Company full, effective, and exclusive ownership of all tangible and intangible property thereby arising. 2.8(i) Adequacy of Technical Documentation. The Technical Documentation described on Schedule 2.8(i) includes the source code, system documentation and schematics for the Software Programs, as well as any pertinent commentary or explanation that may be necessary to render such materials understandable and usable by a trained computer programmer. The Technical Documentation also includes any programs (including compilers), "workbenches," tools, and higher level (or "proprietary") languages used for the development, maintenance, and implementation of the Software Program. 2.8(j) Third-Party Components in the Software Program. Company has validly and effectively obtained the right and license to use, copy, modify, and distribute the third-party programming and materials contained in the Software Program and the Technical Documentation, pursuant to the Software Contracts identified in Section 2.8(j). The Software Program and the Technical Documentation contain no other programming or materials in which any third party may claim superior, joint, or common ownership, including any right or license. The Software Program and the Technical Documentation do not contain derivative works of any programming or materials not owned in their entirety by Company. 2.8(k) Third-Party Interests or Marketing Rights in the Software Program. Company has not granted, transferred, or assigned any right or interest in the Software Program, the Technical Documentation, or the Intellectual Property to any Person. There are no contracts, agreements, licenses, and other commitments and arrangements in effect with respect to the marketing, distribution, licensing, or promotion of the Software Program or any other independent salesperson, distributor, sublicensor, or other remarketer or sales organization, except for the Software Contracts identified as Distribution or VAR Agreements in Schedule 2.8(j)). 2.8(l) Prepaid Expenses. All of Company's prepaid expenses are set forth in Schedule 2.8(l). -8- 9 Section 2.9 Conduct of Business. Between February 1, 1999 and the date hereof, Company has conducted the Business only in the ordinary course and in a manner consistent with its past practices. Section 2.10 Solvency. The Company is Solvent. Section 2.11 Financial Statements (a) Financial Statements. Schedule 2.11 consists of the unaudited financial statements of the Company (the "Financial Statements") for its fiscal year ended December 31, 1998 (the "Financial Statement Date") (consisting of a balance sheet, a statement of operations, a statement of shareholder's equity and retained earnings and a statement of cash flows. The Financial Statements were prepared in accordance with generally accepted accounting principles and practices consistently applied throughout the periods reported upon and fairly and accurately present the financial condition and the results of the operations of Company as at the respective dates thereof and for the periods reported therein. (b) Absence of Liabilities. On the Financial Statement Date, Company had no Liabilities except as and to the extent reflected in the Financial Statements or in this Agreement or in any Schedule hereto. Seller has no Liabilities and no basis for any such Liability exists other than (i) any reflected in the Financial Statements or in this Agreement or in any Schedule hereto or (ii) any arising since the Financial Statement Date in the ordinary course of business of Company and in compliance with the covenants and agreements of Company herein contained. Section 2.12. Permits and Approvals. Schedule 2.12 contains a true and correct description of all licenses, permits, approvals, authorizations, consents and registrations issued in favor of Company, all of which are in full force and effect, and the Company and the Business are currently being operated in compliance with the terms of each of the foregoing. Purchaser will not be required, prior to or following the Closing, to file, apply for or obtain any license, permit, approval, authorization, consent or registration in order to own and operate the Business as currently owned and operated by Company. Section 2.13 Employee Benefits. Except as set forth on Schedule 2.13, Company has not established or maintained or is not obligated to make contributions to or under or otherwise participate in, with respect to any current or former employee, director, or independent contractor of the Company: (i) any equity option, restricted equity, equity appreciation rights, bonus, or other type of incentive compensation plan, program, agreement, or arrangement; (ii) any severance, pension, profit-sharing, thrift or savings, retirement, deferred compensation, employee equity ownership, employee equity purchase, or supplemental executive retirement plan, agreement, or arrangement; or (iii) any life insurance, death benefit, health and hospitalization, disability, employee assistance, education or tuition assistance, vacations benefit or fringe benefit plan, or other employee benefit plan, program, agreement, or arrangement. All such plans listed on Schedule 2.13 in which any of the Company's employees participate (collectively, the -9- 10 "Employee Benefit Plans") have been operated and administered in all material respects in accordance with all applicable laws, rules, and regulations and are fully funded. Company has no obligation or commitment (formal or informal) to create any new benefit plan or program, or to amend any existing Employee Benefit Plan to increase the benefits thereunder. Section 2.14 Employee Matters; Labor Relations. (a) Employment Agreements. None of the employees of the Business are covered by employment contracts, written or oral. None of the employees of the Business are members of any union or covered by any union contracts. Company is not aware of any plan or solicitation of employees of the Business to form or join a union in the past two (2) years. Company is not a party to or bound by any employment agreement (written or oral) or any collective bargaining or other labor agreement that could in any way affect Purchaser, or any employees of the Business that Purchaser may hire after the Closing Date. (b) Labor Laws. With respect to Company's employees, Company has complied in all material respects with the Immigration Reform and Control Act of 1986, as amended, and all other applicable Federal, state, or local laws relating to the employment of labor, including, but not limited to, the provisions thereof relating to wages, non-discriminatory hiring, promotional and employment practices and procedures, collective bargaining and payment of Social Security, unemployment compensation, workers' compensation, and similar taxes, and Company is not presently liable to any Person or governmental agency for any wage in arrears or subject to any liabilities or penalties for failure to comply with any of the foregoing laws. With respect to Company's employees, there are no outstanding charges or claims of a material nature against Company or any of its officers, directors, agents, or employees involving any alleged or actual violation of Company, or, to the best of Company's knowledge, any such Person, of any provision of the National Labor Relations Act, the Age Discrimination in Employment Act, the Equal Employment Opportunity Act of 1964, or any other Federal, state, or local law concerning equal employment opportunities, equal pay legislation, or wage and hour obligations contained in the Fair Labor Standards Act; nor, to Company's knowledge, has there been any threat of any such claim or charge. Section 2.15 Hazardous Substances. Except as listed on Schedule 2.15, to Company's knowledge: (i) none of the assets of the Company has been used for the manufacture, storage, transportation, deposit, disposal, treatment, handling, production, processing or recycling of toxic, dangerous or hazardous substances; (ii) the Company has engaged in no activity which would subject the Company or the Purchaser to liens, damages, penalties, injunctive relief or cleanup costs under any federal, state or local law, or under any civil action respecting hazardous substances; (iii) the Company has complied with each, and is not in violation of any, United States or state, provincial or local law, statute, regulation, permit provision or ordinance, relating to the generation, handling, storage, transportation, treatment or disposal of chemicals, substances (the "Environmental Laws"); and (iv) the Company has obtained and complied with all necessary permits and other approvals, including interim status under the Reserve -10- 11 Conservation and Recovery Act, as amended ("RCRA"), necessary to store, treat, dispose of and otherwise handle hazardous wastes and hazardous substances. A "hazardous substance" shall mean that term as defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., as amended, and dangerous, regulated toxic or hazardous substances, petroleum products, or similar terms under any other applicable United States or state, provincial or local law and any regulations thereunder Section 2.16 Litigation; Compliance with Laws. Except as set forth in Schedule 2.16 attached hereto, there is no suit, action, claim, arbitration, administrative or legal or other proceeding, or governmental or other investigation pending or, to Company or any Seller's knowledge, threatened against or affecting the Company, whether or not covered by insurance; nor does there exist any failure to comply with, nor any default under, any law, ordinance, requirement, regulation, or order applicable to the Company, nor any violation of or default with respect to any order, writ, injunction, judgment, or decree of any court or federal, state or local department, official, commission, authority, board, bureau, agency, or other instrumentality issued or pending against the Company which might have a material adverse effect on the financial condition, business, results of operations, properties, or assets of the Company, or Purchaser's purchase or ownership of the Stock. The Company has obtained all permits, licenses, zoning variances approvals, and other authorization necessary for the complete operation of its business as presently operated, and there are none. There have been no illegal kickbacks, bribes or political contributions made by the Company. Section 2.17 Contracts. Except as listed and described on Schedule 2.17 or any other Schedule attached hereto, the Company is not a party to any written or oral agreement, contract or commitment (the "Contracts."). Except as disclosed on Schedule 2.17, (i) each of the Contracts is valid and enforceable in accordance with its terms, (ii) the parties thereto are in compliance with the provisions thereof, (iii) no party is in default in the performance, observance or fulfillment of any obligation, covenant or condition contained therein, (iv) no event has occurred which with or without the giving of notice or lapse of time, or both, would constitute a default thereunder and (v) the Company's rights under the Contracts are transferable by the Company to Purchaser without restriction except for the Consents. To Company's knowledge, none of the terms or provisions of any of the Contracts materially adversely affects the prospects, conditions, affairs, or operations of the Company or the Business, including restrictions on the Company's ability to compete. Section 2.18. Product and Service Warranties. Set forth on Schedule 2.18 are the standard forms of product and service warranties and guarantees utilized by Company in connection with the operation of the Business together with all other material product and service warranties and guarantees used by Company in connection with the operation of the Business. Section 2.19. Taxes. For any period ending on or before the Closing, the Company and Sellers have duly and timely filed or will file all federal, state, and local tax returns, declarations, -11- 12 and reports, estimates, information returns and statements (collectively, "Returns") required to be filed or sent by it, him or on its/his behalf and all such Returns are or will be true, correct and complete, true, correct and complete copies of which Returns have been delivered to Purchaser prior to the date hereof. The Company has paid in full all Taxes (as defined hereafter) and any penalties with respect to the Returns and any penalties entered with respect thereto, due and payable for any period ending on or before the Financial Statement Date. For all tax periods which commence after the Closing, to the extent any Taxes are due and payable the Company shall use its best efforts to determine a good faith estimate of the Taxes, shall properly reserve the full amount of such estimate. The Company's federal income tax liabilities, if any, have never been audited by the Internal Revenue Service and have been satisfied for all taxable years up to and including the taxable year ended December 31, 1997. Neither the Internal Revenue Service nor any state or local taxing authority has asserted that additional taxes are owed by the Company. As used herein, the term "Taxes" shall include all federal, state, and local taxes, including income, excise, withholding, property, franchise, gross receipt and other taxes. Section 2.20. Insurance. Schedule 2.20 sets forth a list of all policies or binders of fire, liability, product liability, worker's compensation, vehicular or other insurance held by or on behalf of Company (specifying for each such insurance policy, except the policies for worker's compensation and vehicular insurance, the insurer, the policy number or covering note number with respect to binders, and each pending claim thereunder of more than $5,000 and setting forth the aggregate amounts paid out under each such policy through the date hereof). Such policies and binders are valid, in full force and effect and sufficient to protect the Business against all insured hazards. Company is not in default with respect to any provision contained in any such policy or binder. Company has no knowledge of any material inaccuracy in any application for such policies or binders, any failure to pay premiums when due or any similar state of facts which might form the basis for termination of any such insurance. Company has no knowledge of any state of facts or the occurrence of any event that is reasonably likely to form the basis for any claim against Seller not fully covered by the policies referred to on Schedule 2.20. Company has not received written notice from any of its insurance carriers that any insurance premiums will be materially increased in the future or that any insurance coverage listed on Schedule 2.20 will not be available in the future on substantially the same terms as now in effect. Section 2.21. Contracts with Affiliates. There are no contracts, obligations or arrangements between Company and any Seller or any director, officer, shareholder or employee of Seller or any Affiliate of any such person applicable to the Business except for those identified and described on Schedule 2.21. Section 2.22. Copies of Articles and Bylaws. The copies of Company's Certificate or Articles of Incorporation (certified by the Secretaries of State of the respective jurisdictions of incorporation) and Bylaws (certified by Company's Secretary) which have been delivered to Purchaser are correct and are in effect as of the date of this Agreement. -12- 13 Section 2.23. Directors and Officers. The Company has delivered to Purchaser a true and complete list as of the date of this Agreement showing the names of each of the Company's officers and directors, each of whom has been duly elected. Section 2.24 Commission. Neither Company nor any of the Sellers nor anyone on its/their behalf has made any agreement or taken any action which may cause anyone claiming through Seller to become entitled to a commission as a result of the sale of the Stock pursuant to this Agreement. Section 2.25 Statements and Other Documents Not Misleading. Neither this Agreement, including all Schedules, nor any other financial statement, document or other instrument heretofore or hereafter furnished by Company or any Seller to Purchaser in connection with the transactions contemplated hereby contains or will contain any untrue statement of any material fact or omits or will omit to state any material fact required to be stated in order to make such statement, document or other instrument not misleading. There is no fact known to the Company or any Seller which may materially adversely affect the Company's assets or business prospects which has not been set forth in this Agreement, the Schedules or the other documents furnished to Purchaser on or prior to the date hereof in connection with the transactions contemplated hereby. Section 2.26 Conditions Affecting. There is no fact, development or threatened development with respect to the markets, products, services, clients, customers, facilities, computer software, databases, personnel, vendors, suppliers, operations, assets or prospects of the Business which are known to Seller which is reasonably likely to materially adversely affect the business, operations or prospects of Seller considered as a whole, other than such conditions as may affect as a whole the economy generally. Seller has used its best efforts to keep available for Purchaser the services of the employees, agents, customers and suppliers of the Company active in the conduct of the Business. Seller does not have any reason to believe that any loss of any employee, agent, customer or supplier or other advantageous arrangement will result because of the consummation of the transactions contemplated hereby. Section 2.27 Business. The sole business of the Company is the Business. All assets owned by the Company are used solely in connection with the operation of the Business. Section 2.28 Subsidiaries. The Company has no subsidiaries or interests in other entities. Section 2.29 No Changes. Since the date of the most recent Financial Statements or December 31, 1998, and except as disclosed to Buyer on Schedule 2.29, there has not been: (a) Any materially adverse change in the financial or other condition, assets, liabilities or business of the Company, except changes described in Schedule 2.29 hereto, none of which individually or in the aggregate has been materially adverse to the Company; -13- 14 (b) Any damage, destruction or loss (whether or not covered by insurance) or any condemnation by governmental authorities which has or may adversely affect the Business, prospects or any property of the Company; (c) Any strike, lockout, labor trouble or any event or condition of similar character adversely affecting the business or prospects of the Company; (d) Any declaration, setting aside or payment of any dividend or other distribution in respect of any of the Company's shares of stock, or any direct or indirect redemption, purchase or other acquisition of any such shares; or (e) Any increase in the compensation payable or to become payable by the Company to any of its officers, employees or agents, or any known payment or arrangement made to or with any thereof, other than salary reviews and increases taking effect after the Financial Statement Date, all of which were consistent with the Company's past practices, except as disclosed to Buyer in writing as soon as any such events have occurred. ARTICLE III REPRESENTATIONS AND WARRANTIES RESPECTING PURCHASER Purchaser represents and warrants to Seller as follows: Section 3.1 Organization. Purchaser is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware. Section 3.2. Due Authorization. The execution and delivery of this Agreement by Purchaser and performance of the obligations of Purchaser contemplated hereby and by the Transaction Documents has been duly and validly authorized by all necessary corporate action. Purchaser has the right, power and authority to enter into and perform this Agreement and the Transaction Documents constitutes, upon their execution constitute, the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with their terms. Section 3.3. Conflict With Other Instruments. The execution, delivery and performance of this Agreement and the Transaction Documents by Purchaser will not contravene any provision of Purchaser's certificate of incorporation or by-laws and will not result in a breach of, or constitute a default under, any agreement or other document to which Purchaser is a party or by which Purchaser is bound, or any decree, order or rule of any court or governmental agency or any provision of applicable law which is binding on Purchaser. Section 3.4. Government and Third-Party Approvals No consent by, approval or authorization of or filing, registration or qualification with any federal, state or local authority, or any corporation, person or other entity (including any party to any contract or agreement with Purchaser) is required for the execution, delivery or performance of this Agreement by Purchaser or in connection with Purchaser's consummation of the transactions contemplated hereby. -14- 15 Section 3.5. Litigation No litigation, arbitration investigation or other proceeding of or before any court arbitrator or governmental or regulatory official, body or authority is pending or, to the knowledge of Purchaser, threatened against Purchaser or the transactions contemplated by this Agreement and Purchaser does not know of any basis for such litigation, arbitration, investigation or proceeding. Section 3.6 Capitalization. The authorized capital stock of Purchaser immediately prior to the Closing, consists of 20,000,000 shares of Common Stock, par value one cent ($.01) per share, of Purchaser (the "Common Stock"), 5,297,750 shares of which are outstanding as of the Closing, and 10,000,000 shares of Preferred Stock, par value one cent ($.01) (the "Preferred Stock"). As of the date of the Closing, 6,500,000 shares of Preferred Stock have been designated as Series A, of which 6,443,606 shares are outstanding. The Shares have been duly authorized for issuance. Assuming the accuracy of the representations and covenants of Seller set forth in Article 4, the Shares will have been offered, issued, sold and delivered in compliance with all applicable state and federal laws concerning the issuance of securities, and when issued, will be validly issued, fully paid and non-assessable shares of Common Stock, and will not have been issued in violation of the preemptive rights of any person. Other than as described in this Section 3.6 or set forth in Schedule 3.6, there are no outstanding shares of Common Stock, Preferred Stock, or any other securities of Purchaser, and except as described on Schedule 3.6 hereto, there are no options, warrants, call conversion rights, commitments, or agreements of any character to which Purchaser is a party or by which Purchaser may be bound that do or may obligate Purchaser to issue, deliver, or sell, or cause to be issued, delivered, or sold, additional shares of Common Stock, Preferred Stock, or other securities of Purchaser, or that do or may obligate Purchaser to grant, extend, or enter into any such option, warrant, call conversion right, commitment, or agreement. Except as set forth in Schedule 3.6, there are no outstanding arrangements, agreements, commitments, or understandings of any kind affecting or relating to the voting, issuance, purchase, redemption, repurchase, or transfer of any capital stock or any other securities of Purchaser. Section 3.7 Brokers. Purchaser has not expressly or impliedly retained any broker, finder, investment banker, or financial advisor in connection with this Agreement or the transactions contemplated hereby. Purchaser has not taken any actions that will cause Seller to incur or be required to pay, any broker, finder, investment banker, financial advisor, or similar fee in connection with this Agreement or any transaction contemplated hereby, to any Person acting as broker, finder, investment banker, financial advisor, or in any similar capacity on behalf of Purchaser. Section 3.8 Acquisition of Shares for Investment. Purchaser is acquiring ownership of the Company for investment for its own account and not with a view to the resale or distribution thereof in violation of any federal or state securities laws. Purchaser or such assignees will not offer, sell, transfer, assign, pledge or hypothecate any portion of the Shares in the absence of registration under, or pursuant to an applicable exemption from all applicable federal and state securities laws. -15- 16 ARTICLE IV SECURITIES LAW MATTERS Section 4.1 Investment. Each Seller represents, covenants and agrees as follows: (a) Access to Information. Seller has had access to such information relating to the business and affairs of Purchaser which Seller has reasonably requested, and all additional information which Seller has considered necessary to verify the accuracy of the information so received. Seller has had the opportunity to ask questions of and receive answers from the Purchaser concerning the terms and conditions of the transactions contemplated by this Agreement. On the basis of the foregoing, Seller is familiar with the operations, business plans and financial condition of Purchaser. (b) General Access. Seller or his representative has received and read or reviewed, and is familiar with, this Agreement and the other agreements executed or delivered herewith, including the terms of the Stock, and confirms that all documents, records and books pertaining to such Seller's investment in the eVS Shares and requested by such Seller or his representative have been made available or delivered to him. (c) Reliance on Sellers' Representations. Seller understands that Purchaser may issue and deliver to such Seller the number of eVS Shares indicated on Schedule 1.1, pursuant to this Agreement, without compliance with the registration requirements of the United States Securities Act of 1933 (the "Securities Act") or any state securities laws; that for such purpose Purchaser will rely upon the representations, warranties, covenants and agreements contained herein; and that such non-compliance with registration is not permissible unless such representations and warranties are correct and such covenants and agreements performed. Except for Mr. J. Scott Sanders and Mr. Scott Calhoun, each Seller represents that he is an "accredited investor" as such term is defined in Rule 501 under the Securities Act for the reasons set forth on Schedule 4.1(c) hereto. (d) Transfer Restrictions Imposed by Securities Laws. Seller understands that, under existing rules of the United States Securities and Exchange commission (the "SEC") he/she may be unable to sell the Shares except to the extent that the Shares may be sold (i) pursuant to an effective registration statement covering such shares pursuant to the Securities Act or (ii) in a bona fide private placement to a purchaser who shall be subject to the same restrictions on any resale or (iii) subject to the restrictions contained in Rule 144 under the Securities Act ("Rule 144") and state securities laws. Seller understands that Purchaser is under no obligation to effect a registration of the eVS Shares under the Securities Act. (e) Rule 144. Seller is familiar with the provisions of Rule 144 and the limitations upon the availability and applicability of such rule, including without limitation its holding period requirements and volume limitations. (f) Sophisticated Investor. Seller is a sophisticated investor familiar with the -16- 17 type of risks inherent in the acquisition of restricted securities such as the eVS Shares and its financial position is such that it can afford to retain the eVS Shares for an indefinite period of time without realizing any direct or indirect cash return on its investment and can afford a complete loss of his investment. (g) Lack of Liquidity Seller has no present need for liquidity in connection with his purchase of the Stock. (h) Suitability and Investment Objectives. The purchase of the Stock by Seller is consistent with the general investment objectives of Seller. Seller understands that the purchase of the Stock involves a high degree of risk and there may be no established market for the Purchaser's capital stock. (i) Investment Intent. Seller is acquiring the eVS Shares for his own account and not with a view to, or for sale in connection with, the distribution thereof within the meaning of the Securities Act. (j) Legends on Certificates. During the term of this Agreement, each certificate representing eVS Shares shall, if applicable, contain upon its face or upon the reverse side thereof legends to the following effect: "This Certificate represents securities which are restricted and which are subject to the terms and conditions of a Stockholders' and Registration Rights Agreement dated February 24, 1999 by and among eMerge Vision Systems, Inc. ("eVS") and the stockholders identified therein (a copy of which is on file at the principal office of eVS) and the rights, privileges and options therein contained. No sale, transfer, assignment, pledge, hypothecation or other disposition of this Certificate or any of the securities represented thereby shall be made except in compliance with the terms and conditions of said agreement. The Shares represented by this Certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), but have been issued pursuant to an exemption from such registration. Neither such Shares nor any interest therein may be sold, transferred, pledged, hypothecated or otherwise disposed of until either (i) the holder thereof shall have received an opinion of counsel for the Company that registration thereof under the Act is not required or (ii) a registration statement under the Act covering such Shares or such interest and the disposition thereof shall have become effective under the Act. -17- 18 ARTICLE V ACTIVITIES PRIOR TO CLOSING BY COMPANY Section 5.1 Operation of Business. Prior to the Closing, Sellers shall cause the Company to conduct its business only in the ordinary course and in connection therewith and, to the extent consistent therewith, the Company shall use its best efforts to preserve its business organization intact and maintain its existing relations with customers, suppliers, employees and business associates. The Company shall: (a) Organizational Documents. Not amend its Certificate/Articles of Incorporation or Bylaws, except as may be necessary to carry out this Agreement or as required by law; (b) Corporate Name. Not change its corporate name or permit the use thereof by any other person or entity; (c) Compensation, Bonuses. Not pay or agree to pay to any employee, officer, or director of the Company, without the consent of the Purchaser; (d) Management. Not make any changes in the its management without the consent of Purchaser; (e) Mergers, Etc Not merge or consolidate the Company with any other corporation or allow it to acquire or agree to acquire or be acquired by any corporation, association, partnership, joint venture, or other entity; (f) Disposition of Assets. Not sell, transfer, or otherwise dispose of any assets of the Company without the prior written consent of Purchaser; (g) Indebtedness. Not create, incur, assume, or guarantee any indebtedness for money borrowed arising out of or in connection with the Company's business except in the ordinary course of business; create or suffer to exist any lien on any of the Company's assets, except those in existence on the date hereof; or increase the amount of any indebtedness outstanding under any loan agreement, mortgage, or other borrowing arrangement in existence on the date hereof arising out of or in connection with the Company's business; (h) Payables. Pay when due, in accordance with past practices, all of its accounts payable and trade obligations; (i) Maintenance of Assets. Maintain its assets and properties in good operating repair, order, and condition, reasonable wear and tear excepted, and notify Purchaser immediately upon any loss of, damage to, or destruction of any of the Company's assets; (j) Insurance. Maintain in full force and effect insurance coverage of the -18- 19 types and in the amounts currently held and apply the proceeds received under any insurance policy or as a result of any loss or destruction of or damage to any of the Company's assets to the repair or replacement of such assets; (k) Contracts and Permits. Maintain in full force and effect all Contracts and permits necessary for or related to the operation of the Company's business in all material respects and in all places as such business is now conducted and renew or revalidate any permits which may become void, expired, terminated, canceled or withdrawn between the date hereof and the Closing; (l) Litigation, Etc Promptly advise Purchaser in writing of the commencement of, and of any known threat to commence any, suit, claim, action, arbitration, legal or administrative proceeding, governmental investigation, or tax audit against it; (m) Dividends or Other Distributions. Not declare, set aside or pay any dividend or other distribution in respect of its shares of capital stock, or redeem, purchase or otherwise acquire any such shares of capital stock; and (n) Capital Stock. Not issue, sell, pledge, dispose of or encumber any additional shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock or split, combine or reclassify the outstanding Stock. Section 5.2 Access to Information. Prior to Closing, Seller and Company will cooperate fully with Purchaser and shall provide Purchaser and its accountants, counsel, and other representatives, during normal business hours, full access to the books, records, equipment, Contracts, other assets owned or leased by the Company, and customer lists, and full opportunity to discuss the Company's business, affairs, Software Programs, Intellectual Property, assets, processes, and trade secrets with its officers, employees, customers, suppliers and independent accountants, and furnish to Purchaser and its representatives copies of such documents, records, and information with respect to the affairs of the Company as Purchaser or its representatives may reasonably request. Purchaser, Company and Sellers, and their respective principals agree that they will hold in confidence, trade secret or proprietary information or data supplied by the other in conjunction with this Agreement. In the event that the transaction contemplated by this Agreement is not consummated for any reason, each party will return to the other all documents and other materials provided to it relating to the other party, without retaining copies thereof. Section 5.3 Due Diligence Investigation. As an inducement to Purchaser to expend substantial sums in the performance of its due diligence investigation, Sellers agree that Purchaser may terminate this Agreement at any time prior to the Closing Date, upon written notice to Sellers, if Purchaser in good faith but in its sole discretion, determines that the financial, technical or legal condition or the condition of the assets, properties and business of the Company or its prospects, are unsatisfactory. -19- 20 Section 5.4 Best Efforts. Subject to the other provisions of this Agreement, Sellers will use their best efforts to cause the conditions listed in Section 7.1 hereof to be satisfied on the Closing Date (as defined in Section 12.1) and further will use their best efforts to satisfy the requirements of any applicable federal or state securities laws relating to an exemption from registration. Section 5.5 Benefit Plans. The Company shall not adopt, terminate, amend, extend, or otherwise change any benefit plan without the prior written consent of Purchaser, and the Company shall give Purchaser prior written notice of the Company's intention to take any such action required by law or necessary to continue the qualified status of any benefit plans as they pertain to the Company's employees or its former employees. Section 5.6 Notice of Change. The Company will promptly notify Purchaser of the existence or happening of any fact, event or occurrence prior to the Closing Date and of which the Company or any of the Company's employees, officers, directors, stockholders, or other representatives has knowledge which may alter the accuracy of completeness of any representation or warranty contained in Article 2 of this Agreement. Section 5.7 No Discussions Unless and until this Agreement is terminated pursuant to Article 10 hereof, Sellers will not, and will not authorize or permit the Company or any of its employees, officers, directors, or other representatives to, enter into, participate in, request, solicit or engage in any discussions, negotiations, understandings, agreements or other communications with any person or entity other than Purchaser relating to offers, inquiries, negotiations or proposals with respect to the sale of the assets or any capital stock of the Company, or any type of business combination transaction. Seller and the Company will promptly notify Purchaser of any such offer, inquiry, negotiation or proposal which either Seller or the Company may receive. Section 5.8 Publicity. No party shall issue any press releases or otherwise make public statements with respect to the terms of this Agreement or the transactions contemplated hereby, without the consent of the other parties, except as may be required by any national, state, provincial or local governmental or regulatory agency. The parties hereto shall not issue any such press release or make any such public statement or filing prior to such consultation, except as may be required by law. -20- 21 ARTICLE VI ACTIVITIES PRIOR TO CLOSING BY PURCHASER Section 6.1 Best Efforts. Subject to the other conditions of this Agreement, Purchaser will use its best efforts to cause the conditions listed in Section 7.2 hereof to be satisfied on the Closing Date (as defined in Section 12.1) and will further use it best efforts to satisfy the conditions of any applicable federal or state securities laws relating to an exemption from registration. Section 6.2 Access to Information. Purchaser shall provide Sellers with information concerning Purchaser's as reasonably requested by Seller regarding Purchaser's ability to consummate the transactions contemplated herein, as may be reasonably requested. Seller shall not disclose any such information to any other person or entity without the prior written consent of Purchaser. ARTICLE VII CONDITIONS PRECEDENT TO CLOSING Section 7.1 Conditions to Obligation of Purchaser to Close. The obligation of Purchaser to consummate the transaction contemplated under this Agreement on the Closing Date (as defined in Section 12.1) shall be subject to the satisfaction or the waiver by Purchaser of the following conditions on or prior to the Closing Date: (a) Satisfactory Completion of Due Diligence. The results of Purchaser's due diligence investigation shall be satisfactory to Purchaser, in Purchaser's sole discretion. (b) Representations and Warranties; Compliance with Agreement. The representations and warranties of the Company and Sellers set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, and the Company and each Seller shall have performed all covenants and agreements to be performed by it or him under this Agreement on or prior to the Closing Date and shall have delivered to the Purchaser a certificate to such effect, dated the Closing Date, which certificate shall be in form and substance satisfactory to Purchaser and its counsel. (c) Opinion of Counsel for the Company. Gholson, Hicks & Nickels, counsel for the Company, shall have delivered to Purchaser their favorable opinion, dated the Closing Date and in the form set forth in Exhibit 7.1(c). (d) Litigation Affecting Closing. On the Closing Date, no proceeding shall be pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in -21- 22 any such suit, action or proceeding shall be pending or threatened. (e) Required Consents. The parties (other than the Company) to any other contract, commitment or agreement to which the Company is a party, any governmental agency or body or any other person, firm or corporation which owns or has authority to grant any franchise, license, permit, easement, right or other authorization necessary for the business or operations of the Company, and any governmental body or regulatory agency having jurisdiction over Purchaser or the Company, to the extent that their consent or approval is required under the pertinent debt, lease, contract, commitment or agreement or other document or instrument or under applicable laws, rules or regulations for the consummation of the transaction contemplated hereby in the manner herein provided, shall have granted such consent or approval, which shall include all Consents. (f) Approval of Purchaser; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved by Purchaser, in the exercise of its reasonable judgment, and Purchaser or its counsel shall have been furnished with certified copies, satisfactory in form and substance to Purchaser in the exercise of its reasonable judgment, of all such corporate records of the Company, and of the proceedings of such persons authorizing the execution, delivery and performance of this Agreement as Purchaser shall reasonably require. (g) Availability of Exemption from Registration. The transaction contemplated by this Agreement shall be exempt from registration under the securities laws of the United States and any applicable state or local jurisdiction. (h) Delivery of Schedules. Delivery by Company and Seller of the Schedules to this Agreement, which Schedules shall be in form and substance reasonably satisfactory to the Purchaser. Section 7.2 Conditions to Obligation of Seller to Close. The obligation of each Seller to consummate the transfer of the Stock on the Closing Date (as defined in Section 12.1) shall be subject to the satisfaction of the following conditions on or prior to the Closing Date: (a) Satisfactory Completion of Due Diligence. The results of each Seller's due diligence investigation of the Purchaser shall be satisfactory to such Seller, in such Seller's sole discretion. (b) Representations and Warranties. The representations and warranties of Purchaser set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, Purchaser shall have performed all covenants and agreements to be performed by it under this Agreement on or prior to the Closing Date, and Purchaser shall have delivered to Company a certificate to such effect, dated the Closing Date, which certificate shall be in form and substance satisfactory to Company and its counsel; -22- 23 (c) Litigation Affecting Closing. On the Closing Date, no proceeding shall be pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transaction contemplated hereby, and no investigation that might eventuate in any such suit, action or proceeding shall be pending or threatened; (d) Approval of Seller; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved on the Closing Date by Sellers, in the exercise of their reasonable judgment, and Sellers shall have been furnished with certified copies, satisfactory in form and substance to Sellers in the exercise of their reasonable judgment, of all such records of Purchaser and the Company and of the proceedings of Purchaser and the Company authorizing their execution, delivery and performance of this Agreement and the eVS Shares as Sellers shall reasonably require. (e) Availability of Exemption from Registration. The transactions contemplated by this Agreement shall be exempt from registration under the securities laws of the United States and any applicable state or local jurisdiction and Sellers' shall have been satisfied with the information of Purchaser furnished to them in connection therewith. (f) Opinion of Counsel for the Company. Counsel for the Company, shall have delivered to Purchaser their favorable opinion, dated the Closing Date and in the form set forth in Exhibit 7.2(f). ARTICLE VIII CERTAIN POST-CLOSING COVENANTS Section 8.1 Covenant Not to Compete (a) Sellers shall not, for a period of three (3) years following the Closing Date (the "Restricted Period"), compete, directly or indirectly, with Purchaser by engaging in the development or sale of software related to an electronic, on-line, internet, and/or web-enabled auction system, or the sale through an electronic, on-line, internet, and/or web-enabled auction system of any products or services related to (i) the animal science industry, including without limitation cattle, swine, poultry or other animals produced for consumption by humans and other animals ("Livestock"), horses, third party Livestock feed or supplements, or third party veterinary certifications relating thereto, (ii) the veterinary medicine industry and/or the (iii) the agriculture industry. Nor shall any Seller compete directly or indirectly with Purchaser by developing or offering for sale an information system and/or data services of any kind for use in the animal sciences, veterinary medicine or agriculture industries during the Restricted Period. (b) The foregoing prohibition against competition shall apply to any area within North America provided however that nothing contained herein shall prevent: (i) Dr. Duane Pankratz from operating and selling on line, electronically or on the internet (but not -23- 24 through an auction system) products developed by (A) Grand Laboratories, Inc., which is in the business of developing and selling vaccines for Livestock and animals, (B) Roth Angus, Inc., which is in the business of raising and selling its pure bred cattle, or (C) Black Hills Gold, which is in the business of selling jewelry or otherwise operating the aforementioned businesses in the manner each is being conducted as of the date hereof, or (ii) Mr. David Sanders from conducting his cattle brokerage business in the manner such business is being conducted as of the date hereof and selling his/his clients' cattle on line, electronically or on the internet (but not through an auction system). (c) A Seller shall be deemed to be competing as described in paragraph (a) hereof if Seller shall engage, directly or indirectly, in any of the business covered thereby, whether for its own account or that of any other person, firm, corporation, partnership or other business entity, and whether its participation shall be as a stockholder, general or limited partner, or investor possessing an ownership interest exceeding one percent (1%) in any such entity, or as a principal, agent, lender or in any other capacity. (d) During the Restricted Period, no Seller shall, directly or indirectly: (1) solicit, divert, take away or induce customers (wherever located) of Purchaser, to avail themselves of the services or products of others which are competitive with any of Purchaser's services or products or (2) solicit, employ or in any other fashion hire any employee of Purchaser unless such person shall have been discharged by Purchaser, or otherwise induce any employee of Purchaser to leave the employ of Purchaser. The prohibition set forth in paragraph 8.1(c)(1) shall not apply to customers who were customers of a Seller as of the Closing date, or products or services which were being offered by a Seller as of the Closing Date. Each Seller expressly acknowledges that damages alone will be an inadequate remedy for any breach or violation of any of the provisions of this Section 8.1, and that Purchaser, in addition to all other remedies available at law or hereunder, shall be entitled, as a matter of right, to injunctive relief, including specific performance, with respect to any such breach or violation, in any court of competent jurisdiction. If any of the provisions of this Section 8.1 are held to be in any respect an unreasonable restriction upon Seller, then they shall be deemed to extend only over the maximum period of time, geographic area or range of activities as to which they may be enforceable. In the event that Seller shall be in violation of the restrictive covenants in this Section 8.1, then the Restricted Period shall be extended for a period of time equal to the period of time during which such breach shall occur; and, in the event that Purchaser should be required to seek relief from such breach in any court, board of arbitration or other tribunal, then the Restricted Period shall be extended for the period of time required for the pendency of such proceedings, including all appeals. -24- 25 Section 8.2 Post-Closing Conduct Generally; Further Assurances. Purchaser and each Seller will cooperate upon and after the Closing Date in effecting the orderly transfer of the operations of the Company to Purchaser. In addition, after the Closing Date, at the request of any party and at the requesting party's expense, but without additional consideration, the other party shall execute and deliver from time to time such further instruments of assignment, conveyance and transfer, shall cooperate in the conduct of litigation and the processing and collection of insurance claims, and shall take such other actions as may reasonably be required to convey and deliver more effectively to Purchaser the Stock or to confirm and perfect the Purchaser's title to the Stock, and otherwise to accomplish the orderly transfer of ownership of the Company to Purchaser and the business assets and operations of the Company as contemplated by this Agreement. ARTICLE IX SURVIVAL; INDEMNIFICATION; EXPENSES Section 9.1 By Sellers. To the extent and in the manner herein provided, each Seller shall, jointly and severally, indemnify, defend, and hold harmless Purchaser or, after the Closing, the Company, from and against any and all damages, losses, obligations, deficiencies, liabilities, claims, encumbrances, penalties, costs, and expenses, including expenses related to investigation and defense including reasonable attorneys' fees (collectively, "Losses"), which Purchaser may suffer or incur, resulting from, related to, or arising out of (i) any misrepresentation, breach of warranty or nonfulfillment of any of the covenants of the Company or any Seller in this Agreement or from any misrepresentation in or omission from any Schedule to this Agreement, certificate, financial statement, or from any other document furnished or to be furnished to Purchaser hereunder; (ii) any misrepresentation relating to the Returns or Taxes; (iii) any and all distribution or transfer of assets of the Company prior to Closing in violation of the spirit of this Agreement; and (iv) any known but undisclosed suits, investigations, proceedings, demands, assessments, audits, judgments, and claims (including employment-related claims) arising out of the foregoing even though such proceeding or claim may not be filed until after the Closing. Section 9.2 By Purchaser. From and after the Closing Date (as defined in Section 12.1), Purchaser agrees to indemnify, defend, and hold harmless each Seller from and against (i) any and all Losses, which each Seller may suffer or incur, resulting from, related to, or arising out of any misrepresentation, breach of warranty, or nonfulfillment of any of the covenants or agreements of Purchaser in this Agreement, (ii) any misrepresentation in or omission from any certificate or document furnished or to be furnished to such Seller hereunder and any and all suits, actions, investigations, proceedings, demands, assessments, audits, judgments, and claims arising out of any of the foregoing, and (iii) any and all Losses resulting from, related to, or arising out of the operation of the Company's business after Closing. Section 9.3 DeMinimus Exclusion and Limitation of Liability. Notwithstanding either of the immediately preceding two subsections, it is understood and agreed that with respect to inaccuracies or breaches of the representations and warranties set forth in this Agreement, each -25- 26 Sellers or Purchaser, as the case may be, shall be obligated to indemnify and hold harmless, only to the extent that the aggregate sum of the liabilities, damages, costs and expenses incurred or sustained by such other with respect to all such inaccuracies or breaches shall exceed the sum of Twenty-Five Thousand Dollars ($25,000.00). Notwithstanding this Section, in no event shall the liability of Sellers under this Agreement for any and all causes of action exceed Four Hundred Thousand Dollars ($400,000.00), in the aggregate and in no event shall the liability of Purchaser under this Agreement for any and all causes of action exceed Four Hundred Thousand Dollars ($400,000.00) in the aggregate and including the value of the Purchase Price paid hereunder. Section 9.4 Procedures. Promptly after acquiring knowledge of any such Losses or Claims against which Indemnitors have indemnified Purchaser or against which Purchaser has indemnified Seller, or as to which either Purchaser or Seller (herein, a "Party") may be liable, Indemnitors or Purchaser, as the case may be, shall give to the other Party written notice thereof; provided, however, that failure to give notice shall not relieve the indemnifying Party of any liability it may have to the indemnified Party if such failure does not materially prejudice the indemnifying Party. In the event of any such Loss or Claim, (i) the indemnifying Party shall have the right to assume the defense thereof and shall not be liable to such indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by such indemnified Party in connection with the defense thereof, provided however that the indemnifying Party shall have waived its right to contest its obligation to indemnify the indemnified Party for all Losses or damages with respect to such Claim; (ii) if the indemnifying Party fails to assume such defense or counsel for the indemnifying Party advises that there are issues which raise conflicts of interest between the indemnifying Party, on the one hand, and the indemnified Party, on the other hand, the indemnified Party may retain one counsel satisfactory to it, and the indemnifying Party shall pay all reasonable fees and expenses of such counsel promptly as statements therefor are received; (iii) the indemnifying Party shall receive from the indemnified Party all necessary and reasonable cooperation in said defense including, but not limited to, the services of employees who are familiar with the transactions out of which any such Loss or Claim may have arisen; and (iv) the indemnifying Party shall not be liable for any settlement effectuated without its prior written consent. ARTICLE X TERMINATION Section 10.1 Events of Termination. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated by written notice of termination at any time before the Closing Date only as follows: (a) Mutual Consent. By mutual consent of the Company, the Sellers and the Purchaser; (b) Breach. By the Sellers holding a majority of the Stock, on the one hand, or by Purchaser, on the other hand, if the other party shall have (a) misstated any representation or been in breach of any warranty contained herein or (b) been in breach of any covenant, -26- 27 undertaking or restriction contained herein and such misstatement of breach has not been cured by the earlier of (i) five (5) days after the non-breaching party gives notice to the breaching party of such misstatement or breach of (ii) the Closing; (c) By Purchaser. (i) if all of the conditions precedent set forth in Section 7.1 hereof have not been met prior to March 29, 1999; and (ii) if the results of its due diligence review of the Company and the Sellers is not satisfactory in its sole discretion. (d) By Sellers. if all of the conditions precedent set forth in Section 7.2 hereof have not been met prior to March 29, 1999; and (ii) if the results of its due diligence review of the Purchaser is not satisfactory in their sole discretion (e) By Either Party. Provided that such party is not in material default hereunder, by either party if the Closing does not occur on or before April 6, 1999; Section 10.2 Consequences of Termination. If this Agreement is validly terminated pursuant to Article 10 and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect; provided, however, that if Purchaser terminates this Agreement because any of the conditions contained in Section 7.1 (except for Section 7.1(a))have not been satisfied, or if Seller terminates this Agreement because any of the conditions contained in Section 7.2 have not been satisfied then the terminating party shall have the right to pursue all of its legal remedies for breach of contract and damages; provided further that if this Agreement is validly terminated pursuant to Section 10.1 and the transactions contemplated hereby are not consummated as described above, the provisions of Sections 5.2 and 6.2 relating to the obligation of the parties to keep confidential and not to use certain information obtained by it from the other party and the provisions of Section 10.3 relating to responsibility for expenses shall survive. No party hereto shall have any liability to any other party in respect of a valid termination of this Agreement pursuant to Section 10.1, except to the extent set forth above. Section 10.3 Expenses if No Closing. If the Closing does not occur and the transactions contemplated hereby are not consummated, then, subject to the right of a non-defaulting party to recover damages, costs and expenses from a defaulting party pursuant to Section 10.2, all costs and expenses incurred in connection with this Agreement shall be paid by the person incurring such expenses; i.e., by Purchaser if incurred by Purchaser and by Seller if incurred by Seller. -27- 28 ARTICLE XI SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations and warranties made by Seller and Purchaser in this Agreement or pursuant hereto shall survive the Closing (as defined in Section 12.1) hereunder, notwithstanding any investigation made by or on behalf of Seller or Purchaser prior to or after the Closing Date (as defined in Section 12.1). ARTICLE XII THE CLOSING Section 12.1 Time and Place. The closing (the "Closing") of the transactions contemplated hereby (the "Closing Date") shall be held on March 18, 1999, at 10:00 a.m., at the offices of the Purchaser, or at such other time and at such other place as shall be mutually agreeable to the Purchaser and the Sellers. Section 12.2 Conduct at Closing (a) As to Seller. Subject to the fulfillment of all of the conditions set forth in Section 7.1 and the delivery of all certificates and opinions required thereby, except such conditions as may be waived by the Seller in writing, on the Closing Date Purchaser shall deliver to Sellers: (i) Certificates evidencing eVS Stock, as provided for in Section 1.1; (ii) The certificate required by Section 7.2(b) hereof; (iii) The opinion of counsel required by Section 7.2(c) hereof; and (iv) A certificate dated the Closing Date and signed on behalf of Purchaser by its Secretary attaching (A) a true and correct copy of Purchaser Certificate of Incorporation, (B) a true and correct copy of the by-laws of Purchaser, (C) the resolutions by the Board of Directors of Purchaser authorizing the actions taken and authorizing the officers of Purchase to execute all documents and instruments to be executed and delivered by Purchaser in connection with the purchase of the eVS Shares, and (D) certificates of good standing certified by the Secretary of State of Delaware; and (E) specimen signatures of the incumbent officers of Purchaser executing this Agreement and the documents executed and delivered pursuant to or in connection with this Agreement. Section 12.3 As to Purchaser. Subject to the fulfillment of all of the conditions set forth in Section 7.2 and the delivery of all certificates required thereby, except such conditions, certificates and as may be waived by Purchaser in writing, Seller shall deliver to Purchaser: -28- 29 (a) The stock certificates evidencing Seller's ownership of the Stock, together with stock powers duly executed in blank, and all other good and sufficient instruments of transfer and conveyance as may be necessary in Purchaser's opinion to vest in Purchaser good, absolute, and marketable title to the Stock; (b) The books and records required by Section 1.2 hereof; (c) The written resignations of those directors and officers of the Company required by Section 1.3 hereof; (d) The certificate required by Section 7.2(a) hereof; (e) The opinion of counsel required by Section 7.2(b) hereof; and (f) A certificate dated the Closing Date and signed on behalf of the Company by its Secretary attaching (a) (i) a true and correct copy of the Company's Articles of Incorporation, (ii) a true and correct copy of the by-laws of the Company, (iii) the resolutions by the Board of Directors and the stockholders of the Company authorizing the actions taken and authorizing the officers of the Company to execute all documents and instruments to be executed and delivered by the Company in connection with the purchase of the Stock, and (iv) certificates of good standing certified by the Secretaries of State or other appropriate officials of those states in which the Company does business; and (b) specimen signatures of the incumbent officers of the Company executing this Agreement and the documents executed and delivered pursuant to or in connection with this Agreement. ARTICLE XIII GENERAL Section 13.1. No Tax Representations. Seller and Purchaser agree that no representation or warranty has been made by them as to the tax consequences of the transactions contemplated by this Agreement or the results of the allocation of the amount of, or the consideration comprising, the Transaction Consideration, that each is engaging separate counsel with respect to such tax consequences, and that each is assuming its own respective tax liability, if any, arising out of this Agreement or the consummation of the transactions contemplated hereunder. Section 13.2. Regarding the Representations and Warranties. Each of the representations and warranties made by each Seller and the Company in Article II is independent of the other representations and warranties made therein, and each of the representations and warranties made by Purchaser in Article III is independent of the other representations and warranties made therein. Section 13.3. Binding Effect and Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by each of the parties and their respective successors and assigns. This Agreement may not be assigned by either party without the prior -29- 30 written consent of the other party. Section 13.4. Waiver. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument duly executed by such party. Section 13.5. Dispute Resolution (a) Good-Faith Negotiations. If any dispute arises under this Agreement that is not settled promptly in the ordinary course of business, the parties shall seek to resolve any such dispute between them, first, by negotiating promptly with each other in good faith in face-to-face negotiations. These face-to-face negotiations shall be conducted by the respective designated senior management representative of each party. If the parties are unable to resolve the dispute between them through these face-to-face negotiations within 20 days (or such period as the parties shall otherwise agree) following the date of notification (the "Notice Date") by one party to the other of the existence of such dispute, then any such disputes shall be resolved in the following manner. For purposes of this Section 13.5(a), Seller and Subsidiary shall be deemed to be a single "party." (b) Mediation. The parties shall endeavor to resolve any dispute arising out of or relating to this Agreement by mediation under the CPR Mediation Procedures for Business Disputes. Unless otherwise agreed, the parties will select a mediator from the CPR Panels of Neutrals and shall notify CPR to initiate the selection process. (c) Resolution of Disputes (i) The controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Florida, including such law in respect of the statute of limitations. The arbitration shall be conducted at the Association's regional office located in Orlando, Florida by three arbitrators, at least one of whom shall be knowledgeable in e-commerce and web software design, programming and implementation, one of whom shall be an attorney and one of whom shall be a member of a "Big Six" accounting firm familiar with businesses engaged in software design, programming and implementation. The arbitrators are not empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any right to recover such damages with respect to any such disputes. Judgment upon the arbitrators' aware may be entered and enforced in any court of competent jurisdiction. (d) Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but shall not be sought as a means to avoid or stay arbitration. -30- 31 (e) Each party is required to continue to perform its obligations under this contract pending final resolution of any dispute arising out of or relating to this contract, unless to do so would be impossible or impracticable under the circumstances. Section 13.6. Notices. All notices, requests, demands, waivers, consents, approvals, or other communications which are required or permitted hereunder shall be in writing and shall be deemed given if delivered personally, sent by reputable overnight courier service (such as Federal Express), sent by telecopier, or sent by registered or certified mail, return receipt requested, postage prepaid, to the addresses set forth below: If to Purchaser: eMERGE Vision Systems, Inc. 10315 102nd Terrace Sebastian, FL 32958 Phone: 561/589-5310 Fax: 561/589-3779 Attention: Charles L. Abraham With a copy to: Karen M. Keating, Esquire 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Telephone: 610/254-4106 Fax: 610/293-1658 If to Seller: Scott Sanders David Sanders 104 Southwood Street 1680 Valley Hills Circle Starkville, MS 39759 Starkville, MS 39759 Phone: 601-323-2954 Phone: 601-323-7083 Fax: 601-320-3999 Fax: 601-323-1325 Scott Calhoun Dr. Duane Pankratz 1 Research Boulevard 44130 279th Street Suite 201-B Freeman, SD 57029 Starkville, MS 39759 Fax: 605-925-4354 Phone: 601-323-1877 Phone: 605-925-4354 Fax: 601-320-3999
With a copy to: -31- 32 William F, Gillis, Esquire Gholson, Hicks & Nickels 710 Main Street, 3rd Floor Columbus, MS 39701 Phone: 601-243-7300 Fax: 601-327-6217 or to such other address or telecopier number as the party entitled to receive such notice may, from time to time, specify in writing to the other party. Section 13.7 Governing Law and Jurisdiction. This Agreement shall be construed and enforced in accordance with the law of the State of Florida without giving effect to the principles of conflicts of law of any jurisdiction. In the event that a party to this Agreement perceives the existence of a dispute with the other party concerning any right or duty provided for herein, the parties will, as soon as practicable, confer in an attempt to resolve the dispute in accordance with Section 13.5 herein. If the parties are unable to resolve such dispute amicably, then the parties hereby submit to the exclusive jurisdiction of and venue in the state and federal courts located in the District of the State of Florida with respect to any and all disputes concerning the subject of, or arising out of, this Agreement. Section 13.8. No Third Party Beneficiaries. Notwithstanding anything to the contrary contained herein, no provision of this Agreement is intended to benefit any person other than the signatories hereto nor shall any such provision be enforceable by any other person. Section 13.9. Severability. Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 13.10. Schedules All Schedules referred to in this Agreement are intended to be and are specifically incorporated by reference herein. Section 13.11. Section Headings All section headings herein have been inserted for convenience of reference only and shall in no way modify or restrict any of the terms or provisions hereof. Section 13.12. Contents of Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to the transaction contemplated hereby and shall not be amended or terminated except by a written instrument duly executed by each of the parties hereto. Any and all prior or contemporaneous agreements or understandings between the parties regarding the subject matter hereof are superseded in their entirety by this Agreement. -32- 33 Section 13.13 Counterparts. This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. The execution of this Agreement by any party hereto will not become effective until counterparts hereof have been execute by all the parties hereto. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. -33- 34 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. eMERGE VISION SYSTEMS, INC. /s/: Charles L. Abraham By: Charles L. Abraham Title: Chief Executive Officer CYBERSTOCKYARD, INC. /s/: Scott Sanders By: Scott Sanders Title:President /s/: J. Scott Sanders J. Scott Sanders /s/: David Sanders David Sanders /s/: Dr. Duane Pankratz Dr. Duane Pankratz /s/: Scott Calhoun Scott Calhoun -34- EX-10.9 10 PURCHASE AGREEMENT DATED JULY 29, 1998 1 Exhibit 10.9 PURCHASE AGREEMENT AMONG eMERGE VISION SYSTEMS, INC. NUTRI-CHARGE J TECHNOLOGIES, LLC AND THE BIEGERT FAMILY IRREVOCABLE TRUST DATED: JULY 29, 1998 2 PURCHASE AGREEMENT This Purchase Agreement (the "Agreement") is made this 29th day of July, 1998, by and among eMERGE VISION SYSTEMS, INC., a Delaware corporation ("Buyer"), NUTRI-CHARGE, a South Dakota partnership (the "Partnership"), J TECHNOLOGIES, LLC, a South Dakota limited liability company ("J Technologies") and Judith Ackland and Larry Cox, Co-Trustees of The Biegert Family Irrevocable Trust dated June 11, 1998 ("Biegert Trust") (J Technologies and The Biegert Family Irrevocable Trust are collectively referred to as the "Sellers" and each as "Seller"). BACKGROUND STS Agriventures, Ltd. ("STS") is a licensee under a license in North America from Her Majesty the Queen in Right of Canada (the "Canadian Government") for the sale and distribution in North America (with the exception of Canada) of electrolyte therapy products known as "Nutri-Charge" (the "Nutri-Charge License") and a worldwide master license from the Canadian Government for the manufacture of Nutri-Charge Premix for livestock (the "Pre-Mix License"). STS is also licensee under a master license from the Canadian Government for the promotion, development, manufacture, sublicense, distribution, use, lease and sale of infra-red detection technology (the "Detection Technology License"). STS is in the business of sub-licensing its rights under the Nutri-Charge License and Detection Technology License to others. STS has sublicensed certain rights under the Nutri-Charge License and Detection Technology License to the Partnership. Buyer has expertise with respect to the use of infrared technology in the biological sciences ("Buyer's Technology"). As part of a single transaction, Buyer will purchase all of the capital stock of STS pursuant to a Stock Purchase Agreement dated July 29, 1998 (the "STS Stock Purchase Agreement") and all of the partnership interests of the Partnership pursuant to this Agreement, surrender the Nutri-Charge License, the Pre-Mix License and the Detection Technology License to the Canadian Government, enter into a new expanded license with the Canadian Government covering the same technologies (the "New Canadian License"), and combine these technologies with Buyer's Technology to develop the business of non invasive scanning livestock with infrared technology to determine health, meat quality and meat grading together with manufacturing, distributing and selling electrolyte therapy products alone or in conjunction with infra-red detection technology products to identify and treat the effects of stress and other potentially value-reducing infirmities in cattle, swine, poultry and other livestock and other applications derived from the New Canadian License (such combination to be referred to as "eVS Business"). Sellers own all of the partnership interests of the Partnership (the "Interests"). Buyer desires to purchase the Interests from Sellers and Sellers desire to sell the Interests to Buyer, all upon the terms and subject to the conditions set forth herein. 2 3 NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants herein contained, and intending to be legally bound, the parties agree as follows: ARTICLE 1 PURCHASE OF INTERESTS 1.1 Sale and Purchase. Subject to the terms and conditions set forth in this Agreement, and in reliance upon the joint and several representations and warranties made by the Partnership and each of the Sellers to the Buyer in this Agreement, each of the Sellers shall sell to the Buyer and the Buyer shall purchase and receive from each of the Sellers, the percentage of Interests set forth opposite each Seller's name in the Partnership Interest Table set forth on Schedule 1.1 hereto (the "Partnership Interest Table"). 1.2 Books and Records. At the Closing, as defined in Section 10.1, Sellers shall cause the Partnership to deliver to Buyer, or turn over to Buyer's representatives, all partnership agreements of the Partnership, and the original copies of all books of account, leases, other agreements, securities, customer lists, files and other documents, instruments and papers of all kind and nature belonging to or relating to the business of the Partnership and necessary or desirable in Buyer's judgment for the on-going conduct of the Partnership and its business, whether in the possession of Sellers or the Partnership. ARTICLE 2 CONSIDERATION 2.1 Consideration; Payment. The consideration to be paid by Buyer to Seller for the Interests shall be equal to 2,000,000 shares of common stock of Buyer (the "eVS Shares") payable as follows: (i) 1,000,000 eVS Shares to be issued at the Closing to Biegert Trust; (ii) 1,000,000 eVS Shares to be issued at the Closing to J Technologies; (iii) 400,000 of the eVS Shares to be issued to Biegert Trust and all 1,000,000 eVS Shares to be issued to J Technologies shall initially be "Restricted Shares" (as defined below) and shall remain such until the earlier of (A) the seventh anniversary of the Closing or (B) in seven (7) 200,000 share increments, 3 4 (iv) the first time during the term of this Agreement that Annual Gross Sales (as defined below) reach or exceed the following milestones: (v) $12,000,000 - 200,000 eVS Shares will no longer be Restricted Shares; (vi) $15,000,000 - an additional 200,000 eVS Shares will no longer be Restricted Shares; (vii) $18,000,000 - an additional 200,000 eVS Shares will no longer be Restricted Shares; (viii) $21,000,000 - an additional 200,000 eVS Shares will no longer be Restricted Shares; (ix) $24,000,000 - an additional 200,000 eVS Shares will no longer be Restricted Shares; (x) ($27,000,000 - an additional 200,000 eVS Shares will no longer be Restricted Shares; and (xi) $30,000,000 - the final 200,000 eVS Shares will no longer be Restricted Shares. "Annual Gross Sales" is defined as the gross revenues (net of discounts, rebates and returns) of Buyer and Buyer's Affiliates (as defined below) from sales of products that are a result of or derived from the technology which is part of the eVS Business, earned in the 12 month period commencing on January 1, 1999, and each 12 month period thereafter (each such period, a "Calendar Year"). Within 30 days after the end of a Calendar Year, eVS will advise Biegert Trust and J Technologies of the Annual Gross Sales and Biegert Trust and J Technologies shall have the right to deliver eVS notice of the allocation of, and the share certificate for, the number of shares that will no longer be restricted shares pursuant to this section, and eVS will remove the appropriate legend from the share certificate(s) with respect to such shares. For purposes of the Agreement, "Buyer's Affiliates" shall mean any regularly-owned subsidiary of Buyer and any other entity in which Buyer owns, directly or indirectly, at least 50% of the voting control of or equity in and any other entity that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control by Buyer. So long as the eVS Shares are Restricted Shares, neither Seller shall have any right to, and shall not, sell, pledge, encumber, dispose of or otherwise transfer such Restricted Shares or any interest therein, except J Technologies may transfer its eVS Shares to (x) John Johanns or (y) to any permitted assignee of John Johanns' rights under the Put Option (as defined below) if with regard to (y) either, (i) such transfer is made 4 5 concurrently with the exercise by the transferee of the Put Option or (ii) if prior to such transfer Buyer is delivered an opinion of counsel reasonably satisfactory to Buyer confirming the enforceability of the foregoing restrictions on transfer on the proposed transferee; provided in each event, any such transferee first executes the Stockholders Agreement. Each Seller and any permitted transferee shall grant to Buyer an irrevocable proxy to vote such Restricted Shares on all matters submitted to a vote of holders of eVS Shares, except matters that will amend such Stockholders Agreement, abrogate or diminish the rights of Sellers under this Agreement. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARTNERSHIP AND SELLERS Partnership and Sellers, jointly and severally, represent and warrant to Buyer as follows: 3.1 Organization, Power, Standing and Qualification. The Partnership is a general partnership consisting of two equal partners, namely, Sellers. Partnership is duly organized, validly existing, and in good standing under the laws of the state of South Dakota, and has full power and authority to carry on its business as it is now being conducted and to own and operate the properties and assets now owned and operated by it. Except as set forth in Schedule 3.1, the Partnership is duly qualified to do business and is in good standing in all jurisdictions where its operations or the ownership or use of its assets requires such qualification. 3.2 Authorization for Agreement. (i) The Partnership. The Partnership's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Partnership: (i) are within the Partnership's powers and (ii) do not (A) require any action by or in respect of, or filing with, any governmental or regulatory authority, (B) violate or constitute, with or without the passage of time or the giving of notice or both, a breach or default under, any requirement of law applicable to the Partnership or any of its properties or any contract to which the Partnership or any of its properties is bound or subject or (C) result in the creation of any adverse claim on any of the Interests. (ii) Individual Sellers. Each Seller's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by each of the Sellers (i) are within the corporate powers and authority of and have been duly authorized by all necessary corporate and shareholder action by each of the Sellers and (ii) do not (A) require any action by or in respect of, or filing with, any governmental or regulatory authority, (B) contravene, violate or constitute, with or without the passage of time or the giving of notice or both, a breach or default under, any requirement of law applicable any of them or any of their respective properties or any contract to which any of them 5 6 or any of their respective properties is bound or subject or (C) result in the creation of any adverse claim on any of the Interests. 3.3 Validity of Contemplated Transactions. Except with respect to those consents required to be obtained in connection with the following and set forth in Schedule 3.3 hereto, all of which have been obtained, the execution, delivery and performance of this Agreement and the collateral documents and the consummation of the transactions contemplated hereby and thereby do not and will not contravene any provision of the Partnership Agreement or other governing documents of the Partnership; nor violate, be in conflict with, or constitute a default under, cause the acceleration of any payments pursuant to, or otherwise impair the validity or effectiveness of any agreement, contract, indenture, lease, or mortgage, or subject any property or asset of the Partnership, or any Seller to any indenture, mortgage, contract, commitment, or agreement, other than this Agreement, to which the Partnership, or any Seller is a party or by which the Partnership or any of its assets is bound; or violate any provision of law, rule, regulation, order, permit, or license to which the Partnership or any Seller is subject. 3.4 Partnership. All of the Interests of the Partnership are collectively owned by the Sellers as set forth in the Partnership Interest Table. All of the Interests are validly issued, fully paid and non-assessable and have not been issued in violation of applicable securities laws or of any preemptive rights or other rights to subscribe for, purchase or otherwise acquire securities. There are no outstanding options, warrants, conversion privileges, subscription, calls commitments or rights of any character relating to the Interests of the Partnership. 3.5 Ownership of Interests. Each Seller is the record and beneficial owner of the Interests as set forth in the Partnership Interest Table and has good, marketable and valid title to such Interests, free and clear of all liens, security interests, pledges, negative pledges, encumbrances, restrictions or options. Upon delivery of the assignment of the Interests to the Buyer, the Buyer shall acquire good, marketable and valid title to such Interests, free and clear of all liens, security interests, pledges, negative pledges, encumbrances, restrictions or options. 3.6 Title to Properties. The Partnership neither owns nor leases, whether beneficially or of record, any tangible properties or assets, personal or real. 3.7 Real Property. The Partnership neither owns nor leases, whether beneficially or of record, any real property. 3.8 Financial Statements. The Partnership and the Sellers have delivered or caused to be delivered to Buyer financial statements consisting of a fiscal year end balance sheet for the Partnership and income statements of the Partnership for the years then ended (collectively, the "Financial Statements"). The Financial Statements are true and correct in all material respects, are in accordance with the applicable books and records of the Partnership and, have been prepared in conformity with generally accepted accounting principles, consistently applied during the related periods, and present fairly 6 7 the financial condition of the Partnership and the results of its operations for the respective periods ended on such dates. 3.9 Absence of Undisclosed Liabilities. The Partnership has no liabilities or obligations of any nature, whether fixed or contingent, direct or indirect, matured or unmatured, except for those which are specifically disclosed in Schedule 3.9 hereto (the "Disclosed Liabilities"). 3.10 Conduct of Business in the United States. Partnership has conducted its business in the United States only, except for matters dealing with the Canadian government in developing, promoting and facilitating the testing of the subject intellectual properties. 3.11 Subsidiaries. The Partnership has no subsidiaries or interests in other entities. 3.12 Compensation Arrangements. The Partnership has no (and has never had any) employees and, except as disclosed in detail on Schedule 3.12, there are no (and have never been any) officers, consultants, agents or other persons performing services for the Partnership for compensation. All consultants, agents and other persons performing services for the Partnership have been paid in full. The Partnership has never adopted any benefit plans. 3.13 Certain Tax Matters. For any period ending on or before the Closing, the Partnership has duly and timely filed or will file all federal, state, and local tax returns, declarations, and reports, estimates, information returns and statements (collectively, "Returns") required to be filed or sent by it or on its behalf and all such Returns are or will be true, correct and complete, true, correct and complete copies of which Returns have been delivered to Buyer prior to the date hereof. The Partnership has paid in full all Taxes (as defined hereafter) and any penalties with respect to the Returns and any penalties entered with respect thereto, due and payable for any period ending on or before the Financial Statement Date. For all tax periods which commence after the Closing, to the extent any Taxes are due and payable the Partnership shall use its best efforts to determine a good faith estimate of the Taxes, shall properly reserve the full amount of such estimate on any Financial Statement delivered to Buyer covering periods after the date of the Financial Statement. The Partnership's federal income tax liabilities, if any, have never been audited by the Internal Revenue Service and have been satisfied for all taxable years up to and including the taxable year ended December 31, 1997. Neither the Internal Revenue Service nor any state or local taxing authority has asserted that additional taxes are owed by the Partnership. As used herein, the term "Taxes" shall include all federal, state, and local taxes, including income, excise, withholding, property, franchise, gross receipt and other taxes. 3.14 Litigation; Compliance with Laws. Except as set forth in Schedule 3.14 attached hereto, there is no suit, action, claim, arbitration, administrative or legal or other 7 8 proceeding, or to Partnership's and Sellers' knowledge, governmental or other investigation pending or, to Partnership's and Sellers' knowledge, threatened against or affecting the Partnership, whether or not covered by insurance; nor to Partnership's and Sellers' knowledge does there now exist any failure by the Partnership to comply with, nor any default by the Partnership under any law, ordinance, requirement, regulation, or order applicable to the Partnership, nor any violation by the Partnership or default by the Partnership with respect to any order, writ, injunction, judgment, or decree of any court or federal, state or local department, official, commission, authority, board, bureau, agency, or other instrumentality issued or pending against the Partnership which might have a material adverse effect on the financial condition, business, results of operations, properties, or assets of the Partnership, or Buyer's purchase or ownership of the Interests. To Partnership's and Sellers' knowledge, the Partnership has obtained all permits, licenses, zoning variances approvals, and other authorization necessary for the complete operation of its business as presently operated. Specifically, except as set forth in Schedule 3.14, the Partnership has obtained all approvals, including without limitation, all US Federal Drug Administration and Department of Agriculture regulatory approvals necessary and proper for the manufacture and sale of electrolyte therapy products manufactured pursuant to the Nutri-Charge License, Nutri-Charge Premix manufactured pursuant to the Pre-Mix License and infra-red detection technology manufactured pursuant to the Detection Technology License. There have been no illegal kickbacks, bribes or political contributions made by the Partnership. 3.15 Intellectual Property. (a) Schedule 3.15.1 sets forth a complete and accurate list and full description of all patents, trademarks, service marks, trade names, copyrights, and similar intangible rights and all applications or registrations thereof owned by the Partnership or used in respect of the Partnership's business (collectively, the "Listed Rights"). With respect to any registrations of the Listed Rights owned or licensed by the Partnership, Schedule 3.15.1 also sets forth, as to each such item of the Listed Rights, the (i) relevant application or registration number, (ii) relevant filing, registration, issue or application date, (iii) record owner, (iv) country, (v) title or description and (vi) remaining life thereof. In addition, Schedule 3.15.1 identifies whether each item of the Listed Rights is owned by the Partnership or is possessed and used by the Partnership under the applicable license, contract, agreement or other commitment. With respect to each such commitment, the identity of the parties thereto, the term thereof and all amounts payable thereunder together with the payment terms therefor are listed on Schedule 3.15.1. Except as set forth on Schedule 3.15.1, the Listed Rights comprise all of the patent rights, trademark and service mark rights, trade names, copyrights and all licenses that are necessary for the conduct of the Partnership's business as now being conducted and as proposed to be conducted. Except as set forth on Schedule 3.15.1, to the best of the Partnership's and Sellers' knowledge, the Partnership owns and possesses (under license) all of the proprietary rights, know-how and trade secrets not included in the Listed Rights (the "Other Proprietary Rights" and, together with the Listed Rights, the "Intellectual Property") necessary for the business as now being conducted and as proposed to be conducted. 8 9 (b) Each item of the Intellectual Property constitutes a valid and enforceable right of the Partnership and does not infringe or conflict with the rights of any other person or entity, except as to the contractual rights of the Canadian government and STS under the license and sublicense agreements. Except as otherwise provided in Schedule 3.15.2, the Partnership has no obligation to compensate, or to obtain the consent of, any third party for the use of any item of the Intellectual Property. There is neither pending nor, to the best of the Partnership's and Sellers' knowledge, threatened (except as disclosed on Schedule 3.15.2) any suit, action, claim, arbitration, grievance, litigation, administrative or legal or other proceeding, or investigation, against the Partnership or its licensors contesting the validity of, or the Partnership's rights to use, any of the Intellectual Property. Except as otherwise provided in Schedule 3.15.2, the Partnership has not granted any license or other right to use, in any manner, any item of the Intellectual Property, whether or not requiring the payment of royalties, and no third party has any right to use any of the Intellectual Property, to the best of the Partnership's and Sellers' knowledge, no person or entity is infringing upon any of the Partnership's rights to the Intellectual Property. The Partnership has not received notice or infringement upon, misappropriation of or conflict with any asserted right of any third party, and to the best of the Partnership's and Sellers' knowledge, there is no basis for any such notice. 3.16 Specific Patent/USFDA Representations. (xii) The Partnership and the Sellers have provided all paperwork they possess concerning the U.S. Food and Drug Administration ("FDA"). (xiii) Aurora Co-op Elevator Company was the manufacturer of the Nutri-Charge product used in the FDA trials undertaken on behalf of the Partnership ("FDA Trials") and the Partnership has been advised that its FDA Registration Number is 1916267. (xiv) Jeffrey Biegert and his affiliates as sponsor of the FDA Trial will assign all right, title and interest that he and they may have in the FDA application process and FDA Trial results. He and they will cooperate in the FDA application process as the sponsor to expeditiously seek FDA approval. The assignment and cooperation of Jeffrey Biegert is contingent upon agreement by Buyer that he and they will be saved and held harmless from any and all costs and expense he or they may incur by reason of being a sponsor to the FDA application process. (xv) John Johanns has had no direct contact with the FDA regarding the Nutri-Charge product other than the initial meeting in Washington, D.C. with Al Schaefer and Rick Stanley present, and except for signing the FDA Trial report as an investigator. Jeffrey Biegert has had no contact with the FDA 9 10 regarding the Nutri-Charge product other than signing the FDA application to manufacture the Nutri-Charge product for the FDA Trial. 3.17 Contracts Except as listed and described on Schedule 3.17(a) or any other Schedule attached hereto, the Partnership is not a party to any written or oral agreement, contract or commitment (the "Contracts.") Except as disclosed on Schedule 3.17(b), (i) each of the Contracts is valid and enforceable in accordance with its terms, (ii) is in compliance with the provisions thereof, (iii) Partnership and, to the best of the Partnership's and Sellers' knowledge, each other party is not in default in the performance, observance or fulfillment of any obligation, covenant or condition contained therein, (iv) no event has occurred which with or without the giving of notice or lapse of time, or both, would constitute a default by the Partnership, or to the best of the Partnership's or Sellers' knowledge, by any other party thereunder and (v) the Partnership's rights under the Contracts are transferable by the Partnership to Buyer without restriction except for the Consents. To the Partnership's and Sellers' knowledge, none of the terms or provisions of any of the Contracts materially adversely affects the prospects, conditions, affairs, or operations of the Partnership or its business, including restrictions on the Partnership's ability to compete. 3.18 Other Transactions. Except as disclosed on Schedule 3.18 hereto, the Partnership has not, since the date of the most recent Financial Statements, (a) operated its business except in the ordinary course of business, (b) incurred any debts, liabilities or obligations except in the ordinary course, (c) discharged or satisfied any liens or encumbrances, or paid any debts, liabilities or obligations, except in the ordinary course of business, (d) mortgaged, pledged or subjected to lien or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business, (e) sold or transferred any of its tangible assets, or canceled any debts or claims, except, in each case, in the ordinary course of business, or (f) suffered any extraordinary losses or waived any rights of substantial value. 3.19 Product Liability Claims. To Partnership's and Sellers' knowledge, there have been no incidents, events or claims relating to the Partnership in the nature of products liability claims, breach of warranty claims or other claims alleging failure of product performance. There is no product liability insurance. 3.20 Bank Accounts. Schedule 3.20 hereto lists the names and addresses of every bank and other financial institution in which the Partnership maintains an account (whether checking, savings or otherwise), lock box or safe deposit box, and the account numbers and names of persons having signing authority or other access thereto. 3.21 No Changes. Since the date of the most recent Financial Statements, and except as disclosed to Buyer in writing as soon as any such events have occurred, there has not been: 10 11 (a) Any materially adverse change in the financial or other condition, assets, liabilities or business of the Partnership, except changes described in Section 3.20 hereto, none of which individually or in the aggregate has been materially adverse to the Partnership; (b) Any damage, destruction or loss (whether or not covered by insurance) or any condemnation by governmental authorities which has or may adversely affect the business, prospects or any property of the Partnership; (c) Any strike, lockout, labor trouble or any event or condition of similar character adversely affecting the business or prospects of the Partnership; (d) Any declaration, setting aside or payment of any distribution in respect of any of the Partnership's Interests or any direct or indirect redemption, purchase or other acquisition of any such Interests; or (e) Any increase in the compensation payable or to become payable by the Partnership to any of its officers, employees or agents, or any known payment or arrangement made to or with any thereof, other than salary reviews and increases taking effect after the Financial Statement Date, all of which were consistent with the Partnership's past practices, except as disclosed to Buyer in writing as soon as any such events have occurred. 3.22 Copies of Partnership Agreement. The Partnership's Restated Partnership Agreement (certified by the general partners of the Partnership) to which Buyer has been provided a copy, is correct and remains in effect as at the date of this Agreement. Except as set forth in Schedule 3.22, there are no other material books and records of the Partnership to which Buyer has not been provided access [in which the Partnership has access.] 3.23 Tangible Assets; Inventory. There are no tangible assets or inventory owned, leased or licensed, whether beneficially or of record, by the Partnership. 3.24 Accounts Receivable. There are no accounts receivable. 3.25 Hazardous Substances. Except as listed on Schedule 3.25, (i) none of the assets of the Partnership has been used for the manufacture, storage, transportation, deposit, disposal, treatment, handling, production, processing or recycling of toxic, dangerous or hazardous substances; (ii) the Partnership has engaged in no activity which would subject the Partnership or the Buyer to liens, damages, penalties, injunctive relief or cleanup costs under any federal, state or local law, or under any civil action respecting hazardous substances; (iii) the Partnership has complied with each, and is not in violation of any, United States federal, state, or local law, statute, regulation, permit provision or ordinance, relating to the generation, handling, storage, transportation, treatment or disposal of chemicals, substances (the "Environmental Laws"); and (iv) the Partnership has obtained and complied with all necessary permits and other approvals, including interim status under the Reserve Conservation and Recovery Act, as amended ("RCRA"), 11 12 necessary to store, treat, dispose of and otherwise handle hazardous wastes and hazardous substances. A "hazardous substance" shall mean that term as defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., as amended, and dangerous, regulated toxic or hazardous substances, petroleum products, or similar terms under any other applicable United States federal, state, or local law and any regulations thereunder. 3.26 Relationship With Licensees. Schedule 3.26 hereto contains an accurate list of the Partnership's licensees. None of such licensees has given the Partnership notice terminating or canceling any license, or materially reducing any payment or royalty, or threatening to terminate or cancel, any license or materially reduce any payment or royalty or relationship with the Partnership, and Seller is not aware of any material deterioration of any such relationship. None of the Partnership's licensees for the past two fiscal years has given the Partnership notice terminating or canceling any license, or materially reducing any payment or royalty, or threatening to terminate or cancel any license, or materially reduce any payment or royalty or supply relationship with the Partnership and the Partnership and Sellers are not aware of any material deterioration of any such relationship. 3.27 Transactions With Affiliates. Except as set forth in Schedule 3.27, no General Partner or affiliate of the Partnership, nor any officer or director of any General Partner or any affiliate of the Partnership, (i) owns or has a material interest in any asset used by the Partnership in the operation of its business, (ii) has any direct or indirect interest of any nature whatsoever in any person which markets or provides the same type of services as those which Buyer will provide by purchasing the business of the Partnership, (iii) provides or causes to be provided any assets, services or facilities used or held for use in connection with the business of the Partnership. 3.28 Veracity of Statements. No representation or warranty by the Partnership or any Seller contained in this Agreement and no statement contained in any certificate, schedule or other instrument furnished to Buyer pursuant hereto or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to the Sellers and the Partnership as follows: 4.1 Organization. The Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation, (ii) has the power and authority to own and operate its properties and assets and to transact its business as currently conducted and (iii) is duly qualified and authorized to do business and is in good standing in all jurisdictions, which are identified on Schedule 4.1 hereto, where the failure to be duly qualified, authorized and in good standing would have a 12 13 material adverse effect upon the Buyer's businesses, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise). 4.2 Authorization for Agreement. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Buyer (i) are within the Buyer's corporate powers and duly authorized by all necessary corporate action on the part of the Buyer and (ii) do not (A) require any action by or in respect of, or filing with, any governmental body, agency or official, except as set forth in this Agreement or (B) contravene, violate or constitute, whether with or without the passage of time or the giving of notice or both, a breach or a default under, any requirement of law applicable to the Buyer or any of its properties or any Contract to which the Buyer or any of its properties is bound. 4.3 Enforceability. This Agreement has been duly executed and delivered by the Buyer and constitutes the legal, valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms. 4.4 Litigation. There is no legal proceeding or order pending against or, to the knowledge of the Buyer, threatened against or affecting, the Buyer or any of its properties or otherwise that could adversely affect or restrict the ability of the Buyer to consummate fully the transactions contemplated by this Agreement or that in any manner draws into question the validity of this Agreement. 4.5 Hazardous Substances. (i) none of the assets of the Buyer has been used for the manufacture, storage, transportation, deposit, disposal, treatment, handling, production, processing or recycling of toxic, dangerous or hazardous substances; (ii) the Buyer has engaged in no activity which would subject the Buyer or the Partnership to liens, damages, penalties, injunctive relief or cleanup costs under any federal, state or local law, or under any civil action respecting hazardous substances; (iii) the Buyer has complied with each, and is not in violation of any, United States federal, state, or local law, statute, regulation, permit provision or ordinance, relating to the generation, handling, storage, transportation, treatment or disposal of chemicals, substances (the "Environmental Laws"); and (iv) the Buyer has obtained and complied with all necessary permits and other approvals, including interim status under the Reserve Conservation and Recovery Act, as amended ("RCRA"), necessary to store, treat, dispose of and otherwise handle hazardous wastes and hazardous substances. A "hazardous substance" shall mean that term as defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section9601, et seq., as amended, and dangerous, regulated toxic or hazardous substances, petroleum products, or similar terms under any other applicable United States federal, state, or local law and any regulations thereunder. 4.6 Product Liability Claims. There have been no incidents, events or claims relating to the Buyer in the nature of products liability claims, breaches of warranty claims or other claims alleging failure of product performance. 4.7 Conflict With Authority, Bylaws, Etc. Neither the execution and delivery of this Agreement and the Collateral Documents to which Buyer is a party, nor the 13 14 consummation of the transactions contemplated hereby and thereby in the manner herein provided will violate, be in conflict with, constitute a default under, cause the acceleration of any payments pursuant to, or otherwise impair the good standing, validity, and effectiveness of any lease, license, permit, authorization, or approval applicable to Buyer; or violate any provision of law, rule, regulation, order, or permit to which Buyer is subject. 4.8 Acquisition of Interests for Investment. Buyer is acquiring ownership of the Partnership for investment for its own account and not with a view to the resale or distribution thereof in violation of any federal or state securities laws. Buyer or such assignees will not offer, sell, transfer, assign, pledge or hypothecate any portion of the Interests in the absence of registration under, or pursuant to an applicable exemption from all applicable federal and state securities laws. 4.9 Capitalization of Buyer. The authorized capital stock of Buyer consists of 20,000,000 shares of a single class of common stock having $0.01 par value per share and 4.10 10,000,000 shares of blank check preferred stock. Upon the Closing and the closing of the transactions contemplated in the STS Stock Purchase Agreement, Buyer's issued and outstanding capital will be as set forth in Buyer's Capitalization Table attached as Schedule 4.9 hereto, and such shares will be validly issued, fully paid and non-assessable and will not have been issued in violation of applicable securities laws or of any preemptive rights or other rights to subscribe for, purchase or otherwise. 4.11 Financial Statements. Buyer has delivered or caused to be delivered to the Sellers financial statements consisting of a fiscal year end balance sheet for the Buyer for __________ and income statements and statements of cash flow of the Buyer, for the years then ended (collectively, the "Financial Statements"). The Financial Statements are true and correct in all material respects, are in accordance with the applicable books and records of the Buyer and, have been prepared in conformity with generally accepted accounting principles, consistently applied during the related periods ("GAAP"), and present fairly the financial condition of the Buyer and the results of its operations for the respective periods ended on such dates. 4.12 Absence of Undisclosed Liabilities. At the date of the Financial Statements, Buyer had no liabilities or obligations of any nature, whether fixed or contingent, direct or indirect, matured or unmatured, required by GAAP to be reflected on the Financial Statements which was not so reflected. 4.13 Certain Tax Matters. For any period ending on or before the Closing, the Buyer has duly and timely filed or will file all federal, state and local tax returns, declarations, and reports, estimates, information returns and statements (collectively, "Buyer Returns") required to be filed or sent by it or on its behalf and all such Buyer Returns are or will be true, correct and complete. Buyer has paid in full all Taxes and any penalties entered with respect to the Buyer Returns and any penalties entered into with respect thereto, due and payable for any period ending or before the date of the 14 15 Financial Statements. Buyer's federal income tax liabilities, if any, have never been audited by the Internal Revenue Service. Neither the Internal Revenue Service nor any state or local taxing authority has asserted that additional taxes are owed by Buyer. 4.14 Litigation: Compliance with Laws. Except as set forth in Schedule 4.13 attached hereto, there is no suit, action, claim, arbitration, administrative or legal or other proceeding, or to Buyer's knowledge, governmental or other investigation pending or, to Buyer's knowledge, threatened against or affecting the Buyer, whether or not covered by insurance; nor to Buyer's does there now exist any failure by Buyer to comply with, nor any default by Buyer under any law, ordinance, requirement, regulation or order applicable to Buyer, nor any violation by Buyer or default by Buyer with respect to any order, writ, injunction, judgment or decree of any court or federal, state or local department, official, commission, authority, board, bureau, agency, or other instrumentality issued or pending against Buyer which might have a material adverse effect on the financial condition, business, results of operations, properties, or asset of Buyer or Buyer's purchase of ownership of the Interests. To Buyer's knowledge, the Buyer has obtained all permits, licenses, zoning variances approvals, and other authorization necessary for the complete operation of its business as presently operated, except for the approvals of FDA as to which no representations are made. 4.15 Property. Except as set forth on Schedule 4.14, to the best of the Buyer's knowledge, the Buyer owns or possesses (under license) prior to or contemporaneously with this agreement all of the proprietary rights, know-how and trade secrets necessary for the business as presently conducted, excluding the eVS Business. To the best of Buyer's knowledge, each item such intellectual property constitutes a valid and enforceable right of the Buyer and does not infringe or conflict with the rights of another person or entity. There is neither pending nor, to the best of the Buyer's knowledge, threatened (except as disclosed on Schedule 4.14) any suit, action, claim, arbitration, grievance, litigation, administrative or legal or other proceeding, or investigation, against the Buyer or its licensors contesting the validity of, or the Buyer's rights to use, any of such intellectual property. To the best of Buyer's knowledge, no person or entity is infringing upon any of the Buyer's rights to the intellectual property. The Buyer has not received notice or infringement upon, misappropriation of or conflict with any asserted right of any third party, and to the best of Buyer's knowledge, there is no basis for any such notice. 4.16 No Changes. Since the date of the Financial Statements, and except as disclosed to Sellers in writing as soon as any such events have occurred, there has not been: (a) Any materially adverse change in the financial or other condition, assets, liabilities or business of Buyer, none of which individually or in the aggregate has been materially adverse to Buyer; 15 16 (b) Any damage, destruction or loss (whether or not covered by insurance) or any condemnation by governmental authorities which has or may adversely affect the business, prospects or any property of Buyer; or (c) Any strike, lockout, labor trouble or any event or condition of similar character adversely affecting the business or prospects of Buyer. 4.17 Veracity of Statements. No representation or warranty by Buyer contained in this Agreement and no statement contained in any certificate, schedule or other instrument furnished to Sellers pursuant hereto or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact. ARTICLE 5 ACTIVITIES PRIOR TO CLOSING BY SELLER 5.1 Operation of Business. Prior to the Closing, the Partnership shall conduct its business only in the ordinary course and in connection therewith and, to the extent consistent therewith, the Partnership shall use its best efforts to preserve its business organization intact and maintain its existing relations with customers, suppliers, employees and business associates. Except as set forth in Schedule 5.1, the Partnership shall: (a) Organizational Documents. Not amend its partnership agreement, except as may be necessary to carry out this Agreement or as required by law; (b) Partnership Name. Not change its partnership name or permit the use thereof by any other person or entity; (c) Compensation, Bonuses. Not hire or pay or agree to hire or pay any employee, independent contractor, officer, or director of the Partnership, without the consent of Buyer. (d) Management. Not make any changes in its management without the consent of Buyer; (e) Mergers, Etc. Not merge or consolidate the Partnership with any entity or allow it to acquire or agree to acquire or be acquired by any corporation, association, partnership, joint venture, or other entity; except JLB, Inc. has sold its interest in the Partnership to the Biegert Trust and Nutri-Search, Inc. has sold its interest in the Partnership to J Technologies. (f) Disposition of Assets. Not sell, transfer, or otherwise dispose of any assets of the Partnership without the prior written consent of Buyer; 16 17 (g) Indebtedness. Not create, incur, assume, or guarantee any indebtedness for money borrowed arising out of or in connection with the Partnership's business except in the ordinary course of business; create or suffer to exist any lien on any of the Partnership's assets, except those in existence on the date hereof; or increase the amount of any indebtedness outstanding under any loan agreement, mortgage, or other borrowing arrangement in existence on the date hereof arising out of or in connection with the Partnership's business; (h) Payables. Pay when due, in accordance with past practices, all of its accounts payable and trade obligations; (i) Contracts and Permits. Maintain in full force and effect all Contracts and permits necessary for or related to the operation of the Partnership's business in all material respects and in all places as such business is now conducted and renew or revalidate any permits which may become void, expired, terminated, canceled or withdrawn between the date hereof and the Closing; (j) Litigation, Etc. Promptly advise Buyer in writing of the commencement of, and of any known threat to commence any, suit, claim, action, arbitration, legal or administrative proceeding, governmental investigation, or tax audit against it; (k) Interests. Not issue sell, pledge, dispose of or encumber any additional Interests of, or rights convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any Interests. 5.2 Access to Information. Prior to Closing, Seller will cooperate fully with Buyer and shall provide Buyer and its accountants, counsel, and other representatives, during normal business hours, full access to the books, records, Contracts, other assets owned or leased by the Partnership, and full opportunity to discuss the Partnership's business, affairs, assets, industrial processes, and trade secrets with its officers, employees, customers, suppliers and independent accountants, and furnish to Buyer and its representatives copies of such documents, records, and information with respect to the affairs of the Partnership as Buyer or its representatives may reasonably request. Buyer and Seller, and their respective principals agree that they will hold in confidence, trade secret or proprietary information or data supplied by the other in conjunction with this Agreement. In the event that the transaction contemplated by this Agreement is not consummated for any reason, each party will return to the other all documents and other materials provided to it relating to the other party, without retaining copies thereof. 5.3 Best Efforts. Subject to the other provisions of this Agreement, Sellers will use their best efforts to cause the conditions listed in Section 7.1 hereof to be satisfied on the Closing Date (as defined in Section 10.1). 5.4 Benefit Plans. The Partnership shall not adopt, terminate, amend, extend, or otherwise change any benefit plan without the prior written consent of Buyer, and the Partnership shall give Buyer prior written notice of the Partnership's intention to take any 17 18 such action required by law or necessary to continue the qualified status of any benefit plans as they pertain to the Partnership's employees or its former employees. 5.5 Notice of Change. The Partnership will promptly notify Buyer of the existence or happening of any fact, event or occurrence prior to the Closing Date and of which the Partnership or any of the Partnership's employees, partners, or other representatives has knowledge which may alter the accuracy or completeness of any representation or warranty contained in Article 3 of this Agreement. 5.6 No Discussions. Unless and until this Agreement is terminated pursuant to Article 14 hereof, Seller will not, and will not authorize or permit the Partnership or any of its employees, officers, directors, or other representatives to, enter into, participate in, request, solicit or engage in any discussions, negotiations, understandings, agreements or other communications with any person or entity other than Buyer relating to offers, inquiries, negotiations or proposals with respect to the sale of the assets or any capital stock of the Partnership, or any type of business combination transaction. Seller and the Partnership will promptly notify Buyer of any such offer, inquiry, negotiation or proposal which either Seller or the Partnership may receive. 5.7 Publicity. No party shall issue any press releases or otherwise make public statements with respect to the terms of this Agreement or the transactions contemplated hereby, without the consent of the other parties, except as may be required by any national, state, provincial or local governmental or regulatory agency. The parties hereto shall not issue any such press release or make any such public statement or filing prior to such consultation, except as may be required by law. ARTICLE 6 ACTIVITIES PRIOR TO CLOSING BY BUYER 6.1 Best Efforts. Subject to the other conditions of this Agreement, Buyer will use its best efforts to cause the conditions listed in Section 7.2 hereof to be satisfied on the Closing Date (as defined in Section 10.1). 6.2 Access to Information. Buyer shall provide Seller with information reasonably requested by Seller regarding Buyer's ability to consummate the transactions contemplated herein, as may be. Seller shall not disclose any such information to any other person or entity without the prior written consent of Buyer. 18 19 ARTICLE 7 CONDITIONS PRECEDENT TO CLOSING 7.1 Conditions to Obligation of Buyer to Close. The obligation of Buyer to consummate the transaction contemplated under this Agreement on the Closing Date (as defined in Section 10.1) shall be subject to the satisfaction or the waiver by Buyer of the following conditions on or prior to the Closing Date: (a) Representations and Warranties; Compliance with Agreement. The representations and warranties of the Partnership and Sellers set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, and the Partnership and Sellers shall have performed all covenants and agreements to be performed by it under this Agreement on or prior to the Closing Date and shall have delivered to the Buyer a certificate to such effect, dated the Closing Date, which certificate shall be in form and substance satisfactory to Buyer and its counsel; (b) Opinion of Counsel for the Partnership and Sellers. Frank C. Heinisch, counsel for the Partnership and Sellers, shall have delivered to Buyer their favorable opinion, dated the Closing Date and in the form set forth in Exhibit 7.1.2; (c) Litigation Affecting Closing. On the Closing Date, no proceeding shall be pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such suit, action or proceeding shall be pending or threatened; (d) Required Consents. The parties (other than the Partnership) to any other contract, commitment or agreement to which the Partnership is a party, any governmental agency or body or any other person, firm or corporation which owns or has authority to grant any franchise, license, permit, easement, right or other authorization necessary for the business or operations of the Partnership, and any governmental body or regulatory agency having jurisdiction over Buyer or the Partnership, to the extent that their consent or approval is required under the pertinent debt, lease, contract, commitment or agreement or other document or instrument or under applicable laws, rules or regulations for the consummation of the transaction contemplated hereby in the manner herein provided, shall have granted such consent or approval, which shall include all Consents; provided however the parties acknowledge that Sellers and Partnership shall not be responsible to procure the consent and approval of the Canadian Government and STS; 19 20 (e) No Material Damage to Business. The assets, properties and business of the Partnership shall not have been and shall not be threatened to be materially adversely affected in any way as a result of fire, explosion, earthquake, disaster, accident, labor dispute, any action by any governmental authority, flood, drought, embargo, riot, civil disturbance, uprising, activity of armed forces or act of God; (f) Approval of Buyer; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved by Buyer, in the exercise of its reasonable judgment, and Buyer or its counsel shall have been furnished with certified copies, satisfactory in form and substance to Buyer in the exercise of its reasonable judgment, of all such records of the Partnership, and of the proceedings of such persons authorizing the execution, delivery and performance of this Agreement as Buyer shall reasonably require; (g) Other Transactions. The closing of the transactions contemplated by the New Canadian License and the STS Stock Purchase Agreement shall have been completed on the Closing Date. (h) Stockholders Agreement. The Stockholders Agreement, by and among Buyer, the Partnership and certain other stockholders of Buyer and the Partnership (the "Stockholders Agreement"), shall have been executed and delivered by the parties thereto. (i) Put Option Agreement. A Put Option Agreement, by and among John R. Johanns and XL Vision, Inc. (the "Put Option") in the form attached hereto as Schedule 7.1.9 shall have been executed and delivered by the parties thereto. 7.2 Conditions to Obligation of Sellers to Close. The obligation of Sellers to consummate the transfer of the Interests on the Closing Date (as defined in Section 10.1) shall be subject to the satisfaction of the following conditions on or prior to the Closing Date: (a) Representations and Warranties. The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, Buyer shall have performed all covenants and agreements to be performed by it under this Agreement on or prior to the Closing Date, and Buyer shall have delivered to Seller a certificate to such effect, dated the Closing Date, which certificate shall be in form and substance satisfactory to Seller and its counsel; (b) Opinion of Counsel of Buyer. Pepper Hamilton LLP, counsel for Buyer, shall have delivered to Sellers their opinion, dated the Closing Date and in the form set forth in Exhibit 7.2.2; 20 21 (c) Litigation Affecting Closing. On the Closing Date, no proceeding shall be pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transaction contemplated hereby, and no investigation that might eventuate in any such suit, action or proceeding shall be pending or threatened; (d) Approval of Sellers; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved on the Closing Date by Sellers, in the exercise of their reasonable judgment, and Sellers shall have been furnished with certified copies, satisfactory in form and substance to Sellers in the exercise of their reasonable judgment, of all such records of Buyer and the Partnership and of the proceedings of Buyer and the Partnership authorizing their execution, delivery and performance of this Agreement as Sellers shall reasonably require; and (e) Stockholders Agreement. The Stockholders Agreement and Put Option shall have been duly executed and delivered by the parties thereto. ARTICLE 8 INDEMNIFICATION 8.1 By Sellers and Individual Indemnitors. To the extent and in the manner herein provided, each of John Johanns and Jeffrey Biegert each being called an "Indemnitor" and collectively, the "Indemnitors") shall, jointly and severally, indemnify, defend, and hold harmless Buyer and, after the Closing, the Partnership, from and against any and all damages, losses, obligations, deficiencies, liabilities, claims, encumbrances, penalties, costs, and expenses, including expenses related to investigation and defense including reasonable attorneys' fees (collectively, "Losses"), which Buyer may suffer or incur, resulting from, related to, or arising out of (a) any misrepresentation, breach of warranty or nonfulfillment of any of the covenants of the Partnership or any Seller in this Agreement or from any misrepresentation in or omission from any Schedule to this Agreement, certificate, financial statement, or from any other document furnished or to be furnished to Buyer by Sellers hereunder; (b) any claims relating to the Returns or Taxes of the Partnership; 21 22 (c) any claims based upon alleged injuries to persons, property or business by reason of alleged defectiveness, improper design, or manufacture or malfunction or otherwise of any product manufactured by a third party under license or sub-license from the Partnership, where such claim or injury is actually known to the Partnership or Sellers, or is currently asserted or threatened against the Partnership; (Indemnitors shall not be assumed or imputed to have actual knowledge of design or manufacture in which they did not directly participate nor supervise.) (d) any and all Losses not disclosed on Schedule 3.9 resulting from, related to or arising out of the operation of the Partnership's business prior to the Closing; and (e) any and all actions, suits, investigations, proceedings, demands, assessments, audits, judgments, and claims (including employment-related claims) arising out of the foregoing even though such proceeding or claim may not be filed until after the Closing. Notwithstanding the foregoing, the obligations of either Indemnitor to indemnify Buyer hereunder shall be limited to $250,000. Either Indemnitor shall have the right to defer payment of any Losses indemnifiable hereunder until the fourth anniversary of the Closing Date, provided if an Indemnitor elects so to defer payment of any such Loss, the Indemnitor shall, pay Buyer the amount of the Loss (subject to the aggregate limitation set forth in the preceding sentence) plus interest at the rate of 12% per annum from the date of the Loss to the date paid (interest will be without regard to the aggregate limitation set forth in the preceding sentence.) 8.2 By Buyer. From and after the Closing Date (as defined in Section 10.1), Buyer agrees to indemnify, defend, and hold harmless each Seller from and against (i) any and all Losses, which each Seller may suffer or incur, resulting from, related to, or arising out of any misrepresentation, breach of warranty, or nonfulfillment of any of the covenants or agreements of Buyer in this Agreement, (ii) any misrepresentation in or omission from any certificate or document furnished or to be furnished to such Seller hereunder and any and all suits, actions, investigations, proceedings, demands, assessments, audits, judgments, and claims arising out of any of the foregoing, and (iii) any and all Losses resulting from, related to, or arising out of the operation of the Partnership's business after Closing. 8.3 Procedures. Promptly after acquiring knowledge of any such Losses against which Sellers have indemnified Buyer or against which Buyer has indemnified Seller, or as to which either Buyer or Seller (herein, a "Party") may be liable, Sellers or Buyer, as the case may be, shall give to the other Party written notice thereof; provided, however, that failure to give notice shall not relieve the indemnifying Party of any liability it may have to the indemnified Party if such failure does not materially prejudice the indemnifying Party. In the event of any such Losses, (i) the indemnifying Party shall have the right to assume the defense thereof and shall not be liable to such indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by such indemnified Party in connection with the defense thereof, provided however that 22 23 the indemnifying Party shall have waived its right to contest its obligation to indemnify the indemnified Party for all such Losses; (ii) if the indemnifying Party fails to assume such defense or counsel for the indemnifying Party advises that there are issues which raise conflicts of interest between the indemnifying Party, on the one hand, and the indemnified Party, on the other hand, the indemnified Party may retain one counsel satisfactory to it, and the indemnifying Party shall pay all reasonable fees and expenses of such counsel promptly as statements therefor are received; (iii) the indemnifying Party shall receive from the indemnified Party all necessary and reasonable cooperation in said defense including, but not limited to, the services of employees who are familiar with the transactions out of which any such Losses may have arisen; and (iv) the indemnifying Party shall not be liable for any settlement effectuated without its prior written consent. ARTICLE 9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations and warranties made by Seller and Buyer in this Agreement or pursuant hereto shall survive the Closing (as defined in Section 10.1) hereunder, notwithstanding any investigation made by or on behalf of Seller or Buyer prior to or after the Closing Date (as defined in Section 10.1). ARTICLE 10 THE CLOSING 10.1 Time and Place. The closing (the "Closing") of the transactions contemplated hereby (the "Closing Date") shall be held on July 29, 1998 at 1:00 p.m., at the offices of Pepper Hamilton LLP, 3000 Two Logan Square, Eighteenth and Arch Streets, Philadelphia, Pennsylvania 19103-2799, or at such other time and at such other place as shall be mutually agreeable to the Buyer and the Sellers. 10.2 Conduct at Closing. (a) As to Sellers. Subject to the fulfillment of all of the conditions set forth in Section 7.1 and the delivery of all certificates and opinions required thereby, except such conditions as may be waived by the Sellers in writing, on the Closing Date Buyer shall deliver to Sellers: (xvi) certificates evidencing eVS Stock, as provided for in Section 2.1; (xvii) the certificate regarding representations and warranties required by Section 7.2.1 hereof; (xviii) a certificate dated the Closing Date and signed on behalf of Buyer by its Secretary attaching (A)(i) a true and correct copy of Buyer's Articles 23 24 of Incorporation, (ii) a true and correct copy of the by-laws of Buyer, (iii) the resolutions by the Board of Directors of Buyer authorizing the actions taken and authorizing the officers of Buyer to execute all documents and instruments to be executed and delivered by Buyer in connection with the purchase of the Interests, and (iv) certificates of good standing certified by the Secretary of State of Delaware; and (B) specimen signatures of the incumbent officers of Buyer executing this Agreement and the documents executed and delivered pursuant to or in connection with this Agreement; (xix) the opinion of counsel as required by 7.2.2 hereof; and (xx) the executed Stockholders Agreement and Put Option as required by 7.2.5. (b) As to Buyer. Subject to the fulfillment of all of the conditions set forth in Section 7.2 and the delivery of all certificates and opinions required thereby, except such conditions, certificates, and opinions as may be waived by Buyer in writing, Seller shall deliver to Buyer: (xxi) assignments of Sellers' Interests and all other good and sufficient instruments of transfer and conveyance as may be necessary in Buyer's opinion to vest in Buyer good, absolute, and marketable title to the Interests; (xxii) the books and records required by Section 1.2 hereof; (xxiii) the certificate required by Section 7.1.1 hereof; (xxiv) the opinion of counsel required by Section 7.1.2 hereof; (xxv) a certificate dated the Closing Date and signed on behalf of the Partnership by its Sellers attaching (a) (i) a true and correct copy of the Partnership's Partnership Agreement and (ii) certificates of good standing and/or fictitious name certificates certified by the Secretaries of State or other appropriate officials of those states in which the Partnership does business; and (b) specimen signatures of the incumbent officers of the Sellers executing this Agreement and the documents executed and delivered pursuant to or in connection with this Agreement; (xxvi) the executed Stockholders Agreement and Put Option as required by Section 7.1.8; (xxvii) irrevocable proxies signed by Sellers; and (xxviii) Consulting Agreement to be signed by John Johanns. 24 25 ARTICLE 11 CONDUCT OF SELLER AND BUYER AFTER CLOSING 11.1 Post-Closing Conduct Generally. Buyer and each Seller will cooperate upon and after the Closing Date in effecting the orderly transfer of the operations of the Partnership to Buyer. In addition, after the Closing Date, at the request of any party and at the requesting party's expense, but without additional consideration, the other party shall execute and deliver from time to time such further instruments of assignment, conveyance and transfer, shall cooperate in the conduct of litigation and the processing and collection of insurance claims, and shall take such other actions as may reasonably be required to convey and deliver more effectively to Buyer the Interests or to confirm and perfect the Buyer's title to the Interests, and otherwise to accomplish the orderly transfer of ownership of the Partnership to Buyer and the business assets and operations of the Partnership as contemplated by this Agreement. 11.2 Non-Competition. For a period of five (5) years from and after the Closing Date (the "Restricted Period"), each Seller and each of John Johanns, and Jeffery Biegert, and any Seller Affiliate covenants and agrees and shall sign and deliver to Buyer at Closing an Acknowledgment and Agreement to that effect that, without the prior written consent of Buyer, such person shall not do any of the following directly or indirectly without the prior written consent of the Partnership: (a) engage or participate in any business activity in the United States or Canada, competitive with the eVS Business, as same are conducted by the Buyer and its affiliates during the Restricted Period (business activity competitive with eVS Business shall not restrict or limit the Sellers, John Johanns and Jeffrey Biegert, and the Seller Affiliates from continuing to conduct in the ordinary course of their business their present activities of manufacturing and marketing feed products and supplements owning and feeding cattle, cow\calf operations, ranches, feed lots and similar aspects of the cattle industry of a nature not similar to the eVS Business) provided that Buyer acknowledges and consents to either John Johanns and/or Jeffrey Biegert individually and/or entities of which either one or both own 20% or more may continue to produce feed and feed supplement with electrolytes in the ordinary course of business in substantially the same mode as is presently being marketed); provided, however, that notwithstanding the foregoing exemptions and proviso, none of either Seller, John Johanns, Jeffrey Biegert or any Seller Affiliate shall be permitted to engage in the sale of any feed supplement or other product which either (i) is advertised or marketed as, or in respect of which claims are asserted that it constitutes, a product which is intended for use, or can be used, either alone or in conjunction with infra-red technology products, in an antemortem environment (i.e., either at the slaughterhouse facilities or within 24 hours prior to shipping to slaughterhouse facilities) to identify and/or treat the effects of stress and other value reducing infirmities in cattle or (ii) a majority of which product is, in fact, fed or administered to cattle in an antemortem environment (i.e., within 24 hours prior to either arriving at the slaughtering facilities or shipping to the slaughtering facilities.) For purpose of this Agreement, the term "Seller's Affiliate" means any entity in which either John Johanns and/or Jeffrey Biegert owns, directly or indirectly, at 25 26 least 20% of the voting control of or equity in and any other entity that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control by John Johanns and/or Jeffrey Biegert. (b) become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) any person, firm, corporation, association or other entity engaged in any business that is competitive with the eVS Business as conducted by the Buyer and its affiliates during the Restricted Period or become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) any portion of the business of any person, firm, corporation, association or other entity where such portion of such business is competitive with the eVS Business as conducted by the Buyer and its affiliates during the Restricted Period with respect to any employment hereunder with respect to any period thereafter, (business activity competitive with eVS Business shall not restrict or limit the Sellers, John Johanns and Jeffrey Biegert, and the Seller's Affiliates from continuing to conduct in the ordinary course of their business their present activities of manufacturing and marketing feed products and supplements owning and feeding cattle, cow\calf operation, ranches, feed lots and similar aspects of the cattle industry of a nature not similar to the eVS Business provided that Buyer acknowledges and consents to either John Johanns and/or Jeffrey Biegert individually and/or entities of which either one or both own 20% or more may continue to produce feed and feed supplements with electrolytes in the ordinary course of business in substantially the same mode as is presently being marketed), provided, however, that notwithstanding the foregoing exemptions and proviso, none of either Seller, John Johanns, Jeffrey Biegert or any Seller Affiliate shall be permitted to engage in the sale of any feed supplement or other product which either (i) is advertised or marketed as, or in respect of which claims are asserted that it constitutes, a product which is intended for use, or can be used, either alone or in conjunction with infra-red technology products, in an antemortem environment (i.e., either at the slaughterhouse facilities or within 24 hours prior to shipping to slaughterhouse facilities) to identify and/or treat the effects of stress and other value reducing infirmities in cattle or (ii) a majority of which product is, in fact, fed or administered to cattle in an antemortem environment (i.e., within 24 hours prior to either arriving at the slaughtering facilities or shipping to the slaughtering facilities). Notwithstanding the foregoing, Seller may not hold more than five percent (5%) of the outstanding securities of any class of any publicly-traded securities of a Partnership that is engaged in activities referenced in Section 11.2 hereof. (c) influence or attempt to influence any supplier, customer or potential customer of the Buyer and its affiliates to terminate or modify any written or oral agreement or course of dealing with the Buyer and its affiliates; or (d) influence or attempt to influence any person to either (i) terminate or modify his employment, consulting, agency, distributorship or other arrangement with the Buyer and its affiliates, or (ii) employ or retain, or arrange to have any other person or entity employ or retain, any person who has been employed or retained by the Partnership or Buyer as an employee, consultant, agent or distributor of the Buyer and its affiliates at 26 27 anytime during the twelve (12) month period immediately preceding the termination of the Restricted Period. It is further understood and agreed that the obligations under this Section shall remain in effect for the entire five-year period indicated, notwithstanding any termination of this Agreement during such period due to a breach hereof by the Sellers. It is also understood and agreed that, in the event of a continuing material breach by a Seller of this Section, Buyer shall be entitled to an injunction restraining such breach. The exercise by Buyer of any or all such rights shall not be construed as prohibiting Buyer from pursuing any other right or remedy it may have with respect to such breach, including the recovery of damages. If any of the provisions of this Section 11.2 are held to be in any respect an unreasonable restriction upon either Seller, then they shall be deemed to extend only over the maximum period of time, geographic area, or range of activities as to which they may be enforceable. In the event that either Seller shall be in violation of the restrictive covenants in this Section 11.2, then the Restricted Period shall be extended with respect to such Seller for a period of time equal to the period of time during which such breach shall occur; and, in the event that Buyer should be required to seek relief from such breach in any court, board of arbitration or other tribunal, then the Restricted Period shall be extended for the period of time required for the pendency of such proceedings, including all appeals. ARTICLE 12 SECURITIES LAW MATTERS 12.1 Investment. Each Seller represents, covenants and agrees as follows: (a) Seller has had access to such information relating to the business and affairs of Buyer which Seller has reasonably requested, and all additional information which Seller has considered necessary to verify the accuracy of the information so received. Seller has had the opportunity to ask questions of and receive answers from the Buyer concerning the terms and conditions of the transactions contemplated by this Agreement. On the basis of the foregoing, Seller is familiar with the operations, business plans and financial condition of Buyer. (b) Seller understands that Buyer will issue and deliver to such Seller the number of eVS Shares indicated on Schedule 1.1, pursuant to this Agreement, without compliance with the registration requirements of the United States Securities Act of 1933 (the "Securities Act"); that for such purpose Buyer will rely upon the representations, warranties, covenants and agreements contained herein; and that such non-compliance with registration is not permissible unless such representations and warranties are correct and such covenants and agreements performed. Seller represents that he/she is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. 27 28 (c) Seller understands that, under existing rules of the United States Securities and Exchange commission (the "SEC") he/she may be unable to sell the Interests except to the extent that the Interests may be sold (i) pursuant to an effective registration statement covering such Interests pursuant to the Securities Act or (ii) in a bona fide private placement to a purchaser who shall be subject to the same restrictions on any resale or (iii) subject to the restrictions contained in Rule 144 under the Securities Act ("Rule 144"). Seller understands that Buyer is under no obligation to effect a registration of the eVS Shares under the Securities Act. (d) Seller is familiar with the provisions of Rule 144 and the limitations upon the availability and applicability of such rule. (e) Seller is a sophisticated investor familiar with the type of risks inherent in the acquisition of restricted securities such as the eVS Shares and its financial position is such that it can afford to retain the eVS Shares for an indefinite period of time without realizing any direct or indirect cash return on its investment. (f) Seller is acquiring the eVS Shares for his/her own account and not with a view to, or for sale in connection with, the distribution thereof within the meaning of the Securities Act. 12.2 Legends on Certificates. During the term of this Agreement, each certificate representing eVS Shares shall, if applicable, contain upon its face or upon the reverse side thereof legends to the following effect: "This Certificate represents securities which are restricted and which are subject to the terms and conditions of a Stockholders Agreement dated July 29, 1998 by and among eMerge Vision Systems, Inc. ("eVS") and the stockholders identified therein (a copy of which is on file at the principal office of eVS) and the rights, privileges and options therein contained. No sale, transfer, assignment, pledge, hypothecation or other disposition of this Certificate or any of the securities represented thereby shall be made except in compliance with the terms and conditions of said agreement. the Shares represented by this Certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), but have been issued pursuant to an exemption from such registration. Neither such Shares nor any interest therein may be sold, transferred, pledged, hypothecated or otherwise disposed of until either (i) the holder thereof shall have received an opinion of counsel for eVS that registration thereof under the act is not required or (ii) a registration statement under the Act covering such 28 29 Shares or such interest and the disposition thereof shall have become effective under the Act." ARTICLE 13 BROKERAGE; EXPENSES; TAXES None of the parties, nor, where applicable, any of their respective shareholders, officers, directors, or employees, has employed or will employ any broker, agent, finder, or consultant or has incurred or will incur any liability for any brokerage fees, commissions, finders' fees, or other fees, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. Except as otherwise expressly provided in this Agreement, each party agrees to bear all the respective costs, fees and expenses of any character incurred by such party including all attorneys' fees and expenses, in connection with this Agreement or the transactions contemplated hereby, except that any such costs, fees and expenses incurred by the Partnership in connection with the transactions contemplated herein shall be paid by the Sellers. Sellers shall pay any applicable sales, documentary, use, filing, transfer, and other taxes payable as a result of the transfer of the Interests. ARTICLE 14 TERMINATION 14.1 Events of Termination. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated by written notice of termination at any time before the Closing Date only as follows: (a) Mutual Consent. By mutual consent of the Partnership, the Sellers and the Buyer; (b) Breach. By the Sellers holding a majority of the Interests, on the one hand, or by Buyer, on the other hand, if the other party shall have (a) misstated any representation or been in breach of any warranty contained herein or (b) been in breach of any covenant, undertaking or restriction contained herein and such misstatement of breach has not been cured by the earlier of (i) ten (10) days after the non-breaching party gives notice to the breaching party of such misstatement or breach of (ii) the Closing; (c) By Buyer. Provided that the Buyer is not in material default hereunder, if all of the conditions precedent set forth in Section 7.1 hereof have not been met prior to 60 days from the execution hereof; 29 30 (d) By Sellers. Provided that the Sellers are not in material default hereunder, if all of the conditions precedent set forth in Section 7.2 hereof have not been met prior to 60 days from the execution hereof; (e) By Either Party. Provided that such party is not in material default hereunder, by either party if the Closing does not occur on or before 60 days from the execution hereof; 14.2 Consequences of Termination. If this Agreement is validly terminated pursuant to Section 14.1 and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect; provided, however, that if Buyer terminates this Agreement because any of the conditions contained in Section 7.1 have not been satisfied or if Seller terminates this Agreement because any of the conditions contained in Section 7.2 have not been satisfied then the terminating party shall have the right to pursue all of its legal remedies for breach of contract and damages; provided further that if this Agreement is validly terminated pursuant to Section 14.1 and the transactions contemplated hereby are not consummated as described above, the provisions of Section 6.2 relating to the obligation of Buyer to keep confidential and not to use certain information obtained by it from Seller and the provisions of Section 14.3 relating to responsibility for expenses shall survive. No party hereto shall have any liability to any other party in respect of a valid termination of this Agreement pursuant to Section 14.1, except to the extent set forth above. 14.3 Expenses if No Closing. If the Closing does not occur and the transactions contemplated hereby are not consummated, then, subject to the right of a non-defaulting party to recover costs and expenses from a defaulting party pursuant to Section 14.2, all costs and expenses incurred in connection with this Agreement shall be paid by the person incurring such expenses, i.e., by Buyer if incurred by Buyer and by Seller if incurred by Seller or the Partnership. ARTICLE 15 OPTION TO PURCHASE TECHNOLOGY 15.1 Option to Purchase Technology. Subject to compliance with the provision of the New Canadian License, or any time after the seventh anniversary of the Closing, if Buyer has not previously consummated a public offering of its securities pursuant to a registration statement filed under the Securities Act, and Buyer's Board of Directors determines in its good faith judgment that Buyer should not commercialize the technologies licensed under the New Canadian License, Sellers shall have the right to purchase from Buyer all of the Technology then comprising the eVS Business by transferring to Buyer all of the eVS Shares other than any eVS Shares previously sold to XL Vision, Inc. pursuant to the Put Option. 30 31 ARTICLE 16 MISCELLANEOUS 16.1 Entire Agreement; Amendments. This Agreement, together with the Stockholders Agreement by and among the Buyer and Sellers of even date herewith, and the collateral documents, constitutes the entire understanding among the parties with respect to the subject matter contained herein and supersedes any prior understandings and agreements among them respecting such subject matter. This Agreement may be amended, supplemented, and terminated only by a written instrument duly executed by all of the parties. 16.2 Headings. The headings in this Agreement are for convenience of reference only and shall not affect its interpretation. 16.3 Gender; Number. Words of gender may be read as masculine, feminine, or neuter, as required by context. Words of number may be read as singular or plural, as required by context. 16.4 Exhibits and Schedules. Each Exhibit and Schedule referred to herein is incorporated into this Agreement by such reference. 16.5 Severability. If any provision of this Agreement is held illegal, invalid, or unenforceable, such illegality, invalidity, or unenforceability will not affect any other provision hereof. This Agreement shall, in such circumstances, be deemed modified to the extent necessary to render enforceable the provisions hereof. 16.6 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given to the person if delivered personally or upon sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), or reputable courier services, charges prepaid, or by facsimile, to such party's address (or to such party's facsimile number). If to Buyer, to: eMerge Vision Systems, Inc. 1305 102nd Terrace Sebastian, FL 32958 Attention: Chuck Abraham, President Fax Number: (561) 589-2049 With a copy to: Pepper Hamilton LLP 3000 Two Logan Square Philadelphia, PA 19103 U.S.A. Attention: Elam M. Hitchner, III, Esquire Fax Number: (215) 981-4750 31 32 If to Sellers or the Partnership, to: Judith Ackland P.O. Box 197 Shickley, NE 68436 With a copy to: Frank C. Heinisch, Attorney at Law P.O. Box 311 Geneva, NE 68361-0311 Larry Cox, CPA P.O. Box 88 Henderson, NE 68371 Jim Titus, Attorney at Law 121 S. 13th Street, #601 P.O. Box 81849 Lincoln, NE 68501-1849 Notice of any change in any such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived by the party entitled to receive such notice. 16.7 Waiver. The failure of any party to insist upon strict performance of any of the terms or conditions of this Agreement will not constitute a waiver of any of its rights hereunder. 16.8 Assignment. No party may assign any of its rights or delegate any of its obligations hereunder without the prior written consent of the other parties hereto. 16.9 Successors and Assigns. This Agreement binds, inures to the benefit of, and is enforceable by the successors and assigns of the parties, and does not confer any rights on any other persons or entities. 16.10 Governing Law. This Agreement shall be construed and enforced in accordance with the law of the State of Delaware. 16.11 No Benefit to Others. The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto and their successors and assigns, and they shall not be construed as conferring and are not intended to confer any rights on any other persons. 16.12 Counterparts. This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when 32 33 executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. The execution of this Agreement by any party hereto will not become effective until counterparts hereof have been executed by all the parties hereto. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. ATTEST eMERGE VISION SYSTEMS, INC. By: By: /s/ Charles L. Abraham ---------------------------- ---------------------------- Name: Name: Charles L. Abraham --------------------------- -------------------------- Title: Title: Chief Executive Officer -------------------------- ------------------------- [EXECUTIONS CONTINUED] 33 34 ATTEST NUTRI-CHARGE, by each of its general partners: ATTEST ATTEST /s/: Judith Ackland /s/: Larry Cox - -------------------------------- -------------------------------- Judith Ackland, Co-Trustee of The Larry Cox, Co-Trustee of The Biegert Family Irrevocable Trust Biegert Family Irrevocable Trust dated June 11, 1998, as Seller dated June 11, 1998, as Seller ATTEST J TECHNOLOGIES, LLC, as Seller By: /s/: Heidi Johanns ---------------------------- Heidi Johanns, Member WITNESS: - ---------------------------- The following persons, intending to be legally bound hereby, execute this Agreement and agree to its terms with respect only to Article 8, Indemnification and, as applicable, Section 11.2, Non-Competition: WITNESS: /s/: John Johanns - ---------------------------- ---------------------------- John Johanns WITNESS: /s/: Jeffrey L. Biegert - ---------------------------- ---------------------------- Jeffrey L. Biegert 34 35 SCHEDULE 1.1: PARTNERSHIP INTEREST TABLE: a. J TECHNOLOGIES, LLC, a South Dakota 50%; 1,000,000 shares eMERGE VISION limited liability company SYSTEMS, INC. common stock b. Judith Ackland and Larry Cox, /Co-Trustees 50% 1,000,000 shares eMERGE VISION of The Biegert Family Irrevocable Trust SYSTEMS, INC. common stock dated June 11, 1998;
35 36 SCHEDULE 3.1: ORGANIZATION, POWER, STANDING AND QUALIFICATION Nutri-Charge is not actively doing business. Nutri-Charge is a South Dakota partnership registered in Nebraska. Recently Amended Certificates of Partnership of Nutri-Charge have been signed evidencing the change of partners. The certificates have not yet been filed in Nebraska and South Dakota. The filing will be done shortly. A Continuation of Certificate of Assumed Business Name was recently filed in Idaho and a Trade Name Registration was recently filed in Colorado. There are no other states in which Nutri-Charge has filed to do business. Nutri-Charge knows of no requirement to qualify to do business in any other states. 36 37 SCHEDULE 3.3 CONTEMPLATED TRANSACTIONS None, except for the consents required by the collaborative research agreement, license and sublicense agreements with the Canadian Government and STS Agriventures, Inc. 37 38 SCHEDULE 3.9 ABSENCE OF UNDISCLOSED LIABILITIES There are no liabilities except those future liabilities created with the Sublicenses with the Canadian Government and STS Agriventures, Inc. Kelly F. Lechtenberg, Midwest Veterinary Services Inc. recently presented a bill for $35,000 for services rendered in a field trial. The bill was presented to John Johanns and Nutri-Charge. The bill will be paid by John Johanns and/or Jeffrey Biegert or an affiliate in the ordinary course of business. Nutri-Charge will not be responsible for the bill. The bill is not in dispute. 38 39 SCHEDULE 3.12 COMPENSATION ARRANGEMENTS In conducting the field tests, affiliates of Nutri-Charge have retained agents and consultants to manufacture the electrolyte product solely for testing purposes and not for marketing. Agents and consultants have been retained by Nutri-Charge affiliates to assist with field tests under the supervision of Ag-Canada. All such agents and consultants have been paid in full and no further obligation is owed to such agents and consultants except for ongoing field trials of the infrared detection technology at Logan Valley Feed Lot under the control of Dr. Kelly Lechtenberg and under the supervision of Ag-Canada. See response in Schedule 3.9. 39 40 SCHEDULE 3.14 LITIGATION, COMPLIANCE WITH LAWS (INCLUDING REGULATORY APPROVALS) Litigation: None. Compliance with Laws. Jeffrey Biegert (Biegert Feeds) obtained approvals from US Federal Drug Administration for the field trials of the Nutri-Charge product. Dr Allan L. Schaefer of Ag Canada has been in charge of all such applications. No final approval has been received from FDA and Department of Agriculture for the manufacture and sale of electrolyte therapy products manufactured pursuant to the Nutri-Charge License, Nutri-Charge Premix manufactured pursuant to the Pre-Mix License and infra-red detection technology manufactured pursuant to the Detection Technology License. Nutri-Charge has relied on STS Atriventures, LTD and the Canadian government to procure such approvals, Nutri-Charge has not obtained any approvals except they assisted in procuring approval for the Nutri-Charge product field trials that were conducted. Nutri-Charge has cooperated and will assist in such application process, but Dr Schaefer has done all the work in making the applications. There has been no application process by Nutri-Charge and no approvals concerning the Infrared Detection Technology. 40 41 SCHEDULE 3.15.1 LISTED RIGHTS The Canadian government owns all patents and intellectual property in accordance with the sublicenses by and between Nutri-Charge, STS and Ag-Canada. STS and Ag-Canada records are a superior primary source of such information. US patent number 5,505,968 for Antemortem Nutrient Supplement for Livestock was issued April 9, 1996 and assigned to Canada. The Method for Detecting Poor Meat Quality in Live Animals, (Infrared Detection Technology) was the subject of Patent applications, US 08/084,993 and Canada 2,099,529. The Canadian trade mark application for NUTRI-CHARGE, is application 727,395. See schedule 3.1 above. The Nutri-Charge trade name is registered in the State of Nebraska. 41 42 SCHEDULE 3.15.2 LICENSES All intellectual property is owned by the Canadian government and Nutri-Charge's rights are created by and subject to the License and Sub-license Agreements. 42 43 SCHEDULE 3.17(A) CONTRACTS "Contracts" include only Collaborative Research Agreements, License and Sublicense Agreements with the Canadian government and STS Agriventures LTD.. 43 44 SCHEDULE 3.17(b) None 44 45 SCHEDULE 3.18 OTHER TRANSACTIONS None 45 46 SCHEDULE 3.20 BANK ACCOUNTS US Bank, P.O. Box 64799, St. Paul, MN 55164; Office Used: US Bank 17th & Farnam, Omaha, NE 68102; Account Name: Nutri-Charge Partnership; Account Number: 1 057 0068 5123 46 47 SCHEDULE 3.22 MATERIAL ADVERSE CHANGE IN FINANCE None 47 48 SCHEDULE 3.25 HAZARDOUS SUBSTANCES None to Partners and Seller's knowledge. No permits or other approvals have been procured under the Reserve Conservation and Recovery Act. 48 49 SCHEDULE 3.26 RELATIONSHIP WITH LICENSEES None, Nutri-Charge has not licensed its sub-license. 49 50 SCHEDULE 3.27 TRANSACTIONS WITH AFFILIATES. Jeff Biegert and John Johanns own in their own right and work together through various organizations in the cattle industry. Directly and indirectly they own or control cow calf operations, ranch operations, feed lot operations, feed cattle, buy, sell cattle, manufacture and market feed and feed supplements and generally deal in and with all aspects of beef production to the point of slaughter. The feed supplements that are produced in the ordinary course of business contain electrolyte substances. Without specifically listing all the entities involved this schedule is a reservation for Jeff Biegert and John Johanns and their numerous and various business entities to continue in the normal and customary course of business their cattle businesses in their current relationships and to create new entities and relationships to continue the same or similar business activities, subject only to any restrictions contained in Section 11.2 hereof. 50 51 SCHEDULE 4.13 [None] 51 52 SCHEDULE 4.14 [None] 52 53 SCHEDULE 5.1 None. 53 54 SCHEDULE 7.1.9 Copy of the Put Option letter agreement is attached hereto. 54 55 EXHIBIT 7.1.2 Opinion of Counsel for the Partnership. Frank C. Heinisch 55 56 EXHIBIT 7.2.2 Opinion of Counsel of Buyer. Pepper Hamilton LLP 56 57 TABLE OF CONTENTS
Page ---- BACKGROUND 2 ARTICLE 1 PURCHASE OF INTERESTS.............................................. 3 1.1 Sale and Purchase ................................................. 3 1.2 Books and Records ................................................. 3 ARTICLE 2 CONSIDERATION...................................................... 3 2.1 Consideration; Payment ............................................ 3 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARTNERSHIP AND SELLERS.......... 5 3.1 Organization, Power, Standing and Qualification ................... 5 3.2 Authorization for Agreement ....................................... 5 3.3 Validity of Contemplated Transactions ............................. 6 3.4 Partnership ....................................................... 6 3.5 Ownership of Interests ............................................ 6 3.6 Title to Properties ............................................... 6 3.7 Real Property ..................................................... 6 3.8 Financial Statements .............................................. 6 3.9 Absence of Undisclosed Liabilities ................................ 7 3.10 Conduct of Business in the United States .......................... 7 3.11 Subsidiaries ...................................................... 7 3.12 Compensation Arrangements ......................................... 7 3.13 Certain Tax Matters ............................................... 7 3.14 Litigation; Compliance with Laws .................................. 8 3.15 Intellectual Property. ............................................ 8 3.16 Specific Patent/USFDA Representations ............................. 9 3.17 Contracts ......................................................... 10 3.18 Other Transactions ................................................ 10 3.19 Product Liability Claims .......................................... 10 3.20 Bank Accounts ..................................................... 11 3.21 No Changes ........................................................ 11 3.22 Copies of Partnership Agreement ................................... 11 3.23 Tangible Assets; Inventory ........................................ 11 3.24 Accounts Receivable ............................................... 11 3.25 Hazardous Substances .............................................. 12 3.26 Relationship With Licensees ....................................... 12 3.27 Transactions With Affiliates ...................................... 12 3.28 Veracity of Statements ............................................ 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER............................ 13 4.1 Organization ...................................................... 13 4.2 Authorization for Agreement ....................................... 13 4.3 Enforceability .................................................... 13 4.4 Litigation ........................................................ 13 4.5 Hazardous Substances .............................................. 13 4.6 Product Liability Claims .......................................... 14
57 58 4.7 Conflict With Authority, Bylaws, Etc .............................. 14 4.8 Acquisition of Interests for Investment ........................... 14 4.9 Capitalization of Buyer ........................................... 14 4.10 10,000,000 shares of blank check preferred stock .................. 14 4.11 Financial Statements .............................................. 15 4.12 Absence of Undisclosed Liabilities ................................ 15 4.13 Certain Tax Matters ............................................... 15 4.14 Litigation: Compliance with Laws .................................. 15 4.15 Property .......................................................... 16 4.16 No Changes ........................................................ 16 4.17 Veracity of Statements ............................................ 16 ARTICLE 5 ACTIVITIES PRIOR TO CLOSING BY SELLER.............................. 16 5.1 Operation of Business ............................................. 17 5.2 Access to Information ............................................. 18 5.3 Best Efforts ...................................................... 18 5.4 Benefit Plans ..................................................... 18 5.5 Notice of Change .................................................. 18 5.6 No Discussions .................................................... 18 5.7 Publicity ......................................................... 19 ARTICLE 6 ACTIVITIES PRIOR TO CLOSING BY BUYER............................... 19 6.1 Best Efforts ...................................................... 19 6.2 Access to Information ............................................. 19 ARTICLE 7 CONDITIONS PRECEDENT TO CLOSING.................................... 19 7.1 Conditions to Obligation of Buyer to Close ........................ 19 7.2 Conditions to Obligation of Sellers to Close ...................... 21 ARTICLE 8 INDEMNIFICATION.................................................... 22 8.1 By Sellers and Individual Indemnitors ............................. 22 8.2 By Buyer .......................................................... 23 8.3 Procedures ........................................................ 23 ARTICLE 9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................... 24 ARTICLE 10 THE CLOSING........................................................ 24 10.1 Time and Place .................................................... 24 10.2 Conduct at Closing ................................................ 24 ARTICLE 11 CONDUCT OF SELLER AND BUYER AFTER CLOSING.......................... 25 11.1 Post-Closing Conduct Generally .................................... 25 11.2 Non-Competition ................................................... 26 ARTICLE 12 SECURITIES LAW MATTERS............................................. 28 12.1 Investment ........................................................ 28 12.2 Legends on Certificates ........................................... 29 ARTICLE 13 BROKERAGE; EXPENSES; TAXES......................................... 30 ARTICLE 14 TERMINATION........................................................ 30 14.1 Events of Termination ............................................. 30 14.2 Consequences of Termination ....................................... 31 14.3 Expenses if No Closing ............................................ 31 ARTICLE 15 OPTION TO PURCHASE TECHNOLOGY...................................... 31 15.1 Option to Purchase Technology ..................................... 31
58 59 ARTICLE 16 MISCELLANEOUS...................................................... 32 16.1 Entire Agreement; Amendments ...................................... 32 16.2 Headings .......................................................... 32 16.3 Gender; Number .................................................... 32 16.4 Exhibits and Schedules ............................................ 32 16.5 Severability ...................................................... 32 16.6 Notices ........................................................... 32 16.7 Waiver ............................................................ 33 16.8 Assignment ........................................................ 33 16.9 Successors and Assigns ............................................ 33 16.10 Governing Law ..................................................... 33 16.11 No Benefit to Others .............................................. 34 16.12 Counterparts ...................................................... 34
59 EX-10.10 11 ASSET PURCHASE AGREEMENT DATED JANUARY 15, 1999 1 EXHIBIT 10.10 ASSET PURCHASE AGREEMENT PRIVATE THIS ASSET PURCHASE AGREEMENT (THIS "AGREEMENT") IS DATED AS OF JANUARY 15, 1999 BY AND AMONG EMERGE VISION SYSTEMS, INC. (FORMERLY ENHANCED VISION SYSTEMS, INC.), A DELAWARE CORPORATION ("SELLER"), AND SPERRY MARINE INC., A DELAWARE CORPORATION ("BUYER"). BACKGROUND Seller is engaged in the manufacture, sale and distribution of the infrared systems that are more particularly described in specifications attached hereto as Schedule 1 (the "IR Systems") for use on marine vessels (the "Marine Business"). The parties hereto wish to provide for the sale by Seller, and the purchase by Buyer, of certain of the assets of Seller and for certain other matters, all as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. SALE OF PURCHASED ASSETS 1.1 Sale and Purchase. At the "Closing" (as defined in Section 2.1) of this Agreement, Seller shall sell, assign, deliver and transfer to Buyer, and Buyer shall purchase from Seller, all of the assets of Seller specifically set forth below (the "Purchased Assets"). Notwithstanding any other provision hereof, Seller shall not sell to Buyer, and the Purchased Assets shall not include, any asset of the Seller not set forth below ("Excluded Assets"). The Purchased Assets are: (a) all of Seller's inventory of IR Systems, including all constituent and unassembled parts owned by Seller at Closing, other than the Purchased IR Systems (as defined below) (the "Inventory"); (b) all of Seller's rights, to the extent assignable, under the Hardware/Software License Agreement, dated July 12, 1996 (the "License Agreement"), between Digital Imaging Inc. ("Digital") and Seller; (c) all tooling owned by Seller used in the manufacture of the IR Systems that is listed or described on Schedule 2 (collectively, "Vendor Tooling"), whether located at Seller's facilities or located at the vendor facility listed on such Schedule; (d) all equipment owned by Seller which is used to test the performance and functionality of the IR Systems that is listed on Schedule 3 (collectively, "Test Equipment"); and 2 (e) all goodwill associated with the Marine Business. 1.2 Excluded Assets. Seller shall not sell, and Buyer shall not purchase, pursuant to this Agreement, any of the following assets: (a) any of the IR Systems (the "Purchased IR Systems") that Seller is selling to Buyer pursuant to the terms of one or more Purchase Orders (including Purchase Order #302388 dated November 23, 1998), as the same may be amended or supplemented from time to time after the date hereof (the "Purchase Order"), between Seller and Buyer, and all Inventory required by Seller to manufacture such Purchased IR Systems; (b) any parts or assemblies that would otherwise be included in the Inventory but which are not required for the manufacture of up to 100 IR Systems and which are identified in writing by Buyer prior to Closing; (c) any other Inventory reasonably determined prior to Closing to be defective that is identified in writing by Buyer prior to Closing; (d) any Test Equipment that Buyer may elect in writing prior to Closing to exclude from the Purchased Assets; and (e) any other asset of Seller not expressly specified in Section 1.1 hereof. 1.3 Assumed and Excluded Liabilities. From and after the Closing, Buyer shall assume and be liable for all of Seller's obligations to be performed after the Closing under the License Agreement, including, without limitation the payment when due of all fees and royalties due Digital thereunder. Except as provided in the immediately preceding sentence, Buyer shall not assume and shall not become liable or responsible in any way for any liabilities or obligations whatsoever, direct or indirect, contingent or otherwise, of Seller or any affiliate of Seller (including, without limitation, any partner, officer, employee, director or agent of Seller) to any person, or for any reason, known or unknown, actual or inchoate, and whether arising from facts or events occurring prior to, on or after the Closing (collectively, the "Excluded Liabilities"). 1.4 Purchase Price. The aggregate purchase price for the Purchased Assets (the "Purchase Price") shall be One Million Eight Hundred Ninety Thousand Nine Hundred Seventy Six Dollars and Sixty Two Cents ($1,890,976.62). Such amount does not include any amounts payable to Seller by Buyer in accordance with the terms of the Purchase Order. Payment of the Purchase Price shall be made by wire transfer of immediately available funds, to such account as shall be specified in writing by Seller to Buyer, and shall be paid, and allocated by the parties for tax purposes, in accordance with the following schedule: Payment Amount Due Date Allocation PRIVATE 1. $200,000 Closing Inventory 2. 2 3 $1,000,000 August 1, 1999 Inventory 3. $412,390 September 1, 1999 Inventory 4.(a) $278,585.62 October 1, 1999 Vendor Tooling and Test Equipment (b) $1 October 1, 1999 Goodwill The Purchase Price shall be adjusted, up or down, based on the difference, if any, between (a) $1,612,390 and the book value of the Inventory on the date of Closing, and (b) $285,999 and the book value of the Vendor Tooling and Test Equipment, each as determined by Seller in accordance with generally accepted accounting principles, consistently applied with the determination of the value of such Inventory on Seller's financial statements. Any necessary adjustment to the Purchase Price on account of subsection (a) above shall be made to the payment due on September 1, 1999 and shall be allocated to the Inventory. Any necessary adjustment to the Purchase Price on account of subsection (b) above shall be made to the payment due on October 1, 1999 and shall be allocated to the Vendor Tooling and Test Equipment. Buyer and Seller shall file all tax returns consistently with the allocations set forth above. SECTION 2. THE CLOSING Section 2.1. Closing. The closing of the purchase and sale of the Purchased Assets hereunder, subject to the terms and conditions set forth herein (the "Closing"), shall take place on February 22, 1999 or such earlier date when the Inventory is shipped to Buyer, at the offices of Seller, commencing at 10:00 A.M. or at such other date, place and time as may be mutually agreed by Buyer and Seller (the "Closing Date"), provided, however, that Seller shall retain possession of, and have the right to use for the manufacture and testing of the Purchased IR Systems, the Vendor Tooling and Test Equipment until ten business days after the all of the Purchased IR Systems are delivered to Buyer pursuant to the Purchase Order. At the Closing, in addition to the other actions contemplated elsewhere herein: (a) Seller shall deliver to Buyer the following: (i) the Purchased Assets to the Charlottesville, Virginia 3 4 location of Buyer; (ii) the Purchase and License Agreement in the form attached hereto as Exhibit A (the "Purchase and License Agreement"), executed by Seller; and (iii) such bills of sale, endorsements, assignments, certificates of title and other instruments of transfer and conveyance as shall be effective to vest title to each of the Purchased Assets in Buyer. (iv) Buyer shall deliver or cause to be delivered the Purchase and License Agreement, executed by Buyer. SECTION 3. REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer that as of the date of this Agreement and as of the Closing Date: 3.1 Legal Status. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to own and lease the Purchased Assets. Seller has not agreed, contingently or otherwise, to share any profits, losses, costs or liabilities of the Marine Business with any other person or entity. The Marine Business is and has been conducted solely by and through the Seller and through or by no other person or entity. 3.2 No Conflict or Violation. Subject to obtaining the necessary approval and consent pursuant to the License Agreement (the "Consent") and in reliance upon Section 4.2 and 4.8 herein, the execution, delivery and performance of this Agreement and the other agreements and instruments contemplated hereby will not: (i) conflict with any of the terms, conditions or provisions of the articles of incorporation or bylaws of Seller; (ii) violate any provision of, or require any consent, authorization or approval under, any law or administrative regulation or any judicial, administrative or arbitration order, award, judgment, writ, injunction or decree, or any governmental permit, license or authorization, applicable or issued to Seller; (iii) conflict with, result in a breach of, constitute a default under (whether by notice or the lapse of time or both), or accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under, any contract, indenture, mortgage, lien, lease, agreement or instrument to which Seller is a party or by which it or any of the Purchased Assets is bound; or (iv) result in the creation of any lien, charge, restriction or encumbrance upon, or any loss of benefit with respect to any of the Purchased Assets. 3.3 Authority and Binding Agreement. Subject to obtaining the Consent, Seller has the full capacity, legal power and authority to execute, deliver and perform this Agreement and its obligations hereunder. Seller has taken all necessary legal and other action to authorize the execution, delivery and performance of this Agreement. This Agreement and all other agreements and instruments to be executed by Seller in connection herewith have been duly executed and delivered by, and constitute the legal, valid and binding obligations of Seller, enforceable against it in accordance with their respective terms. 3.4 Consents, Authorizations and Permits. Except for obtaining the Consent, no consent, waiver or approval of or notice to any person is or will be necessary to 4 5 consummate the transactions contemplated by this Agreement and permit Buyer to employ the Purchased Assets following Closing without restriction, lien or encumbrance. 3.5 Assets. Seller is the sole beneficial and record owner of and has good title to the Purchased Assets, free and clear of all liens, encumbrances, claims, restrictions, liabilities and rights of others, absolute or contingent, against or affecting any of the Purchased Assets. Upon consummation of the Closing, Buyer shall acquire all of Seller's right and title to the Pur chased Assets, free and clear of all liens, encumbrances, claims, restrictions and liabilities of any nature. 3.6 Litigation. There are no, and during the last three years there have not been any claims, actions, suits, proceedings (arbitration or otherwise) or investigations involving or affecting the Marine Business or any of the Purchased Assets before or by any court or governmental agency or instrumentality, or before any arbitrator of any kind. To the best of Seller's knowledge, no such claim, action, suit, proceeding or investigation is presently threatened or contemplated and there are no facts which could reasonably serve as a basis for any such claim, action, suit, proceeding or investigation. 3.7 Contracts. Except for the Purchase Order, Seller has no contracts, leases or agreements of any nature whatsoever (including, without limitation, barter or similar arrangements), or any commitments obligating Seller to purchase any equipment or other assets or to procure services, which relate to the Purchased Assets. Buyer shall have no obligation under or with respect to any such contracts, agreements, orders or obligations. 3.8 Product Warranties and Claims. BUYER ACKNOWLEDGES THAT THE PURCHASED ASSETS ARE BEING ACQUIRED BY IT "AS IS" AND THAT SELLER DOES NOT WARRANT THAT THE INVENTORY IS MERCHANTABLE OR FIT FOR ANY PARTICULAR PURPOSE. THE PARTIES FURTHER AGREE THAT NEITHER THIS AGREEMENT NOR ANY SALE MADE PURSUANT TO THIS AGREEMENT INCLUDES ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. SELLER MAKES NO WARRANTIES AS TO THE CONDITION OR QUALITY OF THE PURCHASED ASSETS. SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller that as of the date of this Agreement and as of the Closing Date: 4.1 Legal Status. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.2 Registered U.S. Entity. Buyer's parent is registered with the U.S. Department of State as a manufacturer and exporter of defense articles under Category XII of the U.S. Munitions List. Buyer is not controlled by any foreign organization, entity, interest or person. For the purpose of this Section, the term "control" means the power, direct or indirect, whether or not exercised, and whether or not exercised or exercisable through the ownership of a majority or a dominate minority of the total 5 6 outstanding voting securities of an issuer, or by proxy voting, contractual arrangements or other means, to determine, direct or decide matters affecting an entity. 4.3 Authority and Binding Agreement. Buyer has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Buyer has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. This Agreement has been and all other agreements and instruments to be executed by Buyer in connection herewith have been (or upon execution and delivery will have been) duly executed and delivered by, and constitute (or upon execution and delivery will constitute) legal, valid and binding obligations of Buyer, enforceable against it in accordance with their respective terms. 4.4 No Conflict or Violation. Neither the execution nor delivery by Buyer of this Agreement, the compliance by Buyer with the terms and conditions hereof nor the consummation by Buyer of the transactions contemplated hereby will: (i) conflict with any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Buyer; (ii) violate any provision of, or require any consent, authorization or approval under, any law or administrative regulation or any judicial, administrative or arbitration order, award, judgment, writ, injunction or decree, or any governmental permit, license or authorization applicable or issued to, Buyer; or (iii) conflict with, result in a breach of, constitute a default under (whether by notice or the lapse of time or both), or accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under any indenture, mortgage, lien, lease, agreement or instrument to which Buyer is a party. 4.5 Consents. No consent, approval or waiver of or notice to any person is or will be necessary or required on the part of Buyer in connection with the authorization, execution, delivery or performance of its obligations hereunder or under the Purchase and License Agreement, or under any document or instrument to be delivered by Buyer in connection herewith or therewith. 4.6 Litigation; Compliance with Laws. No action, suit, claim or inquiry, proceeding or governmental investigation is pending or threatened against or relating to Buyer that would adversely impact its ability to own the Purchased Assets or operate the Marine Business as of the Closing. There is no outstanding order, injunction or decree of any court or governmental agency or authority or self-regulatory body that materially adversely affects Buyer or Buyer's ability to own the Purchased Assets or operate the Marine Business or that would prevent the consummation of the transactions contemplated hereby. Buyer has not engaged in, or is now engaging in, any act of course of conduct in violation of any material respect of any law, regulation, ordinance or other requirement of any governmental body or court which could impair Buyer's ability to consummate the transactions contemplated by this Agreement or the Purchase and License Agreement, own the Purchase Assets or operate the Marine Business as of the Closing, and no notice or claim alleging any such violation has been received by Buyer. 4.7 Financial Capacity. Buyer has, and will maintain, sufficient assets and cash flow to enable it to timely make all payments required under this Agreement to Seller and to perform its obligations under the Purchase and License Agreement. 4.8 Compliance with Export Laws. To the best of Buyer's knowledge, Buyer is in compliance with all laws, rules, regulations, permits, licenses and other requirements 6 7 relating to the export from the United States of goods, technology and/or information ("Export Laws"). To the extent that Buyer is or at any time during the last five years was not in compliance with such Export Laws, Buyer represents that any such noncompliance will have no adverse effect on Seller or Seller's ability to consummate the transactions contemplated hereby and/or enter into and perform its obligations under the Purchase and License Agreement. SECTION 5. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE The obligation of Buyer to purchase the Purchased Assets under this Agreement is subject to the satisfaction, at or before the Closing, of all of the following conditions: 5.1 Accuracy of Representations and Warranties; Performance by Seller. The representations and warranties of Seller contained in this Agreement shall be true in all material respects, except for changes permitted or contemplated by this Agreement, on and as of the time of Closing (except to the extent that they expressly relate to an earlier date). Seller shall have performed and complied with all material covenants, agreements and conditions required by this Agreement to be performed or satisfied by it before or at the Closing. Seller shall have delivered to Buyer a certificate signed by a duly authorized person, dated the Closing Date, certifying to the foregoing effect. 5.2 Absence of Litigation. No action or proceeding before any court or other governmental entity shall have been instituted or threatened by any person or entity (other than Buyer) to restrain or prohibit the transactions contemplated by this Agreement and shall not have been dismissed or resolved. 5.3 Consents. The Consent and to the extent required, any statutory and regulatory consents, approvals, permits, orders and actions required by any governmental entity shall have been obtained. 5.4 Purchase and License Agreement. Seller shall have entered into the Purchase and License Agreement. 5.5 Waiver of Conditions. Notwithstanding the failure of any one or more of the foregoing conditions, Buyer may proceed with the Closing without satisfaction, in whole or in part, of any one or more of such conditions and without written waiver. To the extent that Buyer proceeds with the Closing, Buyer shall be deemed to have waived for all purposes any rights or remedies it may have against Seller by reason of the failure of any such conditions. SECTION 6. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE 6.1 Accuracy of Representations and Warranties; Performance by Buyer. The representations and warranties of Buyer contained in this Agreement shall be true in all material respects, except for changes permitted or contemplated by this Agreement, on and as of the time of Closing (except to the extent that they expressly relate to an earlier date). Buyer shall have performed and complied with all material covenants, agreements 7 8 and conditions required by this Agreement to be performed or satisfied by it before or at the Closing. Buyer shall have delivered to Seller a certificate signed by a duly authorized officer of Buyer, dated the Closing Date, certifying to the foregoing effect. 6.2 Absence of Litigation. No action or proceeding before any court or other governmental entity shall have been instituted or threatened by any person (other than Seller) to restrain or prohibit the transactions contemplated by this Agreement and shall not have been dismissed or resolved. 6.3 Consents. The Consent and to the extent required, any statutory and regulatory consents, approvals, permits, orders and actions required by any governmental entity shall have been obtained. 6.4 Purchase and License Agreement. Buyer shall have entered into the Purchase and License Agreement. 6.5 Financing Statement. Buyer shall have executed a financing statement reflecting the security interest granted to Seller pursuant to Section 7.7. 6.6 Waiver of Conditions. Notwithstanding the failure of any one or more of the foregoing conditions, Seller may proceed with the Closing without satisfaction, in whole or in part, of any one or more of such conditions and without written waiver. To the extent that Seller proceeds with the Closing, Seller shall be deemed to have waived for all purposes any rights or remedies it may have against Buyer by reason of the failure of any such conditions or the breach of any such representations. SECTION 7. COVENANTS; CERTAIN AGREEMENTS 7.1 Use of Name. From and after the Closing, Seller shall not use for any purpose the name "AMIRIS" or any similar sounding name or any variant thereof. 7.2 Employee Access and Participation. Seller shall assist Buyer in the training of its employees in the manufacture and testing of the Purchased IR Systems by permitting designated employees of Buyer who have signed a nondisclosure agreement in the form attached hereto as Exhibit B, to participate in the manufacture and testing of the Purchased IR Systems at Seller's Sebastian, Florida facility. Buyer shall be solely responsible for all expenses (e.g., travel, lodging and compensation expenses) incurred by such employees in traveling to and participating in such assembly. 7.3 Support Documentation. Seller shall, no later than seven days after the date of execution hereof, provide Buyer with written copies of the latest revision level of the following: (a) the technical data packages applicable to the manufacture of the IR Systems; (b) the manufacturing assembly procedures related to the IR Systems; and (c) the test procedures used to determine the functionality and performance of the IR Systems. 7.4 Engineering Support Personnel. For a 120 day period, commencing on the Closing Date, Seller shall make available to Buyer the services of up to three full-time engineers employed by Seller who shall, upon the written request of Buyer, work at Buyer's Charlottesville, Virginia facility during normal business hours to train and 8 9 support the transfer of the manufacture and assembly processes of the IR Systems to such facility. Seller shall be solely responsible for all compensation expenses of such engineers and Buyer shall be responsible for all travel, lodging and other similar expenses incurred by Seller and/or such engineers in fulfilling their obligations under this Section 7.4. 7.5 Engineering and Drafting Services. For a one year period, commencing on the date hereof, upon Buyer's reasonable written request, accompanied by an appropriate statement of work specifying in reasonable detail the work to be performed and the requested schedule for completion thereof, Seller shall provide up to 4,160 hours of engineering and/or drafting services at the following rates: (a) $100 per hour for services that are performed by an engineer and (b) $50 per hour for services that are performed by a draftsman. Within ten days after receipt of such statement of work and requested schedule, Seller shall provide Buyer with an estimate of the number of hours required to complete such work (which estimate Seller shall not exceed without Buyer's consent) and a proposed schedule for completion of such work. Buyer shall also pay any travel, lodging or other similar charges incurred by Seller during the course of providing such services hereunder. After the end of such one-year period, Seller may, in its sole discretion, agree to provide additional engineering and drafting services to Buyer at such prices and on such other terms and conditions as shall be determined solely by Seller. 7.6 Maintenance of Technical Information. Seller shall maintain and, as requested by Buyer, upgrade, at Seller's cost, all schematics relating to the IR Systems currently maintained by it, in electronic format, for a period not to exceed one year from the date hereof. Seller shall have no obligation to perform such maintenance and upgrades subsequent to the expiration of such one year period. 7.7 Security Interest. Buyer hereby grants to Seller, to secure all of Buyer's liabilities hereunder and under the Purchase and License Agreement, a first and prior security interest under the Uniform Commercial Code, as adopted in the State of Florida (the "UCC"), in (i) all of the Purchased Assets, (ii) all proceeds of the Purchased Assets, and (iii) all products of the Purchased Assets (collectively, the "Collateral"). So long as any liability to Seller is outstanding hereunder or under the Purchase and License Agreement, Buyer will not, without the prior written consent of Seller, which may be withheld in its sole discretion, permit any lien or encumbrance to attach to the Collateral, or any levy to be made thereon, or any financing statement (except Seller's statement) to be on file with respect thereto. Buyer represents that the location where the Collateral will be kept is 1070 Seminole Trail, Charlottesville, Virginia 22901. Buyer will keep the Collateral, to the extent applicable, in good condition and repair, reasonable wear and tear excepted, and will keep the Collateral insured for the benefit of Seller (to which loss shall be payable) in such amounts, with such companies and against such risks as may be satisfactory to Seller, pay the cost of insurance and deliver certificates evidencing such insurance to Seller. Buyer hereby assigns to Seller all right to receive the proceeds of such insurance. Buyer will, upon Seller's request, join with Seller in executing a financing statement, in form satisfactory to Seller, and such continuation statements and other instruments as Seller may from time to time request and pay the cost of filing the same in any public office deemed advisable by Seller. Seller may, upon reasonable notice, inspect and check the Inventory, Vendor Tooling and Test Equipment. If at any time, Buyer fails to pay any amount due to Seller hereunder or under the Purchase and 9 10 License Agreement, all liabilities of Buyer to Seller shall immediately become due and payable, and Seller may (in addition to any other rights and remedies which it may have) immediately and without demand exercise any and all of the rights and remedies granted to a secured party upon default under the UCC. 7.8 Export Controls. Buyer acknowledges that certain of the Purchased Assets that Buyer may receive from Seller under this Agreement are controlled under laws and regulations of the U.S. Government that prohibit or restrict the export of technology and certain other activities. Buyer further acknowledges and agrees that such laws and regulations may require that Buyer obtain a license from the U.S. Government before the Purchased Assets or products made therefrom are sold, leased, sublicensed or otherwise transferred to a foreign person. Seller shall be excused from performance under this Agreement or under any other agreement, and shall not be liable or accountable to Buyer for any loss or damage, including lost profits or other indirect or incidental damages, to the extent that an act or omission of the U.S. Government (including acts or omissions of Congress and the judiciary) or any law or regulation restricts, prohibits or delays Seller's performance of an obligation under this Agreement or restricts or limits Buyer's use or transfer of the Purchased Assets or any product made therefrom. Notwithstanding anything to the contrary contained herein, in the event Buyer is required to respond to inquiries from a U.S. Government Agency relating to the export of the Purchased Assets, Seller shall provide reasonable assistance to Buyer in responding thereto at Buyer's sole expense. SECTION 8. INDEMNIFICATION 8.1 Indemnification by Seller. Seller shall indemnify and hold Buyer and its officers, directors, shareholders and affiliates harmless from and against and in respect of any and all losses, costs, expenses, claims, damages, deficiencies, liabilities and obligations, including costs of investigation and defense, and reasonable attorneys' fees and expenses but excluding incidental or consequential damages ("Damages"), which Buyer or any such person may suffer, incur, or become subject to, arising out of, based upon or otherwise in respect of: (i) any liabilities or obligations of, or claims against, Seller, whether accruing prior to or after Closing, known or unknown, of any nature whatsoever, including, without limitation, Excluded Liabilities and liabilities of Seller to its creditors; (ii) any breach of any representation or warranty of Seller under this Agreement or the other documents and agreements contemplated hereby; or (iii) non fulfillment of any covenant on the part of Seller under this Agreement or the other documents and agreements contemplated hereby. 8.2 Indemnification by Buyer. Buyer shall indemnify and hold Seller, and its officers, directors and partners harmless against and in respect of any and all Damages which Seller or any such person may suffer, incur or become subject to arising out of, based upon or otherwise in respect of (i) any breach of any representation or warranty of Buyer, (ii) nonfulfillment of any covenant on the part of Buyer under this Agreement, (iii) the Assumed Liabilities, and (iv) any and all liabilities, obligations, or claims arising from facts or events occurring after the Closing in connection with Buyer's ownership or operation of the Marine Business. 10 11 8.3 Indemnification Procedures. (a) Any party seeking indemnification pursuant to this Section 8 (the "Indemnified Party") shall notify the other party or parties from whom such indemnification is sought (the "Indemnifying Party") of the Indemnified Party's assertion of such claim for indemnification, specifying the basis of such claim. The Indemnified Party shall thereupon give the Indemnifying Party reasonable access to the books, records and assets of the Indemnified Party which evidence or support such claim or the act, omission or occurrence giving rise to such claim. (b) Each Indemnified Party shall promptly notify the Indemnifying Party of the assertion by any third party of any claim with respect to which the indemnification set forth in this Section 8 relates (which shall also constitute the notice required by Section 8.3(a)). The Indemnifying Party shall have the right, upon notice to the Indemnified Party within ten business days after the receipt of any such notice, to undertake the defense of or, with the consent of the Indemnified Party (which consent shall not unreasonably be withheld or delayed), to settle or compromise such claim. The failure of the Indemnifying Party to give such notice and to undertake the defense of or to settle or compromise such a claim shall constitute a waiver of the Indemnifying Party's rights under this Section 8.3(b) and shall preclude the Indemnifying Party from disputing the manner in which the Indemnified Party may conduct the defense of such claim or the reasonableness of any amount paid by the Indemnified Party in satisfaction of such claim. The election by the Indemnifying Party, pursuant to this Section 8.3(b) to undertake the defense of a third-party claim shall not preclude the party against which such claim has been made also from participating or continuing to participate in such defense, so long as such party bears its own legal fees and expenses for so doing. (c) All claims for breach of any representation or warranty made by any party must be asserted not later than two years from the Closing Date, and no party shall be entitled to indemnity hereunder or other relief at law or in equity for any such claims asserted after that date. (d) This Section 8 shall not impose any time limitation on the assertion of claims for breach of covenant made by any party or for claims for indemnification asserted by Buyer against Seller based upon the assertion against Buyer of any claim with respect to an Excluded Liability or for claims for indemnification asserted by Seller against Buyer based upon the assertion against Seller of any claim with respect to an Assumed Liability or facts or events occurring after the Closing in connection with Buyer's ownership or operation of the Marine Business. (e) The rights of indemnification hereunder are not exclusive of any other rights a party hereto may have, whether at law or in equity. SECTION 9. MISCELLANEOUS 9.1 Further Assurances. Seller shall, from time to time at the request of Buyer, and without further consideration, provide to Buyer such information relating to 11 12 the Purchased Assets, and execute and deliver to Buyer such further instruments of assignment, transfer, conveyance and confirmation, and take such other action as Buyer may reasonably request in order more effectively to transfer title to the Purchased Assets or to effectuate the purposes of this Agreement or the other documents and agreements contemplated hereby. To the extent Seller is unable to obtain the Consent through the use of all reasonable efforts prior to Closing, Seller shall (i) if permitted pursuant to the terms of the License Agreement, use all reasonable efforts to provide Buyer with the full benefit such agreement, (ii) cooperate in any lawful arrangement designed to provide such benefits to Buyer and (iii) enforce at the request and expense of Buyer any rights of Seller arising from the License Agreement. Buyer shall use reasonable best efforts to obtain, on or before the Closing, a guarantee from Litton Industries, Inc. of the full performance when due of all of Buyer's obligations hereunder and pursuant to the Purchase and License Agreement, the Purchase Order and each of the other agreements and transactions contemplated hereby. 9.2 Survival of Representations and Warranties. The representations and warranties made by each party in this Agreement or in any document delivered hereto, shall survive the Closing for a period of one year, and notwithstanding any investigation conducted before or after the Closing or the decision of any party to complete the Closing, each party hereto shall be entitled to rely upon the representations and warranties of the other party and to obtain indemnification for any breach thereof. 9.3 Notices. All notices or other communications permitted or required hereunder shall be in writing and shall be sufficiently given if and when hand delivered to the persons set forth below or if sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested, or by telegram, telecopy or telex, receipt acknowledged, addressed as set forth below or to such other person or persons and/or at such other address or addresses as shall be furnished by any party hereto to the others. Any such notice or communication shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor in all other cases. If to Buyer: Sperry Marine Inc. 1070 Seminole Trail Charlottesville, Virginia 22901 Attention: Carlton Carrol Telephone No.: 804-974-2539 Telecopier No.: 804-974-2480 With a copy to: Gerald L. Lett, Esq. Deputy Director, Intellectual Property Law 1500 PRC Drive MS 6E2 12 13 McLean, VA 22102-5050 Telephone No.: 703-556-2790 Telecopier No.: 703-556-2527 If to Seller: eMerge Vision Systems, Inc. c/o XL Vision, Inc. 10315 102nd Terrace Sebastian, Florida 32958 Attention: Mike Janney Telephone No.: 561-589-5310 Telecopier No.: 561-589-3779 With a copy to: Karen M. Keating, Esq. Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Telephone No.: 610-254-4106 Telecopier No.: 610-254-4376 9.4 Assignment and Benefit. Neither Buyer nor Seller shall assign, delegate or otherwise transfer any obligations under this Agreement without the written consent of the other. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon, the parties hereto and each of their respective permitted successors and assigns. This Agreement shall not be construed as giving any person other than the parties hereto and their permitted successors, heirs and assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any of the provisions herein contained. This Agreement is intended to be for the sole and exclusive benefit of the parties hereto and their permitted successors, heirs and assigns and for the benefit of no other person or entity. 9.5 Entire Agreement. This Agreement, together with the Purchase and License Agreement and all other agreements, exhibits, schedules and certificates referred to herein or delivered pursuant to hereto, constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and under standings with respect thereto. Any amendment, modification, or waiver of this Agreement shall be in writing. Unless expressly provided, the waiver by a party of any breach of any provision of this Agreement shall not constitute or operate as a waiver of any other breach of such provision or of any other provision hereof, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other provision hereof. 9.6 Fees and Expenses. Seller and Buyer shall each be responsible for and bear all of their own costs and expenses incurred in connection with the sale 13 14 of the Purchased Assets. 9.7 Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with the internal laws of the State of Florida, without giving effect to otherwise applicable principles of conflict of law. 9.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same agreement. 9.9 Effect of Headings. The subject headings of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 9.10 Incorporation by Reference. The schedules and exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. [Intentionally left blank] 14 15 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement, all as of the day and year first above written. EMERGE VISION SYSTEMS, INC. By: /s/: T. Michael Janney --------------------------------- Name: T. Michael Janney --------------------------- Title: Chief Financial Officer --------------------------- SPERRY MARINE INC. By: C. Graham ---------------------------- Name: C. Graham ---------------------- Title: Manager --------------------- 15 16 SCHEDULE 1 IR SPECIFICATIONS The IR System is comprised of the following: AMIRIS System #105190000 NSK 1000 System #105190001 FROS System #105594000 Three Field of View Assembly #105235 CCD Overlay #105504 16 17 SCHEDULE 2 VENDOR TOOLING PRIVATE ITEM # PART NUMBER DESCRIPTION TOOL VENDOR VALUE 1 105097000 HEATSINK LID MACHINED MILLING FIXTURE RUOFF & SONS $ 376.00 2 105100000 ENDCAP, PAN & TILT 17 18 MILLING FIXTURES S. ENGINEERING $ 2,493.00 3 105149000 HOUSING, AZ-EL MILLING FIXTURES S. ENGINEERING $ 2,494.12 4 105224000 GEAR SECTOR GEAR CUTTING FIXTURE PEERLESS $ 313.00 5 105224000 GEAR SECTOR GEAR HOB PEERLESS $ 313.00 6 105224000 GEAR SECTOR 18 19 GEAR MILLING FIXTURE PEERLESS $ 314.00 7 105241000 MIRROR HOUSING CASTING WAX INFECTION MOLD AIC $ 5,580.00 8 105266000 CELL, LENS, 3X, CASTING STRAIGHTENING MANDREL NU CAST $ 650.00 9 105266000 CELL, LENS, 3X, CASTING WAX INJECTION MOLD NU CAST $ 7,250.00 10 105434000 19 20 AZ-EL HOUSING CASTING WAX INJECTION MOLD AIC $ 12,870.00 11 105440000 CAMERA HOUSING CASTING WAX INFECTION MOLD NU CAST $ 16,950.00 12 105456000 LID, HEATSINK CASTING STRAIGHTENING MANDREL NU CAST $ 950.00 13 105456000 LID, HEATSINK CASTING WAX INJECTION MOLD NU CAST $ 12,050.00 20 21 14 105457000 ENDCAP CASTING WAX INJECTION MOLD AIC $ 6,750.00 15 105458000 SHAFT, AZIMUTH-CASTING 1 CAVITY MANUAL DIE SOUTHERN TOOL $ 3,100.00 16 105505000 CA, GIMBEL/CAMERA CONNECTOR MOLD (10EA) WPI $ 1,072.50 17 105560000 CA, GIMBEL/CAMERA, 25 PIN CONNECTOR MOLD (10EA) WPI $ 21 22 1,170.00 Subtotal $ 74,695.62 Material Handling % 11.5% Material Handling % $ 8,590.00 Total Cost for Tooling $ 83,285.62 22 23 SCHEDULE 3 TEST EQUIPMENT PRIVATE Relay Lens Alignment Fixture Auto Collimator $ 10,000 Sissors Jack $ 700 Misc Optical Mounts & Cables $ 4,000 IR Optical Imager (105462) $ 24,000 Power Supply (+15VDC @ 2 Amps) $ 600 PC & Monitor & Video Monitor $ 13,000 23 24 6 inch collimator (included in above amount) 3 FOV IR and Visible Alignment Fixture IR Target Wheel $ 5,000 8" Collimator $ 14,000 Sissors Jack $ 700 Misc optical Mounts $ 2,000 Power Supply (+24 VDC) $ 600 Optical Bench (needed to mount both alignment fixtures) $ 16,000 Quad Optical Bench Test Fixture 24 25 $ 19,100 Leak Detector Leak Detector $ 21,000 Sterling Charging Station $ 3,000 Power Supply Load Bank $ 2,000 Camera Box Charging Station $ 800 PRIVATE PRIVATE Flow Bench $ 4,500 Engineering System $ 54,300 PRIVATE TOTAL $ 195,300 25 26 EXHIBIT A PURCHASE AND LICENSE AGREEMENT 26 27 EXHIBIT B NONDISCLOSURE AGREEMENT THIS NONDISCLOSURE AGREEMENT (this "Agreement") is made and entered into as of the day of , 1999, by and between ___________________, a Delaware corporation (the "Corporation"), and ("Disclosee"). BACKGROUND Disclosee acknowledges that (i) Disclosee will acquire unique knowledge of the business and operations of the Corporation, (ii) Disclosee will develop or acquire during the term of his or her visit to the Corporation, rights and information which are proprietary in nature to the Corporation, and (iii) the provisions contained in this Agreement are required in order to preserve for the Corporation the valuable and legitimate rights of the Corporation. NOW THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. Confidentiality. Disclosee acknowledges and agrees that in the course of, or incident to, the performance of this Agreement, the Corporation may provide to Disclosee or Disclosee may have access to, trade secrets, proprietary and other confidential information of the Corporation. For purposes of this Agreement, the term "confidential information" shall mean all information concerning the business, technology or affairs of the Corporation and/or its affiliates and all information received from third parties and held in confidence by the Corporation and/or its affiliates, including, without limitation, client lists and all other information relating to existing and potential clients, suppliers, markets, contracts, prices, software, requirements, strategies, products, technology, know-how, information, data, processes, inventions, development, formulations, applications and methods of design and development, except any information that is shown to have been voluntarily disclosed to the public by the Corporation, to have been independently developed and disclosed by third parties or to have otherwise entered the public domain by lawful means. Disclosee recognizes and agrees that the confidentiality of the confidential information is necessary to the ability of the Corporation to compete effectively with its competitors. In light of the foregoing, Disclosee agrees that: (a) During the term of this Agreement and at all times thereafter, Disclosee will hold confidential information in the strictest confidence and will not, without the prior written consent of the Corporation, disclose or publish, and shall take all reasonable precautions to prevent any of Disclosee's employer's, partners, associates or agents from disclosing or publishing, any portion thereof to any person or 27 28 entity (which terms, as used in this Agreement, shall include, without limitation, any individual, firm, corporation, association or group) except as required by applicable law or legal process as to which he or she will give the Corporation prompt notice and consult with it on the possibility of seeking a protective order or other means to preserve the confidentiality of the information required to be disclosed; and (b) Upon expiration or termination of this Agreement for any reason whatsoever, Disclosee will immediately return to the Corporation all documents or other tangible records, and any and all copies thereof, within Disclosee's possession, custody, or control, containing or reflecting any confidential information. Section 2. Breach of Conditions. Disclosee acknowledges that upon the breach of any of the provisions of this Agreement the Corporation would sustain irreparable harm, and, therefore, Disclosee agrees that in addition to any other remedies which the Corporation may have under this Agreement or otherwise upon such breach, the Corporation shall be entitled to apply to any court of competent jurisdiction for equitable relief, including specific performance and injunctions restraining Disclosee from committing or continuing any such violation of this Agreement. Section 3. Interpretation. If any provision of this Agreement is held to be invalid or unenforceable by a judicial order for any reason, such action shall not affect the enforceability of the remaining provisions hereof and, without limiting the foregoing, any such holding shall in no event preclude the Corporation from enforcing the provisions hereof for such term, in such territory and to such extent not inconsistent with or prohibited by said judicial order. If any provision, or part thereof, however, is held to be unenforceable because of the duration thereof or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and/or to delete specific words or phrases, and in its reduced form such provision shall then be enforceable. Section 4. Binding Effect. This Agreement shall be binding on the respective successors, assigns, heirs, executors and administrators of the parties hereto. Section 5. Entire Agreement. This Agreement constitutes the entire understanding and agreement between the parties with respect to the matters contemplated herein and shall not be modified or amended except by the written agreement of the parties. Section 6. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Florida, without reference to the principles of conflicts of laws otherwise applicable therein. 28 29 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. By: Name: Title: [Signature] [Print Name] 29 EX-10.11 12 PURCHASE & LICENSE AGREEMENT DATED JANUARY 15,1999 1 EXHIBIT 10.11 PURCHASE AND LICENSE AGREEMENT THIS PURCHASE AND LICENSE AGREEMENT (this "AGREEMENT") is made as of January 15, 1999 by and between SPERRY MARINE, INC., a Delaware corporation ("SPERRY"), and eMERGE VISION SYSTEMS, INC. (formerly Enhanced Vision Systems, Inc.), a Delaware corporation ("eVS"). BACKGROUND WHEREAS, eVS is engaged in the manufacture, sale and distribution of the infrared systems that are more particularly described in specifications attached hereto as Schedule 1 (the "IR SYSTEMS") for use on marine vessels (the "MARINE BUSINESS"); and WHEREAS, Sperry and eVS have entered into an Asset Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of the date hereof (the "EFFECTIVE Date"), whereby Sperry will purchase certain assets of eVS used in the Marine Business; and WHEREAS, eVS has developed and is the owner of information and technology pertaining to the design, manufacture and assembly of the IR Systems; and WHEREAS, Sperry desires and is willing to devote reasonable efforts to design, manufacture, assemble and sell the IR Systems in the Territory (as herein defined) using the information and technology owned by eVS; and WHEREAS, as contemplated by the Purchase Agreement, eVS is willing to grant to Sperry, and Sperry is willing to acquire from eVS, the right and exclusive license to use and, subject to satisfaction of certain conditions, to purchase the eVS technology and information to design, manufacture, assemble and sell IR Systems in the Territory, subject to the terms and conditions herein contained; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1. Each reference in this Agreement to: "Affiliate" shall mean any person or entity that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such person or entity, and shall be presumed to include any other entity in which at least 20% of the equity interests are held, directly or indirectly, by such person or entity. 2 "Consent" shall have the meaning set forth in Section 2.6. "Effective Date" shall have the meaning set forth in the Background section. "Errors" shall have the meaning set forth in Section 8.2. "Field of Use" shall mean all applications except biological, medical and human and animal health measurement and monitoring. "Intellectual Property" means the proprietary information of eVS relating to the assembly, design and manufacture of the IR Systems, including without limitation, all lens prescriptions, electronic schematics, source code for all software contained in an IR Systems, related manufacturing and engineering documentation, formulae, processes, characteristics, raw material data, know how, experience, and trade secrets which pertain to the use of the IR Systems or other Proprietary Information of eVS relating to the design, assembly and manufacture of the IR Systems. "IR Systems" shall have the meaning set forth in the Background section. "License" shall have the meaning set forth in Section 4.1. "Proprietary Information" shall have the meaning set forth in Section 7.1. "Royalty" shall have the meaning set forth in Section 8.1. "Sales Price" shall have the meaning set forth in Section 8.1. "Term" shall have the meaning set forth in Section 11.1. "Territory" means the entire world. "Transfer" shall have the meaning set forth in Section 9.1. "Units" shall have the meaning set forth in Section 8.1. 2 3 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF eVS eVS represents and warrants to Sperry as follows: 2.1. Power and Authorization. eVS has the full capacity, legal right, power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly and validly executed and delivered by eVS and constitutes the legal, valid and binding obligation of eVS and is enforceable against it in accordance with its terms. 2.2. Ownership. eVS legally and beneficially owns the entire right, title and interest in and to the Intellectual Property, including the right to assign rights thereto in accordance with this Agreement and the right to preclude the use and disclosure of the Intellectual Property by third parties. 2.3. No Litigation. There are no judicial or administrative actions, suits, claims, proceedings or governmental investigations pending or, to the best of eVS' knowledge, threatened, against eVS with respect to any of the Intellectual Property, either at law or in equity, before any court or administrative agency or before any governmental department, commission, board, bureau, agency or instrumentality of any jurisdiction, and eVS does not believe or have reason to believe that there is any basis or grounds for any such action, suit, claim, proceeding or investigation. 2.4. No Conflicts. Except for the consent required pursuant to the Hardware/Software License Agreement dated July 12, 1996 between Digital Imaging Inc. and Enhanced Vision Systems, Inc. (the "CONSENT") and in reliance on Sperry's representations contained in Sections 3.6 and 3.7 herein, neither the execution nor delivery of this Agreement, nor the consummation of the transactions herein contemplated, nor the fulfillment of or compliance with the terms and provisions hereof will (a) violate any provision of law, administrative regulation or court decree applicable to eVS, or (b) conflict with or result in a breach of any of the terms, conditions or provisions of or constitute a default under any organizational document of eVS, or of any agreement, commitment or instrument to which eVS is a party. 2.5. No Adverse Contracts. Except for the Consent, eVS is not subject to any contract or agreement affecting the Intellectual Property that will preclude or restrict in any way the performance of eVS' obligations, or adversely affect Sperry's rights, under this Agreement. 3 4 2.6. Trademark. To the best of eVS' knowledge, eVS has the right to use without consideration the name "AMIRIS" in the regions in which it has been used to date, free and clear of any lien, security interest, restriction, encumbrance or other adverse claim. eVS has not granted or licensed to any person any rights with respect to such name and no other person has any rights in or to such name. 2.7. Compliance with Export Laws. eVS is, and at all times during the last five years has been, in compliance with all United States laws and regulations relating to the export from the United States of the IR Systems. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SPERRY Sperry represents and warrants to eVS as follows: 3.1. Power and Authorization. Sperry has the full capacity, legal right, power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly and validly executed and delivered by Sperry and constitutes the legal, valid and binding obligation of Sperry and is enforceable against it in accordance with its terms. 3.2. No Litigation. There are no judicial or administrative actions, suits, claims, proceedings or governmental investigations pending or, to the best of Sperry's knowledge, threatened, against Sperry that would adversely impact its ability to operate the Marine Business as of the Effective Date, either at law or in equity, before any court or administrative agency or before any governmental department, commission, board, bureau, agency or instrumentality of any jurisdiction, and Sperry does not believe or have reason to believe that there is any basis or grounds for any such action, suit, claim, proceeding or investigation. 3.3. No Default. Sperry is not in default with respect to any term or provision of any organizational document, mortgage, indenture, statute, rule or regulation applicable to it, or with respect to any order, writ, injunction, decree, rule or regulation of any court or administrative agency, which could preclude or in any way restrict the performance of Sperry's obligations, or adversely affect eVS' rights, under this Agreement. 3.4. No Adverse Contracts. Sperry is not subject to any contract or agreement that will preclude or restrict in any way the performance of Sperry's obligations, or adversely affect eVS' rights, under this Agreement. 4 5 3.5. No Conflicts. Neither the execution nor delivery of this Agreement, nor the consummation of the transactions herein contemplated, nor the fulfillment of or compliance with the terms and provisions hereof will (a) violate any provision of law, administrative regulation or court decree applicable to Sperry, or (b) conflict with or result in a breach of any of the terms, conditions or provisions of or constitute a default under any organizational document of Sperry, or of any agreement, commitment or instrument to which Sperry is a party or by which it is bound. No consent or approval of the shareholders of Sperry or of any public authority or other person that has not been obtained is required as a condition to the validity or enforceability against it of this Agreement. 3.6. U.S. Entity. Sperry's parent is registered with the U.S. Department of State as a manufacturer and exporter of defense articles under Category XII of the U.S. Munitions List. Sperry is not controlled by an foreign organization, entity, interest or person. For the purpose of this Section, the term "control" means the power, direct or indirect, whether or not exercised, and whether or not exercised or exercisable through the ownership of a majority or a dominate minority of the total outstanding voting securities of an issuer, or by proxy voting, contractual arrangements or other means, to determine, direct or decide matters affecting an entity. 3.7. Compliance with Export Laws. To the best of Sperry's knowledge, Sperry is in compliance with all laws, rules, regulations, permits, licenses and other requirements relating to the export from the United States of goods, technology and/or information ("Export Laws"). To the extent that Sperry is or at any time during the last five years was not in compliance with such Export Laws, Sperry represents that any such noncompliance will have no adverse effect on eVS or eVS's ability to consummate the transactions or perform its obligations contemplated herein. ARTICLE 4 GRANT OF LICENSE 4.1. Grant of License. Subject to the terms and conditions herein contained, eVS hereby grants to Sperry, and Sperry hereby accepts, an exclusive, nontransferable right and license to employ the Intellectual Property made available under this Agreement to design, manufacture and assemble the IR Systems within the Territory for sale exclusively in the Territory within the Field of Use (the "LICENSE"). 4.2. Restrictions on Grant. Nothing contained in this Agreement shall be construed as granting Sperry any right or license to manufacture or otherwise produce, cause to be manufactured or otherwise produced, or to sell or knowingly cause to be sold, any of the other products currently produced or owned by eVS. 5 6 ARTICLE 5 DISCLOSURE OF TECHNOLOGY BY eVS 5.1. Disclosure Obligations. Commencing on the Effective Date and to be completed within 30 days thereafter, eVS shall disclose or cause to be disclosed to Sperry such Intellectual Property in its current form and as necessary and complete for Sperry to manufacture the IR Systems. Such disclosure shall include the items listed in Schedule 2. For the purpose of imparting the Intellectual Property, eVS agrees: (a) to have employees and/or consultants of eVS experienced in the use of the Intellectual Property impart to such employees of Sperry as Sperry shall designate information relative to such Intellectual Property. To this end, eVS and Sperry shall each appoint promptly upon execution of this Agreement, one representative to interface with the representative appointed by the other; and (b) to furnish Sperry with copies of reports and other available technical data relative to the utilization of the Intellectual Property, including existing descriptions of problems encountered, their solutions and lessons learned concerning the manufacture and sale of the IR Systems. ARTICLE 6 DEVELOPMENT AND SALES EFFORTS 6.1. Reasonable Efforts. Sperry agrees to use reasonable efforts to develop and increase the market for the IR Systems within the Territory. ARTICLE 7 RESTRICTIONS ON THE USE OF CERTAIN INFORMATION 7.1. Proprietary Information. (a) Sperry hereby agrees that in no event shall it disclose to any third party or utilize for its behalf or that of any third party any information relating to the design, manufacture and assembly of the IR Systems, the Intellectual Property or other proprietary information provided hereunder or any information derived therefrom (hereafter referred to as the "PROPRIETARY INFORMATION"), and hereby agrees to take all reasonable steps, including but not limited to at least those steps which Sperry takes to protect its own proprietary or confidential property, to prevent any such disclosure by any partner, employee or other agent of Sperry, without the prior written consent of eVS, which may be granted or withheld in the sole discretion of eVS. The foregoing provision shall not apply to any Proprietary Information as to which Sperry or any of its partners, employees or other agents can demonstrate that such information: 6 7 (i) is now public knowledge through no action of Sperry or such partner, employee or other agent; or (ii) has been properly provided to Sperry or such partner, employee or other agent without restriction by an independent third party; or (iii) has been developed independently by Sperry or such partner, employee or other agent in the course of work by employees of Sperry, such partners, employees or other agents who have not had access to Proprietary Information pursuant to this Agreement. (b) The provisions of this Article 7 shall survive until the later of the date of Transfer or five years after the termination of this Agreement. 7.2. Sperry Information. (a) eVS hereby agrees that in no event shall it disclose to any third party or utilize for its behalf or that of any third party any proprietary information provided by Sperry hereunder or any information derived therefrom (hereafter referred to as the "SPERRY INFORMATION"), and hereby agrees to take all reasonable steps, including but not limited to at least those steps which eVS takes to protect its own proprietary or confidential property, to prevent any such disclosure by any partner, employee or other agent of eVS, without the prior written consent of Sperry, which may be granted or withheld in the sole discretion of Sperry. The foregoing provision shall not apply to any Sperry Information as to which eVS or any of its partners, employees or other agents can demonstrate that such information: (i) is now public knowledge through no action of eVS or such partner, employee or other agent; or (ii) has been properly provided to eVS or such partner, employee or other agent without restriction by an independent third party; or (iii) has been developed independently by eVS or such partner, employee or other agent in the course of work by employees of eVS, such partners, employees or other agents who have not had access to Sperry Information pursuant to this Agreement. (b) The provisions of this Article 7 shall survive until the later of the date of Transfer or five years after the termination of this Agreement. 7 8 7.3. Confidentiality Agreement. Sperry and eVS shall require all partners, employees or other agents to whom any Proprietary Information or Sperry Information is to be disclosed to execute a confidentiality agreement with such party, satisfactory in form and substance to eVS or Sperry, respectively. ARTICLE 8 ROYALTY 8.1. Royalty Amount. (a) From the date hereof until the date of the Transfer (as defined herein), Sperry agrees to pay eVS a royalty (the "Royalty"), within 30 days after the end of each calendar quarter during such period, an amount calculated as follows: R = 8% (S x U) Where: R equals the Royalty; S equals the Net Sales Price (as defined herein); and U equals the number of Units (as defined herein) sold for such calendar quarter. (b) As used herein: (i) "Net Sales Price" shall mean Sperry's price to its customers, resellers, foreign offices or agents, less reasonable commissions, customary trade discounts, transportation charges and value-added or sales taxes. Net Sales Price shall not include prices reasonably allocated to features not provided by the IR Systems. (ii) "Units" shall mean any IR System and all related or derivative products; provided, that, such term shall not include any spare or replacement parts or additional features of the IR Systems that are developed by or on behalf of Sperry by third parties, or by eVS at Sperry's sole expense; and further, provided that such term shall not include the IR Systems to be purchased by Sperry pursuant to Purchase Order #302388 dated November 23, 1998, between Sperry and eVS. 8 9 8.2. Right of Set-off; Audit. Except as otherwise provided in Section 9.1, Sperry's obligation to pay the Royalty is absolute and shall not be subject to any right of set-off by Sperry for claims it may have against eVS. eVS may, through an independent public accounting firm retained and paid by it, upon ten days prior notice to Sperry and no more than once per year, inspect at each place of business of Sperry those books and records of Sperry necessary to determine the calculation of the Royalty. Such inspection shall be conducted during normal business hours. Calculations of the Royalty which are not in accordance with this Agreement ("Errors") shall be paid to eVS by Sperry, within 30 days of the conclusion of the audit, and shall include interest, which shall accrue at a rate of eight percent (8%) per annum from the original due date thereof. If any audit or inspection reveals Errors by Sperry in an amount of ten (10%) or more with respect to any calendar quarter, Sperry shall promptly reimburse eVS for the reasonable cost of such audit or inspection. 8.3. Survival of Royalty. Except as provided in Article 9, Sperry's obligation to pay the Royalty due hereunder shall survive the expiration or termination of this Agreement until the date of Transfer. ARTICLE 9 TRANSFER 9.1. Transfer of Ownership of the Intellectual Property. If, within the four year period beginning on the date hereof, eVS receives Royalty payments in the aggregate amount of $4,250,000 from Sperry, Sperry's obligation to make further Royalty payments shall cease and eVS shall, within 60 days of the date on which it has received the final payment constituting such amount, transfer to Sperry all of its rights, title and interest in and to the Intellectual Property (the "Transfer"). If eVS has not received Royalty payments in the aggregate amount of $4,250,000 within such four year period, Sperry shall continue to pay the Royalty to eVS until such time as eVS has received an aggregate amount of $5,000,000 in Royalty payments. Upon the receipt by eVS of such amount, Sperry's obligation to make Royalty payments shall cease and eVS shall, within 60 days of the date on which it has received the final payment constituting such amount, effect the Transfer. At the time of the Transfer, eVS shall deliver to Sperry all documents or other tangible records, including copies thereof, within eVS' possession, custody or control, containing or reflecting any Proprietary Information. 9 10 ARTICLE 10 INDEMNIFICATION 10.1. By eVS. eVS shall indemnify and hold Sperry harmless against any claims, losses, damages, actions, amounts paid in settlement and expenses, including reasonable attorneys' fees and costs of investigation (other than amounts paid in settlement of any claim without eVS' consent) resulting in whole or in part from claims by third parties against Sperry for any alleged infringement, prior to the Transfer, of any license, patent or other proprietary rights of a third party as a result of the use or other exploitation of the Intellectual Property pursuant to the license granted under this Agreement; provided, that Sperry notifies eVS promptly in writing of any such claim. Sperry shall permit eVS, in its sole discretion, to defend, compromise or settle such claim and shall provide all information, assistance and authority to enable eVS to do so. Sperry shall have no authority to settle any claim on behalf of eVS. eVS shall have no liability for any claim of infringement based on the use or combination of the Intellectual Property with hardware, software or other materials or information not provided by eVS hereunder. 10.2. By Sperry. Sperry shall indemnify and hold eVS harmless against any claims, losses, damages, actions, amounts paid in settlement and expenses, including reasonable attorneys' fees and costs of investigation (other than amounts paid in settlement of any claim without Sperry's consent) resulting in whole or in part from claims by third parties against eVS for any alleged infringement, after the Transfer, of any license, patent or other proprietary rights of a third party as a result of the use or other exploitation of the Intellectual Property; provided, that eVS notifies Sperry promptly in writing of any such claim. eVS shall permit Sperry, in its sole discretion, to defend, compromise or settle such claim and shall provide all information, assistance and authority to enable Sperry to do so. eVS shall have no authority to settle any claim on behalf of Sperry. 10.3. Remedies. Should the Intellectual Property become, or in the sole opinion of eVS, be likely to become the subject of a claim of infringement, eVS may, at its sole option and cost, (a) procure for Sperry the right to continue to use the Intellectual Property, (b) replace or modify the Intellectual Property to make such non-infringing, provided that the same function is performed by the replacement or modified Intellectual Property, or (c) if the right to continue to use cannot reasonably be procured or the Intellectual Property cannot reasonably be replaced or modified, terminate both the License and its obligation to effectuate the Transfer. 10 11 ARTICLE 11 TERM AND TERMINATION 11.1. Term. This Agreement shall become effective on the date hereof and, unless terminated at an earlier date, shall continue until the occurrence of the Transfer (the "Term"). 11.2. Termination. (a) In the event either party hereto breaches this Agreement in any material respect and fails to remedy such breach within 30 days after written notice thereof by the other party, then said other party may terminate this Agreement on written notice to the breaching party. (b) In the event this Agreement is terminated pursuant to paragraph (a) of this Section, Sperry shall promptly return to eVS (in no event later than 60 days after such termination) all Proprietary Information that Sperry has received from eVS pursuant to this Agreement. Notwithstanding anything herein to the contrary, the continuing obligations of the parties to make payments accrued as of the date of termination and the obligations under Articles 7 and 8 hereof shall survive the termination of this Agreement. 11.3. Upon termination of this Agreement upon the occurrence of the Transfer, Sperry shall be entitled to continue to use Intellectual Property purchased by it hereunder to produce the IR Systems and eVS shall have no further obligations hereunder with respect thereto. 11.4. In order to protect eVS against the unauthorized use of the Proprietary Information and trade secrets made available to Sperry hereunder, Sperry hereby agrees that during the term hereof and for five years after termination of this Agreement pursuant to Section 11.2(a), Sperry shall not sell or transfer any Proprietary Information without the prior written consent of eVS, which consent may be withheld in its sole discretion. ARTICLE 12 MISCELLANEOUS 12.1. Export Controls. Sperry acknowledges that certain of the Intellectual Property that Sperry may receive from eVS under this Agreement is controlled under laws and regulations of the U.S. Government that prohibit or restrict the export of technology and certain other activities. Sperry further acknowledges and agrees that such laws and regulations may require that Sperry obtain a license from the U.S. Government 11 12 before the Intellectual Property or products made therefrom are sold, leased, sublicensed or otherwise transferred to a foreign person. Until the date of Transfer, if any, Sperry shall implement and follow all necessary procedures to comply with applicable laws, regulations and administrative actions of the U.S. Government, and shall not engage in any activity which it or eVS reasonably believes could subject it to civil, criminal or administrative liability, including but not limited to the sale, lease, transfer, or sublicensing of any equipment or technical data without appropriate authorization. eVS shall be excused from performance under this Agreement or under any other agreement, and shall not be liable or accountable to Sperry for any loss or damage, including lost profits or other indirect or incidental damages, to the extent that an act or omission of the U.S. Government (including acts or omissions of Congress and the judiciary) or any law or regulation restricts, prohibits or delays eVS' performance of an obligation under this Agreement or restricts or limits Sperry's use or transfer of the Intellectual Property or any product made therefrom. 12.2. Information to be Provided by eVS. eVS shall, in its sole discretion, determine the nature and extent of all information to be provided to Sperry hereunder. eVS acknowledges and agrees, however, that it is obligated hereby to provide all information in its possession, custody or control necessary to manufacture the IR Systems. 12.3. Notices. Any notice or other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be deemed to be delivered on the date received by such party. All notices and documents mailed to a party shall be duly given when delivered personally or transmitted by telex or telecopier, receipt acknowledged, or in the case of documented overnight delivery service or registered or certified mail, return receipt requested, postage prepaid, on the date shown on the receipt thereof. All notices and other communications shall be given to the party at its respective address set out opposite its name below, or at such other address as it shall have theretofore specified by written notice similarly delivered: eVS: eMERGE Vision Systems, Inc. c/o XL Vision, Inc. 10305 102nd Terrace Sebastian, Florida 32958 Attention: Mike Janney Telephone No.: 561-589-5310 Telecopier No.: 561-589-3779 12 13 With a copy to: Karen M. Keating, Esq. Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Telephone No.: 610-254-4106 Telecopier No.: 610-254-4376 Sperry: Sperry Marine Inc. 1070 Seminole Trail Charlottesville, Virginia 22901 Attention: Carlton Carrol Telephone No.: 804-974-2539 Telecopier No.: 804-974-2480 With a copy to: Gerald L. Lett, Esq. Deputy Director, Intellectual Property Law 1500 PRC Drive MS 6E2 McLean, VA 22102-5050 Telephone No.: 703-556-2790 Telecopier No.: 703-556-2527 12.4. Governing Law. The validity, performance, construction, and effect of this Agreement shall be governed by the laws of the State of Florida for the determination of any controversy whatsoever arising under or in connection with this Agreement, without reference to the principles of conflicts of law otherwise applicable therein. 12.5. Binding Effect; Assignment. This Agreement shall be binding upon the successors or permitted assigns of the parties hereto, but shall not be assignable by any party without the prior written consent of the other. 12.6. Cooperation. Sperry shall promptly notify eVS of any circumstances surrounding any unauthorized possession, use or knowledge of information relating to the Intellectual Property after Sperry has knowledge thereof, shall cooperate with eVS in preventing the recurrence of such unauthorized possession, use or knowledge, and shall cooperate with eVS in any litigation against third parties brought by eVS to protect its proprietary rights. 13 14 12.7. Relationship of the Parties. Each party shall be solely and entirely responsible for its acts and for the acts of its agents, employees and subcontractors during the performance of this Agreement. Nothing in or arising out of this Agreement shall be deemed to constitute eVS or Sperry as a partner of the other. 12.8. Injunctive Relief. eVS and Sperry expressly acknowledge that money damages alone will be an inadequate remedy for any breach or violation of any of the provisions of Article 7 of this Agreement, and that the nonbreaching party, in addition to all other remedies under this Agreement, shall be entitled, as a matter of right, to injunctive relief, including specific performance, with respect to any such breach or violation. 12.9. Entire Agreement. This Agreement constitutes the entire understanding between the parties with respect to the subject matter thereof and may be amended only by a document in writing. 12.10. Waiver. Failure by either party to insist on compliance with this Agreement by the other party to this Agreement shall not be deemed a waiver of any term or condition of this Agreement, and such party may thereafter insist upon compliance with all terms and conditions of this Agreement. 12.11. Binding Effect; Assignment. This Agreement shall be binding upon the successors or permitted assigns of the parties hereto, but shall not be assignable by any party without the prior written consent of the other. 12.12. Use of Competing Technologies. eVS shall not develop and use competing technologies to manufacture or sell products in the marine transportation field for a period of three years after the Effective Date. [SIGNATURE PAGE TO FOLLOW] 14 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. SPERRY MARINE INC. By: /s/: C. Graham -------------- Name: C. Graham Title: President EMERGE VISION SYSTEMS, INC. By: /s/: T. Michael Janney ---------------------- Name: T. Michael Janney Title:Chief Financial Officer 15 16 SCHEDULE 1 IR SPECIFICATIONS The IR System is comprised of the following: AMIRIS System #105190000 NSK 1000 System #105190001 FROS System #105594000 Three Field of View Assembly #105235 CCD Overlay #105504 16 17 SCHEDULE 2 INTELLECTUAL PROPERTY ITEMS TO BE TRANSFERRED [TO BE PROVIDED.] 17 EX-10.12 13 ASSET PURCHASE AGREEMENT DATED MAY 19, 1999 1 EXHIBIT 10.12 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is made and entered into this 14th day of May, 1999 by and among eMERGE Vision Systems, Inc., a Delaware corporation ("Buyer") and Professional Cattle Consultants, L.L.C. an Oklahoma Limited Liability Company ("Seller"). RECITALS A. Seller is in the business of developing, and marketing, a data network and/or software services for use in agriculture, veterinary medicine, and animal food sciences markets (the "Business") including the network/software product commonly referred to as "Benchmark" (the "Software Program"); and B. Seller desires to sell, and Buyer desires to purchase, the Business and substantially all of the tangible and intangible assets used in the Business, including, but not limited to, the Software Program, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt, sufficiency, and adequacy of which are hereby acknowledged, Seller and Buyer agree as follows: ADDITIONAL DEFINITIONS Buyer and Seller agree that the following defined terms shall have the meanings stated below throughout this Agreement. "Anderson" shall mean Arlen Anderson, an individual who is a co-manager of Seller and officer of Lextron. "Lextron" shall mean Lextron, Inc., a Colorado corporation. Lextron is the investor in fifty percent of the outstanding membership units of Seller. "To The Best Of Seller's Knowledge" shall mean to the actual knowledge of Tom Tippens and Roberta Tippens after reasonable investigation and/or due diligence, and shall not include any knowledge whatsoever (actual, imputed, by estoppel, or otherwise) of Anderson or Lextron or any of Lextron's officers, directors, representatives, employees or agents except as specifically provided herein. "VetLife Contract" shall mean the Agreement for Data Processing and Management Services dated February 4, 1999 between Seller and VetLife, a division of Ivy Animal Health, Inc., a Delaware corporation, a copy of which is attached to this Agreement as Appendix One. 2 AGREEMENTS ARTICLE I SALE AND PURCHASE OF ASSETS 1.1 Effective as of the close of business on the Closing Date (as defined in Section 1.1.1) and subject to the terms and conditions hereof and in reliance on the representations and warranties contained herein, Seller shall sell, convey, transfer, assign, and deliver to Buyer at the Closing (as defined in Section 1.1.1), and Buyer shall purchase from Seller, all of the properties, business, and assets of Seller used in connection with the Business, of every kind and description, personal and mixed, tangible and intangible, wherever located (except the Excluded Assets, defined in Article II) (collectively, the "Purchased Assets"). Without limiting the generality of the foregoing, the Purchased Assets shall include the following: 1.1.1 all of Seller's inventory as of the Closing Date, including, without limitation: (i) computer program code (in all media) and materials, including the Software Program; (ii) computer program documentation, including user materials; (iii) all other unused or reusable materials, stores, supplies, works in progress, finished goods, product samples, packaging, and shipping materials, as listed on Schedule 1(a) hereto (collectively, the "Inventory"); 1.1.2 all of Seller's technical and descriptive materials (other than Inventory) if any relating to the acquisition, design, development, use, or maintenance of computer code and program documentation and materials, including, but not limited to, all technical and programming notes, if any (the "Technical Documentation"); 1.1.3 all of the rights and benefits accruing to Seller, if any, under or pursuant to any and all contracts, agreements, licenses, and other commitments and arrangements, oral or written, with any person or entity relating to the ownership, license, acquisition, design, development, distribution, marketing, use, or maintenance of computer program code, related technical or user documentation, and databases, in each case relating to or arising out of the Business, including, but not limited to: (i) licenses from third parties; (ii) development contracts, work-for-hire agreements, and consulting and employment agreements; (iii) distributorships and manufacturer's representation contracts; (iv) licenses and sublicenses to others; and (v) maintenance, support, or enhancement agreements, if any and as listed on Schedule 1(c) hereto (collectively, the "Software Contracts"); 1.1.4 all of Seller's equipment and devices (including data processing hardware and related telecommunications equipment, media, and tools) used in the Business, if any and as listed on Schedule 1(d) hereto (the "Computer Equipment"), including, but not limited to, Seller's rights under all related warranties if any; 2 3 1.1.5 all of Seller's other equipment, including, but not limited to, all furniture, office equipment, and other personal property, as listed on Schedule 1(e) hereto; 1.1.6 all accounts receivable of Seller relating to the Business, arising from sales of products in the ordinary course of business as of the date of this Agreement, including all license fees and maintenance fees and charges owing or to become owing to Seller under Software Contracts, as are listed on Schedule 1(f) hereto (the "Accounts Receivable"); 1.1.7 all operating data and records of Seller related to the Business, including, but not limited to, all customer lists, vendor lists, price lists, correspondence, customer files, account histories, customer specifications, dealer and distributor lists, promotional materials, sales literature, art work, sales data, and other historical and current information relating to sales, financial, accounting, and credit records, correspondence, budgets, and other similar documents and records, if any; 1.1.8 all of the rights and benefits accruing to Seller under or pursuant to the Accounts Receivable, contracts, agreements, including, but not limited to, all distributorship or sales representation agreements, licenses, leases, arrangements, commitments, and unshipped, open, and blanket purchase orders, other than the Software Contracts, all as identified on Schedule 1(h) (the "Purchased Contracts"); 1.1.9 all claims, if any, Seller may have against any person relating to or arising from the Purchased Assets, the Software Contracts, the Purchased Contracts, or the Business, including rights to recoveries for damages or defective goods, refunds, insurance claims, and chooses in action; 1.1.10 all of Seller's right, title, and interest in and to, if any, the name "PCC," and "Professional Cattle Consultants, L.L.C.", and all variants thereof if any, all of Seller's right, title, and interest in and to the Internet domain name "PCC-Online.Com" and all iterations or permutations thereof and the registrations therefor if any, any and all trademarks, service marks, trade names, and copyrights of Seller and all licenses, registrations, and applications therefor, if any, and all Seller's other intellectual property rights, rights to the data compiled through the use of the Software Program technology, if any, know-how, trade secrets, computer software, code, slogans, patents, formulae, processes, if any, and other similar intangible rights relating to the Business if any (the "Intellectual Property"), as are listed on Schedule 1(j) hereto; and 1.1.11 all of Seller's right, title, and interest in and to the goodwill of Seller relating to the Business and all other assets of every kind and description, wherever located, used or useful in, or related to the Business if any. ARTICLE II EXCLUDED ASSETS 2.1 Notwithstanding Article I, Seller is not selling or assigning to Buyer, and the Purchased Assets shall not include, any of the following (collectively, the "Excluded Assets"): 3 4 2.1.1 all cash consideration to be received by Seller, and Seller's other rights, under this Agreement; 2.1.2 all limited liability company records, equity record books, files, and other documentation of Seller, not relating to operation of the Business or the Purchased Assets; 2.1.3 all of Seller's cash, cash equivalents, deposits in banks, securities, and prepaid and deferred items, existing on the Closing Date with respect to the Business; 2.1.4 any items of the Purchased Assets that Buyer expressly elects not to accept or otherwise take; 2.1.5 any rights of Seller under covenants not to compete between Seller and Lextron and Seller and Anderson both dated February 14, 1997, which covenants not to compete shall be terminated prior to the Closing Date; 2.1.6 any rights of Seller under the following agreements: a) Seller's Operating Agreement with its members dated February 14, 1997; b) Seller's Membership Interest Buy-Sell Agreement dated February 14, 1997; and c) Seller's Subscription Agreements with Lextron and PCC Feedlot Investment Services Corporation both dated February 14, 1997; and 2.1.7 any tax refunds, tax deposits and similar rights with respect to governmental and taxing authorities. ARTICLE III PURCHASE PRICE, LIABILITIES AND OTHER RELATED MATTERS 3.1 Purchase Price. Subject to adjustment as provided herein, the purchase price (the "Purchase Price") for the Purchased Assets shall be cash in the amount of $1,800,000 payable by wire transfer to the following account and the assumption of the Assumed Liabilities (as defined in Section 3.2): BancFirst Weatherford, OK, ABA #103003632, Account # 0453012849, Professional Cattle Consultants. 3.2 Assumed Liabilities. On the Closing Date, (i) Buyer shall assume and agree to pay, perform, and discharge in full when due the accounts payable and accrued expenses of Seller related solely and directly to the Business for the month of May 1999, including trade accounts payable accrued employee compensation and related payroll taxed and Seller's 4 5 obligations under the Software Contracts and the Purchased Assets (hereafter collectively referred to as the "Assumed Liabilities"), all as listed on Schedule 3.2 hereto; 3.3 Non-Assumption of Liabilities and Obligations of Seller. Other than the Assumed Liabilities, Buyer shall not assume or become liable for any liabilities, obligations, or commitments of Seller of any nature whatsoever, including, but not limited to (collectively, the "Excluded Liabilities"): (i) any liabilities or obligations of Seller for Federal, state, local, foreign, or other taxes, including, without limitation, income, sales, use, franchise, real or personal property, or other taxes, assessments, duties, levies, or imposts, or for any penalties or interest with respect to any of the foregoing, related to any other period; (ii) any liabilities or obligations with respect of any pension, profit sharing, medical insurance, or other employee benefit plan or fringe benefit arrangement established or maintained by Seller, whether or not any such plans or benefits thereunder relate to employees who may be employed by Buyer following consummation of the transactions contemplated hereby, including, without limitation, any health insurance benefits payable with respect to costs incurred on or prior to the Closing Date, whether or not claims therefor are submitted on or prior to the Closing Date, and any disability benefits payable with respect to disabilities occurring on or prior to the Closing Date, all of which shall be paid by Seller; (iii) any liabilities or obligations whatsoever to or with respect to any employees or independent contractors of Seller, specifically including, without limitation, any obligations to pay salaries, wages, bonuses, commissions, vacation, severance, or termination pay, employee benefits, health insurance benefits, or unemployment compensation for any period other than May 1 through May 31, 1999; (iv) any liabilities or obligations arising out of any workers' compensation claims relating to employment by Seller, or product liability claims for personal injury, property damage, or otherwise relating to products sold or distributed by Seller; (v) any liabilities, obligations, or commitments for product warranty or returns or exchanges of products sold or distributed by Seller; (vi) any liabilities or obligations, whether or not known to Seller, based on, arising out of or otherwise in respect to any act or omission of Seller, or any other party, or any event or condition on or off any premises of Seller, occurring at any time on or prior to the Closing Date; (vii) any liabilities, obligations, or expenses to be borne by Seller in connection with the negotiation and documentation of this Agreement; and (viii) any other liabilities or obligations of Seller, known, unknown, fixed, contingent, accrued, absolute, or otherwise, except the Assumed Liabilities. 3.4 Adjustment of Purchase Price. A post-Closing adjustment shall be made to the Purchase Price, in the manner described below, to the extent that the Assumed Liabilities are greater than or less than $25,000. For that purpose, Buyer will, within sixty (60) days of the Closing Date, audit the books and records of the Business to determine the actual value of the Assumed Liabilities. The value of the Assumed Liabilities shall be the value as carried on the books and records of the Business as of the Closing Date, prior to any reduction thereof except that the Software Contracts and the Purchase Contracts shall be deemed to have no value for the purposes of the adjustment under this Section 3.4. 3.5 Allocation of Purchase Price. The Purchase Price shall be allocated among each item, class, or category of the Purchased Assets, as reasonably determined by Buyer and set forth on Schedule 3.5. Seller and Buyer shall prepare and file their respective Federal and any state or 5 6 local income tax returns based on such allocation of the Purchase Price. Seller and Buyer shall prepare and file any notices or other filings required pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") and any such notices and filings shall be prepared based on such allocation of the Purchase Price. ARTICLE IV THE CLOSING 4.1 Time and Place of Closing. The closing of the sale and purchase of the Business and the Purchased Assets (the "Closing") shall take place at 12:00 p.m. local time on May 14, 1999 at the offices of Seller's counsel, Terry W. Tippens, 100 North Broadway 1700 Bank One Tower, Oklahoma City, Oklahoma (the "Closing Date"). 4.2 Seller's Closing Deliveries. At the Closing, in addition to any other documents specifically required to be delivered pursuant to this Agreement, Seller shall execute and deliver, or cause to be executed and delivered, as appropriate, to Buyer the following: 4.2.1 Bill of Sale and Assignment. A bill of sale substantially in the form attached hereto as Exhibit A and such other forms of assignment, endorsements, and other good and sufficient instruments of sale, assignment, conveyance, and transfer, as may be necessary to sell, assign, transfer, and deliver the Purchased Assets. 4.2.2 Assignment and Assumption Agreement. Assignment and assumption agreement in the form attached hereto as Exhibit B, and consents of the appropriate third parties, relating to the assignment and assumption of the Software Contracts and the Purchased Contracts. 4.2.3 Assignment of Intellectual Property. Assignment agreement in the form attached hereto as Exhibit C, relating to the assignment of the Intellectual Property. 4.2.4 Certified Resolutions. Copies of the resolutions of the managers and members of Seller authorizing the execution, delivery, and performance of this Agreement and all related agreements, documents, and certificates, and the transactions contemplated hereby and thereby, certified as of the Closing Date by at least one of its managers. 4.2.5 Confidentiality and Non-Compete Agreement. Confidentiality and non-compete agreement between Roberta Tippens and Buyer, in the capacity as an independent contractor in the form attached hereto as Exhibit D. 4.2.6 Certificate of Good Standing. Certificate of good standing of Seller issued by the Secretary of State of Oklahoma, dated not more than fourteen (14) days prior to the Closing Date. 4.2.7 Articles of Organization. A copy of the Articles of Organization of Seller, 6 7 and all amendments thereto, certified by the Secretary of State of Oklahoma not more than fourteen (14) days prior to the Closing Date. 4.2.8 Secretary's Certificate. A certificate of a manager of Seller, dated as of the Closing Date, certifying a copy of the Operating Agreement of Seller and as to the incumbency and signatures of the authorized manager of Seller executing this Agreement and all other agreements, documents, or certificates contemplated or delivered under this Agreement. 4.2.9 Legal Opinion. No legal opinion of counsel is required from either Seller's or Buyer's Counsel. 4.2.10 Lien Termination Statements. UCC-3 termination statements with respect to the liens specified in Schedule 4.210 hereto, if any. 4.2.11 Other. Such other documents and certificates required to be executed or delivered at the Closing in accordance with the terms of this Agreement or as reasonably required by Buyer or its counsel, including, without limitation, tax clearance certificates from the appropriate governmental authorities if requested by Buyer in a reasonable period of time prior to the Closing Date. 4.3 Buyer's Closing Deliveries. At the Closing, in addition to any other documents specifically required to be delivered pursuant to this Agreement, Buyer shall execute and deliver, as appropriate, to Seller the following: 4.3.1 Purchase Price. Payment of the Purchase Price. 4.3.2 Assignment and Assumption Agreement. Assignment and assumption agreement in the form attached hereto as Exhibit B relating to the assignment and assumption of the Software Contracts and the Purchased Contracts. 4.3.3 Certified Resolutions. Unless waived by Seller, resolutions of Buyer's directors authorizing the execution, delivery, and performance of this Agreement and all related agreements, documents and certificates, and the transactions contemplated hereby and thereby certified as of the Closing Date by its Secretary or Assistant Secretary. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER Seller, PCC Feedlot Investment Services Corporation, [AN OKLAHOMA CORPORATION,] Tom Tippins and Terry Tippins jointly and severally represents and warrants to Buyer, on and as of the date hereof and on and as of the Closing Date, as follows: 5.1 Organization of Seller. Seller is an Oklahoma limited liability company duly organized, validly existing, and in good standing under the laws of the State of Oklahoma and is 7 8 duly qualified to do business and is in good standing as a foreign limited liability company in each jurisdiction in which the character of the properties owned or held under lease by Seller or the nature of the businesses transacted by Seller requires such qualification. In this regard, Seller has not qualified to do business in any state except for Oklahoma. 5.2 Power and Authority. Seller has all requisite power and authority to own, lease, and operate its properties, to conduct its business as it has been and is now being conducted, to enter into this Agreement, and all other agreements or documents to be executed or delivered in connection herewith, and, subject to any required approvals or consents by other parties to contracts to which Seller is a party (which shall be obtained by Seller prior to Closing), to perform the obligations to be performed by it hereunder. All member and other actions required to be taken by or on the part of Seller to execute, deliver, and carry out the terms of this Agreement and all other agreements or documents to be executed or delivered in connection herewith, and to authorize Seller to sell, assign, transfer, convey, and deliver the Purchased Assets to Buyer, have been duly and properly taken. This Agreement and all other agreements and documents to be executed and delivered by Seller in connection herewith, when executed and delivered, shall constitute the legal, valid, and binding obligations of Seller enforceable against Seller in accordance with their respective terms and this Agreement. 5.3 Subsidiaries. Seller does not own, directly or indirectly, any outstanding capital stock, or securities convertible into capital stock, of any other corporation or any participating interest in any partnership, joint venture, or other business enterprise. 5.4 No Violation to Result. The execution and delivery of this Agreement and all other agreements and documents to be executed or delivered in connection herewith, and the consummation of the transactions contemplated hereby and thereby: 5.4.1 are not in violation or breach of, do not conflict with or constitute a default under, and will not accelerate or permit the acceleration of the performance required by, any of the terms of the charter documents or operating agreement of Seller or any note, debt instrument, security agreement, or mortgage, or any other contract or agreement, written or oral, to which Seller is a party or by which Seller or any of its properties or assets are bound; 5.4.2 will not be an event that, after notice or lapse of time or both, will result in any such material violation, breach, conflict, default, or acceleration; 5.4.3 will not result in a material violation under any law, judgment, decree, order, rule, regulation, or other legal requirement of any governmental authority, court or arbitration tribunal, whether Federal, state, or local (within the United States or otherwise) at law or in equity, and applicable to Seller or any of its properties or assets; 5.4.4 will not result in the creation or imposition of any lien, option, encumbrance, security agreement, restriction, charge, or claim of any kind in favor of any third party upon any of the properties or assets of Seller; and 5.4.5 will not result in the termination of any contract, lease, or other 8 9 commitment of Seller relating to the Business, including, without limitation, any of the Software Contracts and Purchased Contracts. 5.5 No Existing Material Defaults. Seller is not in default of, and has no notice or knowledge of any default under: (i) any of the terms of any note, debt instrument, security agreement, mortgage, or under any other commitment, contract, agreement, license, lease, or other instrument, whether written or oral, to which it is a party or by which it or any of its properties or assets is bound including, without limitation, any of the Software Contracts and Purchased Contracts; or (ii) any law, judgment, decree, order, rule, regulation, or other legal requirement of any governmental authority, court, or arbitration tribunal whether Federal, state, or local (within the United States or otherwise), at law or in equity, and applicable to it or to any of its properties or assets. To The Best Of Seller's Knowledge, there exists no condition or event that, after notice or lapse of time or both, would constitute a material default under any of the foregoing. 5.6 Financial Statements. Attached hereto as Schedule 5.6 are Seller's financial statements as of April 30, 1999. 5.7 Adverse Changes. From March 31, 1999 to the Closing Date, the Business has been conducted only in the ordinary and regular course, and there have not been any material adverse changes in the condition (financial or otherwise), assets, liabilities, commitments, business prospects of the Business, the Purchased Assets, or the Assumed Liabilities except that Seller has or will terminate its covenants not to compete with Lextron and Anderson prior to the Closing Date. 5.8 Taxes. Seller has prepared (or caused to be prepared) and timely and properly filed (or caused to be timely and properly filed) with the appropriate Federal, state, and local authorities (within the United States or otherwise) all tax returns, information returns, and other reports required to be filed and has paid (or caused to be paid) in full all taxes, interest, penalties, assessments, or deficiencies, if any, currently due to, or claimed to be currently due by, any taxing authority, excepting only any such taxes that are being duly and timely contested in good faith by Seller and adequately reserved on the books of Seller. Seller has not executed or filed with any taxing authority any agreement extending the period for assessment or collection of any taxes. Seller is not a party to any pending action or proceeding, nor is To The Best Of Seller's Knowledge any such action or proceeding threatened against Seller by any governmental authority for the assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against Seller. During the course of any audit currently in process or not completed, no issues have been suggested by any representative of any governmental authority that, if asserted, would To The Best Of Seller's Knowledge result in a proposed assessment of taxes, interest, or penalties against Seller. Seller has not executed or filed any consent agreement to extend the period for assessment or collection of any taxes. 5.9 Condition of Assets. All equipment and other items of tangible personal property owned, leased, or otherwise used by Seller in the Business and included in the Purchased Assets, are now and on the Closing Date shall be (i) in the possession of Seller and in good, useable 9 10 condition and repair for the current use, ordinary wear and tear excepted and (ii) reasonably adequate for the conduct of the Business as currently conducted. All equipment and other items of tangible personal property owned, leased, or otherwise used by Seller in the Business and included in the Purchased Assets, are located at the premises listed on Schedule 5.9. 5.10 Title to Assets. At the Closing, Seller shall have and shall transfer to Buyer, good and marketable title to all of Seller's equipment, computer equipment, accounts receivable, records, claims, and names constituting a portion of the Purchased Assets, which shall be free and clear of any mortgage, pledge, lien, conditional sale or other agreement, option, encumbrance, restriction, charge, or claim of any kind. There are no assets used in the operation of the Business that are not included in the Purchased Assets, and the Purchased Assets include all of the assets and properties necessary to operate the Business in the same manner as it is currently conducted. 5.11 Inventory. Schedule 1(a) constitutes a true and complete list of all Inventory. 5.12 Licenses and Permits. To The Best Of Seller's Knowledge Seller possesses all material licenses and other required governmental or official approvals, permits, and authorizations, as to which the failure to so possess would have a material adverse effect on the Business, financial condition, or results of operations of Seller. To The Best Of Seller's Knowledge all such licenses, approvals, permits, and authorizations are in full force and effect, Seller is in material compliance with their requirements, and no proceedings are pending or, To The Best Of Seller's Knowledge threatened, to revoke or amend any of them. To The Best Of Seller's Knowledge, Schedule 5.12 hereto contains a complete list of all such licenses, approvals, permits, and authorizations. 5.13 Consents. Some consents of third parties are required in connection with the execution, delivery, and performance of this Agreement by Seller. 5.14 Intellectual Property. Schedule 1(j) constitutes a true and complete list of all Seller's Intellectual Property. Seller only has contract rights and obligations to process data, which rights are included in the Purchased Assets and Seller's rights to process the data are assignable to Buyer at the Closing. Seller is not in default under any such licensing or similar agreements, and has not received any notice of conflict with or infringement (or alleged infringement) of any rights of others. To The Best Of Seller's Knowledge Seller does not infringe upon any proprietary right of any third party. Seller's use in the Business of any technical or proprietary data has not required and does not require the payment of any royalty or similar payment to any Person, and, on the Closing Date, Seller will transfer to Buyer Seller's rights to all the Intellectual Property and its rights process data without the payment of any royalty or other special consideration. In addition to, and without limiting the generality of the foregoing, Seller has and will convey to Buyer at the Closing Seller's rights if any, to use the names "P.C.C." and "Professional Cattle Consultants, L.L.C." and any names similar thereto, and the rights to use the Internet domain name "PCC-Online.Com" and all iterations and permutations thereof, together with all logos, slogans, trademarks, and service marks relating thereto or heretofore used by Seller in connection therewith. To the Best Of Seller's Knowledge, 10 11 there are no names similar to the names specified in the prior sentence, used in the agriculture, veterinary medicine, and animal food sciences markets. Seller has at all times maintained in reasonable and material confidence all data owned by third parties. Seller owns exclusively otherwise or that it has not conveyed to any third party any interest in, the rights (including copyright rights) to the data compiled through the use of the Software Program (the "Data"). The Data has been selected, coordinated, and arranged in a manner materially original with Seller. No person has challenged Seller's use and manipulation of the Data. To the Best Of Seller's Knowledge, there are no material Federal or state laws or regulations, or restrictions of any third party, restricting such rights to use, manipulate, or convey the Data. As used in this Agreement, the term "Person" means any individual, sole proprietorship, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, or other entity of any kind, as the context requires. 5.15 Procedures for Copyright Protection. Seller has not filed for any copyright protection. 5.16 Procedures for Trade Secret Protection. Seller has promulgated and used its best efforts to retain its trade secrets. To The Best Of Seller's Knowledge there have not been any material violation of its trade secrets by any Person. The source code and system documentation relating to the Software Program: (i) have at all times been maintained in reasonable confidence; and (ii) have been disclosed by Seller only to employees and consultants having a "need to know" the contents thereof in connection with the performance of their duties to Seller and who are obligated to keep such information confidential. 5.17 Personnel Agreements. Anyone, including, but not limited to, all employees, agents, consultants, and contractors, who have contributed to or participated in the conception and development of the Software Program, Technical Documentation, or Intellectual Property on behalf of Seller either: (i) have been party to a "work-for-hire" arrangement or agreement with Seller, in accordance with applicable Federal and state law that has afforded Seller original ownership of any tangible and intangible property thereby arising; or (ii) have executed appropriate instruments of assignment in favor of Seller as assignee that have conveyed, in accordance with applicable Federal and state law, to Seller full, effective, and exclusive ownership of all tangible and intangible property thereby arising. 5.18 Adequacy of Technical Documentation. The Technical Documentation includes the necessary source code, system documentation, statements of principles of operation, and schematics for the Software Program, as well as any necessary and pertinent commentary or explanation that may be necessary to render such materials understandable and usable by a trained computer programmer. To The Best Of Seller's Knowledge the Technical Documentation also includes any necessary programs (including compilers), "workbenches," tools, and higher level (or "proprietary") languages used for the development, maintenance, and implementation of the Software Program. 5.19 Third-Party Components in the Software Program. Seller has validly and effectively obtained the right and license to use, copy, modify, and distribute the third-party 11 12 programming and materials contained in the Software Program and the Technical Documentation, pursuant to the Software Contracts identified as "licenses from third parties" in Schedule 1(c). The Software Program and the Technical Documentation contain no other programming or materials in which any third party has claimed superior, joint, or common ownership, including any right or license. The Software Program and the Technical Documentation do not contain derivative works of any programming or materials not owned in their entirety by Seller and included in the Purchased Assets. 5.20 Third-Party Interests or Marketing Rights in the Software Program. Seller has not granted, transferred, or assigned any material right or interest in the Software Program, the Technical Documentation, or the Intellectual Property to any Person except to persons entitled to the same and except pursuant to the Software Contracts identified in Schedule 1(c). Except as set forth in Schedule 1(c), all Software Contracts identified in Schedule 1 (c) describe the end-user agreements and, grants to the end-user thereunder. There are no contracts, agreements, licenses, and other commitments and arrangements in effect with respect to the marketing, distribution, licensing, or promotion of the Software Program or any other independent salesperson, distributor, sublicensor, or other remarketer or sales organization, except for the Software Contracts identified in Schedule 1(c). 5.21 Year 2000 Compliance. To The Best Of Seller's Knowledge the Software Product is materially Year 2000 Compliant. 5.22 Equipment. Schedules 1(d) and 1(e) hereto constitutes a true and complete list of the Computer Equipment and other equipment owned by Seller or with respect to which it may have ownership rights. Each such piece of equipment is located at Seller's premises indicated on Schedule 0. 5.23 Litigation; Warranty Claims. Except as set forth on Schedule 5.23, for the five (5) year period occurring immediately prior to the date of this Agreement, there has not been and currently there is no litigation, suit, proceeding, action, claim, or investigation, at law or in equity, pending or, To The Best of Seller's Knowledge, threatened against or affecting Seller or involving any property or assets of Seller, before any court, agency, authority, or arbitration tribunal, including, but not limited to, any claims related to processing data, any product liability, workers' compensation or wrongful dismissal claims, or claims, actions, suits, or proceedings relating to toxic materials, hazardous substances, pollution, or the environment. There is not any such litigation, suit, proceeding, action, claim, or investigation that relates to the Purchased Assets or the transactions contemplated hereby. Seller is not subject to or in default with respect to any notice, order, writ, injunction, or decree of any court, agency, authority, or arbitration tribunal. Schedule 5.3 lists all warranty claims asserted against Seller during the three (3) year period occurring immediately prior to the date of this Agreement, relating to products sold or distributed by Seller. 5.24 Compliance with Laws. To The Best Of Seller's Knowledge Seller and the Purchased Assets are in compliance with all material laws, statutes, rules, regulations, and other 12 13 requirements imposed by Federal, state, local, and other governmental authorities applicable to the operation or ownership of the Business or the Purchased Assets. 5.25 Employee Benefits. Except as set forth on Schedule 5.25, Seller has not established or maintained or is not obligated to make contributions to or under or otherwise participate in, with respect to any current or former employee, director, or independent contractor of the Seller: (i) any equity option, restricted equity, equity appreciation rights, bonus, or other type of incentive compensation plan, program, agreement, or arrangement; (ii) any severance, pension, profit-sharing, thrift or savings, retirement, deferred compensation, employee equity ownership, employee equity purchase, or supplemental executive retirement plan, agreement, or arrangement; or (iii) any life insurance, death benefit, health and hospitalization, disability, employee assistance, education or tuition assistance, vacations benefit or fringe benefit plan, or other employee benefit plan, program, agreement, or arrangement. All such plans listed on Schedule 5.25 in which any of the Seller's employees participate (collectively, the "Employee Benefit Plans") have been operated and administered in all material respects in accordance with all applicable laws, rules, and regulations and are fully funded. Seller has no obligation or commitment (formal or informal) to create any new benefit plan or program, or to amend any existing Employee Benefit Plan to increase the benefits thereunder. 5.26 Employee Matters; Labor Relations. 5.26.1 Employment Agreements. None of the employees of the Business are covered by employment contracts, written or oral except that Tom Tippens and Joe Young are subject to covenants not to compete and Anderson and Lextron were subject to covenants not to compete that were terminated prior to the Closing Date. None of the employees of the Business are members of any union or covered by any union contracts. Seller is not aware of any plan or solicitation of employees of the Business to form or join a union in the past two (2) years. To The Best Of Seller's Knowledge Seller is not a party to or bound by any employment agreement (written or oral) or any collective bargaining or other labor agreement that has affected the Purchased Assets, or any employees of the Business that Buyer may hire after the Closing Date except as disclosed in the first sentence of this subsection 5.27.1. 5.27 Labor Laws. With respect to Seller's employees, To The Best Of Seller's Knowledge Seller has complied in all material respects with the Immigration Reform and Control Act of 1986, as amended, and all other applicable Federal, state, or local laws relating to the employment of labor, including, but not limited to, the provisions thereof relating to wages, non-discriminatory hiring, promotional and employment practices and procedures, collective bargaining and payment of Social Security, unemployment compensation, workers' compensation, and similar taxes, and Seller is not presently liable to any Person or governmental agency for any wage in arrears or subject to any liabilities or penalties for failure to comply with any of the foregoing laws. With respect to Seller's employees, there are no outstanding charges or claims of a material nature against Seller or any of its managers, agents, or employees involving any alleged or actual violation of Seller or any such Person of any provision of the National Labor Relations Act, the Age Discrimination in Employment Act, the Equal Employment Opportunity Act of 1964, or any other material Federal, state, or local law 13 14 concerning equal employment opportunities, equal pay legislation, or wage and hour obligations contained in the Fair Labor Standards Act; nor, there been any threat of any such claim or charge. 5.28 Insurance. Seller presently maintains and has at all times prior to the date hereof maintained, liability casualty, property loss, and other insurance coverage to the extent it deemed appropriate on the Purchased Assets and with respect to the Business. Schedule 5.28 is a true and complete list of all policies of insurance relating to the Business, the Purchased Assets, and the Assumed Liabilities, whether currently in force or otherwise applicable to any current or future liability, setting forth the type of coverage, policy number, policy periods, and the status of premiums paid thereon. 5.29 Leases, Contracts, and Other Commitments. 5.29.1 Contracts and Other Commitments. Except for the Purchased Contracts described in Schedule 1(h) attached hereto, the Software Contracts described in Schedule 1(c), and the Property Leases, Seller has no outstanding contracts or other commitments, written or oral, for the performance or receipt of services, or for the payment of monies, or for the purchase, sale, lease, license, use, or acquisition of real or personal property of any kind or character relating to the Business, the Purchased Assets, or the Assumed Liabilities, except for the purchase orders, sales orders, and other similar commitments incurred in the ordinary course of business which (i) in the case of contracts or commitments that involve the performance of services or the sale of products by Seller, do not involve the payment to Seller of any amount in excess of Five Thousand Dollars ($5,000.00) in any single case and Twenty-Five Thousand Dollars ($25,000.00) in the aggregate, (ii) in the case of contracts or commitments that involve the receipt of services or the purchase, lease, or other acquisition of property by Seller, do not involve the payment of any amount in excess of Five Thousand Dollar ($5,000.00) in any single case or Twenty-Five Thousand Dollars ($25,000.00) in the aggregate, and (iii) in either case, none of which, by its terms, cannot be performed within one (1) year from the date of such contract or commitment. Specifically, without limiting the generalities of the foregoing, Seller has no written or oral contract, agreement, or understanding with any sales representative, commission agent, distributor, consultant, or similar Person, nor any written or oral employment contract, agreement, or understanding with any Person, that relates to the Business, the Purchased Assets, or the Assumed Liabilities, except as may be disclosed in the attached Schedule 1(h). 5.29.2 Property Leases. Schedule 5.29.2 identifies each of the real properties in which Seller has a valid and subsisting leasehold interest and describes each of the Property Leases thereto. Seller does not own any real property that is used in or useful in the operation of the Business. The real property which Seller leases is leased from Tom Tippens and Roberta Tippens who are related parties to Seller. 5.29.3 Compliance with Contracts. Seller is in material compliance with the provisions of all material contracts, leases, and other commitments that relate to the Business, the Purchased Assets, and the Assumed Liabilities, and no material default exists by any party to any such contract, lease, or commitment; furthermore, To The Best Of Seller's Knowledge no event 14 15 has occurred that, with the passage of time or giving of notice or both, would constitute a material default under any such contract, lease, or commitment, and To The Best Of Seller's Knowledge Seller is not aware of any event or circumstance that caused such a default or event to occur. To The Best Of Seller's Knowledge all such contracts, leases, and commitments are materially valid, binding, and enforceable in accordance with their terms and are in full force and effect. To The Best Of Seller's Knowledge no outstanding purchase commitment of Seller is in excess of the normal, ordinary, and usual requirements of the Business, and no contract price in any outstanding purchase commitment of Seller is excessive of the current market prices for the relevant materials, products, commodities or services. To The Best Of Seller's Knowledge no outstanding sales or lease commitment by Seller in connection with the Business obligates Seller to sell or lease any products or services at a price which, in view are currently prevailing and projected costs of manufacturing, overhead and administrative and general expenses applicable thereto, would result in, when all such sales and lease commitments are taken in the aggregate, any material loss. 5.30 Accounts Receivable. Schedule 1(f) constitutes a true and complete list of all material Accounts Receivable. All Accounts Receivable arose from bona fide transactions in the ordinary course of business and To The Best Of Seller's Knowledge are not subject to any material offset, counterclaim, or set-off. Since March 31, 1999, all Accounts Receivable have been collected only in the ordinary course of business. 5.31 Accounts Payable. Schedule 3.2 constitutes a true and complete list of all accounts payable and accrued expenses included within the Assumed Liabilities. To The Best Of Seller's Knowledge all such accounts payable and accrued expenses arose from bona fide transactions in the ordinary course of business. 5.32 Customers. Attached hereto as Schedule 5.32, is a complete and accurate list of Seller's material customers during the twelve (12) month period ending as of the date hereof. There are no outstanding disputes with any customer listed on Schedule 0 and no such customer has refused to, or stated its intention not to, continue to do business with Seller any successor to Seller's business or otherwise to materially change its arrangements with Seller. 5.33 Related Party Transactions. Except as stated below, and none of the members, managers, or officers of Seller: (i) are currently a party to any transaction with Seller, including, but not limited to, any contract, agreement, or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from, any such Person, or to or from any corporation, partnership, limited liability company, trust, or other entity in which any such Person owns in excess of five percent (5%) of the outstanding equity interest; (ii) own, directly or indirectly, any interest in, excepting not more than five percent (5%) equity holdings for investment purposes, securities of any publicly held or traded company; (iii) are an officer, director, employee, or consultant of any Person that is a competitor, customer, or supplier of Seller; (iv) own, directly or indirectly, in full or in part, any copyright, trademark, trade name, service mark, franchise, patent, invention, permit, license, trade secret, or confidential information that Seller is using or the use of which is 15 16 necessary for the Business; or (v) have any cause of action or other claim whatsoever against, or owes any amount to Seller: 5.33.1 Operating Agreement between Sellers and its members dated February 14, 1997; 5.33.2 Membership Buy-Sell Agreement between Seller and its members dated February 14, 1997; 5.33.3 Subscription Agreement between Seller and Lextron dated February 14, 1997; 5.33.4 Covenant Not to Compete between Seller and Lextron dated February 14, 1997, which covenant not to compete will be terminated prior to the Closing Date; 5.33.5 Covenant Not to Compete between Seller and Anderson dated February 14, 1997, which covenant not to compete will be terminated prior to the Closing Date; 5.33.6 Subscription Agreement between Seller and PCC Feedlot Investment Services Corporation dated February 14, 1997; 5.33.7 Covenant Not to Compete between Seller and PCC Feedlot Investment Services Corporation February 14, 1997; 5.33.8 Covenant Not to Compete between Seller and Tom Tippens February 14, 1997; 5.33.9 Covenant Not to Compete between Seller and Roberta "Bobbie" Tippens February 14, 1997; and 5.33.10 Lease pursuant to which Tom Tippens and Roberta Tippens lease to Seller real property located at 211 Main Street, Weatherford, Oklahoma. 5.34 Brokers. Except as stated in this Section 5.34, Seller has not expressly or implicitly retained any broker, finder, investment banker, or financial advisor in connection with this Agreement or the transactions contemplated hereby. Except as provided below, Seller has not taken any actions that will cause Buyer to incur or be required to pay, any broker, finder, investment banker, financial advisor, or similar fee in connection with this Agreement or any transaction contemplated hereby, to any Person acting as broker, finder, investment banker, financial advisor, or in any similar capacity on behalf of Seller. Seller has consulted with Doering & Eastwood and Seller shall be solely responsible for paying all fees owed to Doering & Eastwood. 5.35 Full Disclosure. No representation or warranty of Seller, and none of the material information furnished by Seller or by any of the authorized managers, officers, employees, agents, accountants, or representatives of Seller, to Buyer pursuant to this Agreement, or the information contained in the Schedules to this Agreement, or any other information furnished to 16 17 Buyer by Seller or by any of the authorized directors, officers, employees, agents, accountants, or representatives of Seller at any time prior to the Closing (pursuant to the request of Buyer or otherwise) contains any material misstatement of a fact or omits any fact required to be stated herein or therein or necessary to make all such statements and information not misleading. 5.36 True Copies. To The Best Of Seller's Knowledge all documents furnished to Buyer by or on behalf of Seller are true and correct copies, and there are no amendments or modifications thereto except as set forth in such documents. 5.37 Lextron Representation and warranties. Lextron, as a fifty percent owner of Seller, hereby joins Seller and the other parties identified in the beginning of Article 5 in the following representations and warranties contained herein: Section 5.1, 5.2, and 5.34. 5.38 Survival of Representations and Warranties. The representations and warranties of Seller made in this Agreement are correct, true, and complete in all material aspects as of the date hereof and will be correct, true, and complete in all material aspects at the Closing Date with the same force and effect as though such representations and warranties had been made at the Closing Date, and shall survive the Closing only as provided in Article IX. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER 6.1 Buyer represents and warrants to Seller, on and as of the date hereof and on and as of the Closing Date, as follows: 6.2 Organization of Buyer. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. 6.3 Power and Authority. Buyer has all requisite power and authority to enter into this Agreement, and all other agreements in connection herewith, and to perform the obligations to be performed by it hereunder. All corporate and other proceedings required to be taken by or on the part of Buyer to execute, deliver, and carry out the terms of this Agreement, and all other agreements or documents to be executed or delivered in connection herewith, and to perform its obligations hereunder and thereunder, have been duly and properly taken. This Agreement, and all other agreements and documents to be executed and delivered by Buyer in connection herewith when executed and delivered, constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms. 6.4 No Violation to Result. The execution and delivery of this Agreement and all other agreements and documents to be executed and delivered in connection herewith, and the consummation of the transactions contemplated hereby and thereby: 6.4.1 are not in violation or breach of, do not conflict with or constitute a default under, and will not accelerate or permit the acceleration of the performance required by, any of 17 18 the terms of the charter documents or bylaws of Buyer or any note, debt instrument, security agreement, or mortgage, or any other contract or agreement, written or oral, to which Buyer is a party or by which Buyer or any of its properties or assets is bound; 6.4.2 will not be an event that, after notice or lapse of time or both, will result in any such violation, breach, conflict, default, or acceleration; and 6.4.3 will not result in a violation under any law, judgment, decree, order, rule, regulation or other legal requirement of any governmental authority, court, or arbitration tribunal whether Federal, state, or local (within the United States or otherwise) at law or in equity, and applicable to Buyer. 6.5 Brokers. Buyer has not expressly or implicitly retained any broker, finder, investment banker, or financial advisor in connection with this Agreement or the transactions contemplated hereby. Buyer has not taken any actions that will cause Seller to incur or be required to pay, any broker, finder, investment banker, financial advisor, or similar fee in connection with this Agreement or any transaction contemplated hereby, to any Person acting as broker, finder, investment banker, financial advisor, or in any similar capacity on behalf of Buyer. 6.6 Special Representations Regarding Lextron and Anderson. Buyer fully understands that Lextron is an inactive investor in Seller, and that Anderson is Lextron's designated appointed manager of Seller. Buyer understands that Lextron and Anderson have not been involved in the day to day management of Seller . 6.7 VetLife Contract. Buyer is familiar with the terms and provisions of the VetLife Contract. Buyer acknowledges and agrees that to the extent any of Seller's representations, warranties, covenants, and agreements in this Agreement are inconsistent with or otherwise conflict with or contradict in any respect the VetLife Contract, the representations, warranties, covenants, and agreements of Seller herein are modified to be consistent with the terms of the VetLife Contract. 6.8 Terminations and Covenants Not to Compete. Buyer understands and agrees that prior to the Closing Date Seller intends to and will terminate its Covenants Not to Compete with Lextron and Anderson. Seller acknowledges and agrees that Lextron and Anderson reserve the right to compete in any and all respects against Seller after the Closing Date. ARTICLE VII FURTHER AGREEMENTS AND ASSURANCES OF SELLER 7.1 Obligations to Employees. Seller shall terminate the employment of each of its employees as of the Closing Date. To the extent any employee of Seller rejects Buyer's offer of employment made pursuant to Section 7.1 hereof, Seller shall be responsible for, and shall pay, all amounts (excluding any amounts included in the Assumed Liabilities), including wages, salaries, bonuses, commissions, vacation pay, and severance pay, if any, and all other employee 18 19 benefits due to any or all of Seller's employees or independent contractors. Specifically, but not in limitation of the foregoing, Seller shall be responsible for providing COBRA health continuation coverage under Section 4980B of the Code to all of its employees to the extent required by law, as well as complying with to the extent required by law all Federal, state, and local laws, rules, and regulations promulgated thereunder, relating to the termination of employees, including, but not limited to, the Worker's Adjustment and Retraining Notification Act. Buyer does not assume and Seller shall with respect to matters accruing prior to the Closing Date indemnify, defend, and hold harmless Buyer against any and all obligations and responsibilities with respect to each and every employee of Seller under any employment agreement, current or future pension, retirement, deferred compensation, bonus, profit-sharing, insurance, or similar plan, agreement, arrangement, or formal or informal understanding, for the benefit of employees, in each case whether or not legally binding, that Seller maintains or ever has maintained or to which Seller contributes or ever has contributed or to which Seller is obligated to contribute including, but not limited to, the Employee Benefit Plans. Buyer shall have no liability whatsoever to employees of Seller with respect to accrued benefits under any Employee Benefit Plans for employees' service with Seller prior to the Closing Date, whether or not any of such employees are offered employment by, or become employees of, Buyer. Seller shall be responsible for and shall indemnify, defend, and hold harmless Buyer against all employee benefit claims (including long-term disability and medical and hospitalization claims) of any nature whatsoever and workers' compensation claims: (a) that have arisen on or before the Closing Date for any and all employees of Seller; (b) for employees of Seller who are or become retired on or before the Closing Date with respect to disability, illness, or any other state of facts occurring before or after the Closing Date; and (c) for any and all employees of Seller (or their eligible dependents) with respect to events or situations that may lead to a determination of eligibility or disability, illness, or any other state of facts occurring before the Closing Date. Buyer shall have no liability whatsoever in respect of any of the foregoing accruing or occurring prior to the Closing Date. 7.2 Non-Disclosure and Non-Competition Relating to the Business. From and after the Closing Date, Seller, PCC Feedyard Investment Corporation, Tom Tippens and Roberta "Bobbie" Tippens each shall not: 7.2.1 at any time or in any manner, either directly or indirectly, divulge, disclose, or communicate to any Person, except the authorized attorneys, accountants, or representatives of Seller who have a need to know in connection with their respective services for Seller, in any manner whatsoever, any Confidential Information (as defined in this Section); 7.2.2 for a period of five (5) years from and after the Closing Date, in any manner, either directly or indirectly, as an owner, partner, officer, director, consultant, agent, employee, independent contractor, or equity holder (as applicable) of any Person, engage in the business of developing, marketing, distributing, or selling services or software designed to provide information services, imaging tools, or animal supplements (except for the sale, prescription, or distribution of annual supplements in the ordinary course of a bovine and equine veterinary practice) in the markets of veterinary medicine, animal sciences, or human medicine, anywhere within the United States of America; 19 20 7.2.3 for a period of five (5) years from and after the Closing Date, in any manner, either directly or indirectly, solicit any employee of Buyer (or the Business) to work for any Person other than Buyer, or engage in any activity that would cause any employee to violate any agreement with Buyer, or dissuade, or attempt to dissuade, any such employee from faithfully discharging such employee's contractual and fiduciary obligations to serve Buyer's interests with undivided loyalty; and 7.2.4 induce or persuade any customer or supplier of Buyer (or the Business) to terminate its relationship with Buyer (or the Business) or to enter into any relationship with any other Person engaged in the business of developing, marketing, distributing, or selling services or software designed to provide information services, imaging tools, or animal supplements (except for the sale, prescription, or distribution of annual supplements in the ordinary course of a bovine and equine veterinary practice) in the markets of veterinary medicine, animal sciences, or human medicine, anywhere within the United States of America. For purposes of this Section 7.2, "Confidential Information" means any information not in the public domain concerning any matters affecting or relating to the Business, including, but not limited to, inventions, trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, source code, databases, other original works of authorship, records, ideas and research relating to design, coding, operation, use, installation, or maintenance of computer software or proposed computer software products of the Business, any portion of any reports, analyses or other materials generated or used in connection with the Business, the prices Seller obtains or has obtained from the sale of, or at which it sells or has sold, its products and services, and listings of any or all of the foregoing, in whatever form, or any other information concerning the Business without regard to whether all or any part of the foregoing matter would otherwise be deemed "confidential" or "material," the parties hereto stipulating that, as between them, the same are confidential and material and significantly affect the effective and successful conduct of the Business. If any clause or provision of this Section 7.2 be found unenforceable by a court of competent jurisdiction, then such clause or provision shall be deemed to be enforceable to the extent permitted by law and every other clause and provision shall continue in full force and effect. Seller acknowledges that the restraints imposed upon it pursuant to this Section 7.2 are no greater than is reasonably necessary to preserve and protect the assets and legitimate business interests of Buyer and that such restraints will not impose undue hardship on Seller, and that a violation of this Section by Seller would irreparably injure Buyer. Accordingly, Buyer may, in addition to pursuing its other remedies, obtain an injunction from any court having jurisdiction of the matter against Seller, as applicable, for any such violation without having to prove the inadequacies of monetary relief and no bond or other security shall be required in connection with such injunction. The agreements contained in this Section 7.2 shall be construed and enforced independently of any other provision of this Agreement or any other understanding or agreement between the parties, and the existence of any claim or cause of action of Seller against Buyer, of whatever nature, shall not constitute a defense to the enforcement of the agreements contained in this Section 7.2 against Seller. 20 21 7.3 Satisfaction of Excluded Liabilities. From and after the Closing Date, Seller shall pay, perform, and otherwise satisfy in full when due, all liabilities and obligations that relate to or may affect the Business or the Purchased Assets, including, but not limited to, the Excluded Liabilities, excepting only the Assumed Liabilities. 7.4 Further Assurances. From time to time after the Closing Date, without additional consideration, Seller shall execute and deliver all such other reasonable instruments of sale, assignment, conveyance, and transfer and shall take all such other reasonable action, as Buyer may reasonably request to more effectively transfer and vest in Buyer, and to put Buyer in possession of, any of the Purchased Assets including, but not limited to, the data which Seller processes. 7.5 Name Change. Seller shall take all necessary corporate action to approve the withdrawal or cancellation of every registration or a corporate or assumed name incorporating the names "PCC," or "Professional Cattle Consultants, L.L.C." in each state where Seller has registered a corporate or assumed name incorporating such names. Seller shall prepare and deliver to Buyer at Closing, all documentation and filings necessary to effect such actions, in forms appropriate for filing by Buyer. After the Closing Date, Seller shall refrain from using the names "PCC" or Professional Cattle Consultants, L.L.C. or any derivation thereof, except in an historical manner. 7.6 Collection of Accounts Receivable. For a period of ninety (90) days from the Closing Date, Seller shall reasonably assist Buyer in the collection of the Accounts Receivable. 7.7 Best Efforts. For a period of ninety (90) days from the Closing Date, each of Seller and Roberta Tippins shall use its/her best efforts to maintain the oral and written Purchased Contracts and to undertake all actions necessary to effect the transition of such agreements/relationships to Buyer and to secure additional customers. ARTICLE VIII FURTHER AGREEMENTS AND ASSURANCES OF BUYER 8.1 Satisfaction of Conditions by Buyer. Buyer shall not voluntarily undertake any course of action inconsistent with the satisfaction of the requirements or conditions applicable to it in this Agreement, including, but not limited to, the satisfaction of the Assumed Liabilities, and Buyer shall promptly do all such acts and take all such measures as may be appropriate to enable it to perform the obligations herein provided to be performed by it. 8.2 Buyer to Assist in Obtaining Consents. Buyer shall provide assistance, as reasonably requested by Seller, to secure consents to the assignment of any of the Purchased Contracts to be assumed by Buyer hereafter. 8.3 Employment. Buyer shall offer at-will employment to all employees of Seller set forth on Schedule 8.3, effective as of the first business day following the Closing Date, subject to execution by each such employee of Buyer's confidentiality and intellectual property agreement. 21 22 8.4 Disclosure of Data. Buyer agrees that for so long as it provides its customers with what is currently referred to as the "PCC Monthly Cattle Gram" future form Buyer shall designate in its sole discretion, that it will provide to Tom Tippens and Lextron the PCC monthly Cattle Gram such information so long as each of Mr. Tippens and Lextron are current with their respective subscription and or others fees owed to Buyer, as in effect from time to time, and further provided that Mr. Tippen and Lextron agree that each shall not use such information to compete with Buyer in any way. ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 9.1 Survival of Representations and Warranties. Notwithstanding any other provision of this Agreement, each and every representation and warranty of Seller set forth in this Agreement or any other agreement or document executed or delivered in connection herewith, shall survive the Closing for a period of two (2) years from the Closing Date, despite any investigations made by or on behalf of any party hereto, excepting only that the representations and warranties of Seller set forth in Sections 5.1 and 5.14, shall survive the Closing without limitation, and the representations and warranties with respect to taxes set forth in Section 5.9, shall survive until the expiration of any statutes of limitation applicable with respect to such taxes, including any extensions with respect to such statutes granted by or on behalf of Seller. All of the covenants and other agreements of the parties hereto shall survive the Closing until the expiration of any statutes of limitation applicable thereto. 9.2 Indemnification. Seller hereby indemnifies and agree to defend and hold Buyer and its officers, directors, shareholders, affiliates, employees, successors, and assigns (collectively, the "Buyer Indemnitees") harmless from and against any and all liabilities, losses, damages, costs, and expenses (including, without limitation, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Buyer Indemnitees because of any inaccuracy in, or breach or violation of, any of the representations, warranties, covenants, or agreements made by Seller pursuant to this Agreement or any other agreement or document executed or delivered in connection herewith, whether or not such inaccuracy, breach, or violation was known or should have been known, by Buyer, Seller, on the date of this Agreement or on the Closing Date, it being the acknowledged intention of the parties that Seller shall be completely responsible for, and Buyer shall be conclusively deemed to have relied upon, such representations, warranties, and covenants in the consummation of the purchase and sale transactions contemplated herein. In addition, Seller hereby indemnifies and agrees to defend and hold the Buyer Indemnitees harmless from and against any and all liabilities, lawsuits, damages, costs and expenses (including, but not limited to, court costs, costs of investigation, and reasonable attorneys' fees), incurred or sustained by any of the Buyer Indemnitees as a result of: (i) any and all debts, liabilities (including, but not limited to, the Excluded Liabilities set forth in Section 0), obligations, or commitments of Seller of any nature whatsoever, whether approved, liquidated, unliquidated, ordinary, extraordinary, absolute, contingent, unknown, 22 23 known, or otherwise, except the Assumed Liabilities, which Buyer expressly agrees to assume pursuant to Section 0; and (ii) any and all suits, actions, or claims (including, but not limited to, product liability, patent infringement, and unfair trade practice claims) relating to the sale or any other form of transaction, or any action or inaction on the part of Seller at any time on or prior to the Closing Date, whether or not pending as of the Closing Date. ARTICLE X AMENDMENT; WAIVER 10.1 Amendment. This Agreement may only be amended in a writing that refers to this Agreement and is executed by the parties hereto. 10.2 Integration. This Agreement (including the Exhibits and Schedules hereto), and each agreement or document executed or delivered in connection herewith, embodies the entire agreement of the parties hereto in relation to the purchase and sale of the Purchased Assets and the other transactions contemplated herein, and supersedes all prior understandings and agreements of the parties with respect to the subject matter hereof. 10.3 Waiver; Remedies. No delay on the part of any party in exercising any right, power, or privilege shall operate as a waiver thereof, nor shall any waiver of any right, power, or privilege operate as a waiver of any other right, power, or privilege, nor shall any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or of any other right, power, or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that the parties otherwise may have at law or in equity, by statute or otherwise. ARTICLE XI MISCELLANEOUS 11.1 Successors, Assigns, and Third Parties. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successor and assigns; provided, however, that Seller may not make any assignment of this Agreement or any interest herein or obligation hereunder, without the prior written consent of Buyer. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any Person, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 11.2 Governing Law. This Agreement shall in all respects be interpreted, construed, and governed by and in accordance with the laws of the State of Florida, applicable to contracts made and to be performed therein. Each of the parties to this Agreement irrevocably consents to the jurisdiction and venue (and waives any inconvenient forum objection) of the Federal and state courts located in the State of Florida, County of Indian River, for the purposes of any court proceedings hereunder and to accept service of process by mail. 23 24 11.3 Specific Performance. The purpose of Buyer in entering this Agreement is to gain control of the Purchased Assets of the Business. Such Business and the Purchased Assets are unique and cannot be readily obtained on the open market. If Seller refuses to perform its obligations under this Agreement, Buyer shall be entitled to specific performance. In any action to enforce the provisions of this Agreement, Seller shall waive the defense that there is an adequate remedy at law. 11.4 Certain Words. Words such as "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular Section or subsection of this Agreement unless the context indicates otherwise. Wherever appropriate in the context, terms used herein in the singular also include the plural, and vice versa, and each masculine, feminine, or neuter pronoun shall also include the other genders. 11.5 Notices. Except as otherwise expressly provided herein, any notice, consent, or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been given three (3) days after the date sent if sent by United States certified mail, return receipt requested, with proper postage thereon, one (1) day after the date sent if sent by overnight courier of national recognition, or when transmitted, if sent by facsimile, and shall be addressed as follows: (a) If to Buyer: eMERGE Vision Systems, Inc. 10315 102nd Terrace Sebastian, FL 32968 Attention: Charles L. Abraham with a copy to Karen Keating, Esq. Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087-1945 Veenita Bhatia, Esq. Morgan Lewis & Bockius 1701 Market Street Philadelphia, PA 19103 Telephone: 215-963-5220 (b) If to Seller: [NEW COMPANY] 2811 E. Main Street Weatherford, Oklahoma 73096 Attn: Tom L. Tippens with a copy to Terry W. Tippens, Esq. Seller's counsel: Fellers, Snider, Blankenship, Bailey & Tippens 24 25 100 North Broadway 1700 Bank One Tower Oklahoma City, Oklahoma 73102 and to Lextron Dr. Robert C. Hummel Arlen Anderson Lextron, Inc. 620 "O" Street Post Office Box BB Greeley, Colorado 80632-1240 with a copy to John O'Brien, Esq. Lextron's counsel Kerr Friedrich Brosseau Bartlett, LLC 1600 Broadway, Suite 1360 Denver, Colorado 80202 or at such other address or addresses as the party addressed may from time to time designate in writing. 11.6 Expenses. All sales and similar taxes arising out of the transfer of the Purchased Assets and the transactions contemplated hereby shall be paid by the party responsible by law for such tax. All legal, accounting, and other costs and expenses incurred in connection herewith and the transactions contemplated hereby shall be paid by the party incurring such expenses. 11.7 Confidentiality. All nonpublic information disclosed heretofore or hereafter by Buyer or Seller to the other in connection with this Agreement shall be kept confidential by such other, and shall not be used other than in connection with this Agreement, except to the extent it was known when received or as it is or hereafter becomes lawfully obtainable from other sources, or to the extent such duty as to confidentiality and non-use is waived, or except as may be required by court order or any governmental agency. Such obligation as to confidentiality and non-use shall survive any termination of this Agreement. 11.8 Headings. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 11.9 Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, illegal, inoperative, or unenforceable, the same shall not affect any other provision contained herein, or render the same invalid, inoperative, or unenforceable to any extent whatsoever, which provisions shall remain in full force and effect. 11.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute the same agreement. 25 26 11.11 Record Retention. The parties hereto agree to retain for a period of seven (7) years from and after the Closing, and make available to each other and their respective agents, counsel, accountants, employees or representatives, all of the books, records and documents (including records with respect to accounts receivable, accounts payable and general ledger maintained on magnetic tape or any other electronic medium) relating to Seller which existed on the date next preceding the Closing and which were in the possession of any of them. IN WITNESS WHEREOF, the parties have caused this Asset Purchase Agreement to be executed and delivered by its duly authorized officer as of the date first written in the Preamble to this Agreement. SELLER: Professional Cattle Consultants, L.L.C., an Oklahoma limited liability company By: /s/: Tom L. Tippens ---------------------------------- Tom L. Tippens Its: Co Manager Professional Cattle Consultants, L.L.C., an Oklahoma limited liability company By: /s/: Arlen Anderson ---------------------------------- Arlen Anderson Its: Co Manager BUYER: eMERGE Vision Systems, Inc., a Delaware corporation By: /s/: Charles L. Abraham ---------------------------------- Its: Chief Executive Officer ---------------------------------- 26 27 LIST OF APPENDIX EXHIBITS AND SCHEDULES APPENDIX Appendix One VetLife Contract EXHIBITS Exhibit A Bill of Sale and Assignment Exhibit B Assignment and Assumption Agreement Exhibit C Assignment of Intellectual Property Exhibit D Confidentiality and Non-Compete Agreement Exhibit E Shareholders' Agreement Exhibit F Registration Rights Agreement Exhibit G Legal Opinion SCHEDULES Schedule 1(a) Inventory Schedule 1(c) Software Contracts Schedule 1(d) Computer Equipment Schedule 1(e) Equipment Schedule 1(f) Accounts Receivable Schedule 1(h) Purchased Contracts Schedule 1(j) Intellectual Property Schedule 0 Assumed Liabilities Schedule 0 Allocation of Purchase Price Schedule 0 Lien Termination Statements Schedule 0 Licenses and Permits Schedule 0 Copyright Protection Schedule 0 Trade Secret Protection Schedule 0 Litigation; Warranty Claims Schedule 0 Employee Benefit Plans Schedule 0 Insurance Schedule 0 Property Leases Schedule 0 Customers 1 EX-10.14 14 SUBSCRIPTION AGREEMENT LETTER FOR PURCHASE 1 EXHIBIT 10.14 eMerge Vision Systems, Inc. 10315 102nd Terrace Sebastian, FL 32958 Gentlemen: The undersigned subscriber ("Subscriber") hereby subscribes for and agrees to purchase Two Million Four Hundred thousand (2,400,000) shares of the Series B Junior Preferred Stock, $..01 par value per share, (the "Shares") of eMerge Vision Systems, Inc. (the "Company") for an aggregate purchase price of $4,800,000. Upon your acceptance of this subscription, Subscriber will cancel the debt of the Company to the Subscriber in the amount of the purchase price against issuance to Subscriber of a certificate representing the Shares, which shall be free and clear of all liens, mortgages, pledges, security interests and other encumbrances except as set forth herein or as provided for in the Articles of Incorporation of the Company, and which shall be fully paid and non-assessable. Subscriber hereby represents, warrants and acknowledges to the Company and agrees with the Company as follows: 1. Subscriber is acquiring the Shares solely for its own account without a view to the distribution or resale thereof; 2. The Shares are not being sold by the Company pursuant to any registration under the Securities Act of 1933, the Florida Securities Laws or any other applicable state securities laws (collectively, the "Securities Laws"). The Shares are being sold in reliance upon exemption from registration under such laws, and Subscriber understands that it may not sell, transfer or otherwise dispose of any or all of the Shares except pursuant to an effective registration under the applicable Securities Laws or upon its delivery to the Company of an opinion of counsel that the sale or disposition is exempt from registration under the applicable Securities Laws. Subscriber understands that the foregoing transfer restrictions are in addition to any transfer restrictions set forth in the Company's Certificate of Incorporation and any contractual transfer restrictions to which Subscriber may agree. A legend will be placed on the certificates evidencing the Shares Subscriber is purchasing hereby, and stop-transfer instructions will be issued to the transfer agent of the Shares to insure compliance with the provisions of the Securities Laws. 3. Unless otherwise expressly agreed to in writing by the Company, the Company has no obligation or intention to effect a registration of the Shares for resale by Subscriber, and Subscriber must therefore hold the Shares indefinitely unless a registration covering the Shares is effected or an exemption from registration is available. 2 4. Subscriber (a) can bear the economic risk of the purchase of the Shares, including the total loss of its investment, (b) has no need for liquidity in this investment, and, (c) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the Company and the investment in the Shares. 5. Prior to the execution of this Agreement, Subscriber and its attorneys, accountants, and other advisers, if any, have: (a) been provided with full and free access and opportunity to inspect, review, examine and inquire about all books, records and information (financial or otherwise) of the Company, its business and affairs, and have made such inspection, review, examination and inquiry as they have deemed appropriate; and (b) been offered the opportunity to ask such questions and obtain such additional information concerning the Company and its business and affairs as they have requested so as to understand the nature of the investment in the Shares and to verify the accuracy of the information obtained as a result of investigation. Neither the Company nor any other person has made any representation or warranty of any kind respecting the Company, its business and affairs. The decision to purchase the Shares has been made solely on the basis of the information obtained pursuant to the inspection, review, examination and inquiry referred to in this Section 5 hereof and has not been based on any other information. 6. Subscriber is an accredited investor as defined in Regulation D under the Securities Act of 1933, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the Company and the investment in the Shares. Please indicate your acceptance of this subscription by signing and returning to Subscriber one copy of this letter. Very truly yours, XL VISION, INC. By: /s/: David Szostak ---------------------------------- Vice President and Chief Financial Officer ACCEPTED AND AGREED: eMERGE VISION SYSTEMS, INC. By: /s/: Charles L. Abraham ------------------------------- 3 Charles Abraham, President Dated: April, 1999 EX-10.15 15 PREFERRED STOCK PURCHASE AGREEMENT DATED 04/01/99 1 EXHIBIT 10.15 PREFERRED STOCK PURCHASE AGREEMENT eMERGE VISION SYSTEMS, INC. 10315 102ND Terrace Sebastian, FL 32957 As of April 1, 1999 To the Persons listed on Exhibit 1.01 hereto Re: Series C Preferred Stock Gentlemen: eMerge Vision Systems, Inc. (the "Company"), a Delaware corporation, agrees with each of you as follows: ARTICLE I PURCHASE AND SALE OF SHARES AND STOCK OPTION 1.01 Purchase and Sale of Shares. At the Closing, the Company will sell, and you will buy, the number of shares of Series C Preferred Stock (the "Preferred Stock") set forth in Exhibit 1 attached hereto, at a purchase price of $5.00 per share (the "Purchased Shares"). The designation, rights, preferences and other terms and provisions of the Preferred Stock are set forth in Exhibit 2 attached hereto. 1.02 The Conversion Shares . The Company has authorized and has reserved and covenants to continue to reserve, free of preemptive rights and other similar contractual rights of shareholders, a sufficient number of its shares of Common Stock to satisfy the rights of conversion of the holders of the Purchased Shares. Any shares of Common Stock issuable upon conversion of the Purchased Shares (and such shares when issued) are herein referred to as the "Conversion Shares." The Purchased Shares and Conversion Shares are sometimes collectively referred to as the "Shares." 1.03. Purchase Price and Closing. The closing shall take place at the offices of Safeguard Scientifics, Inc., 800 The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087, at 10:00 a.m. on April 28, 1999, or at such time and date thereafter as the Purchaser and the Company may agree (the "Closing"). At the Closing, the Company will deliver to the nominee of the Purchaser a certificate for the Purchased Shares, and the Purchaser or its nominee will deliver the purchase price to the Company. 1.04. Use of Proceeds. The Company shall use the cash proceeds from the sale of the Purchased Shares for working capital and general corporate purposes. 2 1.05. Representations by the Purchasers. (a) Investment Representations. Each Purchaser represents that it is its present intention to acquire the Shares for its own account (and it will be the sole beneficial owner thereof) and that the Shares are being and will be acquired by it for the purpose of investment and not with a view to distribution or resale thereof except pursuant to registration under the Securities Act or exemption therefrom. The acquisition by the Purchaser of the Purchased Shares shall constitute a confirmation of this representation by the Purchaser. the Purchaser further represents that it understands and agrees that, until registered under the Securities Act or transferred pursuant to the provisions of Rule 144 or Rule 144A as promulgated by the Commission, all certificates evidencing any of the Shares, whether upon initial issuance or upon any transfer thereof, shall bear a legend, prominently stamped or printed thereon, reading substantially as follows: "The securities represented by this certificate have not been registered under the Securities Act of 1933 or applicable state securities laws. These securities have been acquired for investment and not with a view to distribution or resale. These securities may not be offered for sale, sold, delivered after sale, transferred, pledged or hypothecated in the absence of an effective registration statement covering such shares under the Act and any applicable state securities laws, or the availability of an exemption from registration thereunder." (b) Access to Information. Purchaser or its representative during the course of this transaction, and prior to the purchase of any Purchased Shares, has had the opportunity to ask questions of and receive answers from management of the Company concerning the terms and conditions of the offering of the Purchased Shares and the additional information, documents, records and books relative to its business, assets, financial condition, results of operations and liabilities (contingent or otherwise) of the Company. (c) General Access. Purchaser or its representative has received and read or reviewed, and is familiar with, this Agreement and the other agreements executed or delivered herewith, including the terms of the Preferred Stock, and confirms that all documents, records and books pertaining to the Purchaser's investment in the Company and requested by the Purchaser or his representative have been made available or delivered to him. (d) Sophistication and Knowledge. Purchaser or its representative has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Purchased Shares. Purchaser can bear the economic risks of this investment and can afford a complete loss of his investment. (e) Transfer Restrictions Imposed by Securities Laws. Purchaser understands that: the Shares have not been registered under the Securities Act and applicable state securities laws, and, therefore, cannot be resold unless they are subsequently registered under the Securities Act and applicable state securities laws or unless an exemption from such registration is 2 3 available; Purchaser is and must be purchasing the Purchased Shares for investment for the account of Purchaser and not for the account or benefit of others, and not with any present view toward resale or other distribution thereof. Purchaser agrees not to resell or otherwise dispose of all or any part of the Shares purchased by him, except as permitted by law, including, without limitation, any regulations under the Securities Act and applicable state securities laws; the Company does not have any present intention and is under no obligation to register the Shares under the Securities Act and applicable state securities laws, except as provided in any separate registration rights agreement, if any, between Purchaser and the Company; and Rule 144 or Rule 144A under the Securities Act may not be available as a basis for exemption from registration of the Shares thereunder. (f) Lack of Liquidity. Purchaser has no present need for liquidity in connection with his purchase of the Purchased Shares. (g) Suitability and Investment Objectives. The purchase of the Purchased Shares by the Purchaser is consistent with the general investment objectives of the Purchaser. The Purchaser understands that the purchase of the Purchased Shares involves a high degree of risk in view of the fact that, among other things, the Company is a start-up enterprise, and there may be no established market for the Company's capital stock. (h) Accredited Investor Status. Purchaser is an "Accredited Investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. 1.06. Brokers or Finders. Purchaser represents that no Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon the Company for any commission, fee or other compensation as a finder or broker because of any act or omission by Purchaser or his agents. ARTICLE II CONDITIONS TO PURCHASERS' OBLIGATIONS The obligation of the Purchasers to close is subject to the following conditions: 2.01. Representations and Warranties. Each of the representations and warranties of the Company set forth in Article III hereof shall be true, accurate and correct on the date of the Closing. 2.02. Documentation at Closing. The Purchasers shall have received prior to or at the Closing all of the following materials, each in form and substance satisfactory to each Purchaser and its counsel, and each of the following events shall have occurred, or each of the following documents shall have been delivered, prior to or simultaneous with the Closing: (a) A copy of the Certificate of Incorporation of the Company, as amended or restated to date, together with such evidence as may be available of the filing thereof; a copy of the resolutions of the Board of Directors providing for the approval of the Amended and Restated 3 4 Certificate of Incorporation of the Company in the form attached as Exhibit 2, the approval of the issuance of the Purchased Shares; a copy of a consent of shareholders of the Company approving the Amended and Restated Articles of Incorporation of the Company; and a copy of the Bylaws of the Company, all of which have been certified by the Secretary of the Company to be true, complete and correct in every particular; and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, required to be obtained at or prior to the Closing with respect to this Agreement and the issuance of the Purchased Shares. (b) The Company shall have obtained any consents or waivers necessary to be obtained at or prior to the Closing to execute and deliver this Agreement, the Purchased Shares and the other agreements and instruments executed and delivered by the Company in connection herewith and to carry out the transactions contemplated hereby and thereby, and such consents and waivers shall be in full force and effect at the Closing. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement, the Purchased Shares and the other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken. (c) The Certificate of Incorporation of the Company shall have been amended and restated in the form set forth in Exhibit 2 attached hereto. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants as of the Closing as follows: 3.01. Organization and Standing of the Company. The Company is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as now proposed to be conducted and to execute and deliver this Agreement, to issue, sell and deliver the Purchased Shares and to issue and deliver the Conversion Shares and to perform its other obligations pursuant hereto and thereto. The Company is duly licensed or qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions wherein the character of the property owned or leased or the nature of the activities conducted by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a material adverse effect on the business, operations or financial condition of the Company. 3.02. Corporate Action. This Agreement and the other agreements executed in connection herewith have been duly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The Purchased Shares have been duly authorized. The issuance, sale and delivery of the Purchased Shares and the issuance and delivery of the Conversion Shares upon conversion of the Purchased Shares have been duly authorized by all required corporation action; the Purchased Shares have been validly issued, are 4 5 fully paid and nonassessable with no personal liability attaching to the ownership thereof and are free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in this Agreement; and the Conversion Shares have, as of the Closing, been duly reserved for issuance upon conversion of the Purchased Shares and, when so issued, will be duly authorized, validly issued, fully paid and nonassessable with no personal liability attaching to the ownership thereof and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in this Agreement. 3.03. Brokers or Finders. No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon the Company for any commission, fee or other compensation as a finder or broker because of any act or omission by the Company or its respective agents. 3.04. Capitalization; Status of Capital Stock. As of the Closing, the Company will have a total authorized capitalization consisting of (i) 100,000,000 shares of Common Stock, $.01 par value, and (ii) 15,000,000 shares of Preferred Stock, $.01 par value. The capitalization table attached as Exhibit 3 to this Agreement sets forth all of the issued and outstanding shares of capital stock of the Company and all issued and outstanding options, warrants, convertible securities, and rights which are exercisable for or convertible into shares of capital stock of the Company as of the Closing, and there are no shares reserved for issuance or commitments of the Company to issue any additional equity securities except as disclosed in Exhibit 3. All the outstanding shares of capital stock of the Company have been duly authorized, and are validly issued, fully paid and non-assessable. The Purchased Shares when issued and delivered in accordance with the terms hereof, and the Conversion Shares, when issued and delivered upon conversion of the Purchased Shares, will be duly authorized, validly issued, fully-paid and non-assessable. 3.05. Registration Rights. The Purchasers are parties to the Registration Rights Agreement dated July 17, 1997 among the Company and the purchasers of its Series A Preferred Stock. As a result, the Shares will be included in the definition of Registrable Securities under that agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4.01. Reporting Requirements. Until the consummation of the Company's Initial Public Offering, the Company will furnish the following to each person who holds at least 100,000 shares issued pursuant to this Agreement: (a) Monthly Reports. As soon as available and in any event within 30 days after the end of each calendar month, consolidated and consolidating balance sheets of the Company as of the end of such month and consolidated and consolidating statements of income and retained earnings and a summary statement of monthly cash flow of the Company for such month and for the period commencing at the end of the previous fiscal year and ending with the 5 6 end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year, and including comparisons to the monthly budget or business plan and an analysis of the variances from the budget or plan, prepared in accordance with generally accepted accounting principles consistently applied; and, as soon as available and in any event within 30 days after the end of each fiscal quarter, a consolidated and consolidating statement of changes in financial position of the Company for such quarter and for the corresponding period of the prior fiscal year, prepared in accordance with generally accepted accounting principles consistently applied; (b) Annual Reports. As soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the annual audit report for such year for the Company, including therein consolidated and consolidating balance sheets of the Company as of the end of such fiscal year and consolidated and consolidating statements of income and retained earnings and of changes in financial position of the Company for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, all such consolidated statements to be duly certified by the chief financial officer of the Company and an independent public accountant of recognized national standing approved by a majority of the Board of Directors; (c) Budgets and Operating Plan. As soon as available and in any event at least 30 days before the beginning of each fiscal year of the Company, a business plan and monthly and quarterly operating budgets for the forthcoming fiscal year, and as soon as available and in any event within 30 days after the end of each calendar month, monthly comparisons against the business plan and monthly operating budgets; ARTICLE V MISCELLANEOUS 5.01. Amendments, Waivers and Consents. Any provision in the Agreement to the contrary notwithstanding, and except as hereinafter provided, changes in, termination or amendments of or additions to this Agreement may be made, and compliance with any covenant or provision set forth herein may be omitted or waived, if the Company (i) shall obtain consent thereto in writing from the holder or holders of at least a majority in interest of the Shares and (ii) shall deliver copies of such consent in writing to any holders who did not execute such consent; provided that no consents shall be effective to reduce the percentage in interest of the Shares the consent of the holders of which is required under this Section 5.02. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 5.02. Addresses for Notices. All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed, faxed, or delivered by hand or guaranteed courier service to each applicable party: If to any other holder of the Shares: at such holder's address for notice as set forth in 6 7 Exhibit 1 hereto or at such other address as shall be designated by such Person in a written notice to the other parties complying as to delivery with the terms of this Section. If to the Company: eMerge Vision Systems, Inc. 10315 102ND Terrace Sebastian, FL 32957 Fax: 561-589-3779 Attn: Mike Janney, CFO or at such other address as shall be designated by the Company in a written notice to the other parties complying as to delivery with the terms of this Section. 5.03. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company and the Purchaser and their respective heirs, successors and assigns, except that the Company shall not have the right to delegate its obligations hereunder or to assign its rights hereunder or any interest herein without the prior written consent of the holders of at least a majority in interest of the Shares. 5.04. Survival of Representations and Warranties. All representations and warranties made in this Agreement, the Shares, or any other instrument or document delivered in connection herewith or therewith, shall survive the execution and delivery hereof or thereof. 5.05. Severability. The provisions of this Agreement and the terms of the Preferred Stock are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement or the terms of the Preferred Stock shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or the terms of the Preferred Stock; but this Agreement and the terms of the Preferred Stock shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 5.06. Confidentiality. Purchaser agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information which the Purchaser may obtain from the Company pursuant to financial statements, reports and other materials submitted by the Company to the Purchaser pursuant to this Agreement, or pursuant to visitation or inspection rights granted hereunder, unless such information is known, or until such information becomes known, to the public; provided, however, that the Purchaser may disclose such information (i) on a confidential basis to his attorneys, accountants, consultants and other professionals to the extent necessary to obtain their services in connection with its investment in the Company, (ii) to any prospective purchaser of any Shares from the Purchaser as long as such prospective purchaser agrees in writing to be bound by the provisions of this Section 5.06, (iii) to any affiliate or partner of the Purchaser and (iv) as required by applicable law. 7 8 5.07. Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the Commonwealth of Pennsylvania, and without giving effect to choice of laws provisions. 5.08. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 5.09. Further Assurances. From and after the date of this Agreement, upon the request of the Purchaser or the Company, the Company and the Purchaser shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Purchased Shares. IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase Agreement to be executed as of the date first above written. eMERGE VISION SYSTEMS, inc. By:___________________________ Title: PURCHASERS: SAFEGUARD 99 CAPITAL L.P. ______________________________ By: Safeguard Delaware, Inc., Name: its general partner By:___________________________________ ______________________________ Name: ______________________________________ ______________________________ Name: Name: 8 9 EXHIBIT 1 Schedule of Purchasers
Name and Address of Purchaser Number of Shares Purchase Price Safeguard 99 Capital L.P. 1,000,000 $ 5,000,000 c/o Safeguard Scientifics, Inc. 435 Devon Park Drive Wayne, PA 19087 Attn: Michael Miles, CFO Fax: 610-293-0601
9 10 EXHIBIT 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF eMERGE VISION SYSTEMS, INC. eMerge Vision Systems, Inc., a Delaware corporation, hereby certifies as follows: FIRST. The name of the corporation under which its Certificate of Incorporation was filed is Enhanced Vision Systems, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was September 12, 1994. SECOND. This Restated Certificate of Incorporation amends, restates and integrates the provisions of the Certificate of Incorporation of said corporation and has been duly adopted Delaware by majority vote of the holders of all of the outstanding stock entitled to vote thereon in accordance with the provisions of Sections 242 and 245 and all other applicable provisions of the General Corporation Law of the State of Delaware. THIRD. The text of the Certificate of Incorporation is hereby amended and restated to read herein as set forth in full: 1. The name of the corporation is eMerge Vision Systems, Inc. 2. The address of the corporation's registered office is 1013 Centre Road in the City of Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. 3. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The aggregate number of shares of all classes of stock which the Corporation shall have authority to issue 115,000,000 shares, of which 100,000,000 million shares shall be designated Common Stock, par value $0.01 per share (herein called the "Common Stock") and 15,000,000 shares shall be designated Preferred Stock consisting of 6,500,000 shares of Series A Preferred Stock, par value $0.01 per share (herein called the "Series A Preferred Stock"), 2,400,000 shares of Series B Junior Preferred Stock, par value $0.01 per share (herein called the "Series B Junior Preferred Stock") and 1,300,000 shares of Series C Preferred Stock, par value $0.01 per share (herein called the "Series C Preferred Stock"). The Board of Directors shall have the full authority permitted by law to divide the authorized and unissued shares into classes or series, or both, and to determine for any such class or series its designation and the number of shares of the class or series and the voting rights, preferences, limitations and special rights if any, of the shares of the class or series. *************** 10 11 DESCRIPTION AND DESIGNATION OF SERIES A PREFERRED STOCK A1. DESIGNATION. A total of 6,500,000 shares of the Company's Preferred Stock shall be designated the "Series A Preferred Stock". As used herein, the term "Preferred Stock" used without reference to the Series A Preferred Stock means the shares of Preferred Stock, without distinction as to series, except as otherwise expressly provided for herein, or as the context otherwise requires. A2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series A Preferred Stock (voting as a separate class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series A Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. "Subsidiary" or "Subsidiaries" means any corporation, partnership or joint venture of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time at least fifty percent (50%) of the outstanding voting shares or similar interests other than directors' qualifying shares. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. A3. LIQUIDATION, DISSOLUTION OR WINDING UP. A3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. A3.1.1 In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series A Preferred Stock in liquidation preference, and subject to the liquidation rights and preferences of any class or series of Preferred Stock designated in the future to be senior to, or on a parity with, the Series A Preferred Stock with respect to liquidation preference, the holders of each share of Series A Preferred Stock shall be 11 12 entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus or earnings ("Available Assets"), the greater of (i) an amount per share of Series A Preferred Stock equal to $1.00, plus $.10 for each year (pro rated for partial years) from July 16, 1997 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series A Preferred Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series A Preferred Stock and of any other series of Preferred Stock on parity with the Series A Preferred Stock with respect to liquidation preference the full amounts to which they otherwise would be entitled, the holders of Series A Preferred Stock and such other series of Preferred Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series A Preferred Stock and such other series of Preferred Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. A3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section A3; provided, however that, in the case of any such transaction to which the provisions of Section A5.6 also apply, the holders of a majority of the outstanding shares of Series A Preferred Stock (voting together as a single class) shall have the right to elect the benefits of the provisions of Section A5.6 hereof for all of the Series A Preferred Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section A3. The provisions of this Section A3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. A3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section A3 shall be payable in whole or in part in property other than cash, the value of any 12 13 property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such series and class. A4. VOTING POWER. A4.1 GENERAL. Except as otherwise required by applicable law or as otherwise provided herein, (i) each holder of Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation (including election of directors other than the Series A Directors, as hereinafter defined) and shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series A Preferred Stock could be converted, and (ii) the holders of shares of Series A Preferred Stock and Common Stock shall vote together (or render written consents in lieu of a vote) as a single class on all matters submitted to the stockholders of the Corporation (including election of directors to the extent not otherwise expressly provided for). Each holder of Series A Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. A4.2 LIMITATIONS DURING FIRST THREE YEARS. Notwithstanding paragraph A4.1, for a period of three years from the date of the initial filing of this Certificate of Designation, the holders of Series A Preferred Stock shall not have any voting rights, other than as required by law and as provided in paragraph A4.3 and Section A6 below. A4.3 DIRECTOR ELECTION RIGHTS. So long as any shares of Series A Preferred Stock remain outstanding, the holders of the Series A Preferred Stock, voting as a separate class, shall have the right to elect two directors of the Corporation (the "Series A Directors"). At any annual or special meeting of the Corporation held for the purpose of electing directors, the presence in person or by proxy (or by written consent) of the holders of a majority of the outstanding shares of Series A Preferred Stock shall constitute a quorum for the election of the Series A Directors. A5. CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Common Stock: A5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section 5, any shares of the Series A Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Common Stock. The number of shares of Common Stock which a holder of Series A Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series A Preferred Stock being converted at any time, by (ii) 13 14 the rate (the "Series A Conversion Rate") equal to the quotient obtained by dividing $1.00 by the "Series A Conversion Value." The Series A Conversion Value in effect from time to time, except as adjusted in accordance with this Section A5, shall be $1.00. A5.2 AUTOMATIC CONVERSION. A5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933, as amended, (other than on Form S-4 or S-8 on any successor forms thereto) covering the offer and sale of Common Stock in an underwritten public offering on a firm commitment basis in which the gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of the public offering of at least $30,000,000, but subject to the closing of such public offering, (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock in a rights offering to shareholders of Safeguard Scientifics, Inc., but subject to the closing of such rights offering, or (C) upon the election, set forth in a written notice to the Corporation, of holders of Series A Preferred Stock to convert at least two-thirds of the outstanding shares of Series A Preferred Stock to Common Stock; all outstanding shares of Series A Preferred Stock shall be converted automatically into the number of fully paid, non-assessable shares of Common Stock into which such shares of Series A Preferred Stock are convertible pursuant to this Section A5 as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. A5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph A5.2.1, the holders of the Series A Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series A Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. A5.3 ANTI-DILUTION ADJUSTMENTS. 14 15 A5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series A Preferred Stock outstanding, issue or sell shares of its Common Stock or "Common Stock Equivalents" (as defined in Section A5.3.2.1 below) without consideration or at a price per share or "Net Consideration Per Share" (as defined in Section A5.3.3 below) less than the Series A Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series A Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series A Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series A Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued.
Example: initial capital 1,000,000 initial conversion price $ 1.00 new shares issued 1,000,000 total new consideration $ 500,000 new issue price $ 0.50 new shares which would be issued at initial conversion price 500,000 new conversion price $ 0.75
15 16 The provisions of this Section A5.3.1 may be waived as to all shares of Series A Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series A Preferred Stock. A5.3.2 COMMON STOCK EQUIVALENTS. A5.3.2.1 GENERAL. For the purposes of this Section A5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any warrants, options, subscription or purchase rights with respect to such convertible or exchangeable securities (collectively, "Common Stock Equivalents"), shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series A Conversion Value shall be made under this Section A5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. A5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section A5.3, then, upon the effectiveness of each such change, the Series A Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section A5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series A Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series A Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series A Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series A Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series A Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series A Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series A Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. A5.3.3 NET CONSIDERATION PER SHARE. For purposes of this Section A5.3 the "Net Consideration Per Share" which shall be receivable by the Corporation for any Common Stock issued upon the exercise or conversion of any Common Stock Equivalents shall be determined as follows: 16 17 A5.3.3.1 The "Net Consideration Per Share" shall mean the amount equal to the total amount of consideration, if any, received by the Corporation for the issuance of such Common Stock Equivalents, plus the minimum amount of consideration, if any, payable to the Corporation upon exercise, or conversion or exchange thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such Common Stock Equivalents were exercised, exchanged or converted. A5.3.3.2 The "Net Consideration Per Share" which shall be receivable by the Corporation shall be determined in each instance as of the date of issuance of Common Stock Equivalents without giving effect to any possible future upward price adjustments or rate adjustments which may be applicable with respect to such Common Stock Equivalents. A5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series A Preferred Stock. A5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section A5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section A5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation. A5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS; BASKET FOR RESERVED EMPLOYEE SHARES. This Section A5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), or (B) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series A Preferred Stock. Further, this Section A5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series A Preferred Stock. 17 18 A5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series A Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series A Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series A Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. An "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (ii) a subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of the Common Stock. A5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section A5. A5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right 18 19 shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section A5.6 and Section A3.2 apply, the holders of a majority of the outstanding shares of Series A Preferred Stock (voting together as a single class) shall have the option of electing treatment for the Series A Preferred Stock under this Section A5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section A3.2, and not this Section A5.6, shall apply. A5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In each case of an adjustment or readjustment of the Series A Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series A Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. A5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series A Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series A Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. The date when such written notice is received by the Corporation, together with the certificate or certificates representing the shares of Series A Preferred Stock being converted, shall be the "Conversion Date". As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver to the holder of the shares of Series A Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series A Preferred Stock in accordance with the provisions of this Section A5, and cash, as provided in Section A5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series A Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. A5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series A Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series A Preferred Stock, the Corporation shall pay to the holder of the shares of Series A Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the 19 20 Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series A Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series A Preferred Stock being converted. A5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series A Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series A Preferred Stock which were not converted. A5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock (including any shares of Series A Preferred Stock represented by any warrants, options, subscription or purchase rights for Series A Preferred Stock), and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock (including any shares of Series A Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series A Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. A6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. The Corporation shall not take any corporate action or amend its Certificate of Incorporation or this Certificate of Designation (except to reduce the number of shares designated as Series A Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by vote or written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a single class, each share of Series A Preferred Stock to be entitled to one vote in each instance, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series A Preferred Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation or this Certificate of Designation or take any other corporate action without the approval by the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a single class, if such amendment or corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or 20 21 shares of equity securities of the Corporation other than as provided for in Section 2 hereof; or (b) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series A Preferred Stock or of any class of stock ranking senior to the Series A Preferred Stock with respect to liquidation preferences, dividend rights or containing redemption rights; or (c) reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series A Preferred Stock; or (e) cancel or modify the conversion rights of the holders of Series A Preferred Stock provided for in Section A5 herein; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section A3.2 hereof. A7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Preferred Stock from time to time outstanding. A8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or 21 22 otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. A9. STATUS OF CONVERTED OR REPURCHASED SERIES A PREFERRED STOCK. Any share or shares of Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series A Preferred Stock, the provisions of this Certificate of Designation of Series A Preferred Stock shall terminate and have no further force and effect. DESCRIPTION AND DESIGNATION OF SERIES B JUNIOR PREFERRED STOCK B1. DESIGNATION 1. A total of 2,400,000 shares of the Company's Preferred Stock shall be designated the "Series B Junior Preferred Stock". As used herein, the term "Preferred Stock" used without reference to the Series B Junior Preferred Stock means the shares of Preferred Stock, without distinction as to series, except as otherwise expressly provided for herein, or as the context otherwise requires. B2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series B Junior Preferred Stock, Series A Preferred Stock and any other series of Preferred Stock senior to or on parity with the Series B Junior Preferred Stock with respect to liquidation preference (all voting together as a single class), the Corporation shall not declare or pay any dividends, or purchase, 22 23 redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series B Junior Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. "Subsidiary" or "Subsidiaries" means any corporation, partnership or joint venture of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time at least fifty percent (50%) of the outstanding voting shares or similar interests other than directors' qualifying shares. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. B3. LIQUIDATION, DISSOLUTION OR WINDING UP. B3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series B Junior Preferred Stock shall be junior to the Series A Preferred Stock with respect to liquidation preference. any class or series of Preferred Stock designated in the future to be on a parity with the Series B Junior Preferred Stock with respect to liquidation preference are collectively referred to herein as "Parity Stock". In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series B Junior Preferred Stock in liquidation preference (collectively, "Junior Stock"), and subject to the liquidation rights and preferences of the Series A Preferred Stock and any class or series of Preferred Stock designated in the future to be senior to the Series B Junior Preferred Stock with respect to liquidation preference ("Senior Stock"), the holders of each share of Series B Junior Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus or earnings ("Available Assets"), the greater of (i) an amount per share of Series B Junior Preferred Stock equal to $2.00, plus $.20 for each year (pro rated for partial years) from December 31, 1998 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series B Junior Preferred 23 24 Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series B Junior Preferred Stock and of any Parity Stock the full amounts to which they otherwise would be entitled, the holders of Series B Junior Preferred Stock and Parity Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series B Junior Preferred Stock and Parity Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. B3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section B3; provided, however that, in the case of any such transaction to which the provisions of Section B5.6 also apply, the holders of the outstanding shares of Series B Junior Preferred Stock and Parity Stock (voting together as a single class) shall have the right by majority vote to elect the benefits of the provisions of Section B5.6 hereof for all of the Series B Junior Preferred Stock and Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section B3. The provisions of this Section B3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. B3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section B3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each Series and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such Series and class. B4. VOTING POWER. B4.1 GENERAL. For each vote in which holders of Series B Junior Preferred Stock are entitled to participate, each share of Series B Junior Preferred Stock shall be entitled to that 24 25 number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series B Junior Preferred Stock could be converted. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Series B Junior Preferred Stock shall be entitled to vote together with the Common Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors generally, but excluding election of the "Series A Directors", as defined in the Certificate of Designation of the Series A Preferred Stock of the Company). Each holder of Series B Junior Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. B4.2 LIMITATIONS DURING FIRST THREE YEARS. Notwithstanding paragraph B4.1, for a period of three years from the date of the initial filing of this Certificate of Designation, the holders of Series B Junior Preferred Stock shall not have any voting rights, other than as required by law and as provided in Section B6 below. B5. CONVERSION RIGHTS. The holders of the Series B Junior Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Common Stock: B5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section B5, any shares of the Series B Junior Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Common Stock. The number of shares of Common Stock which a holder of Series B Junior Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series B Junior Preferred Stock being converted at any time, by (ii) the rate (the "Series B Conversion Rate") equal to the quotient obtained by dividing $2.00 by the "Series B Conversion Value." The Series B Conversion Value in effect from time to time, except as adjusted in accordance with this Section B5, shall be $2.00. B5.2 AUTOMATIC CONVERSION. B5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933, as amended, (other than on Form S-4 or S-8 on any successor forms thereto) covering the offer and sale of Common Stock in an underwritten public offering on a firm commitment basis in which the gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of the public offering of at least $35,000,000, but subject to the closing of such public offering, (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock 25 26 in a rights offering to shareholders of Safeguard Scientifics, Inc., but subject to the closing of such rights offering, or (C) upon the election, set forth in a written notice to the Corporation, of holders of at least two-thirds of the outstanding shares of Series B Junior Preferred Stock and Parity Stock (counted as a single class) to convert their Series B Junior Preferred Stock and Parity Stock to Common Stock; all outstanding shares of Series B Junior Preferred Stock and Parity Stock shall be converted automatically into the number of fully paid, non-assessable shares of Common Stock into which such shares of Series B Junior Preferred Stock and Parity Stock are convertible pursuant to this Section B5 or the designation of such Parity Stock as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. B5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph B5.2.1, the holders of the Series B Junior Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series B Junior Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series B Junior Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. B5.3 ANTI-DILUTION ADJUSTMENTS. B5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series B Junior Preferred Stock outstanding, issue or sell shares of its Common Stock or "Common Stock Equivalents" (as defined in Section B5.3.2.1 below) without consideration or at a price per share or "Net Consideration Per Share" (as defined in Section B5.3.3 below) less than the Series B Conversion Value in effect immediately prior to such issuance or sale, then in each such case the Series B Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series B Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: 26 27 N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series B Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued.
Example: initial capital 1,000,000 initial conversion price $ 1.00 new shares issued 1,000,000 total new consideration $ 500,000 new issue price $ 0.50 new shares which would be issued at initial conversion price 500,000 New conversion price $ 0.75
The provisions of this Section B5.3.1 may be waived as to all shares of Series B Junior Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series B Junior Preferred Stock. B5.3.2 COMMON STOCK EQUIVALENTS. B5.3.2.1 GENERAL. For the purposes of this Section B5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any warrants, options, subscription or purchase rights with respect to such convertible or exchangeable securities (collectively, "Common Stock Equivalents"), shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series B Conversion Value shall 27 28 be made under this Section B5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. B5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section B5.3, then, upon the effectiveness of each such change, the Series B Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section B5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series B Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series B Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series B Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series B Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series B Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series B Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series B Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. B5.3.3 NET CONSIDERATION PER SHARE. For purposes of this Section B5.3, the "Net Consideration Per Share" which shall be receivable by the Corporation for any Common Stock issued upon the exercise or conversion of any Common Stock Equivalents shall be determined as follows: B5.3.3.1 The "Net Consideration Per Share" shall mean the amount equal to the total amount of consideration, if any, received by the Corporation for the issuance of such Common Stock Equivalents, plus the minimum amount of consideration, if any, payable to the Corporation upon exercise, or conversion or exchange thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such Common Stock Equivalents were exercised, exchanged or converted. B5.3.3.2 The "Net Consideration Per Share" which shall be receivable by the Corporation shall be determined in each instance as of the date of issuance of Common Stock Equivalents without giving effect to any possible future upward price adjustments or rate adjustments which may be applicable with respect to such Common Stock Equivalents. B5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution 28 29 payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series B Junior Preferred Stock. B5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section B5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section B5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation. B5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS. This Section B5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), (B) to any additional shares of Common Stock which become issuable upon conversion of any other series or class of preferred stock or convertible security of the Company as a result of any anti-dilution adjustment to the conversion ratio of such series or class, or (C) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series B Junior Preferred Stock. Further, this Section B5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series B Preferred Stock. B5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series B Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series B Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series B Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. An "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common 29 30 Stock, (ii) a subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of the Common Stock. B5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series B Junior Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series B Junior Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section B5. B5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series B Junior Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series B Junior Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section B5.6 and Section B3.2 apply, the holders of the outstanding shares of Series B Junior Preferred Stock and Parity Stock (voting together as a single class) shall have the option by majority vote to elect treatment for the Series B Junior Preferred Stock and Parity Stock under this Section B5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section B3.2, and not this Section B5.6, shall apply. B5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY. In each case of an adjustment or readjustment of the Series B Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series B Junior Preferred Stock so affected with a certificate prepared by the 30 31 Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. B5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series B Junior Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series B Junior Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. The date when such written notice is received by the Corporation, together with the certificate or certificates representing the shares of Series B Junior Preferred Stock being converted, shall be the "Conversion Date". As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver to the holder of the shares of Series B Junior Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series B Junior Preferred Stock in accordance with the provisions of this Section B5, and cash, as provided in Section B5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series B Junior Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. B5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series B Junior Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series B Junior Preferred Stock, the Corporation shall pay to the holder of the shares of Series B Junior Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series B Junior Preferred Stock being converted at any one time by any holder thereof, not upon each share of Series B Junior Preferred Stock being converted. B5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series B Junior Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series B Junior Preferred Stock which were not converted. 31 32 B5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Junior Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Junior Preferred Stock (including any shares of Series B Junior Preferred Stock represented by any warrants, options, subscription or purchase rights for Series B Junior Preferred Stock), and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Junior Preferred Stock (including any shares of Series B Junior Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series B Junior Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. B6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. B6.1 The Corporation shall not take any corporate action or amend this Certificate of Designation (except to reduce the number of shares designated as Series B Junior Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by majority vote or written consent of the holders of outstanding shares of Series B Junior Preferred Stock, voting as a single class, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series B Junior Preferred Stock without similarly changing the rights, preferences, privileges of or limitations on all other classes or series of Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend this Certificate of Designation or take any other corporate action without the approval of the holders of outstanding shares of Series B Junior Preferred Stock if such amendment or corporate action would: (a) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series B Junior Preferred Stock; or (b) reduce the amount payable to the holders of Series B Junior Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series B Junior Preferred Stock; or (d) cancel or modify the conversion rights of the holders of Series B Junior Preferred Stock provided for in Section B5 herein. B6.2 The Corporation shall not take any corporate action or amend its Certificate of Incorporation without the approval by majority vote or written consent of the holders of 32 33 outstanding shares of Series B Junior Preferred Stock and Parity Stock, voting together as a single class, if such corporate action or amendment would similarly change the rights, preferences, privileges of or limitations on the Series B Junior Preferred Stock and all classes or series of Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation or take any other corporate action without the approval of the holders of the outstanding shares of Series B Junior Preferred Stock and Parity Stock, voting together as a single class, if such amendment or corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of equity securities of the Corporation other than as provided for in Section 2 hereof; or (b) [intentionally omitted] (c) similarly reduce the amount payable to the holders of Series B Junior Preferred Stock and Parity Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) similarly adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series B Junior Preferred Stock and Parity Stock; or (e) similarly cancel or modify the conversion rights of the holders of Series B Junior Preferred Stock and Parity Stock; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section B3.2 hereof. B7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Junior Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Series B Junior Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable 33 34 shares of stock on the conversion of all Series B Junior Preferred Stock from time to time outstanding. B8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Series B Junior Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. B9. STATUS OF CONVERTED OR REPURCHASED SERIES B JUNIOR PREFERRED STOCK. Any share or shares of Series B Junior Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series B Junior Preferred Stock, the provisions of this Certificate of Designation of Series B Junior Preferred Stock shall terminate and have no further force and effect. DESCRIPTION AND DESIGNATION OF SERIES C PREFERRED STOCK C1. DESIGNATION. A total of 1,300,000 shares of the Company's Preferred Stock shall be designated the "Series C Preferred Stock." As used herein, the term "Preferred Stock" used without 34 35 reference to the Series C Preferred Stock means the shares of Preferred Stock, without distinction as to series, except as otherwise expressly provided for herein, or as the context otherwise requires. C2. RESTRICTIONS ON DISTRIBUTIONS. Except to the extent in any instance approval is provided in writing by the holders of two-thirds of the outstanding shares of Series A Preferred Stock, Series C Preferred Stock and any other series of Preferred Stock senior to or on parity with the Series C Preferred Stock with respect to liquidation preference (all voting together as a single class), the Corporation shall not declare or pay any dividends, or purchase, redeem, retire, or otherwise acquire for value any shares of its capital stock junior to the Series C Preferred Stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing. "Subsidiary" or "Subsidiaries" means any corporation, partnership or joint venture of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time at least fifty percent (50%) of the outstanding voting shares or similar interests other than directors' qualifying shares. Notwithstanding the foregoing, Subsidiaries may declare and make payment of cash and stock dividends, return capital and make distributions of assets to the Corporation, and nothing contained in the foregoing shall prevent the Corporation from: (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock paid to the holders of shares of such class of capital stock; (ii) complying with any specific provision of the terms of any subsequently designated series of Preferred Stock in accordance with its terms; (iii) redeeming or repurchasing any stock of a deceased stockholder out of proceeds of insurance held by the Corporation on that stockholder's life; or (iv) redeeming or repurchasing any stock of any director, officer, employee, advisor, consultant or other person or entity, pursuant to a stock repurchase agreement or stock restriction agreement under which the Corporation has the right or obligation to repurchase such shares in the event of death, termination of employment or of the consulting arrangement, or other similar discontinuation of a business relationship. C3. LIQUIDATION, DISSOLUTION OR WINDING UP. C3.1 TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. The Series C Preferred Stock shall be on a parity with the Series A Preferred Stock with respect to liquidation preference. The Series A Preferred Stock, and any class or series of Preferred Stock designated in the future to be on a parity with the Series C Preferred Stock with respect to liquidation preference are collectively referred to herein as "Parity Stock". In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or in the event of its insolvency, before any distribution or payment is made to any holders of Common Stock, the Series B Junior Preferred Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series C Preferred Stock in liquidation preference (collectively, "Junior Stock"), and subject to the liquidation rights and preferences of any class or series of Preferred Stock designated in the future to be senior to the Series C Preferred Stock with respect to liquidation preference ("Senior Stock"), the holders of each share of Series C Preferred Stock shall be entitled to be paid first out of 35 36 the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus or earnings ("Available Assets"), the greater of (i) an amount per share of Series C Preferred Stock equal to $5.00, plus $.50 for each year (pro rated for partial years) from April 15, 1999 until the date of distribution of Available Assets, (subject to equitable adjustment for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Preferred Stock), or (ii) such amount per share of Series C Preferred Stock as would have been payable had each share of Preferred Stock which is convertible into Common Stock been so converted immediately prior to such liquidation, dissolution or winding up. If, upon liquidation, dissolution or winding up of the Corporation, the Available Assets shall be insufficient to pay the holders of Series C Preferred Stock and of any Parity Stock the full amounts to which they otherwise would be entitled, the holders of Series C Preferred Stock and Parity Stock shall share ratably in any distribution of Available Assets pro rata in proportion to the respective liquidation preference amounts which would otherwise be payable upon liquidation with respect to the outstanding shares of the Series C Preferred Stock and Parity Stock if all liquidation preference dollar amounts with respect to such shares were paid in full. C3.2 TREATMENT OF REORGANIZATION, CONSOLIDATION, MERGER, OR SALE OF ASSETS. Any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non-surviving party, and any sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation for purposes of this Section C3; provided, however that, in the case of any such transaction to which the provisions of Section C5.6 also apply, the holders of the outstanding shares of Series C Preferred Stock and Parity Stock (voting together as a single class) shall have the right by majority vote to elect the benefits of the provisions of Section C5.6 hereof for all of the Series C Preferred Stock and Parity Stock in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section C3. The provisions of this Section C3.2 shall not apply to (i) any reorganization, merger or consolidation involving only a change in the state of incorporation of the Corporation, (ii) a merger of the Corporation with or into a wholly-owned Subsidiary of the Corporation that is incorporated in the United States of America, or (iii) a merger, reorganization, consolidation or other combination, of which the Corporation is substantively the surviving corporation and operates as a going concern, with another corporation incorporated in the United States of America and which does not involve a recapitalization, reorganization, reclassification or other similar change in the capital structure of the Corporation. C3.3 DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution provided for in this Section C3 shall be payable in whole or in part in property other than cash, the value of any property distributed shall be the fair market value of such property as reasonably determined in good faith by the Board of Directors of the Corporation. All distributions of property other than cash made hereunder shall be made, to the maximum extent possible, pro rata with respect to each Series 36 37 and class of Preferred Stock and Common Stock in accordance with the liquidation amounts payable with respect to each such Series and class. C4. VOTING POWER. C4.1 GENERAL. For each vote in which holders of Series C Preferred Stock are entitled to participate, each share of Series C Preferred Stock shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series C Preferred Stock could be converted. Except as otherwise required by applicable law or as otherwise provided herein, each holder of Series C Preferred Stock shall be entitled to vote together with the Common Stock and all other series and classes of stock permitted to vote with the Common Stock on all matters submitted to a vote of the stockholders of the Corporation (including election of directors generally, but excluding election of the "Series A Directors", as defined in the Certificate of Designation of the Series A Preferred Stock of the Company). Each holder of Series C Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the by-laws of this Corporation at the same time and in the same manner as notice is given to all other stockholders entitled to vote at such meetings. C4.2 LIMITATIONS DURING FIRST THREE YEARS. Notwithstanding paragraph C4.1, for a period of three years from the date of the initial filing of this Certificate of Designation, the holders of Series C Preferred Stock shall not have any voting rights, other than as required by law and as provided in Section C6 below. C5. CONVERSION RIGHTS. The holders of the Series C Preferred Stock shall have the following rights and be subject to the following obligations with respect to the conversion of such shares into shares of Common Stock: C5.1 VOLUNTARY CONVERSION. Subject to and in compliance with the provisions of this Section C5, any shares of the Series C Preferred Stock may, at the option of the holder thereof, be converted at any time and from time to time into fully-paid and non-assessable shares of Common Stock. The number of shares of Common Stock which a holder of Series C Preferred Stock shall be entitled to receive upon conversion shall be the product obtained by multiplying (i) the number of shares of Series C Preferred Stock being converted at any time, by (ii) the rate (the "Series C Conversion Rate") equal to the quotient obtained by dividing $5.00 by the "Series C Conversion Value." The Series C Conversion Value in effect from time to time, except as adjusted in accordance with this Section C5, shall be $5.00. C5.2 AUTOMATIC CONVERSION. C5.2.1 EVENTS CAUSING CONVERSION. Immediately (A) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933, as amended, (other than on Form S-4 or S-8 on any successor forms thereto) covering the offer and sale of Common Stock in an underwritten public offering on a firm commitment basis in which the 37 38 gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of the public offering of at least $35,000,000, but subject to the closing of such public offering, (B) prior to the effectiveness of a registration statement filed by the Company pursuant to the Securities Act of 1933 covering the offer and sale of Common Stock in a rights offering to shareholders of Safeguard Scientifics, Inc., in which the gross proceeds of the offering will equal or exceed $10,000,000 (calculated before deducting underwriters' discounts and commissions and other offering expenses), and in which the public offering price per share of Common Stock (calculated before deducting underwriters' discounts and commissions) results in a valuation of the total number of outstanding shares of capital stock of the Company immediately prior to the closing of the public offering of at least $35,000,000, but subject to the closing of such rights offering, or (C) upon the election, set forth in a written notice to the Corporation, of holders of at least two-thirds of the outstanding shares of Series C Preferred Stock and Parity Stock (counted as a single class) to convert their Series C Preferred Stock and Parity Stock to Common Stock; all outstanding shares of Series C Preferred Stock and Parity Stock shall be converted automatically into the number of fully paid, non-assessable shares of Common Stock into which such shares of Series C Preferred Stock and Parity Stock are convertible pursuant to this Section C5 or the designation of such Parity Stock as of the closing and consummation of such underwritten public offering or the date of such approval, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. C5.2.2 SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon the occurrence of the conversion event specified in paragraph C5.2.1, the holders of the Series C Preferred Stock shall, upon notice from the Corporation, surrender the certificates representing such shares at the office of the Corporation or its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of Series C Preferred Stock so surrendered were convertible on the date on which the conversion occurred. The Corporation shall not be obligated to issue such certificates unless certificates evidencing such shares of Series C Preferred Stock being converted are either delivered to the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. C5.3 ANTI-DILUTION ADJUSTMENTS. C5.3.1 UPON DILUTIVE ISSUANCES. If the Corporation shall, while there are any shares of Series C Preferred Stock outstanding, issue or sell shares of its Common Stock or "Common Stock Equivalents" (as defined in Section C5.3.2.1 below) without consideration or at a price per share or "Net Consideration Per Share" (as defined in Section C5.3.3 below) less than the Series C Conversion Value in effect immediately prior to such issuance or sale, then in each such 38 39 case the Series C Conversion Value, except as hereinafter provided, shall be lowered so as to be equal to an amount determined by multiplying such Series C Conversion Value by the following fraction: N(0) + N(1) ------------------- N(0) + N(2) Where: N(0) = the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock or Common Stock Equivalents (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and convertible securities). N(1) = the number of shares of Common Stock which the aggregate consideration, if any, (including the Net Consideration Per Share with respect to the issuance of Common Stock Equivalents) received or receivable by the Corporation for the total number of such additional shares of Common Stock so issued or deemed to be issued would purchase at the Series C Conversion Value in effect immediately prior to such issuance. N(2) = the number of such additional shares of Common Stock so issued or deemed to be issued.
Example: initial capital 1,000,000 initial conversion price $ 1.00 new shares issued 1,000,000 total new consideration $ 500,000 new issue price $ 0.50 new shares which would be issued at initial conversion price 500,000 new conversion price $ 0.75
The provisions of this Section C5.3.1 may be waived as to all shares of Series C Preferred Stock in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written agreement of the holders of two-thirds of the outstanding shares of Series C Preferred Stock. C5.3.2 COMMON STOCK EQUIVALENTS. 39 40 C5.3.2.1 GENERAL. For the purposes of this Section C5.3, the issuance of any warrants, options, subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock and the issuance of any warrants, options, subscription or purchase rights with respect to such convertible or exchangeable securities (collectively, "Common Stock Equivalents"), shall be deemed an issuance of Common Stock. Any obligation, agreement or undertaking to issue Common Stock Equivalents at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Series C Conversion Value shall be made under this Section C5.3 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any Common Stock Equivalents. C5.3.2.2 ADJUSTMENTS FOR ADJUSTMENT, CANCELLATION OR EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net Consideration Per Share of any such Common Stock Equivalents be decreased from time to time other than as a result of the application of anti-dilution provisions substantially similar to the provisions of this Section C5.3, then, upon the effectiveness of each such change, the Series C Conversion Value will be that which would have been obtained (1) had the adjustments made pursuant to Section C5.3.2.1 upon the issuance of such Common Stock Equivalents been made upon the basis of the new Net Consideration Per Share of such securities, and (2) had the adjustments made to the Series C Conversion Value since the date of issuance of such Common Stock Equivalents been made to such Series C Conversion Value as adjusted pursuant to clause (1) above. Any adjustment of the Series C Conversion Value which relates to any Common Stock Equivalent shall be disregarded if, as, and when such Common Stock Equivalent expires or is canceled without being exercised, or is repurchased by the Company at a price per share at or less than the original purchase price, so that the Series C Conversion Value effective immediately upon such cancellation or expiration shall be equal to the Series C Conversion Value that would have been in effect (1) had the expired or canceled Common Stock Equivalent not been issued, and (2) had the adjustments made to the Series C Conversion Value since the date of issuance of such Common Stock Equivalents been made to the Series C Conversion Value which would have been in effect had the expired or canceled Common Stock Equivalent not been issued. C5.3.3 NET CONSIDERATION PER SHARE. For purposes of this Section C5.3, the "Net Consideration Per Share" which shall be receivable by the Corporation for any Common Stock issued upon the exercise or conversion of any Common Stock Equivalents shall be determined as follows: C5.3.3.1 The "Net Consideration Per Share" shall mean the amount equal to the total amount of consideration, if any, received by the Corporation for the issuance of such Common Stock Equivalents, plus the minimum amount of consideration, if any, payable to the Corporation upon exercise, or conversion or exchange thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such Common Stock Equivalents were exercised, exchanged or converted. 40 41 C5.3.3.2 The "Net Consideration Per Share" which shall be receivable by the Corporation shall be determined in each instance as of the date of issuance of Common Stock Equivalents without giving effect to any possible future upward price adjustments or rate adjustments which may be applicable with respect to such Common Stock Equivalents. C5.3.4 STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN COMMON STOCK. In the event that the Corporation shall make or issue (otherwise than to holders of Common Stock), or shall fix a record date for the determination of holders of any capital stock of the Corporation other than holders of Common Stock entitled to receive, a dividend or other distribution payable in Common Stock or securities of the Corporation convertible into or otherwise exchangeable for shares of Common Stock of the Corporation, then such Common Stock or other securities issued in payment of such dividend shall be deemed to have been issued for a consideration of $.01, except for dividends payable to the holders of Series C Preferred Stock. C5.3.5 CONSIDERATION OTHER THAN CASH. For purposes of this Section C5.3, if a part or all of the consideration received by the Corporation in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this Section C5.3 consists of property other than cash, such consideration shall be deemed to have a fair market value as is reasonably determined in good faith by the Board of Directors of the Corporation. C5.3.6 EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS. This Section C5.3 shall not apply (A) under any of the circumstances which would constitute an Extraordinary Common Stock Event (as described below), (B) to any additional shares of Common Stock which become issuable upon conversion of any other series or class of preferred stock or convertible security of the Company as a result of any anti-dilution adjustment to the conversion ratio of such series or class, or (C) to any issuance or sale of shares of Common Stock and/or Common Stock Equivalents in an underwritten public offering not requiring conversion of the Series C Preferred Stock. Further, this Section C5.3 shall not apply with respect to the issuance or sale of shares of Common Stock, or the grant or options exercisable therefor, to directors, officers, employees and consultants of the Corporation or any subsidiary pursuant to any qualified or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement, employee stock ownership plan (ESOP), consulting agreement, or such other options, issuances, arrangements, agreements or plans intended principally as a means of providing compensation for employment or services or of providing additional compensation to a financial institution in connection with the Corporation obtaining equipment lease/financing, provided that in each such case such plan, agreement, or other arrangement or issuance is approved by the vote or consent of two-thirds of the Board of Directors or by the written consent of the holders of two-thirds of the outstanding shares of Series C Preferred Stock. C5.4 ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the happening of an Extraordinary Common Stock Event (as hereinafter defined), the Series C Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the Series C Conversion Value by a fraction, the numerator of 41 42 which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Series C Conversion Value, which, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Event or Events. An "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (ii) a subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of the Common Stock. C5.5 ADJUSTMENT UPON CERTAIN DIVIDENDS. In the event the Corporation shall make or issue, or shall fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution (other than a distribution in liquidation or other distribution otherwise provided for herein) with respect to the Common Stock payable in (i) securities of the Corporation other than shares of Common Stock, or (ii) other assets (excluding cash dividends or distributions), then and in each such event provision shall be made so that the holders of the Series C Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation which they would have received had their Series C Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or such other assets receivable by them, giving application to all other adjustments called for during such period under this Section C5. C5.6 ADJUSTMENT UPON CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock shall be changed into the same or different number of shares of any other class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than an Extraordinary Common Stock Event), then and in each such event the holder of each share of Series C Preferred Stock shall have the right thereafter to convert such share into, in lieu of the number of shares of Common Stock which the holder would otherwise have been entitled to receive, the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification or other change by the holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock could have been converted immediately prior to such reorganization, recapitalization, reclassification or change, all subject to further adjustment as provided herein. The provision for such conversion right shall be a condition precedent to the consummation by the Corporation of any such transaction unless the election described below is made. In the case of a transaction to which both this Section C5.6 and Section C3.2 apply, the holders of the outstanding shares of Series C Preferred Stock and Parity Stock (voting together as 42 43 a single class) shall have the option by majority vote to elect treatment for the Series C Preferred Stock and Parity Stock under this Section C5.6, notice of which election shall be submitted in writing to the Corporation at its principal office no later than five (5) business days before the effective date of such event. If no such election shall be made, the provisions of Section C3.2, and not this Section C5.6, shall apply. C5.7 CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In each case of an adjustment or readjustment of the Series C Applicable Conversion Rate, the Corporation at its expense will furnish each holder of Series C Preferred Stock so affected with a certificate prepared by the Treasurer or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. C5.8 EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege, a holder of Series C Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall give written notice to the Corporation at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series C Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Corporation or in blank. The date when such written notice is received by the Corporation, together with the certificate or certificates representing the shares of Series C Preferred Stock being converted, shall be the "Conversion Date". As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver to the holder of the shares of Series C Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Series C Preferred Stock in accordance with the provisions of this Section C5, and cash, as provided in Section C5.9, in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series C Preferred Stock shall cease and the person(s) in whose name(s) any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. C5.9 CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series C Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series C Preferred Stock, the Corporation shall pay to the holder of the shares of Series C Preferred Stock which were converted a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the aggregate number of shares of Series C Preferred Stock 43 44 being converted at any one time by any holder thereof, not upon each share of Series C Preferred Stock being converted. C5.10 PARTIAL CONVERSION. In the event some but not all of the shares of Series C Preferred Stock represented by a certificate(s) surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Series C Preferred Stock which were not converted. C5.11 RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series C Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series C Preferred Stock (including any shares of Series C Preferred Stock represented by any warrants, options, subscription or purchase rights for Series C Preferred Stock), and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Preferred Stock (including any shares of Series C Preferred Stock represented by any warrants, options, subscriptions or purchase rights for such Series C Preferred Stock), the Corporation shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. C6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION. C6.1 The Corporation shall not take any corporate action or amend this Certificate of Designation (except to reduce the number of shares designated as Series C Preferred Stock to the number of such shares which are then issued and outstanding) without the approval by majority vote or written consent of the holders of outstanding shares of Series C Preferred Stock, voting as a single class, if such corporate action or amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series C Preferred Stock without similarly changing the rights, preferences, privileges of or limitations on all other classes or series of Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend this Certificate of Designation or take any other corporate action without the approval of the holders of outstanding shares of Series C Preferred Stock if such amendment or corporate action would: (a) authorize, create or issue, or obligate the Corporation to authorize, create or issue, additional shares of Series C Preferred Stock; or (b) reduce the amount payable to the holders of Series C Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or 44 45 (c) adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series C Preferred Stock; or (d) cancel or modify the conversion rights of the holders of Series C Preferred Stock provided for in Section C5 herein. C6.2 The Corporation shall not take any corporate action or amend its Certificate of Incorporation without the approval by majority vote or written consent of the holders of outstanding shares of Series C Preferred Stock and Parity Stock, voting together as a single class, if such corporate action or amendment would similarly change the rights, preferences, privileges of or limitations on the Series C Preferred Stock and all classes or series of Parity Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation or take any other corporate action without the approval of the holders of the outstanding shares of Series C Preferred Stock and Parity Stock, voting together as a single class, if such amendment or corporate action would: (a) cause or authorize the Corporation to redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of equity securities of the Corporation other than as provided for in Section C2 hereof; or (b) authorize, create or issue, or obligate the Corporation to authorize, create or issue, shares of any class of stock ranking senior to the Series C Preferred Stock and Parity Stock with respect to liquidation preferences or dividend rights, or containing redemption rights; or (c) similarly reduce the amount payable to the holders of Series C Preferred Stock and Parity Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (d) similarly adversely affect the liquidation preferences, dividend rights or voting rights of the holders of Series C Preferred Stock and Parity Stock; or (e) similarly cancel or modify the conversion rights of the holders of Series C Preferred Stock and Parity Stock; or (f) provide for the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of the Corporation; or (g) authorize, approve or cause any merger, consolidation, sale of all or substantially all of the assets of the Corporation, corporate reorganization, recapitalization or other business combinations which could be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to Section C3.2 hereof. 45 46 C7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series C Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of stock receivable on the conversion of the Series C Preferred Stock above the amount payable therefor on such conversion, and (b) will take such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Series C Preferred Stock from time to time outstanding. C8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividends or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Series C Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed by first class mail, postage prepaid, at least 15 days prior to the date specified in such notice on which action is being taken. C9. STATUS OF CONVERTED OR REPURCHASED SERIES C PREFERRED STOCK. Any share or shares of Series C Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be returned to the status of authorized but unissued shares of 46 47 undesignated Preferred Stock. Upon the cancellation of all outstanding shares of Series C Preferred Stock, the provisions of this Certificate of Designation of Series C Preferred Stock shall terminate and have no further force and effect. ************************ 5. The corporation is to have perpetual existence. 6. In furtherance of and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to make, alter or repeal the bylaws of the corporation. 7. The directors of the corporation shall be entitled to the benefits of all limitations on the liability of directors generally that are now or hereafter become available under the General Corporation Law of Delaware. Without limiting the generality of the foregoing, no director of the corporation shall be personally liable to the corporation or to any stockholder of the corporation for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. 8. Elections of directors need not be by written ballot except and to the extent provided in the bylaws of the Corporation. 9. Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. 10. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the bylaws of the corporation. 11. The Corporation shall, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify and upon request shall advance expenses to any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was or has agreed to be a director or officer of the Corporation or while a director or officer is or was serving at the request of the Corporation as a director, officer, employer or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against any and all expenses (including attorney's fees and expenses), judgments, fines, penalties and amounts paid in settlement or incurred in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require the Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Such rights arising under any bylaw, agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the heirs and legal 47 48 representatives of such person. Any repeal or modification of the foregoing provisions of this Article 10 shall not adversely affect any right or protection of a director or officer of this Corporation existing at the time of such repeal or modification. 12. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, eMerge Vision Systems, Inc. has caused this certificate to be signed by Charles Abraham, its Chief Executive Officer on the ____ day of April, 1999. eMerge Vision Systems, Inc. By: /S/ CHARLES ABRAHAM ------------------------------------ Charles Abraham, Chief Executive Officer 48 49 EXHIBIT 3 Capitalization Table
HOLDER SHARES OPTIONS - ------ ------ --------- Safeguard Capital LP 4,181,315 Technology Leaders I 803,250 Technology Leaders II 856,000 Applewood 339,919 XL Vision and employees 4,979,000 Company employees 8,750 2,726,250 Others 3,173,122 Total 14,341,356 2,726,250
49 EX-10.16 16 STOCK PURCHASE AGREEMENT DATED AUGUST 16, 1999 1 EXHIBIT 10.16 COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is made and entered into as of the 6th day of August, 1999, by and between TURNKEY COMPUTER SYSTEMS, INC., a Texas corporation (the "Company") and EMERGE INTERACTIVE INC., a Delaware corporation (the "Investor"). 1. AUTHORIZATION AND SALE OF THE SHARES. 1.1 Authorization of the Shares. As of the Initial Closing (as defined below), the Company will have authorized the issuance to the Investor, pursuant to the terms and conditions of this Agreement, of 16,506 shares of the Company's common stock, $0.10 par value per share (the "Common Stock"). 1.2 Sale of the Shares. Subject to the terms and conditions hereof, the Investor agrees to purchase at the Closings (as defined below), and the Company agrees to sell and issue to the Investor at the Closings, an aggregate of 16,506 shares of the Company's Common Stock (the "Shares") for an aggregate purchase price of $1,900,000 (which shares represent 19% of the issued and outstanding shares of the Company following such issuance), as follows: (a) 4,126 of such Shares shall be sold by the Company to the Investor on the Initial Closing Date in exchange for 50,000 shares (the "Investor Shares") of the Investor's common stock, $0.01 par value per share (the "Investor Common Stock"); (b) 4,127 of such Shares shall be sold by the Company to the Investor on each of the first and second Additional Closing Date in exchange for $500,000 to be paid on each such Additional Closing Date; and (c) 4,126 of such Shares shall be sold by the Company to the Investor on the third Additional Closing Dates set forth below, in the event that the Investor consummates an initial public offering of the Investor Common Stock under the Securities Act of 1933, as amended (the "Securities Act") at any time prior to December 31, 2001, the Company shall sell and the Investor shall purchase all remaining unpurchased Shares within thirty (30) days of the consummation of such public offering. 2. CLOSINGS; DELIVERIES. 2.1 Initial Closing. The initial closing (the "Initial Closing") of the purchase and sale of the Shares hereunder shall be held at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202 as soon as practical after the conditions contained in Section 5 have been satisfied or such other time and place as agreed to by the parties (the date of the Initial Closing is hereinafter referred to as the "Initial Closing Date"). 2.2 Additional Closings. Each additional closing (each an "Additional Closing" and together with the Initial Closing, the "Closings") shall be held at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202 at the respective times specified below or such other time and place as agreed to by the parties (each an "Additional Closing Date" and together with the 2 Initial Closing Dates, the "Closing Dates"): (a) December 31, 1999; (b) December 31, 2000; (c) December 31, 2001. 2.2 Stock Certificates. At the Initial Closing and each Additional Closing, the Company will deliver to the Investor a certificate, registered in the Investor's name, representing the Shares to be purchased by the Investor at the Initial Closing or the Additional Closing, as the case may be, upon payment of the purchase price therefor by check or by federal wire transfer of immediately available funds or by other consideration acceptable to the Company. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Investor at the Initial Closing Date and at each Additional Closing Date as follows: 3.1 Organization and Standing, Certificate and Bylaws. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Texas and is in good standing under such laws. Except as set forth on Schedule 3.1, the Company is not required to be qualified to do business as a foreign corporation in any other jurisdiction, except where the failure to be so qualified would not have a material adverse effect on the Company. The Company has the requisite corporate power to own and operate its properties and assets and to carry on its business as presently conducted and as proposed to be conducted. True and accurate copies of the Company's Articles of Incorporation and Bylaws, as presently in effect, have been delivered to the Investor. Schedule 3.1 is a true and complete list of all jurisdictions in which the Company is qualified to do business as a foreign corporation. 3.2 Corporate Power. The Company has all requisite legal and corporate power and authority (1) to execute and deliver this Agreement and the other agreements contemplated herein; (ii) to issue and sell the Shares; and (iii) to carry out and perform its other obligations under the terms of this Agreement and the other agreements contemplated herein. 3.3 Subsidiaries. The Company does not own or control, directly or indirectly, any interest in any corporation, partnership, trust, joint venture, association or other entity. 3.4 Capitalization. Immediately prior to the Initial Closing, the authorized capital of the Company will consist of 10,000,000 shares of Common Stock, of which 70,368 shares are issued and outstanding and 262,398 shares are held by the Company as treasury shares. The outstanding shares of Common Stock are owned by the shareholders 2 3 and in the number specified in Schedule 3.4 hereto. The outstanding shares of Common Stock are all duly authorized and validly issued, fully paid and nonassessable, and were issued in accordance with the registration and prospectus delivery requirements of the Securities Act, or in compliance with applicable exemptions therefrom. and the registration and qualification requirements of all applicable state securities laws. Except as provided on Schedule 3.4, the Company has not issued any other shares of its capital stock and there are no outstanding options, warrants, subscriptions or other rights or obligations to purchase or acquire any of such shares, nor any outstanding securities convertible into or exchangeable for such shares. There are no agreements to which the Company is a party or has knowledge regarding the issuance, registration, voting or transfer of or obligation (contingent or otherwise) of the Company to repurchase or otherwise acquire or retire or redeem any of its outstanding shares of capital stock. No dividends are accrued but unpaid on any capital stock of the Company. 3.5 Authorization. All corporate action on the part of the Company and its directors, officers and shareholders necessary for the authorization, execution, delivery and performance of all obligations of the Company under this Agreement and the other agreements contemplated herein has been taken. This Agreement and all documents executed pursuant to this Agreement constitute valid, legal and binding obligations of the Company and are enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 3.6 Validity of Stock. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, will be free of any liens or encumbrances, and shall not be subject to any preemptive rights, rights of first refusal or redemption rights, other than as set forth on Schedule 3.6 and as provided herein and in the Shareholders' Agreement. 3.7 Disclosure. No representation or warranty by the Company in this Agreement or in any statement, business plan or certificate furnished or to be furnished to the Investor pursuant to this Agreement or in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements made not misleading in light of the circumstances under which they were made. 3.8 Compliance with Other Instruments; None Burdensome, etc. The Company is not in violation, breach or default of any term of (i) its Articles of Incorporation or its Bylaws, (ii) any provision of any mortgage, indenture, contract. agreement or instrument to which the Company is a party or by which it is bound, (iii) any judgment, decree or order binding upon the Company or any statute, rule or regulation applicable to the Company. The execution, delivery and performance of and compliance with this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute a default 3 4 under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. There is no such term that materially and adversely affects, or in the future may materially and adversely affect, the business, prospects, condition, affairs, operations, properties or assets of the Company. 3.9 Litigation, etc. Except as provided on Schedule 3.9, there is no action, suit, proceeding, claim, arbitration or investigation ("Action") pending or, to the best knowledge of the Company, currently threatened (a) against the Company, (b) affecting any of its properties or assets, (c) that questions the validity of this Agreement or any of the other agreements contemplated herein or the right of the Company to enter into this Agreement or any of the other agreements contemplated herein, or consummate the transactions contemplated hereby or thereby or, (d) to the best knowledge of the Company, against any officer, director or employee of the Company in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of the Company. There are no Actions pending or currently threatened relating to the prior employment of any of the Company's employees or consultants, their use in connection with the Company's business of any information. technology or techniques allegedly proprietary to any of their former employers, clients or other parties, or their obligations under any agreements with prior employers, clients or other parties. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit. proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.10 Governmental Consents etc. No consent, approval, order or authorization of, or registration, declaration, designation, qualification or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Shares or the consummation of any other transaction contemplated hereby, except for such filings as may be required under applicable state securities laws. Based in part on the representations of the Investor set forth in Section 4 hereof, the offer, sale and issuance of the Shares in conformity with the terms of this Agreement are exempt from the registration and prospectus delivery requirements of the Securities Act and all securities laws of the State of Texas. 3.11 Title to Property and Assets. The Company has good and marketable title to its properties and assets held, in each case subject to no mortgage, pledge, lien, encumbrance, security interest or charge of any kind except as set forth on Schedule 3.11. With respect to the property and assets it leases the Company is in compliance in all material respects with such leases and, to the best knowledge, the Company holds valid leasehold interests in such assets free of any liens, encumbrances, security interests or claims of' any party other than the lessors of such property and assets. except as set forth on Schedule 3.11. 3.12 Contracts. All agreements to which the Company is a party are valid and 4 5 binding agreements of the Company and, to the best knowledge of the Company, of every other party thereto, and neither the Company nor, to the best knowledge of the Company, any other party thereto, is in breach or default thereunder, except for such invalidity, nonbinding character, breach or default that has not had, and may not reasonably be expected to have, a material adverse effect on the Company. Set forth on Schedule 3.12 is a list of the agreements of the Company that are material to its business and those agreements are in full force and effect. 3.13 Intellectual Property. (a) Ownership. The Company owns all patents, trademarks, service marks, and copyrights, if any, necessary to conduct its business, or possesses adequate licenses or other rights, if any, therefor, without conflict with the rights of others, except for conflicts which could not reasonably be expected to result in a material adverse effect on the Company. "Proprietary Rights" shall mean (i) all trademarks, tradenames, service marks and other trade designations, including common law rights, registrations and applications therefor, and all patents, copyrights and applications therefor currently owned, in whole or in part, by the Company with respect to the business of the Company, and all licenses. royalties, assignments and other similar agreements relating to the foregoing to which the Company is a party; and (ii) all agreements relating to technology, know-how or processes that the Company is licensed or is authorized to use by others, or which it licenses or authorizes others to use. (b) Conflicting Rights of Third Parties. To the best knowledge of the Company, the Company has the right to use the Proprietary Rights without infringing or violating the rights of any third parties and the use of the Proprietary Rights does not require the consent of any other person that has not been obtained and the Proprietary Rights held by the Company are freely transferable. No claim has been asserted by any person to the ownership of or right to use any Proprietary Right or challenging or questioning the validity or effectiveness of any license or agreement constituting a part of any Proprietary Right, and the Company knows of no valid basis for any such claim. (c) Claims of Other Persons. Except as set forth on Schedule 3.9, the Company has no knowledge of any claim that, or inquiry as to whether, any product, activity or operation of the Company infringes upon or involves, or has resulted in the infringement of, any proprietary right of any other person, corporation or other entity, and no proceedings have been instituted, are pending or, to the best knowledge of the Company, are threatened that challenge the rights of the Company with respect thereto. (d) Trade Secrets and Customer Lists. The Company has the right to use, free and clear of any claims or rights of others, except claims or rights specifically set forth in Schedule 3.13, all trade secrets, customer lists and proprietary information required for the marketing of all merchandise and services formerly or presently sold or marketed by the Company. The Company is not making use of any confidential information or trade secrets of any third party, including, without limitation, any past or present employee of the Company, except under valid and existing license agreements. 5 6 Each employee, officer, consultant or vendor with access to the confidential and proprietary information of the Company has executed an agreement with the Company regarding confidentiality and proprietary information, substantially in the form or forms delivered to counsel for the Investor. (e) Year 2000. No technology owned, developed or licensed by the Company or used in connection with its business (including, but not limited to, information systems and technology, commercial and noncommercial hardware and software, firmware, mechanical or electrical products, embedded systems, or any other electromechanical or processor-based system, whether as part of a desktop system, office system, building system or otherwise) wilt experience any malfunctions. premature cancellation or expiration of contractual rights or deletion of data or any other problems in connection with (1) the year 2000 (and all subsequent years) as distinguished from 1900 years, (11) the date February 29, 2000, and all subsequent leap years, and (iii) the date September 9, 1999, except where such problems, either individually or in the aggregate, would not have a material adverse effect on the Company. 3.14 No Conflict of Interest. Except as set forth on Schedule 3.14, the Company is not indebted, directly or indirectly, to any of its officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with accrued and unpaid salaries, expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees. None of the Company's officers or directors, or any members of their immediate families are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or to the Company's knowledge have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that officers, directors and/or stockholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded company that may compete with the Company. Except as set forth on Schedule 3.14, none of the Company's officers or directors or any member of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.15 Tax Returns, Payments and Elections. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge, except for nonmaterial assessments as have been resolved by the Company prior to January 1, 1999 with the applicable taxing or assessing authority. None of the Company's federal income tax returns and none of its state income or franchise tax returns has ever been audited by governmental authorities. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act 6 7 taxes and Federal Unemployment Tax Act Taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 3.16 Financial Statements. The Company has delivered to the Investor the balance sheets, and statements of retained earnings, operations and cash flow of the Company as of and for the year ended July 31, 1998 and the unaudited balance sheets, and statements of retained earnings, operations and cash flow of the Company as of and for the ten month period ended May 31, 1999 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except that the unaudited Financial Statements do not contain notes required by generally accepted accounting principles). The Financial Statements present fairly in all material respects the financial condition and operating results of the Company as of the dates, and for the periods indicated therein (subject, in the case of the unaudited Financial Statements, to normal year-end audit adjustments, none of which, either individually or, in the aggregate, will be material). Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (1) liabilities incurred in the ordinary course of business subsequent to June 30, 1999 and (11) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate are not material to the financial condition or operating results of the Company and do not exceed $20,000 in value. Except as disclosed in the Financial Statements, the Company is not a Guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 3.17 Changes. Except as set forth on Schedule 3.17, since June )O, 1999 there has not been: (a) any change in the business, assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not had, and may not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the financial condition or operations of the Company; (b) any damage, destruction or loss, whether or not covered by insurance, which has had, or may reasonably be expected to have, individually or in the aggregate, a material adverse effect on the financial condition or operations of the Company; (c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; 7 8 (d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, assets, properties, prospects, financial condition or operating results of the Company (as such business is presently conducted and as It is proposed to be conducted); (e) any material change to any contract or agreement set forth on Schedule by which the Company or any of its assets is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder; (g) any sale., assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer or key employee of the Company- and the Company, to the best of its knowledge, does not know of any impending resignation or termination of employment of any such officer or key employee; (i) receipt of notice that there has been a loss of, or material order cancellation by, any customer of the Company; (j) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its properties or assets, except liens for taxes not yet due or payable; (k) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business, (l) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition or any of such stock by the Company, (m) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted); or (n) any arrangement or commitment or understanding by the Company to do any of the things described in this Section 3.17. 3.18 Legal Compliance. The Company has all franchises, permits, licenses and other rights and privileges necessary to permit it to own its properties and to conduct its business as presently conducted, except where the failure to have such will not have a 8 9 material adverse effect on the Company's business prospects. results of operations or financial condition and (b) the Company, and the business and operations of the Company, have been and are being conducted in all material respects in accordance with all applicable laws, rules and regulations, and the Company is not in violation of any judgment, order or decree. 3.19 Brokerage or Finder's Fees. The Company has not incurred any obligation or liability for brokerage commissions, finder's fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by the Company. 3.20 Minute Books. The minute books of the Company made available to Investor contain an accurate summary of all meetings, consents and actions of the board of directors, committees of the board of directors and the shareholders of the Company since the time of its incorporation, accurately reflecting all transactions referred to in such minutes in all material respects. 3.21 No Pending Transactions. The Company is not a party to or bound by any agreement (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) providing for any other form of acquisition, liquidation, dissolution or winding up of the Company, or (iv) except as otherwise contemplated by this Agreement to issue, grant or sell any capital stock of the Company or rights to acquire the Company's capital stock. 3.22 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, insuring its properties that might be damaged or destroyed. 3.23 Nature of Investment. (a) The Investor Shares to be received by the Company will be acquired for investment for the Company's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Company has no present intention of selling, granting any participation in, or other-wise distributing the same,, but subject to the ability of the Company to transfer shares to an affiliate (within the meaning of Rule 405 promulgated under the Securities Act) of the Company. The Company has no need for liquidity related to the acquisition of the Investor Shares. (b) The Company, or a representative thereof, has received and read or reviewed, and is familiar with, this Agreement and the other agreements executed in connection with this Agreement and confirms that all documents. books and records pertaining to the Investor's investment in the Company and requested by the Investor 9 10 have been made available to the Investor. (c) The Company has had an opportunity to ask questions and receive answers from the Investor regarding the terms and conditions of the offering of the Investor Shares and about other information, documents and records relative to Investor's business assets, financial condition, results of operations and liabilities. The foregoing, however. does not limit or modify the representations and warranties of the Investor in Section 4 of this Agreement or the right of the Company to rely thereon. (d) The Company is an experienced investor in securities and acknowledges that it can bear the complete economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Investor Shares. The Company also represents it is an "accredited investor"' within the meaning of Rule 501 (a) promulgated under the Securities Act. (e) The purchase of the Investor Shares by the Company is consistent with the general investment objectives of the Company. The Company understands that the purchase of the Investor Shares involves a high degree of risk in view of the fact that, among other things, the Investor is a start-up enterprise, and there may be no established market for the Investor Shares. (f) The Company understands that the Investor Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Investor in a transaction not involving a public offering and that under such laws and applicable regulations such securities may not be resold without registration under the Securities Act and applicable state securities laws, except in certain limited circumstances. In this connection, the Company represents that it is familiar with Rule 144 under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. The Company agrees that in no event will it make a transfer or disposition of any of the Investor Shares unless and until, if requested by the Investor, it shall have furnished to the Investor (at the expense of the Company or transferee) an opinion of counsel or other evidence, reasonably satisfactory to the Investor, to the effect that such transfer may be made without restrictions under the Securities Act. The Company understands that the Investor is under no obligation to register any of the securities sold hereunder. The Company understands that no public market now exists for the Investor Shares and that it is uncertain whether a public market will ever exist for the Investor Shares. (g) It is understood that the certificates evidencing the Investor Shares shall bear the following legend, as well as any other legend as may be required by applicable federal and state securities laws: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933), AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. 10 11 THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED, RESOLD, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A STOCKHOLDER AGREEMENT THEN IN EFFECT AND EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM." 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby represents and warrants to the Company at the Initial Closing Date and at each Additional Closing Date as follows: 4.1 Authorization. The Investor has requisite power and authority to enter into this Agreement and all other agreements, documents or instruments contemplated by this Agreement and this Agreement constitutes its valid, legal and binding obligation, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.2 Corporate Power. The Investor has all requisite legal and corporate power and authority (i) to execute and deliver this Agreement and the other agreements contemplated herein; (ii) to issue and sell the Investor Shares; and (iii) to carry out and perform its other obligations under the terms of this Agreement and the other agreements contemplated herein. 4.3 Validity of Stock. The Investor Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, will be free of any liens or encumbrances, and shall not be subject to any preemptive rights, rights of first refusal or redemption rights. 4.4 Compliance with Other Instruments. The execution, delivery and performance of and compliance with this Agreement and the consummation of the transactions contemplated hereby will not result in any violation, breach or default of any term of (i) the Investor's Certificate of Incorporation or Bylaws, (ii) any provision of any mortgage, indenture, contract. agreement or instrument to which the Investor is a party or by which it is bound, (iii) any judgment, decree or order binding upon the Investor or any statute, rule or regulation applicable to the Investor such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Investor pursuant to any such term. 4.5 Litigation, etc. There is no Action pending or, to the best knowledge of the Investor, currently threatened (a) against the Investor, (b) affecting any of its properties or assets, (c) that questions the validity of this Agreement or any of the other agreements 11 12 contemplated herein or the right of the Investor to enter into this Agreement or any of the other agreements contemplated herein, or consummate the transactions contemplated hereby or thereby or. (d) to the best knowledge of the Investor, against any officer, director or employee of the Investor in connection with such officer's, director s or employee's relationship with, or actions taken oil behalf of the Investor. 4.6 Nature of Investment. (a) The Shares to be received by the Investor will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Investor has no present intention of selling, granting an,, participation in, or otherwise distributing the same, but subject to the ability of the Investor to transfer shares to an affiliate (within the meaning of Rule 405 promulgated under the Securities Act) of the Investor. (b) The Investor has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and about other information, documents and records relative to the Company's business assets, financial condition, results of operations and liabilities. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Investor to rely thereon. (c) The Investor is an experienced investor in securities and acknowledges that it can bear the complete economic risk of its investment and has such knowledge and experience in Financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. The Investor also represents it is an "accredited investor" within the meaning of Rule 501 (a) promulgated under the Securities Act. (d) The Investor understands that the Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may not be resold without registration under the Securities Act and applicable state securities laws, except in certain limited circumstances. In this connection, the Investor represents that it is familiar with Rule 144 under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. The Investor agrees that in no event will it make a transfer or disposition of any of the Shares unless and until, if requested by the Company, it shall have furnished to the Company (at the expense of the Investor or transferee) an opinion of counsel or other evidence, reasonably satisfactory to the Company, to the effect that such transfer may be made without restrictions under the Securities Act. The Investor understands that the Company is under no obligation to register any of the securities sold hereunder. The Investor understands that no public market now exists for the Common Stock and that it is uncertain whether a public market will ever exist for the Common Stock. 12 13 (e) It is understood that the certificates evidencing the Shares shall bear the following legend, as well as any other legend as may be required by applicable federal and state securities laws: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED, RESOLD, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A STOCKHOLDER AGREEMENT THEN IN EFFECT AND EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM." 4.7 Brokerage or Finder's Fees. The Investor has not incurred any obligation or liability for brokerage commissions, finder's fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by the Investor. 5. CONDITIONS TO CLOSING OF INVESTOR. 5.1 Initial Closing. The obligation of the Investor to purchase and pay for the Shares at the Initial Closing is subject to the fulfillment to the satisfaction of the Investor (or the waiver by the Investor) on or prior to the Initial Closing Date of the following conditions: (a) the representations and warranties made by the Company in Section 3 hereof shall be true and correct in all respects when made, and shall be true and correct on the Initial Closing Date with the same force and effect as if they had been made on and as of such date; (b) all covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company on or prior to the Initial Closing Date shall have been performed or complied with in all material respects; (c) the Company shall have obtained all approvals, consents and waivers necessary for the consummation of the transactions contemplated by this Agreement; (d) a Shareholders' Agreement, substantially in the form attached hereto as Exhibit A, shall have been entered into by the Company and the shareholders of the Company (Stephen W. Myers, Debora P. Myers, Don Flynt and Carey Coffman) and the Investor; (e) a Stockholders' Agreement, substantially in the form attached hereto as Exhibit B, shall have been entered into by the Company and the Investor; (f) an Indemnification Agreement, substantially in the form attached hereto as Exhibit C, shall have been entered into by the Company and the Investor's designee to the Company's Board of Directors; (g) Burdett, Morgan & Thomas, L.L.P., counsel for the Company, shall have delivered to the Investor its legal opinion, dated as of the Initial Closing Date and in the form as reasonably agreed to by the parties; (h) an Agreement Regarding Interfaces, substantially in the form attached hereto as Exhibit D, shall have been entered into by the Company and the Investor; (i) a compliance certificate, dated as of the Initial Closing Date, signed by the Company's president certifying that the conditions specified in Section 5.1(a)(b) and (c) 13 14 of this Agreement have been fulfilled shall have been delivered to the Investor; (j) the completion by the Investor and its representatives of a successful due diligence review of Company and the Company's business, the success of which shall be determined in the sole discretion of the Investor, and (k) the delivery by the Company to the Investor of the following: (i) a certificate of the Secretary of the Company certifying the following as being true, correct, complete and in full force and unmodified as of the Initial Closing Date: (1) the resolutions of the Board of Directors of the Company authorizing and approving this Agreement and all of the transactions and agreements contemplated hereby, (2) the Articles of Incorporation of the Company, as amended to date and as certified by the Secretary of State of Texas as of a date within fifteen (15) days of the Initial Closing Date, (3) Bylaws of the Company, as amended to date, and (4) the names of the officer or officers of the Company authorized to execute this Agreement and any and all documents, agreements, and instruments contemplated herein; (ii) a certificate of good standing for the Company from the Secretary of State of Texas, and (ii) a certificate from each state where the Company is required to be qualified as a foreign corporation showing such qualification, each such certificate specified in this paragraph (ii) dated as of a date within fifteen (I 5) days of the Initial Closing Date; and (iii) such other documents, instruments, and certificates as the Investor may reasonably request. (b) Additional Closings. The obligation of the Investor to purchase and pay for the Shares at each Additional Closing is subject to the fulfillment (or waiver by the Investor) on or prior to the Additional Closing Date of the following conditions: (a) the representations of the Company contained in this Agreement shall be true and correct in all respects with the same force and effect as if they had been made on and as of each Additional Closing Date (as updated where applicable, provided that such updates do not constitute a material adverse change); (b) the Company shall be in material compliance with all covenants, agreements and conditions contained in this Agreement; and (c) the Company shall have delivered to the Investor such documents, instruments and certificates as the Investor may reasonably request. 6. CONDITIONS TO CLOSING OF COMPANY. The Company's obligation to sell the Shares to the Investor at each respective Closing is subject to the fulfillment on or prior to the applicable Closing Date of the following conditions: 6.1 Representations. The representations and warranties made by the Investor in Section 4 hereof shall be true and correct in all respects when made and shall be true and correct in all respects with the same force and effect as if they had been made on the applicable Closing Date (as updated where applicable, provided that such updates do not 14 15 constitute a material adverse change). 6.2 Payment of Purchase Price. The Investor shall have delivered the purchase price for the Shares being purchased at such Closing in accordance with the provisions of Section 1.2. 6.3 Securities Exemptions. The offer and sale of the Shares to the Investor pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act. and the registration and/or qualification requirements of all other applicable state securities laws. 7. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees with the Investor as follows: 7.1 Preservation of Corporate Existence. The Company shall preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership or lease of its properties. The Company shall use its best efforts to operate the business substantially in the manner operated as of the date of this Agreement and will continue to dedicate the same or greater resources to, and endeavor to expand, its business and prospects. 7.2 Compliance with Laws, Taxes. The Company shall comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paving all taxes, assessments and governmental charges imposed upon it or upon its property before the same become delinquent, except to the extent contested in good faith. 7.3 Maintenance of Insurance. The Company shall maintain insurance with and reputable insurance companies or associations in such amounts and covering response such risks as is customarily carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company operates. 7.4 Keeping of Records and Books of Account. The Company shall keep adequate records and books of account in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. 7.5 Maintenance of Properties. The Company shall maintain and preserve all of material properties and assets, necessary or useful in the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted. 15 16 7.6 Contracts and Rights. The Company shall maintain and preserve its rights under all material contracts and shall maintain its Proprietary Rights as necessary or useful in the proper conduct of its business. 7.7 Board of Directors. The Board of Directors (the "Board") of the Company shall include one (1) director elected by the Investor pursuant to the Shareholders' Agreement. The Company will promptly reimburse in full such director for all reasonable out-of-pocket expenses incurred in attending each meeting of the board of directors or any committee thereof. 7.8 Restriction on Technology Transfers. The Company shall not transfer, sell, dispose of, assign, lease, license or donate any ownership or interest in, or material rights relating to, any of its technology, or other Proprietary Rights to any person or entity (a "Technology Transfer"), without the prior written consent of the Investor and without first offering to make such Technology Transfer to the Investor in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail (the "Technology Transfer Notice") to the Investor stating (i) its bona fide intention to make such Technology Transfer, (ii) the technology or Proprietary Rights to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such technology or Proprietary Rights. (b) Within twenty (20) calendar days after delivery of the Technology Transfer Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Technology Transfer Notice, up to all of such technology or Proprietary Rights; provided, however, that no such election shall be binding upon the Investor unless and until such time as the Company has obtained binding commitments relating to the Technology Transfer specified in the Technology Transfer Notice at the price and upon the terms specified in the Technology Transfer Notice. (c) The Company may, during the 60-day period following the expiration of the period provided in subsection (b), offer the unsubscribed portion of the Technology Transfer to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Technology Transfer Notice. If the Company does not enter into an agreement for the Technology Transfer within such 60-day period, or if such agreement is not consummated within such 60-day period, the right provided hereunder shall be deemed to be revived and such technology or Proprietary Rights shall not be offered unless first offered to the Investor in accordance with this Section. (d) This Section shall not apply to transfers or licenses of technology or Proprietary Rights accomplished in the ordinary course of business as presently conducted or proposed to be conducted. (e) The provisions of this Section shall be, where applicable, 16 17 subordinate to the existing right of first refusal held by Lextron, Inc. pursuant to that certain Agreement dated as of February 18, 1997 by and among the Company, Lynn R. Camp, Barbara A. Camp, Stephen W. Myers and Lextron, Inc. (the "Lextron Agreement"). 7.9 Basic Information and Access and Additional Information. (a) As soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, the Company will furnish to the Investor an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and stockholder equity and cashflows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. (b) As soon as practical, but in any event within thirty (30) days after the end of each month of each fiscal year of the Company, the Company will furnish to the Investor an unaudited profit or loss statement, a statement of cash flows for such fiscal month and an unaudited balance sheet as of the end of such fiscal month. (c) Upon the request of the Investor, the Company shall permit the Investor to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss its affairs with the officers and to inspect the Company's books, records and ledgers, all at such reasonable times and as often as may be reasonably requested. (d) At least thirty (30) days before the end of the fiscal year, the Company shall furnish to the Investor the annual budget of the Company for the succeeding fiscal year. (e) Notwithstanding the foregoing, the provisions of Sections 7.9(a) through (d) above shall terminate upon the closing of a registered public offering of the Company's capital stock. 7.10 Connectivity Access. From the Initial Closing Date and for so long as Investor owns any Shares, the Company shall provide the Investor: (a) guaranteed access to (and all necessary or appropriate support relating to such access) all data maintained on its legacy computer systems with respect to its customers; and (b) the means to provide connectivity between (and all necessary or appropriate support relating to such connectivity) such legacy computer systems data and the Investor's Management Information systems. In exchange for such access and connectivity, the Company and the Investor shall negotiate a reasonable and customary fee prior to the Initial Closing Date. The terms contained in this Section are set forth in more detail in the Agreement Regarding Interfaces, attached hereto as Exhibit D. The parties acknowledge that the rights afforded by this Section represent a material inducement for the parties to enter 17 18 into this Agreement, and that the parties would not have entered into this Agreement on the terms and conditions set forth in this Agreement absent these rights. Notwithstanding any other provision of this Agreement to the contrary, this Section shall survive the termination of this Agreement, except as provided in Section 11.4. 7.11 Exclusive Rights. From the Initial Closing Date and for so long as Investor owns any Shares, the Company shall: (a) establish and maintain an electronic commerce link with respect to its operations relating to cattle sales, feed sales (which for the purposes of this Agreement shall initially exclude feed additives, health related products and other supply items) and other products as may be agreed to by the parties in a form reasonably acceptable to the Investor (including, for example, a link through a hot button or private label program); and (b) grant the Investor exclusive rights to be the provider of any electronic commerce services for the Company relating to such operations relating to cattle sales, feed sales and other products as may be agreed to by the parties. The Company and the Investor shall negotiate in good faith with respect to the details of the provisions contained in this Section; provided, however, that the parties acknowledge that the Investor shall be the sole and exclusive provider of electronic commerce services to the Company's operations relating to cattle sales, feed sales and other products as may be agreed to by the parties, and the Company shall be precluded from entering into any electronic commerce relationships with third parties relating to the Company's operations relating to cattle sales, feed sales and other products as may be agreed to by the parties. In addition, the Company shall not grant exclusive rights to any other party relating to the provision of electronic commerce services for any of the Company's operations other than cattle sales, feed sales or other products as may be agreed to by the parties, and shall provide the Investor with the opportunity to participate in the provision of any such services for these operations granted to third parties on a nonexclusive basis. The parties acknowledge that the rights afforded by this Section represent a material inducement for the parties to enter into this Agreement, and that the parties would not have entered into this Agreement on the terms and conditions set forth in this Agreement absent these rights. Notwithstanding any other provision of this Agreement to the contrary, this Section shall survive the termination of this Agreement, except as provided in Section 11.4. 7.12 Use of Proceeds. The Company shall pay, or caused to be paid, when due and payable, all amounts due under that certain Promissory Note dated February 17, 1997 made by Lynn R. Camp and Stephen W. Myers (the "Borrowers") and payable to Lextron, Inc. in the original aggregate principal amount of $420,000, with respect to which shares of the Company are being held as collateral (the "Lextron Note"). The Company shall notify the Investor of any actual or potential default under the Lextron Note promptly after it receives notice of such actual or potential default, but in any event prior to the foreclosure upon any shares of the Company being held as collateral for the Lextron Note. Upon receipt of such notice, the Investor shall have the option, if it so elects in its sole discretion, to: (i) repay the Lextron Note and replace it with a note to the Borrowers with the same terms and conditions as the Lextron Note (including the receipt of collateral consisting of the shares being held as collateral for the Lextron Note); (ii) repay the Lextron Note and offset the amounts due under the Lextron Note against any 18 19 future payments made by the Investor to the Company on the next Additional Closing Date or at any other time; or (iii) take no action. 8. RESTRICTIONS ON ISSUANCE OF ADDITIONAL SECURITIES. 8.1 Dilution Protection. The Company acknowledges that the purchases made by Investor under this Agreement constitute an investment in 19% of the outstanding capital stock of the Company. In this regard, for so long as the Investor owns any Shares, upon any issuance of (a) Common Stock or other securities of the Company, (b) options to purchase or rights to subscribe for Common Stock or other securities of the Company, (c) securities convertible into or exchangeable for Common Stock or other securities of the Company, and (d) options to purchase or rights to subscribe for such convertible or exchangeable securities (collectively, the "Covered Securities"), the Company shall automatically grant to the Investor sufficient Covered Securities described in subsections (a) through (d) so as to maintain the Investor's then current percentage ownership of the Company, with any convertible securities determined on an as converted basis. The purchase price for such Covered Securities shall be the par value of the securities issued (in the case of subsection (a)) or the par value of the Common Stock into which such Covered Securities are convertible (in the case of subsections (b) through (d)). Payment for such Covered Securities shall be made by the Investor in cash upon ten (10) days prior notice from the Company of such issuance. This additional issuance right shall not apply to (A) shares of Common Stock, rights, options or warrants granted or awarded by the Company, with the approval of its Board of Directors, including the approval of the Board designee of the Investor, to employees, directors and consultants of the Company as compensation for service to the Company in any such capacities. if such rights, options or warrants are granted at an exercise price or value not less than the fair market value of a share as of the date of grant, up to and no more than an aggregate of 7,036 shares of Common Stock (as adjusted to provide for any dividends, stock distributions, splits, combinations or recapitalizations), (B) the issuance of Common Stock or securities convertible into Common Stock in connection with any merger or acquisition involving the Company, which merger or acquisition is properly authorized and approved by the Board of Directors, including the approval of the Board designee of the Investor, or (C) any Covered Securities where the additional issuance rights have been waived in writing by the Investor. 8.2 Right of First Refusal. (a) In addition to the rights set forth in Section 8.1, and until such time as the Company shall have consummated a registered public offering, the Investor shall have the preemptive right to subscribe for the issuance of any and all Covered Securities; provided, however, that the Investor shall not have a preemptive right to subscribe for (A) shares of Common Stock, rights, options or warrants granted or awarded by the Company, with the approval of its Board of Directors, including the approval of the Board designee of the Investor, to employees, directors and consultants of the Company as compensation for service to the Company in any such capacities, if such rights, options or warrants are granted at an exercise price or value not less than the fair market value of 19 20 a share as of the date of grant, up to and no more than an aggregate of 7,036 shares of Common Stock (as adjusted to provide for any dividends, stock distributions, splits, combinations or recapitalizations), (B) the issuance of Common Stock or securities convertible into Common Stock in connection with any merger or acquisition involving the Company, which merger or acquisition is properly authorized and approved by the Board of Directors, including the approval of the Board designee of the Investor, (C) any Covered Securities where the preemptive rights have been waived in writing by the Investor, or (D) any Covered Securities where the issuance of such Covered Securities would represent less than a controlling interest in the Company for the holder of such securities; provided, further, however, that such preemptive rights shall not affect the Investor's rights under Section 8.1 with respect to any Covered Securities issued to the Investor pursuant to such Section. For purposes of this Agreement, an issuance of Covered Securities to a holder shall represent a "controlling interest" in the Company if such issuance, when taken together with all other Covered Securities directly or beneficially owned by such holder, represents 30% or more of the combined voting power or ownership of the outstanding capital stock of the Company, considered on an as converted basis where applicable. (b) In the event the Company proposes to issue any Covered Securities where such issuance is subject to the provisions of this Section, the Company shall first make an offering of such securities in accordance with the following provisions: (i) The Company shall deliver a notice by certified mail (the "Preemption Notice") to the Investor stating (A) its bona fide intention to offer such securities, (B) the number of such securities to be offered, and (C) the price and terms, if any, upon which it proposes to offer such securities. (ii) Within twenty (20) calendar days after delivery of the Preemption Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Preemption Notice, up to all of such securities; provided, however, that no such election to purchase securities shall be binding upon the Investor unless and until such time as the Company has obtained binding commitments to purchase all of the securities specified in the Preemption Notice at the price and upon the terms specified in the Preemption Notice. (iii) The Company may, during the 60-day period following the expiration of the period provided in subsection (ii), offer the unsubscribed portion of the securities to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Preemption Notice. If the Company does not enter into an agreement for the sale of the securities within such 60-day period, or if such agreement is not consummated within such 60-day period, the right provided hereunder shall be deemed to be revived and such securities shall not be offered unless first offered to the Investor in accordance with this Section. (c) The provisions of this Section shall be, where applicable, subordinate to the existing right of first refusal held by Lextron, Inc. pursuant to the 20 21 Lextron Agreement. 9. COMPANY PUT RIGHTS. 9.1 Put. If (a) the Investor has not consummated an initial public offering of the Investor Common Stock under the Securities Act by December 31, 2001, or (b) the Investor undergoes a "change of control," the Company shall have the one (1) time right to sell ("Put") to the Investor all, but not less than all, of the Investor Shares (the "Put Securities") for a period of thirty (30) days following the occurrence of the trigger event described in clause (a) or (b) of this Section 9.1. For purposes of this Section 9, a "change of control" shall mean a merger, consolidation or other business combination pursuant to which the shareholders of the Investor immediately prior to the effective date of such transaction have beneficial ownership of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following such transaction and the consideration for such merger, consolidation or other business combination does not consist of cash and/or securities registered under the Securities Act. 9.2 Exercise. In the event the Company wishes to exercise its right to Put the Put Securities, the Company shall notify the Investor in writing of its intention to exercise its Put right. 9.3 Purchase. The purchase price (the "Put Price") of the Put Securities shall be $500,000. The Investor shall purchase the Put Securities within ninety (90) days from the date it receives notice of the Company's intent to exercise the Put; provided, however, that if the Investor is unable to purchase all of the Put Securities due to state law restrictions, the Put Securities shall be repurchased from time to time to the maximum extent the Investor is legally permitted to do so, and the Put obligation of the Investor under this Section 9 will be a continuing obligation until the Investor's repurchase of all the Put Securities. 9.4 Closing. The Put closing (including any subsequent purchase closing date if multiple purchases result from the application of Section 9.3), shall occur at the Investor's principal office. At the Put closing, to the extent applicable, the Company shall deliver the Put Securities being sold, duly endorsed in blank, accompanied by such supporting documents as the Investor may reasonably determine to be necessary to pass to the Investor good title to the Put Securities, free and clear of all liens (other than restrictions under applicable securities laws and/or any shareholders' agreements). In consideration therefor, the Investor shall deliver to the Company payment, by certified check, cashier's check, or wire transfer, of the aggregate Put Price. 9.5 Transfer of Put Right. The Put right granted hereunder is not assignable. 21 22 10. REGISTRATION RIGHTS 10.1 Optional Registrations. (a) If, at any time or from time to time after the Investor has closed an initial public offering of the Investor Common Stock, the Investor decides to register any of the Investor Common Stock or securities convertible or exchangeable for Investor Common Stock under the Securities Act on a form suitable for an offering for cash, other than a registration solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Securities and Exchange Commission (the "Commission") is applicable, the Investor will promptly give written notice to the Company, and the Investor will use reasonable efforts to effect the registration under the Securities Act of all Registrable Securities (as defined in Section 10.2) that the Company requests be included in such registration by a written notice delivered to the Investor within fifteen (15) days after the notice given by the Investor. (b) If the registration involves an underwritten public offering, the Investor will not be required to register Registrable Securities in excess of the amount that the principal underwriter reasonably and in good faith recommends may be included in such offering (a "Cutback"). If such a Cutback occurs, the number of shares that are entitled to be included in the registration and underwriting shall first be allocated to the Investor for securities being sold for its own account, shall next be allocated to holders with registration rights existing prior to the date of this Agreement, and thereafter shall be allocated among the other holders requesting inclusion in the registration (including the Company) pro rata on the basis of the number of shares each requesting holder requests be included bears to the total number of shares of all requesting holders (other than the Investor) that have been requested to be included in such registration. (c) If the Investor elects to terminate any registration filed under this Section, the Investor will have no obligation to register the securities sought to be included by the Company in such registration. In connection with a registration made by the Investor pursuant to this Section, all expenses of the Investor for such registration and offering and the reasonable fees and expenses of independent counsel for the Company will be borne by the Investor (except that the Company will bear underwriting discounts and commissions attributable to its Registrable Securities being registered and transfer taxes on shares being sold by it). 10.2 Registrable Securities. For the purposes of this Section, the term "Registrable Securities" shall mean any shares of Investor Common Stock issued pursuant to this Agreement, and any other securities issued as a dividend of other distribution with respect to, or in exchange for or in replacement of, any shares of Investor Common Stock issued pursuant to this Agreement, except for shares of Investor Common Stock that have been sold or transferred pursuant to an effective registration statement or pursuant to Rule 144 under the Securities Act. 10.3 Procedure for Registration. Whenever the Investor is required under this 22 23 Agreement to register Investor Common Stock, it agrees to (a) furnish to the Company such copies of each preliminary and final prospectus and such other documents as the Company may reasonably request to facilitate the public offering of its Registrable Securities; and (b) upon the reasonable request of the Company, use reasonable efforts to register or qualify the Registrable Securities covered by the registration statement under the securities or "blue-sky" laws of such jurisdictions as are necessary to permit the sale of such securities by any selling holder, although the Investor will not have to register in any states that require it to qualify to do business or subject itself to general service of process. 10.4 Indemnification. (a) Subject to applicable law, the Investor will indemnify the Company and each person controlling the Company against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred, arising out of any untrue or allegedly untrue statement of a material fact contained in the registration statement, or any omission or alleged omission to state a material fact required to be stated in the registration statement or necessary to make the statements not misleading, or arising out of any violation statement by the Investor of the Securities Act, any state securities or "blue-sky" laws or any applicable rule or regulation. (b) Subject to applicable law, the Company will indemnify the Investor, and each person controlling the Investor, against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred. arising out of any untrue or allegedly untrue statement of a material fact contained in the registration statement, or required to be stated in the registration statement o r necessary to make the statements contained therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit furnished in writing by the Company to the investor specifically for inclusion in such registration statement. In no event shall the liability of the Company under this paragraph be greater in amount than the dollar amount of the proceeds received by the Company upon the sale of the Investor Common Stock pursuant to the registration statement giving rise to such indemnification obligation. 10.5 Rule 144 Requirements. If the Investor becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Investor will use reasonable efforts to file with the Commission such information as the Commission may require and will use reasonable efforts to make available Rule 144 under the Securities Act (or any successor exemptive rule). 10.6 Transfer of Registration Rights. The registration rights of the Company under this Section 10 are not transferable and shall not be assigned by the Company. Any assignment or transfer, or purported assignment or transfer, shall be void and of no force or effect. 10.7 Obligations of the Company in a Registration. The Company agrees to 23 24 timely furnish such information regarding the Company and the securities sought to be registered and to take such other action as the Investor may reasonably request in connection with the registration or qualification of such securities and/or the compliance of such registration statement with all applicable laws. If the registration involves an underwriter, the Company agrees, upon the request of such underwriter, not to sell any unregistered securities of the Investor for a period of up to one hundred and eighty (180) days following the effective date of the registration statement for such offering and to enter into an underwriting agreement and/or any other agreements with such underwriters containing usual and customary terms and provisions. 10.8 Termination of Rights. All rights of any holder of Registrable Securities under this Section 10 shall terminate one (1) year after the Initial Closing Date; provided, however, that the provisions of Section 10.4 shall survive the termination of the rights under this Section 10. 11. MISCELLANEOUS. 11.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Texas, without regard to the State's conflicts of law rules. 11.2 Survival. The representations and warranties of the parties made herein shall survive the closing of the transactions contemplated hereby. 11.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the permitted successors, assigns, heirs, executors and administrators of the Investors. 11.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. This Agreement may be amended, waived, discharged or terminated only with the written consent of the Investor and the Company. 11.5 Brokerage and Finder's Fees. The Company, on the one hand, and the Investor. on the other hand, will be responsible for, and will indemnify and hold harmless the other party for, any brokerage commissions, finder's fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by the Company, on the one hand, or by the Investor, on the other hand. 11.6 Notices, etc. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to the Investor to the address set forth below its signature, or to such other address as the Investor shall have furnished to the Company in writing, or (b) if to 24 25 the Company, at its address set forth below its signature, or at such other address as the Company shall have furnished to the Investor in writing. 11.7 Expense of Transaction. Each party hereto shall bear its own expenses in connection with the transaction described herein. 11.8 Titles and Subtitles. The titles of the sections, paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 11.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11.10 Timely Performance. Time is of the essence as to the performance of the obligations required of the respective parties under this Agreement. 11.11 Attorney's Fees. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 11.12 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of this Agreement shall be interpreted as if such provision were so excluded and (c) the balance of this Agreement shall be enforceable in accordance with its terms. 11.13 Delays or Omission. No delay or omission to exercise any right, power or remedy accruing to the Investor or to the Company, upon any breach or default of any party under this Agreement, shall impair any such right, power or remedy of the Investor or the Company, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of the Investor or the Company of any breach or default under this Agreement, or any waiver on the part of the Investor or the Company of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 11.14 Remedies. In addition to any remedies the parties may have at law or in equity, the parties shall have the following remedies: 25 26 (a) In the event that (i) the Investor fails to consummate an Additional Closing within fifteen (15) days of any scheduled Additional Closing Date specified in Section 2.2, and (ii) the Company has met all of its conditions to such Additional Closing under Section 5.2 as of such time, then all rights granted to the Investor in Sections 7.7, 7.8, 8.1 and 8.2 shall be of no further force or effect. until and unless the Investor consummates such Additional Closing(s) in one subsequent Additional Closing on or before December 31, 2002 with the payment in full by the Investor to the Company of all remaining amounts due under Section 1.2. (b) In the event that (i) the Investor falls to consummate the first Additional Closing within fifteen (15) days of December 31, 1999, and (ii) the Company has met all of its conditions to such Additional Closing under Section 5.2 as of such time, then all rights granted to the Investor in Sections 7.10, and 7.11 shall be of no further force or effect, until and unless the Investor consummates such Additional Closing on or before December 31, 2002. (c) The parties agree that as to the matters expressed in Sections 7, 8, 9 and 10 of this Agreement, they will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of such provisions by the Company or the Investor, the other party shall, in addition to all other remedies, be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions hereof 26 27 IN WITNESS WHEREOF, the Company and the Investor have executed and delivered this Agreement as of the day and year first above written. THE COMPANY: TURNKEY COMPUTER SYSTEMS, INC. 801 South Pierce Street Amarillo, Texas 79101 By: /s/: Stephen W. Myers --------------------- Name: Stephen W. Myers ------------------- Title: President ------------------ THE INVESTOR: EMERGE INTERACTIVE, INC. 10315 102nd Terrace Sebastian, Florida 32958 By:/s/: Charles L. Abraham ----------------------- Name: Charles L. Abraham -------------------- Title: Chief Executive Officer ----------------------- 27 28 EXHIBIT A 28 29 Exhibit A SHAREHOLDERS' AGREEMENT THIS SHAREHOLDERS' AGREEMENT (the "Agreement") is made and entered into as of August _, 1999, by and among TURNKEY COMPUTER SYSTEMS, INC., a Texas corporation (the "'Company"), Stephen W. Myers, Debora P. Myers, Don Flynt, Carey Coffman (the "Shareholders"), and EMERGE INTERACTIVE, Inc. (the "Investor"). WHEREAS, each of the Shareholders is now or hereafter may be the owner of shares of capital stock of the Company or other securities that may be issued in exchange for or in respect of shares of capital stock of the Company, whether pursuant to any exercise, conversion, stock split, stock dividend, combination, reclassification, reorganization or any other means (whether now or hereafter acquired, the "Shares"); WHEREAS, the Company and the Investor are parties to that certain Common Stock Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"); WHEREAS, the obligations of the Company and Investor under the Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company, Shareholders and Investor, and WHEREAS, each of the parties to this Agreement have agreed on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, and the parties' desire to provide for the continuity of ownership of the Company to further the interests of the Company and its present and future shareholders, the parties agree as follows: 1. Investor Right of First Refusal. (a) Prior to any sale, transfer, pledge or other disposition (collectively, a "Transfer") of any Shares owned by any Shareholder, such Shareholder shall offer to the Investor the right, for a period of twenty-five (25) business days from the date the Investor receives the written notice described in subsection (b), below, the 25th such day being the "Effective Date," to purchase all of such Shares for cash at an amount equal to the price or other consideration for which such Shares are to be Transferred. Notwithstanding the foregoing, a Shareholder may Transfer Shares: (i) pursuant to a transfer or disposition by will or the laws of descent and distribution due to the death of such Shareholder; (ii) pursuant to a sale between Shareholders of less than a "controlling interest" (as defined below); or (iii) pursuant to a sale representing less than a controlling interest in the Company; provided, in each case, that the transferee under such provision agrees in writing with the Company and the Investor to be bound by and subject to the terms of this Agreement (such transferees being collectively referred to as the "Permitted 30 Transferees"). For purposes of this Agreement, a sale of Shares shall represent a "controlling interest" in the Company if the Shares subject to such Transfer, when taken together with all other Shares directly or beneficially owned by the transferee of such Transfer, represents 30% or more of the combined voting power or ownership of the outstanding capital stock of the Company, considered on an as-converted basis where applicable. (b) With respect to each Transfer of Shares, the Shareholder proposing such Transfer (the "Transferring Shareholder") shall provide written notice to the Investor. Such written notice shall describe: (i) the Shares proposed to be Transferred; (ii) whether the proposed transferee constitutes a Permitted Transferee; and (iii) the number, price, payment, closing and other relevant terms of the proposed Transfer. The Investor may indicate its interest in purchasing all or any, lesser number of the Shares offered by the Transferring Shareholder to a transferee that is not a Permitted Transferee by providing written notice thereof to the Transferring Shareholder prior to the expiration of the twenty-five (25) day period. In such event, the Transferring Shareholder shall promptly Transfer to the Investor, upon the terms specified in the notice from the Transferring Shareholder to the Investor, the number of Shares specified in the notice from the Investor to the Transferring Shareholder. (c) In the event that the offer set forth in the notice delivered by the Transferring Shareholder to the Investor is thereafter modified, or in the event such proposed offer does not close within thirty (30) days after the Effective Date, then the Transferring Shareholder must once again offer such Shares to the Investor pursuant to the terms of this Agreement. (d) The provisions of this Section shall be, where applicable, subordinate to the existing rights of first refusal or collateral rights held by Lextron, Inc. pursuant to that certain Agreement dated as of February 18, 1997 by and among the Company, Lynn R. Camp, Barbara A. Camp, Stephen W. Myers, Debora P. Myers and Lextron, Inc. 2. Company Right of First Refusal. (a) Prior to any Transfer of any Shares owned by the Investor, the Investor shall offer to the Company the right, for a period of twenty-five (25) business days from the date the Company receives the written notice described in subsection (b), below, to purchase all of such Shares for cash at an amount equal to the price or other consideration for which such Shares are to be Transferred. Notwithstanding the foregoing, the Company may Transfer Shares to any of its affiliates, as defined in the Securities Act of 1933, as amended (an "Investor Permitted Transferee"). (b) With respect to each Transfer of Shares by the Investor, the Investor shall provide written notice to the Company. Such written notice shall describe: (i) the Shares proposed to be Transferred; (ii) whether the proposed transferee constitutes an Investor Permitted Transferee; and (iii) the number, price, payment, closing and other relevant terms of the proposed Transfer. The Company may indicate its interest in 2 31 purchasing all or any lesser number of the Shares offered by the Investor to a transferee that is not an Investor Permitted Transferee by providing written notice thereof to the Investor prior to the expiration of the twenty-five (25) day period. In such event, the Investor shall promptly Transfer to the Company, upon the terms specified in the notice from the Investor to the Company, the number of Shares specified in the notice from the Company to the Investor. (c) In the event that the offer set forth in the notice delivered by the Investor to the Company is thereafter modified, or in the event such proposed offer does not close within thirty (30) days after the Effective Date, then the Investor must once again offer such Shares to the Company pursuant to the terms of this Agreement. (d) The rights of the Investor under Sections I and ') of this Agreement, and Sections 7.7, 7.8, 8.1 and 8.2 of the Purchase Agreement, are particular to the Investor and any Investor Permitted Transferee. In addition to the termination of such rights under any other provision of this Agreement or the Purchase Agreement, such rights shall terminate upon any Transfer occurring after the final Additional Closing Date where upon the completion of such Transfer the Investor and all Investor Permitted Transferees own in an aggregate less than 50% of the Shares owned as of such final Additional Closing Date. 3. Investor Voting Rights. The Investor shall have the right to elect one person to, and the right to remove such person from, the Board of Directors. The Shareholders agree to vote all of their Shares for the Director selected by the Investor pursuant to this Agreement at any annual or special meeting or pursuant to any written consent, conducted or solicited for the purpose of electing directors. The voting agreement contained in this Section is coupled with an interest and the obligation assumed by the Shareholders to vote their Shares as set forth above shall be deemed to be a right coupled with an interest in favor of the Investor. In the event of any resignation (or removal by the Investor) of the Director elected by the Investor, the Shareholders shall take all actions necessary and appropriate to cause such vacancy to be filled in accordance with the provisions hereof. The provisions of this Section shall be subject to the provisions of Section 11.4 of the Purchase Agreement (insofar as those provisions relate to Section 7.7 of the Purchase Agreement). 4. Term. This Agreement shall terminate upon the earlier of the written agreement of the parties or at such time as the Investor ceases to be a holder of Shares of the Company. 5. Specific Enforcement. The parties agree that as to the matters expressed in this Agreement, they will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by the Company and/or the Shareholders, the Investor shall, in addition to all other remedies, be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions hereof. 3 32 6. Legend. Each certificate or other document evidencing the Shares of the Company shall bear a legend substantially as follows: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED, RESOLD, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN SHAREHOLDER AGREEMENT AND EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS." 7. Transfer of Shares. The Company shall not: (a) permit any transfer on its books of any Shares that have been sold or transferred in violation of any of the provisions set forth in this Agreement; (b) treat as an owner of such Shares or accord the right to vote as an owner or to pay dividends to any transferee to whom such Shares shall have been sold or transferred in violation of any of the provisions set forth in this Agreement; or (c) issue any additional shares of capital stock on the Company unless the proposed holder of such newly issued capital stock agrees to become bound by the terms of this Agreement as a "Shareholder." 8. Additional Shareholders. The Company and/or the Shareholders shall cause all future holders of Shares of the Company to execute a signature page to this Agreement and become bound by its terms and conditions. The parties acknowledge that any such party executing such a signature page shall be deemed a party to this Agreement. 9. Notices. Notices given hereunder shall be deemed to have been duly given on the date of personal or overnight delivery or on the date of postmark if mailed by certified or registered mail, return receipt requested, to the party being notified at their or its address specified on the applicable signature page hereto or such other address as the addressee may subsequently notify the other parties of in writing. 10. Entire Agreement and Amendments. This Agreement, the Purchase Agreement, and the other documents delivered pursuant hereto or thereto constitute the full and entire understanding and agreement among the parties with regard to the subjects contained herein and therein. Any provision of this Agreement may be amended or the 4 33 observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company, the Investor and the holders of a majority of the Shares. Any amendment or waiver effected in accordance with this Section shall be binding upon each party to this Agreement. 11. Governing Law. This Agreement and the legal relations between the parties arising under this Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas. The parties agree to submit to the non-exclusive jurisdiction of the federal and state courts of the State of Texas with respect to the breach or interpretation of this Agreement or the enforcement of any and all rights, duties, liabilities, obligations, powers and other relations between the parties arising under this Agreement. 12. Except as otherwise expressly provided herein, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties. The parties may not assign their rights or obligations under this Agreement. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 14. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the part, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. Delays or Omission. No delay or omission to exercise any right, power or remedy accruing to the Investor under this Agreement shall impair any such right, power or remedy of Investor nor shall it be construed to be a waiver of any such. breach or default, or an acquiescence therein, or of or in any similar breach of default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of the Investor of any breach or default under this Agreement, or any waiver on the part of the Investor of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 5 34 IN WITNESS WHEREOF, the Company, the Investor and the Shareholders have executed and delivered this Agreement as of the day and year first above written. COMPANY: TURNKEY COMPUTER SYSTEMS, INC. By: --------------------------------------------------- Stephen W. Myers, President Address: 801 South Pierce Street Amarillo, Texas 79 1 (806) 372-1249 (fax) INVESTOR: EMERGE INTERACTIVE, INC. By: --------------------------------------------------- Address: 10315 102nd Terrace Sebastian, Florida 32958 6 35 SHAREHOLDERS: ------------------------------------------------------ Stephen W. Myers Address: ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ------------------------------------------------------ Debora P. Myers Address: --------------------------------------------- --------------------------------------------- --------------------------------------------- ------------------------------------------------------ Don Flynt Address: --------------------------------------------- --------------------------------------------- --------------------------------------------- ------------------------------------------------------ Carey Coffman Address: --------------------------------------------- --------------------------------------------- --------------------------------------------- 7 36 EXHIBIT B 8 37 EXHIBIT B STOCKHOLDERS' AGREEMENT (eMERGE INTERACTIVE, INC.) THIS STOCKHOLDERS' AGREEMENT is dated as of ____________________, 1999 (the "Effective Date") by and among eMerge Interactive, Inc.,, a Delaware corporation (the "Company"), and Turnkey Computer System, Inc. (the "Common Stockholder" or the "Stockholder") BACKGROUND WHEREAS, the Stockholder is now or may hereafter be the owner of shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock") WHEREAS, the Company and the Stockholder are parties to that certain Common Stock Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), whereby the Company has or will purchase shares of common stock of the Stockholder in exchange for cash and shares of Common Stock of the Company; WHEREAS, as a condition to the issuance of shares of Common Stock to the Stockholder under the Purchase Agreement, the Company has required that the Stockholder enter into this Agreement; WHEREAS, each of the parties to this Agreement have agreed on the terms and conditions set forth in this Agreement; and WHEREAS, Additional Stockholders may Join this agreement when they enter into stock purchase agreements with the Company. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I. DEFINITIONS For convenience, certain terms used in several parts of this Agreement are listed in alphabetical order and defined or referred to below (such terms as well as other terms that are defined elsewhere in this Agreement shall be equally applicable to both singular and plural forms of the terms defined). "Affiliate" means, with respect to a particular party, any Person controlling, controlled by or under common control with that party, as well as any officer, director, partner and majority-owned entity of that party or of its other Affiliates, and in the case of a natural Person, any member of such Person's immediate family. 38 "Agreement" means this Stockholders' Agreement. "Board of Directors" means the Board of Directors of the Company. "Common Stock" is defined above in the Background section. "Common Stockholder" is defined above in the preamble. "Company" is defined above in the preamble. "Effective Date" is defined above in the preamble. "Offer" is defined in Section 2.2(a). "Offer Notice" is defined in Section 2.2(a). "Permitted Transfer" means, with respect to a particular Stockholder, any Transfer to (i) any Affiliate of such a Stockholder, (ii) any Person holding an equity interest in such a Stockholder, (iii) any investment fund in which such Stockholder or an Affiliate thereof has an economic interest, (iv) the spouse or children of such a Stockholder, (v) a trust or fiduciary that acts for the benefit of any such spouse or children, (vi) the Company, or (vii) any other Stockholder, and any Transfer that is part of a Public Offering. "Permitted Transferee" means a Transferee in a Permitted Transfer, other than the Company. "Person" means any natural person, corporation, partnership, proprietorship, association, trust or other legal entity. "Public Offering" means a sale of any Common Stock pursuant to a registration statement under the Securities Act of 1933) as amended, that results in the Company receiving net proceeds of at least $10 million and a minimum $35 million pre-offering valuation of the Company or a rights offering of the Company's securities to the shareholders of Safeguard Scientifics, Inc. "Securities Act" means the Securities Act of 1933, as amended. "Selling Stockholder" is defined in Section 2.2. "Stockholder" is defined above in the preamble. "Stock" means (i) the Common Stock now or hereafter issued and outstanding, (ii) the preferred stock of the Company now or hereafter issued and outstanding, (iii) any additional shares of capital stock of the Company hereafter issued and outstanding, and 2 39 (iv) any securities convertible into or exercisable or exchangeable for any of the foregoing. "Purchase Agreement" is defined above in the Background section. "Transfer" means any actual or proposed disposition of all or a portion of an interest (legal or equitable) by any means, direct or indirect, absolute or conditional, voluntary or involuntary, including by sale, assignment, transfer, pledge, hypothecation, mortgage or other encumbrance, court order, operation of law, distribution, settlement, exchange, waiver,, abandonment, gift, alienation, bequest or disposal; and the correlative terms "Transferred," "Transferring," Transferor" and "Transferee" have corresponding definitions. ARTICLE II. TRANSFERS OF SECURITIES SECTION 2.1 TRANSFER RESTRICTIONS. (a) No Common Stockholder shall Transfer all or any part of the Stock owned by such Stockholder except in compliance with the terms of this Agreement, and any purported Transfer in violation thereof shall be null and void. (b) A Common Stockholder shall be able to Transfer its Stock only by (i) offering to Transfer all, but not less than all, of its Stock under Section 2.2 below or (ii) a Permitted Transfer under paragraph (c) of this Section 2. 1. (c) Notwithstanding the restrictions contained in Section 2.2, a Common Stockholder shall be entitled to Transfer all or any part of the Stock owned by such Stockholder by means of a Permitted Transfer so long, as the proposed Transferee becomes a party hereto in accordance with Section 2.3). (d) Notwithstanding any other provision in this Agreement, no Common Stockholder shall, to the extent requested by an underwriter of securities of the Company, Transfer any of its Stock then owned by the Common Stockholder for a period of 180 days following the effective date (and including the effective date) of a registration statement of the Company filed under the Securities Act, unless a shorter period is agreed to in writing by such underwriter. Each Common Stockholder agrees to execute any documents requested by such underwriter that evidences such agreement and other customary provisions. SECTION 2.2 RIGHT OF FIRST REFUSAL ON DISPOSITIONS. If at any time any Common Stockholder desires to Transfer all, but not less than all, of the Stock owned by such Stockholder (a "Selling Stockholder") to a third party (other than by a Permitted Transfer), the following provisions shall apply: (a) The Selling Stockholder shall give written notice (the "Offer 3 40 Notice") of the proposed transaction to the Company, identifying the proposed Transferee and setting forth the terms of the proposed transaction, which shall be limited to transactions involving cash against delivery of the Stock. The giving by a Selling Stockholder of an Offer Notice shall be deemed to be an offer to the Company to Transfer Stock on the same terms and conditions and at the same price at which the Selling Stockholder is proposing to Transfer such Stock to such third party (the "Offer"). (b) If the Company desires to purchase any or all of the Stock offered for sale, it must accept the Offer within 20 days of receipt of such Offer Notice by giving notice of the acceptance to the Selling Stockholder. The Company may assign its right to purchase any or all of the offered Stock to any other person or persons in the Company's sole discretion. (c) Settlement for any Stock purchased by the Company shall be within 30 days of the date of its acceptance of the Offer. (d) If after compliance with the foregoing provisions, the Company does not purchase all of the Stock covered by an Offer Notice, the Selling Stockholder may, within 30 days from the date of the expiration of the 20-day acceptance period specified in Section 2.2(b), Transfer all, but not less than all, of the remaining Stock to such third party at the price and on the terms set forth in its Offer Notice, subject to Section 2.3. If such Stock is not so sold within such 30 day period, the Selling Stockholder shall not Transfer such Stock without again giving an Offer Notice under this Section 2.2. SECTION 2.3 JOINDER TO AGREEMENT. Any Transfer that is otherwise permissible under or in accordance with Section 2.1 or Section 2.2, shall not be effective unless and until the Transferee executes and delivers to the Company such documentation as the Company may request to require the Transferee to become a party to this Agreement. Upon any such Transfer, the Transferee will have a proportionate share of the rights of his, her or its Transferor as a Stockholder hereunder and will be bound by the obligations of such Transferor hereunder. The Company shall not recognize or record in the stock records of the Company any purported action that violates the restrictions hereof. ARTICLE III. MISCELLANEOUS SECTION 3.1 DURATION OF AGREEMENT. The rights and obligations of the Company and each Stockholder under this Agreement shall be effective as of the Effective Date and shall terminate immediately prior to the earliest to occur of the following: (a) the consummation of the first Public Offering; (b) the consummation of the sale of all, or substantially all, of the Company's assets or capital stock either through a direct sale, merger, reorganization, consolidation or other form of business combination in which control of the Company is being transferred; or (c) written consent to such termination by the parties. 4 41 SECTION 3.2 VOTING PROXY. (a) The Common Stockholder hereby irrevocably constitutes and appoints the Company the sole and exclusive and true and lawful attorney-in-fact, agent and proxy of the Common Stockholder, with full power of substitution and resubstitution, to vote (or give written consent with respect to) in the name, place and stead of the Common Stockholder, with all powers that the Common Stock-holder would possess if personally present, all the Stock of the Company that the Common Stockholder is entitled to vote at any annual or special meeting of stockholders of the Company, or in respect of any action to be taken by written consent in lieu of any such meeting, and at any postponements or adjournments of that meeting, on any and all matters in and according to the Company's sole discretion, and to exercise all of the Common Stockholder's rights to call meetings of the stockholders of the Company. (b) The Common Stockholder agrees to execute and deliver to the Company such additional documents and take such additional actions as the Company may reasonably request to effectuate or further secure and protect the rights of the Company under the foregoing proxy. The Common Stockholder agrees that, in addition to any other provisions of this Agreement, the Common Stock-holder may not Transfer any Stock subject to this irrevocable proxy (and any such Transfer shall be void and of no effect) unless and until the person to whom such Stock is Transferred agrees in writing, in form and substance satisfactory to the Company, to become bound, and becomes bound, by all the terms of this irrevocable proxy. (c) This irrevocable proxy is made pursuant to this Agreement and the Purchase Agreement, and is coupled with an interest, is irrevocable. (d) The Common Stockholder acknowledges that the Company's rights hereunder are unique and that the Company will not have adequate remedies at law for the Common Stockholder's failure to perform its obligations hereunder. Accordingly, the Common Stockholder agrees that the Company shall have the right to specific performance and equitable injunctive relief for the enforcement of such obligations. (e) This irrevocable proxy shall terminate on the Company's express written revocation of this irrevocable proxy. SECTION 3.3 LEGEND. Each certificate representing a share of capital stock beneficially owned by the Stockholders shall bear a legend in substantially the following form, until such time as the shares of capital stock, represented thereby are no longer subject to the provisions hereof. The sale, transfer or assignment of the securities represented by this certificate are subject to the terms and conditions of a certain Stockholders' Agreement dated as of, 1999, as amended from time to time, among the Company and certain holders of its outstanding capital stock. Copies of such Agreement may be obtained at no 5 42 cost by written request made by the holder of record of this certificate to the Secretary of the Company." SECTION 3.4 FURTHER ACTIONS. Each party hereto shall vote all of the shares of Stock owned or otherwise held by him, her or it, or take all actions by written consent in lieu of a meeting, and execute such documents and take all such other actions within his, her or its power that may be necessary in order to carry out the provisions hereof and the actions contemplated hereby, including taking actions as Stockholders to cause to comply with the obligations imposed on the Company hereunder and causing any of such party's representatives or the Board of Directors to take certain actions. SECTION 3.5 CONTENTS OF AGREEMENT. This Agreement sets forth the entire understanding of the parties hereto with respect to the Transactions and supersedes all prior agreements or understandings among the parties regarding those matters. SECTION 3.6 AMENDMENT, PARTIES IN INTEREST, ETC. This Agreement may be amended, modified or supplemented only by a written instrument duly executed by the Company and Common Stockholders holding at least two-thirds of the shares of capital stock held by all Common Stockholders. If any provision of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, legal representatives, successors and permitted assigns of the parties hereto. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument duly executed by such party. SECTION 3.7 INTERPRETATION. Unless the context of this Agreement clearly requires otherwise, (a) references to the plural include the singular, the singular the plural, the part the whole, (b) references to one gender include all genders, (c) "or" has the inclusive meaning frequently identified with the phrase "and/or," (d) "Including" has the inclusive meaning frequently identified with the phrase "but not limited to," and (e) references to "hereunder" or "herein" relate to this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. SECTION 3.8 NOTICES. All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered or sent by mail, facsimile message or Federal Express or other delivery service. Any notices shall be deemed given upon the earlier of the date when received at, or the third day after the date when sent by registered or certified mail or the day after the date when sent by Federal Express to, the address or fax number set forth below, unless such address or fax number is changed by notice to the other party hereto: 6 43 If to the Stockholders, to each Stockholder at the address set forth in the Company's records. If to the Company: Chief Operating Officer eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32952 SECTION 3.9 SEVERABILITY; GOVERNING LAW. If any provisions of this Agreement shall be determined to be illegal or unenforceable by any court of law, the remaining provisions shall be severable and enforceable to the maximum extent possible in accordance with their terms. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, without regard to its provisions concerning conflict of laws. SECTION 3.10 INJUNCTIVE RELIEF. It is acknowledged that it will be impossible to measure the damages that would be suffered by a party if another party fails to comply with the provisions of this Agreement and that in the event of any such failure, each non-breaching party will not have an adequate remedy at law. Therefore, any party shall be entitled to obtain specific performance of another party's obligations hereunder and to obtain injunctive relief. No party shall argue, as a defense to any proceeding for such specific performance or injunctive relief, that another party has an adequate remedy at law. SECTION 3.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. Each such copy shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 7 44 IN WITNESS WHEREOF, the parties hereto have caused this Stockholders' Agreement to be executed as of the date first above written. COMPANY: EMERGE INTERACTIVE, INC. By: _____________________________________ Name: ___________________________________ Title: __________________________________ STOCKHOLDER: TURNKEY COMPUTER SYSTEMS, INC. By: _____________________________________ Name: ___________________________________ Title: __________________________________ 8 45 EXHIBIT C 9 46 EXHIBIT D 10 EX-10.17 17 REGISTRATION RIGHTS AGREEMENT DATED JULY 18, 1997 1 EXHIBIT 10.17 REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT is made as of the 17th day of July 1997 by and among eMerge Vision Systems, Inc., a Delaware corporation (the "Company"), and the stockholders of the Company listed on Schedule I hereto (collectively, the "Stockholders"). BACKGROUND The Stockholders are acquiring contemporaneously with the execution of this Agreement newly issued shares of the Company's Series A Preferred Stock, which are convertible into shares of the Company's Common Stock. The Company has agreed to provide the registration rights provided for in this Agreement as an inducement for the Stockholders to purchase the Series A Preferred Stock. WITNESSETH: The parties hereto, each intending to be legally bound and in exchange for the mutual covenants herein, agree as follows: 1. Demand Registrations. (a) Requests for Registration. At any time after the earlier of three years after the date hereof or six months after the Company's initial public offering, Stockholders holding and/or having the right to acquire at least 1,000,000 Registrable Securities (defined below) subject to adjustment for stock splits, stock dividends, stock combinations and transactions with similar effect, may demand registration (a "Demand Registration") under the Securities Act of 1933, as amended (the "1933 Act"), of all or any portion of the Registrable Securities owned by such Stockholders. In order to accomplish such demand, a Stockholder shall send written notice of the demand to the Company, and such notice shall specify the number of Registrable Securities sought to be registered. The Company shall only be required to effect two Demand Registrations, and shall only be required to proceed with a Demand Registration requested by a Stockholder if the number of Registrable Securities that the Stockholder(s) shall have elected to include in such Demand Registration pursuant to this Section 1 has an aggregate fair market value, in the opinion of an investment banker acceptable to the Stockholder(s) requesting the Demand Registration and to the Company, in excess of $5 million. (b) Procedure. Within 10 days after receipt of such a demand, the Company will give written notice of such requested registration to all other holders of Registrable Securities and will include in such registration, subject to the allocation provisions below, all other Registrable Securities with respect to which the Company has received written requests for inclusion within 15 days after the Company's mailing of such notice, plus any securities of the Company that the Company chooses to include on its own behalf. 2 (c) Expenses. In a Demand Registration, the Company will pay the Registration Expenses (defined below), but the Underwriting Commissions (defined below) will be shared by the Company and those holders of Registrable Securities whose Registrable Securities are included in the Demand Registration in proportion to any securities included on their behalf. (d) Priority on Demand Registrations. If a Demand Registration is underwritten and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included exceeds the number that can be sold in such offering, at a price reasonably related to fair value, the Company will include in such Demand Registration (i) first, the Registrable Securities requested to be included in such Demand Registration by the Stockholders, pro rata on the basis of the number of Registrable Securities owned; (ii) second, any securities that the Company desires to include on its own behalf; and (iii) third, any shares of Common Stock held by any other stockholder of the Company to whom registration is offered; provided, however, that if a Demand Registration would cause an Initial Public Offering, the Company would be entitled to include for registration on its own behalf securities representing up to 30% of the Fully-Diluted Common Stock as of immediately prior to the Initial Public Offering. A registration shall not be considered to be a Demand Registration under Section 1(a), and the Company shall pay the Registration Expenses of such registration, if (i) as a result of the foregoing allocation, the Stockholders are not able to register and sell in the Demand Registration at least 75% of the Registrable Securities sought to be included in the Demand Registration by the Stockholders; (ii) the gross proceeds of the securities included in the registration on behalf of the Company constitute at least 20% of the total gross proceeds of the Demand Registration; or (iii) the registration statement requested by a Stockholder does not become effective for any reason. (e) Selection of Underwriters. If any Demand Registration is underwritten, the selection of investment banker(s) and manager(s) and the other decisions regarding the underwriting arrangements for the offering will be made by the Company and a Stockholder. (f) Restrictions on Demand Registrations. The Company will not be obligated to effect any Demand Registration within six months after the effective date of a previous registration of securities of the Company in an underwritten offering. (g) Contemporaneous Demand. If any holder of the Company's securities that is not a holder of Registrable Securities under this Agreement exercises demand registration rights to have the Company register its securities under the 1933 Act (a "Non-Stockholder Registration") within a period of 30 days before or after the time a Stockholder shall have requested a Demand Registration, then the Stockholder's Demand Registration shall have priority over the Non- Stockholder Registration. Any request by Safeguard Scientifics, Inc. to the Company to effect a Rights Offering (defined below), made within 30 days before or after a Stockholder shall have requested a Demand Registration, shall have priority over the Demand Registration during the Rights Exclusivity Period (defined below). -2- 3 2. Piggyback Registrations. (a) Right to Piggyback. Whenever the Company proposes to register any of its securities under the 1933 Act (other than a Demand Registration or a registration with respect to a Rights Offering (defined below)), and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Securities and will include in such Piggyback Registration, subject to the allocation provisions below, all Registrable Securities with respect to which the Company has received written requests for inclusion within 15 days after the Company's mailing of such notice. The Company shall not select a form of registration statement which imposes, for its use, limitations on the maximum value or number of securities to be registered if these limitations would preclude registration of the Registrable Securities that the Company has been requested to include in such registration. (b) Piggyback Expenses. In all Piggyback Registrations, the Company will pay the Registration Expenses related to the Registrable Securities of the Selling Stockholders, but the Selling Stockholders will pay the Underwriting Commissions related to their Registrable Securities. (c) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number that can be sold in such offering, at a price reasonably related to fair value, the Company will allocate the securities to be included as follows: first, the securities the Company proposes to sell on its own behalf; and second, Registrable Securities requested to be included in such registration by the Selling Stockholders, pro rata on the basis of the respective Registrable Securities requested for sale by them, and third, securities registered to be included in such registration by other stockholders of the Company. (d) Priority on Secondary Registrations. If a Piggyback Registration is initiated as an underwritten secondary registration on behalf of holders of the Company's securities (other than a Demand Registration pursuant to Section 1), and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number that can be sold in such offering, at a price reasonably related to fair value, the Company will allocate the securities to be included as follows: first, the securities requested to be included by the holders initiating such registration; and second, Registrable Securities requested to be included in such registration, pro rata on the basis of the number of Registrable Securities owned among the Selling Stockholders. (e) Selection of Underwriters. If any Piggyback Registration is underwritten, the selection of investment banker(s) and manager(s) and the other decisions regarding the underwriting arrangements for the offering will be made by the Company, if the registration is -3- 4 under Section 2(c), or by the holders initiating such registration, if the registration is under Section 2(d). 3. Registration on Form S-3. The Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms; and to that end, the Company shall register (whether or not required by law to do so) its Common Stock under the Securities Exchange Act of 1934, as amended, in accordance with the provisions of that Act as soon as possible following the effective date of the first registration of any of the Company's securities under the 1933 Act. After the Company has so qualified, in addition to the rights contained in the foregoing provisions of this Registration Rights Agreement, each holder of Registrable Securities shall have the right to require registration of its Registrable Securities on Form S-3 at the Company's expense, provided that (a) the Registrable Securities to be registered shall have a market value of at least $1 million and (b) the Company shall not be obligated to effect more than one such registration during any 12-month period. When the Company receives notice of any holder's request for a registration on Form S-3, it shall send notice of such proposed registration to all other holders of Registrable Securities. 4. Rights Offerings. (a) Rights. The Company shall, upon receipt of a written request from Safeguard Scientifics, Inc., a Pennsylvania corporation ("Safeguard"), grant to the holders of the common stock of Safeguard rights (the "Rights") to purchase from the Company such number of shares of Common Stock as determined by Safeguard up to a maximum of 40% of the sum of (i) all issued and outstanding shares of Common Stock, (ii) all shares of Common Stock issuable upon conversion of all outstanding shares of Preferred Stock, and (iii) all shares of Common Stock issuable upon the exercise of all outstanding options, warrants or other rights to purchase Common Stock, all as of the effective date of the registration statement. The Rights shall be issued in an offering (the "Rights Offering") pursuant to a registration statement, shall be exercisable for a period of no greater then 45 days after the commencement of the Right Offering and shall be transferable by the holder thereof during that period. The Company shall not be obligated to effect a Rights Offering unless the total market value of the Company is at least $30 million as determined in good faith by the Board of Directors of the Company with the advice of such expert as the Board may choose, if any. (b) Expenses. In a Rights Offering, the Company shall bear all reasonable costs and expenses of the Rights Offering, including the Company's printing, legal and accounting fees and expenses, filing fees of the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., and "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of (i) the underwriters' commissions or discounts attributable to the Rights Shares being offered and sold by any selling holders of Rights Shares in connection with the registration of the Rights Shares or (ii) the fees and -4- 5 expenses of counsel of such selling holders, if different than counsel to the Company. The Company shall reimburse Safeguard for its internal expenses incurred under this Section 4(b) by payment of $50,000 on a nonaccountable basis, such payment to be made at the closing of the Rights Offering. (c) Selection of Underwriters and Counsel. The selection of investment banker(s) and manager(s) for the Rights Offering shall be made by Safeguard, subject to the reasonable approval of a majority of the Board of Directors of the Company, which investment banker(s) shall underwrite, on a standby, firm commitment basis, any portion of the offered Common Stock not purchased through the exercise of Rights. The Company shall also engage legal counsel selected by Safeguard, subject to the reasonable approval of a majority of the Board of Directors of the Company, which counsel shall represent the Company in connection with the conduct of the Rights Offering. (d) Exercise Price. The exercise price of the Rights shall be determined by negotiation among the Company, the underwriters and the selling stockholders, if any. Prior to the commencement of the Rights Offering, the Company shall use its best efforts to cause any holder of more than 2% of its Common Stock (or rights to acquire more than 2% of its Common Stock) to execute and deliver to the managing underwriters of the Rights Offering an agreement to withhold such shares from the market for such period, not exceeding 180 days following the closing of the Rights Offering, as such underwriters shall request. (e) Exclusivity Period. The obligations of the Company pursuant to this Section 4 shall expire on the eighth anniversary of this Agreement (such period, the "Rights Exclusivity Period") unless a registration statement relating to the Rights Offering has been filed with the Securities and Exchange Commission by such date, in which case the Rights shall not expire until 150 days after the date such filing was made. (f) Stock Split. After Safeguard has notified the Company of its intention to commence the Rights Offering, the Company shall, prior to the filing of such registration statement as provided hereinafter (or at such earlier date as agreed to by the Company and Safeguard), take all such actions as shall be necessary to cause a split of its authorized Common Stock in such ratio as Safeguard may reasonably request. All reference to share amounts in this Agreement other than as specifically noted shall be deemed to refer to share amounts prior to such split. (g) Registration Services. Safeguard shall diligently and in a timely fashion assist the Company in structuring the Rights Offering, in preparing the necessary registration statement and related disclosure documentation, in clearing the Rights Offering with the Commission and applicable state securities commissions and shall provide such other services and assistance in connection with the Rights Offering as the Company shall reasonably request; provided that nothing contained herein shall require Safeguard to provide to the Company any services or assistance which, if rendered by Safeguard, would require Safeguard to register as a broker- -5- 6 dealer under Section 15 of the Exchange Act or as an investment Adviser under the Investment Advisor Act of 1940, as amended. (h) Working Group. The Company shall cause its counsel and auditors and the Company's employees to render such assistance in consummating the Rights Offering, at the Company's expense, as is customary in the consummation by a company of its initial public offering. In addition, in rendering services under this Section 4, Safeguard may engage special legal counsel, one or more rights, registrar and transfer agents, and such other consultants as Safeguard may deem necessary or desirable in connection with the Rights Offering, the expenses of which shall be paid by the Company and which are not included in the reimbursement described in Section 4(b) above. In addition, Safeguard may require the Company to engage a registered broker-dealer of Safeguard's designation, subject to the reasonable approval of the Company, to provide such services in connection with the Rights Offering as Safeguard may deem reasonably necessary or desirable, including without limitation, to effect or underwrite the offering of the Rights or the Rights Shares in states in which applicable state laws require that a registered broker-dealer effect such offering. 5. Holdback Agreements. Neither the Company nor any Stockholder shall effect any public sale or distribution of equity securities of the Company or any securities convertible into or exchangeable or exercisable for such securities during the seven days prior to and the 90 days after any underwritten Demand Registration, underwritten Piggyback Registration or underwritten Rights Offering has become effective (except as part of such underwritten registration). 6. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to Section 1 or 2 of this Agreement, or Safeguard has requested the Company to commence a Rights Offering pursuant to Section 4 of this Agreement, the Company will, as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities or Rights and Common Stock underlying such Rights and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheet thereto, the Company will furnish each Selling Stockholder or Safeguard, as applicable, with copies of all such documents proposed to be filed) as promptly as practical; (b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the -6- 7 prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (c) furnish to each Selling Stockholder and/or Safeguard such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Selling Stockholder and/or Safeguard may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller or the sale of the of the Rights in the Rights Offering; (d) use its best efforts to register or qualify such Registrable Securities or Rights and shares of Common Stock underlying such Rights under such other securities or blue sky laws of such jurisdictions as the managing underwriter(s) may reasonably request; (e) notify each Selling Stockholder or Safeguard at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that the Company is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of any such seller or Safeguard, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities or Rights and shares of Common Stock underlying such Rights, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statement therein not misleading; (f) cause all such Registrable Securities or Rights and shares of Common Stock underlying such Rights to be listed or included on securities exchanges on which similar securities issued by the Company are then listed or included; (g) provide a transfer agent and registrar for all such Registrable Securities or Rights and shares of Common Stock underlying such Rights not later than the effective date of such registration statement; (h) enter into such customary agreements (including an underwriting agreement in customary form) and take such other customary actions as may be reasonably necessary to expedite or facilitate the disposition of such Registrable Securities or the consummation of the Rights Offering; -7- 8 (i) obtain a "comfort" letter addressed to the Company from its independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters; (j) make available for inspection by any Selling Stockholder or Safeguard, any underwriter participating in any disposition or the Rights Offering pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller, Safeguard or any underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller or Safeguard or any such underwriter, attorney, accountant or agent in connection with such registration statement; (k) with respect to a Rights Offering, the Company shall prepare and file with the Commission, promptly upon Safeguard's request, any amendments or supplements to the registration statement or prospectus that, in Safeguard's opinion, may be necessary or advisable in connection with the Rights Offering, subject to the reasonable approval of counsel for the Company and the Company shall not file any amendment or supplement to the registration statement or prospectus unless (i) it has furnished Safeguard with a copy of such amendment or supplement a reasonable time prior to filing and (ii) Safeguard has not reasonably objected to such amendment or supplement by notice to the Company; (l) with respect to a Rights Offering, the Company shall not issue any advertisement, press release, mailing or other solicitation material of which Safeguard reasonably disapproves by prompt written notice to the Company after receiving reasonable notice thereof. At the time of mailing the prospectus relating to the Rights Offering and at the time of the closing of the Rights Offering, Safeguard shall be entitled to receive (A) from the Company such certificates and documents evidencing compliance with such representations and warranties of the Company as Safeguard shall reasonably request, and (B) from the Company's counsel and independent accountants such opinions and documents as Safeguard may reasonably request thereof as if it were applicable to the Rights Offering; and (m) at the time of mailing the prospectus relating to the Rights Offering and at the time of the closing of the Rights Offering, Safeguard shall be entitled to receive (i) from the Company such certificates and documents evidencing compliance with such representations and warranties of the Company as Safeguard shall reasonably request, and (ii) from the Company's counsel and independent accountants such opinions and documents as Safeguard may reasonably request thereof as if it were applicable to the Rights Offering. -8- 9 7. Indemnification. (a) The Company hereby indemnifies, to the extent permitted by law, each Stockholder, Safeguard, their respective officers and directors, if any, and each person who controls any of them within the meaning of the 1933 Act (each, an "Indemnified Party") against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Indemnified Party expressly for use therein or by any Indemnified Party's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Indemnified Party with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify the underwriters, their officers and directors, and each person who controls such underwriters (within the meaning of the 1933 Act) to the same extent as provided above with respect to the indemnification of any Indemnified Party. (b) In connection with any registration statement in which a Selling Stockholder is participating, each such holder will furnish to the Company in writing such information as is reasonably requested by the Company for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, the Company, its directors and officers and each person who controls the Company (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such holder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Selling Stockholder under this Section 7(b) shall be limited to an amount equal to the net proceeds actually received by the Selling Stockholder from the sale of Registrable Securities covered by the registration statement. (c) Any person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled, or elects not, to assume the defense of a claim will -9- 10 not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 8. Participation in Underwritten Registrations. No Selling Stockholder may participate in any underwritten registration hereunder unless such holder (a) agrees to sell such holder's securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements under Sections 1(e) or 2(e), and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 9. Definitions. (a) The term "Fully-Diluted Common Stock" means, as of a certain date, shares of the Common Stock that are issued and outstanding plus any additional shares of Common Stock that may be issuable upon the conversion, exercise or exchange of any rights that may be issued and outstanding. (b) The term "Initial Public Offering" means the first public offering under the 1933 Act of any of the Company's equity securities. (c) The term "Registrable Securities" means (i) the Common Stock of the Company registered in the names of the Stockholders from time to time, (ii) the Common Stock issuable upon the conversion of the Series A Preferred Stock, and (iii) any securities issued or to be issued with respect to the securities referred to above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been (A) effectively registered under the 1933 Act and disposed of in accordance with the registration statement covering them, or (B) transferred pursuant to Rule 144 (or any similar provision then in force). (d) The term "Registration Expenses" means all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, expenses and fees for listing the securities to be registered on exchanges or electronic quotation systems on which similar securities issued by the Company are then listed, and fees and disbursements of counsel for the Company and of all independent certified public accountants, underwriters (other than Underwriting Commissions) and other persons retained by the Company. -10- 11 (e) The term "Selling Stockholders" means registered holders of Registrable Securities who request inclusion of all or a portion of their shares of Registrable Securities in a Demand Registration pursuant to Section 1(b) or a Piggyback Registration pursuant to Section 2(a). Such term also includes those Stockholders who demand a Demand Registration for the purposes of Sections 5, 6, and 7 and those Stockholders who are permitted by the Company to register Registrable Securities in a Rights Offering. (f) The term "Underwriting Commissions" means all underwriting discounts or commissions relating to the sale of securities of the Company, but excludes any expenses reimbursed to underwriters. 10. Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company may enter into an agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder to include such securities in any registration filed under Sections 1 or 2 hereof or that would add any such holder or prospective holder as a party to this Agreement. However, the Company shall not enter into any such agreement without the prior written consent of the beneficial holders of a majority of the outstanding Registrable Securities unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities would not reduce the amount of the Registrable Securities that the Stockholders would be entitled to include in such registration. 11. Miscellaneous. (a) Termination of Other Agreements. This Agreement sets forth the entire understanding of the parties hereto with respect to rights to the registration of capital stock of the Company and supersedes all prior agreements or understandings among the parties regarding such matters. (b) Notices. Any notices required hereunder shall be deemed to be given upon the earlier of the date when received at, or (i) the third business day after the date when sent by certified or registered mail, (ii) the next business day after the date sent by guaranteed overnight courier, or (iii) the date sent by telecopier or delivered by hand, in each case, to the address of the Company's corporate headquarters in the case of any notice to the Company, and until changed by notice to the Company, the respective addresses of the Stockholders on file with the Company in the case of any notice to the Stockholders. (c) Amendments and Waivers. The provisions of this Agreement may be amended or terminated and the Company may take any action herein prohibited, or omit to perform any act -11- 12 herein required to be performed by it, if approved in writing by the Stockholders that own beneficially a majority of the Registrable Securities and or by any agreement permitted by Section 9. (d) Binding Effect. This Agreement will bind and inure to the benefit of the respective successors (including any successor resulting from a merger or similar reorganization), assigns, heirs, and personal representatives of the parties hereto. Without limiting the generality of the foregoing, in addition, if a Stockholder liquidates or reorganizes such that its assets are transferred to its own stockholders or partners or to another entity, such stockholders, partners or entity shall succeed to all of the rights of the Stockholder hereunder. (e) Governing Law. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the internal law, not the law of conflicts, of Delaware. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered to be an original instrument and to be effective as of the date first written above. Each such copy shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. (g) Interpretation. Unless the context of this Agreement clearly requires otherwise, (a) references to the plural include the singular, the singular the plural, the part the whole, (b) references to one gender include all genders, (c) "or" has the inclusive meaning frequently identified with the phrase "and/or" and (d) "including" has the inclusive meaning frequently identified with the phrase "but not limited to." The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. IN WITNESS WHEREOF, the Company has executed and delivered this Agreement as of the date first written above. eMerge Vision Systems, Inc. By: /s/: Charles L. Abraham Title: Chief Executive Officer [Stockholders will execute Counterpart Signature Pages to this Agreement.] -12- 13 JOINDER AND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT REFERENCE is made to certain Registration Rights Agreement dated as of July 18, 1997 (the "Agreement"), by and among eMERGE Vision Systems, Inc., a Delaware corporation (the "Company"), and the stockholders of the Company listed on Schedule I hereto (collectively, the "Series A Stockholders"). BACKGROUND On July 29, 1998, the Company entered into a series of agreements with the individuals listed on Schedule II hereto (the "Common Stockholders") whereby the Company obtained exclusive rights to certain infrared and electrolyte therapy technologies in exchange for the issuance of shares of the Company's common stock and other consideration. In connection therewith, the Common Stockholders were granted certain piggyback registration rights in connection with the issuance of the shares of the Company's common stock. The Common Stockholders desire, and have required that the Company seek on their behalf, the consent of the Series A Stockholders to amend the Agreement to provide the Common Stockholders with pari pasu treatment of their shares of the Company's common stock with the Series A Stockholders' shares, which are convertible into shares of the Company's Common Stock, with regard to piggyback registration rights. The Company now desires to have the Common Stockholders listed on Schedule II join into the Agreement on a parity with the existing Series A Preferred Stockholders with regard to piggyback registration rights only. WITNESSETH The parties hereto, each intending to be legally bound and in exchange for the mutual covenants contained in the Agreement, incorporated herein by reference, agree as follows: 12 The undersigned Series A Stockholders, representing a majority of the beneficial holders of the outstanding Series A Preferred Stock of the Company hereby agree to the joining into Sections 2(c) and 2(d) of the Agreement by the Common Stockholders and to the related terms and conditions contained in the Agreement whereby the Common Stockholders will be treated on a parity with the Series A Stockholders with regard to piggyback registration rights only, and agree to the terms contained in this Joinder and Amendment to Registration Rights Agreement (this "Amendment"). 13 For the purposes of Sections 2(c) and 2(d) only, the Agreement is hereby amended to include the following definitions: -13- 14 (a) The term "Stockholder" shall mean the stockholders listed on Schedule I and Schedule II hereto. 14 The undersigned Common Stockholders hereby agree to joining into Sections 2(c) and 2(d) of the Agreement as amended hereby and agree to be bound by the terms and conditions contained therein and herein. Except as expressly set forth above, all other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Company has executed and delivered this Amendment as of the ___ day of September, 1998. eMERGE VISION SYSTEMS, INC. By:/s/: Charles L. Abraham -------------------------- Name: Charles L. Abraham Title: Chief Executive Officer [STOCKHOLDERS WILL EXECUTE COUNTERPART SIGNATURE PAGES TO TIES AGREEMENT.] -14- 15 COUNTERPART SIGNATURE PAGE TO JOINDER AND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT IN WITNESS WHEREOF, the undersigned hereby agree that this Amendment may be executed in Counterpart copies, each of which shall be deemed an original, and have executed and delivered this Amendment to be effective as the last date written below. Applewood Associates, L.P. September, 1998 By: /s/:Barry Rubenstein -------------------- Name Barry Rubenstein Title: General Partner September, 1998 /s/: Walter W. Buckley, III --------------------------- Walter W. Buckley, III September, 1998 /s/: Elizabeth J. Handley ------------------------- Elizabeth J. Handley September, 1998 /s/: David P. Holveck --------------------- David P. Holveck September, 1998 /s/: Edward Ulrich & /s/: Tinal Bela Limer ------------------------------------------ Edward Ulrich Hoobler & Tinal Bela Limer (JTWROS) September, 1998 /s/: William L. Hooton ---------------------- William L. Hooton September, 1998 /s/: Paul C. Kirkitelos ----------------------- Paul C. Kirkitelos September, 1998 /s/: John W. Poduska -------------------- John W. Poduska -15- 16 Safeguard XL Capital, L.P. By: Safeguard Scientifics (Delaware), Inc., General Partner September, 1998 By: /s/:Michael W. Miles -------------------- Name: Michael W. Miles Title: Vice President TECHNOLOGY LEADERS L. P. By: Technology Leaders Management, L. P. a General Partner By: Technology Leaders Management, Inc. its General Partner September, 1998 By: /s/: Christopher Moller ----------------------- Managing Director TECHNOLOGY LEADERS II L. P. By: Technology Leaders II Management, L. P. a General Partner By: Technology Leaders Management, Inc. its General Partner September, 1998 By: /s/: Christopher Moller ----------------------- Managing Director TECHNOLOGY LEADERS H OFFSHORE C.V. By: Technology Leaders II Management, L. P. a General Partner By: Technology Leaders Management, Inc. the General Partner -16- 17 September, 1998 By: /s/: Christopher Moller ----------------------- Name: Christopher Moller Title: Managing Director TECHNOLOGY LEADERS MI CORP. September, 1998 By: /s/: Christopher Moller ----------------------- Name: Christopher Moller Title: Managing Director September, 1998 By: /s/: Jean C. Temple ------------------- Jean C. Temple September, 1998 By: /s/: David A. Thompson ---------------------- David A. Thompson September, 1998 By: /s/: Conse C. Vecchio --------------------- Conse C. Vecchio September, 1998 By: /s/: Daniel C. Wonak -------------------- Daniel C. Wonak September, 1998 By: /s/: Henry T. Pietraszek ------------------------ Henry T. Pietraszek September, 1998 By: /s/: Donald R. Caldwell ----------------------- Donald R. Caldwell September, 1998 By: /s/: Delbert W. Johnson ----------------------- Delbert W. Johnson -17- 18 September, 1998 By: /s/: James A. Ounsworth ----------------------- James A. Ounsworth September, 1998 By: /s/: Gerald W. Wilk ------------------- Gerald W. Wilk September, 1998 By: /s/: Michael W. Miles --------------------- Michael W. Miles September, 1998 By: /s/: Glenn T. Rieger -------------------- Glenn T. Rieger [End Signature Page] -18- 19 SCHEDULE I SERIES A PREFERRED STOCKHOLDERS
Name Shares - ---- ------ Applewood Associates, L.P. 333,919 Walter W. Buckley, III 26,250 Elizabeth J. Handley 4,500 David P. Holveck 6,000 Edward Ulrich Hoobler & Tina Bela Limer (JTWROS) 45,000 William L. Hooton 41,250 Paul C. Kirkitelos 3,000 John W. Poduska 9,000 Safeguard XL Capital, L.P. 4,181,315 Technology Leaders LP 375,037 Technology Leaders II L.P. 477,049 Technology Leaders II Offshore C.V. 378,951 Technology Leaders MI Corp. 428,213 Jean C. Temple 46,200 David A. Thompson 18,000 Conse C. Vecchio 3,000 Daniel C. Wonak 6,000 Henry T. Pietraszek 18,000 Donald R. Caldwell 8,628
-19- 20 Delbert W. Johnson 3,834 James A. Ounsworth 5,561 Gerald W. Wilk 5,561 Michael W. Miles 4,794 Glenn T. Rieger 4,794 --------- 6,443,606
-20- 21 SCHEDULE II COMMON STOCKHOLDERS
Stockholder Common Shares - ----------- ------------- J Technologies, LLC 1,000,000 a South Dakota limited liability company Attention, Jim Titus, P.O. Box 81849 Lincoln, NE 68501-1849 Judith Ackland and Larry Cox, Co-Trustees, 1,000,000 The Biegert Family Irrevocable Trust dated June 11, 1998 P.O. Box 197 Shickley, NE 68436 Dr. Richard W. Stanley 32,130 3526 Spruce Drive Red Deer, Alberta T4N 3N9 Sylvia R. Doerksen 24,570 3526 Spruce Drive Red Deer, Alberta T4N 3N9 Ian Turnbull 3,150 Box 5351 Lacombe, Alberta T4L lXl
-21- 22 Ann Turnbull 3,150 Box 5351 Lacombe, Alberta T4L lXl Darryl Robinson 7,000 18 Blackfoot Place 2,070,000 Woodstock, Ontario N4T IE2
-22- EX-10.19 18 STOCKHOLDERS' & REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.19 STOCKHOLDERS' AND REGISTRATION RIGHTS AGREEMENT This Stockholders Agreement (this "Agreement") is made on February 24, 1999 by and among EMERGE VISION SYSTEM, INC., a Delaware corporation, with its principal offices located at 10315 102nd Terrace, Sebastian, Florida 32958 ("eVS) and CIN, LLS (formerly Cattle Management Network, LLC) ("CIN"), together with any Permitted Transferee (as defined below) which may become a party to this Agreement hereafter are, for so long as they are stockholders of eVS, collectively referred to herein as the "Stockholders" or individually a "Stockholder.") BACKGROUND In partial consideration for the execution and delivery by eVS of the Asset Purchase Agreement by and between eVS and CIN (the "Asset Purchase Agreement"), CIN has agreed to enter into this Agreement. The parties have determined that it is in the best interests of eVS and the Stockholders to provide for certain rights and restrictions on the future disposition of eVS's common stock, par value $0.01 per share (the "Common Stock"), and various other matters set forth herein. NOW, THEREFORE, in consideration of the agreements and mutual promises and covenants set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1 RESTRICTIONS ON TRANSFER OF SHARES 1.1 Restrictions on Stockholders. Until such time as eVS's Common Stock is the subject of an underwritten firm commitment initial public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale by eVS of its Common Stock in which the aggregate net proceeds exceed ten (10) million dollars (a "Qualified Initial Public Offering") or as expressly provided in this Agreement or in the Asset Purchase Agreement, no Stockholder shall sell, assign, transfer, give, bequeath, devise, donate or otherwise dispose of, or pledge, deposit or otherwise encumber, in any way or manner whatsoever, whether voluntary or involuntary (all of the foregoing hereinafter referred to as "transfer"), any legal or beneficial interest in any of the shares of eVS's Common Stock (collectively, the "Shares") now or hereafter 2 owned (of record or beneficially) by such Stockholder except as expressly provided in this Agreement and in accordance with its terms and conditions. 1.2 Certain Excluded Transfers. The provisions of Articles I and 2 of this Agreement shall not apply to the transfer of Shares by a Stockholder to a Permitted Transferee, provided that the transfer is accomplished in accordance with applicable federal and state securities laws and the Permitted Transferee executes a copy of this Agreement as a Stockholder. As used herein, "Permitted Transferee" means: (a) in the case of any Stockholder who is a natural person, such-- Individual's spouse or issue (in each case natural or adopted), any trust for the benefit of such Individual or his/her spouse or issue, or any corporation or partnership in which the direct or beneficial owner of all of the equity interest is such Individual, spouse or issue or any trust for the benefit of such persons; (b) in the case of any Stockholder who is a natural person, the heirs, trustees, executors, administrators or personal representatives upon the death or incompetency of such person; (c) in the case of a Stockholder other than a trust that is not a natural person, any Controlled Affiliate (as hereinafter defined) of such Stockholder; and (d) in the case of a Stockholder that is a trust, any beneficiaries of such Trust or successor Trust, and Controlled Affiliate of a beneficiary of such Trust or successor Trust; (e) any person or entity that takes such shares pursuant to a sale in connection with a Qualified Initial Public Offering (as hereinafter defined) of such shares, which shares shall no longer be subject to this Agreement; (f) in the case--of a limited liability company, to its members in accordance with their interests in the limited liability company. "Controlled Affiliate" means, with respect to any person, a corporation, partnership or other business association in which such person holds, directly or indirectly, fifty percent (50%) or more of the outstanding capital stock or other equity interests, of such corporation, partnership or other business association. In determining the fifty percent (50%) test, Dr. Crain, his spouse and his issue shall be considered one person. An estate or trust of a deceased individual Stockholder shall be considered the same as the deceased person for the fifty percent (50%) test until such estate or trust is distributed. 3 ARTICLE 2 STOCKHOLDER'S LIMITED RIGHT TO DISPOSE OF SHARES 2.1 Offer to Sell Shares. Except as otherwise provided in Articles 1 and 2 of this Agreement, if any Stockholder shall at any time desire to sell all or any of such Stockholder's Shares, such Stockholder (the "Selling Stockholder") shall first prepare a written offer (the "Offer") to sell such Shares (the "Offered Shares") setting forth the ,-proposed date of the sale, the proposed price per Share, and the other terms and conditions upon which the sale is proposed to be made. Such notice shall also specify whether a Third Party Purchaser (as hereinafter defined) has made an offer to acquire such Shares. The Selling Stockholder shall then transmit a copy of the Offer to eVS. Within two (2) business days of receipt of the Offer, eVS shall transmit a copy of the Offer to the Stockholders other than the Selling Stockholder. 2.2 Option of eVS. Transmittal of the Offer to eVS by the Selling Stockholder shall constitute an offer by the Selling Stockholder to sell the Selling Stockholder's Offered Shares to eVS at the price and upon the terms set forth in the Offer. For a period of fifteen (15) days after the submission of the Offer to eVS, eVS shall have the option, exercisable by written notice to the Selling Stockholder with a copy to each of the other Stockholders, to accept the Selling Stockholder's Offer as to all or any part of the Selling Stockholder's Offered Shares. Such notice shall state the number of Shares eVS will purchase, if any, and the number of Offered Shares available to be purchased. 2.3 Option of Offeree Stockholders. In the event that eVS does not exercise its option with respect to any or all of the Offered Shares in accordance with Section 2.2, the Selling Stockholder, upon notice from eVS of eVS's decision not to accept the Offer as to any or all of the Offered Shares (or upon expiration of the fifteen-day option period referred to in Section 2.2 if eVS fails to give notice as aforesaid), shall be deemed to have offered in writing to sell all, but not less than all, of its remaining Offered Shares (those not purchased by eVS) to the Stockholders, as a group ("Offeree Stockholders") at the price and upon the terms set forth in the Offer. For a period of fifteen (15) days after such Offer to the Offeree Stockholders, the Offeree Stockholders shall have the option, exercisable by written notice to the Selling Stockholder with a copy to eVS and to each of the other Offeree Stockholders, to accept the Offer as to the remaining Offered Shares. Each Offeree Stockholder who exercises this option shall agree, by doing so, to purchase that proportionate part of the remaining Offered Shares which the number of Shares owned by such Offeree Stockholder bears to the total number of Shares owned by all Offeree Stockholders (or in such other proportions as the Offeree Stockholders may agree among themselves). In the event that one or more of the Offeree Stockholders does not exercise its option in accordance with Section 2.3, the Offeree Stockholders who exercised their options pursuant to Section 2.3 shall have a further option for a period of five (5) additional days following the expiration of the fifteen-day period set forth in 4 Section 2.3 to accept the Offer as to the then remaining Offered Shares, and each such Offeree Stockholder who exercises this further option shall agree, by doing so, to purchase that proportionate part of the then remaining Offered Shares, which the number of Shares owned by such Offeree Stockholder bears to the total number of Shares owned by all of the Offeree Stockholders exercising their option pursuant to this Section 2.3 (or in such other proportions as such Offeree Stockholders may agree among themselves). 2.4 Sale to Third Party Purchaser. If, at the end of the option periods described in Sections 2.2 and 2.3 (the "Option Periods"), options have not been exercised by eVS and/or the Offeree Stockholders to purchase all of the Offered Shares, then the Selling Stockholder shall be free, subject to the co-sale provisions of Section 3 hereof, for a period of thirty (30) days thereafter to sell any or all of the Offered Shares as to which options have not been exercised (the "Remaining, Shares") to a third party purchaser (the "Third Party Purchaser") at the price and upon the terms and conditions set forth in the Offer, and on condition that such Third Party Purchaser executes a copy of this Agreement as a Shareholder. If such Remaining Shares are not so sold within the aforesaid thirty-day period, then the Selling Stock-holder shall not be permitted to sell such Remaining Shares without again complying with this Article 2. ARTICLE 3 SECURITIES LAWS 3.1 Notwithstanding the compliance with any other Section of this Agreement, Shares may not be offered, sold or transferred, in whole or in part, in the absence of an effective registration statement under the Securities Act of 1933, as amended or any successor statute thereto (the "Act"), and all applicable state securities laws, or an opinion of counsel acceptable to eVS to the effect that such registration is not required. As long as any Shares subject to this Agreement which are proposed to be transferred are not covered by an effective registration statement under the Act, eVS may place the following legend (or a legend which is substantially similar to the following legend) upon, and issue appropriate stock transfer instructions with respect to, the certificate or certificates representing Shares transferred hereunder: THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE OR OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, OR ASSIGNED EXCEPT: (I) PURSUANT TO REGISTRATIONS UNDER APPLICABLE SECURITIES LAWS; OR (II) IF, IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE 5 CORPORATION, THE PROPOSED TRANSFER MAY BE EFFECTED IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS WITHOUT REGISTRATION. ARTICLE 4 PURCHASE PRICE, TERMS AND SETTLEMENT 4.1 Purchase Price. The purchase price per Share and the terms of payment shall be the price per Share contained in the Offer. 4.2 Time: Date, Location. Settlement for the purchase of Shares by eVS or by a Stockholder pursuant to the provisions of Article 2, shall be made within thirty (30) days following, the date of exercise of the last option exercised. Ail settlements for the purchase and sale of Shares shall, unless otherwise agreed to by all of the purchasers and sellers, be held at the principal executive offices of eVS during regular business hours. The precise date and hour of settlement shall be fixed by the purchaser or purchasers (within the time limits proscribed in this Agreement), or in the event the purchasers fail to agree, by the President of eVS, by notice in writing, to the seller given at least five (5) days in advance of the settlement date specified. 4.3 Certificates. At settlement, the stock certificate or certificates representing the Shares being sold shall be delivered by the seller to the purchaser or purchasers, duly endorsed for transfer or with executed stock powers attached, with any necessary documentary and transfer tax stamps affixed by the seller, free and clear of all liens, claims and encumbrances except for the terms of this Stockholders Agreement. 4.4 Stockholders Agreement. The purchaser, if not already a Stockholder hereunder, shall execute a copy of this Agreement as an additional Stockholder. 4.5 Authority. The seller, if a personal representative of a Stockholder, shall, upon request of a purchaser, provide prior to the date of settlement, evidence reasonably satisfactory to the purchaser of the seller's legal status as personal representative of such Stockholder. 6 ARTICLE 5 REGISTRATION RIGHTS 5.1 Piggyback Registration Rights. Whenever eVS proposes to register any Common Stock for eVS's own or others' account under the Securities Act of 1933 (the "1933 Act") for a public offering for cash, other than a registration relating to employee benefit plans, eVS shall give each holder of Registrable Securities (as hereinafter defined) written notice of eVS's intent to do so. Upon the written request of any such holder given within thirty (30) days after receipt of such notice, eVS will use eVS's reasonable efforts to cause to be included in such registration all of the Registrable Securities that such holder requests to be registered. If eVS is advised in writing in good faith by any managing underwriter of the securities being offered pursuant to any registration statement under this Article 5 that the number of shares to be sold pursuant to such registration statement is greater than the number of such shares that can be offered without adversely affecting the offering, then eVS shall first register the shares sought to be registered by eVS for its own account; second, eVS shall register the number of shares offered for the account of the stockholders of eVS who are parties to a certain Registration Rights Agreement dated as of July 18, 1997, as amended, whereby such stockholders may exercise piggyback registration rights pursuant to Section 2(a) of such agreement (the "Existing Rights"); third, eVS shall resister as many of the shares of Registrable Securities as the underwriters will include in the registration, reducing pro rata the number of shares offered for the accounts of holders of Registrable Securities (based upon the number of Shares proposed to be sold pursuant to such registration statement by each such holder) to a number deemed satisfactory by such managing .underwriter if all of the Registrable Securities can not be included. In the event of such a limitation, shares of persons not having registration rights will not be included in the registration statement unless all Registrable Securities requested to be included in the registration statement have been included. Following the execution hereof, eVS agrees to use its commercially reasonable efforts to obtain the consent of the holders of the Existing Rights to treat holders of Registrable Securities pari passu with the holders of Existing Rights for the purposes of the underwriter cutback provisions set forth above. 5.2 Definition of Registrable Securities. "Registrable Securities" means the Shares, any shares of Common Stock or other capital stock of eVS received by the holders of Shares as a stock dividend or other distribution with respect to such Shares and any other shares of the capital stock of eVS now owned or hereafter acquired by the holder of Shares. 5.3 Registration Procedures. All expenses incurred in connection with the registrations under this Article 5 (including all registration, filing, listing, qualification, printer's and accounting fees, but excluding underwriting commissions and discounts) shall be borne by eVS. If and whenever eVS is under an obligation pursuant to this Article 5 to effect or use eVS's reasonable efforts to effect a registration of any 7 Registrable Securities, eVS shall: (a) use eVS's reasonable efforts to prepare and file with the Commission as soon as reasonably practicable, a registration statement with respect to the Registrable Securities and use eVS's reasonable efforts to cause such registration to promptly become and remain effective for a period of at least one hundred twenty (120) days (or such shorter period during which holders shall have sold all Registrable Securities that they requested to be registered); (b) use eVS's reasonable efforts to register and qualify the Registrable Securities covered by such registration statement under applicable state securities laws as the holders shall reasonably request for the distribution of the Registrable Securities; (c) provide a transfer agent for the Common Stock no later than the effective date of the first registration of any Registrable Securities; (d) list such Registrable Securities on any national securities exchange or The Nasdaq Stock Market's National Market, or if the Common Stock is unable to be so listed, use eVS's reasonable efforts to qualify the Registrable Securities for inclusion on any other automated quotation system of the National Association of Securities Dealers, Inc.; and (e) take such other actions as are reasonable or necessary to comply with the requirements of the Act and the regulations thereunder, or the reasonable request of any holder, with respect to the registration and distribution of the Registrable Securities. eVS is not obligated to effect registration or qualification under this Article 5 in any jurisdiction requiring eVS to qualify to do business (unless eVS is otherwise required to be so qualified) or to execute a general consent to service of process. 5.4 Holdback Agreement. If eVS at any time shall resister shares of Common Stock under the 1933 Act (including any registration pursuant to Article 5) for sale to the public, then Stockholders shall not sell publicly, make any short sale of, grant an option for the purchase of, or otherwise dispose publicly of, any shares of Registrable Securities (other than those shares of Common Stock included in such registration pursuant to Article 5) without the prior written consent of eVS or the managing underwriter of the offering for a period designated by eVS in writing to the holders of shares of Registrable Securities, which period shall not begin more than ten (10) days prior to the effectiveness of the registration statement pursuant to which such public offer will be made and shall not last more than one hundred eighty (180) days after the effective date of such registration statement; provided that Stockholders shall not be obligated to refrain from any of the foregoing for a period that is greater than the minimum period required of any executive officer or director of eVS or person holding, or having the right or option to acquire equity securities representing more than five percent (5%) of the equity securities of eVS or if any such person is not so required. 5.5 Underwriting Arrangement. In connection with each registration pursuant to Article 5 covering an underwritten public offering, eVS and each participating holder agree to enter into a written agreement with the managing underwriter in such form and containing such provisions as are reasonably acceptable to each such participating holder and are customary in the securities business for such an arrangement between such underwriter and companies of eVS's size and investment stature. 8 5.6 Notification. eVS shall notify each holder of Registrable Securities covered by any registration statement of any event that results in the prospectus included in such registration statement, as then in effect, containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. 5.7 Furnishing of Documents. At the request of any participating holder, evS will furnish to each underwriter, if any, and participating holders, a legal opinion of its counsel and a "cold comfort" letter from its independent certified public accountants, each in customary form and substance, at such time or times as such documents are customarily provided in the type of offering involved. As expeditiously as possible, eVS shall furnish to each participating holder such reasonable numbers of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as the participating holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by the participating holders. 5.8 Indemnification and Contribution. (a) In the event of a registration of any of the Registrable Securities under the 19-'I' ) Act pursuant to Article IV, eVS will indemnify and hold harmless each Stockholder, and each other person, if any, who controls such Stockholder within the meaning of the 1933 Act, and each employee, officer and trustee of such Stockholder against any losses, claims, damages or liabilities, joint or several, to which each such controlling person, employee, officer or trustee may become subject under the 19')'i Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities was registered under the 1933 Act pursuant to Article 5, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse such Stockholder, and each such controlling person, employee, officer or trustee for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided that eVS will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such Stockholder or any such controlling person, employee, officer or trustee in writing specifically for use in such registration statement or prospectus. 9 (b) In the event of a registration of any of the Registrable Securities under the 193i Act pursuant to Article 5, each Stockholder will indemnify and hold harmless eVS, each person, if any, who controls eVS within the meaning of the 1933 Act, officer of eVS who signs the registration statement, director of eVS, underwriter and person who controls any underwriter within the meaning of the 1933 Act, against all losses, claims, damages or liabilities, joint or several, to which eVS or such officer, director, underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities was registered under the 1933 Act pursuant to Article 5, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse eVS and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided that such Stockholder will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Stockholder, as such, furnished in writing to eVS by such Stockholder specifically for use in such registration statement or prospectus. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which the indemnifying party may have to such indemnified party other than under this Section 5 and shall only relieve the indemnifying party from any liability which the indemnifying party may have to such indemnified party under this Section 5 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and the indemnified party shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent the indemnifying party shall wish, to assume and under-take the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume and undertake the defense thereof, the indemnify, party shall not be liable to such indemnified party under this Section 5 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses 10 available to the indemnified party which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, then the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the 1933 Act in any case in which either: (i) any holder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last night of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this Section 5; then, and in each such case, eVS and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) as is appropriate to reflect the relative fault of eVS and such holder in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as the relative benefit received by eVS and such holder as a result of the offering in question, it being understood that the parties acknowledge that the overriding equitable consideration to be given effect in connection with this provision is the ability of one party or the other to correct the statement or omission which resulted in such losses, claims, damages or liabilities, and that it would not be just and equitable if contribution pursuant hereto were to be determined by pro rata allocation or by any other method of allocation that does not take into consideration the foregoing equitable considerations; provided that, in any such case: (A) no such holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered by such holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section I 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (e) Removal of Legends, Etc. Notwithstanding anything herein to the contrary, the restrictions imposed by Articles 2 on the transferability of any Shares shall cease and terminate when: (a) any such Shares are sold or otherwise disposed of in accordance with the intended method of disposition by the seller or sellers thereof set forth in a registration statement or such other method that does not require that the securities transferred bear the legend set forth in Section 8.2 hereof; or (b) the holder of such Shares has met the requirements for transfer pursuant to subparagraph (k) of Rule 144 (as amended from time to time) promulgated by the Commission under the 1933 Act. 11 Whenever the restrictions imposed by Articles 2 hereof have terminated, a holder of a certificate for such Shares as to which such restrictions have terminated shall be entitled to receive from eVS, without expense, a new certificate not bearing the restrictive legend set forth in Section 8.2 hereof and not containing any other reference to the restrictions imposed by this Agreement. (f) Changes in Common Stock. If, and as often as, there is any change in the Common Stock by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, then appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed. 12 (g) Preparation of Registration Statements. Whenever eVS is registering any Common Stock under the 1933 Act and a holder of Registrable Securities is selling any securities under such registration determines that it may be Act, eVS will allow such holder and its counsel to participate in the preparation of the registration statement, will include in the registration statement such information as such holder may reasonably request and will take all such other action as such holder may reasonably request. (h) Transferability of Registration Rights. The registration rights described in Sections 5.1 and 5.2 are not transferable by the holders of Registrable Securities to any person to whom such holder transfers Registrable Securities without the written consent of eVS. ARTICLE 6 BRING ALONG PROVISIONS 6.1 Bring Along,.Right. If the holders of at least a majority of the outstanding shares of eVS's common stock approve in writing the sale of eVS to any person or entity that is not an Affiliate of eVS, provided that, with respect to such sale, the shares of stock within a class are all treated equally (an "Approved Sale"), each Stockholder who does not exercise dissenter's and appraisal rights (if any) with respect to the Approved Sale will consent to, vote for and raise no objections against, and if the Approved Sale is structured as a sale of stock, will agree to sell and be permitted to sell all of such Stockholder's shares on the same terms and conditions approved by the holders of a majority of the shares of eVS's common stock. Each Stockholder who is participating in such sale will take all necessary and desirable actions as may be reasonable requested by eVS in connection with the consummation of an Approved Sale. For purpose of this Section, the term "Affiliate" means any person or entity either (i) in which eVS owns, directly or indirectly, at least 20% of the voting control of or equity in and any other entity that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control by eVS, (i) which owns shares of eVS common stock prior to such Approved Sale, or (iii) which owns shares of an entity identified in clause (i) above prior to such Approved Sale. 6.2 Termination of Bring Along Right. The provisions of this Article 6 shall terminate with respect to the shares upon the consummation of a Qualified Initial Public Offering. 13 6.3 Execution of Documents, Costs. Each Stockholder shall, in connection with an Approved Sale, at the request of eVS and without further cost or expense to eVS, and without further cost and expense to eVS, execute and deliver such other instruments as may reasonably be requested in order to consummate the Approved Sale. Each Stockholder shall bear its pro rata share of the reasonable costs and expenses incurred of any Approved Sale to the extent such costs and expenses are incurred for the benefit of all selling Stockholders and are not otherwise paid by eVS or the acquiring party. Costs incurred by a Stockholder on its own behalf will not be considered costs of the Approved Sale hereunder. ARTICLE 7 [RESERVED] ARTICLE 8 ADDITIONAL PROVISIONS 8.1 Copy of Agreement to Be Kept on File. eVS shall keep on file at its principal executive offices, and will exhibit to any Stockholder or his or her duly authorized representative at any and all reasonable times, an executed copy of this Agreement and all amendments thereto to 8.2 Stock certificates to Be Mark and. All certificates hereafter issued by eVS shall be marked with the following legend. THIS CERTIFICATE REPRESENTS SECURITIES WHICH ARE RESTRICTED AND WHICH ARE SUBJECT TO THE TERMS AND CONDITIONS OF A STOCKHOLDERS AGREEMENT DATED FEBRUARY 24, 1999 BY AND AMONG EMERGE VISION SYSTEMS, INC. ("EVS") AND THE STOCKHOLDERS IDENTIFIED THEREIN (A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF EVS) AND THE RIGHTS, PRIVILEGES AND OPTIONS THEREIN CONTAINED. NO SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS CERTIFICATE OR ANY OF THE SECURITIES REPRESENTED THEREBY SHALL BE MADE EXCEPT IN 14 COMPLIANCE WITH THE TERMS AND CONDITIONS OF SAID AGREEMENT. 15 8.3 Termination of Certain Provisions. The provisions of Articles 1, 2, 4, and 6 and Sections 8.2 and 8.5 of this Agreement shall terminate and be of no further force and effect upon the closing of an underwritten, firm commitment initial public offering statement under the 1993 Act, covering the offer and pursuant to an effective registration sale by eVS of its Common Stock in which the aggregate net proceeds to eVS exceed Ten Million Dollars (a "Qualified Initial Public Offering."). 8.4 Rights, Obligation and Remedies. Rights and obligations under, and the remedies to enforce, this Agreement are joint and several as to eVS and each of the Stockholders with each being completely free to enforce any or all of the rights or obligations under this Agreement against any of the others with or without the concurrence or joinder of any of the others. The Shares are unique, and recognizing that the remedy at law for any breach or threatened breach by a party hereto of the covenants and agreements set forth in this Agreement would be inadequate and that any such breach or threatened breach would cause such immediate and permanent damage as would be irreparable and the exact amount of which would be impossible to ascertain, the parties hereto agree that in the event of any breach or threatened breach of any such covenant or agreement, in addition to any and all other legal and equitable remedies which may be available, any party hereto may specifically enforce the terms of this Agreement and may obtain temporary and/or permanent injunctive relief without the necessity of proving actual damage by reason of any breach or threatened breach hereof and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit and without notice. 8.5 Subsequent Stockholder to become Bound. Before any person or entity not a party to this Agreement to whom transfers of Shares may be made hereunder, may be entitled to become a Stockholder of eVS, such person or entity shall be required first to execute and deliver to eVS an agreement pursuant to which such person or entity agrees to be bound by all of the terms and conditions of this Agreement (as it may have then been amended), and the failure of any such person or entity to execute such agreement shall preclude such person or entity from becoming a Stockholder of eVS. 8.6 Amendment, Modification and Termination. This Agreement maybe amended, modified or terminated, or any provision or requirement hereof waived, at anytime by an agreement in writing among eVS, the holders of a majority of the outstanding Shares on a fully diluted basis and their Permitted Transferees; provided that if this Agreement is amended, modified or terminated without the unanimous consent of the Stockholders, all Stockholders that are not a party to such agreement shall be given prompt notice of such amendment, modification or termination. Any such amendment or waiver shall be effective with respect to all parties to this Agreement. 16 8.7 No Waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 8.8 Governing Law and Jurisdiction. This Agreement shall be governed by and interpreted under the laws of the State of Delaware, without giving effect to the principles of conflicts of law of any jurisdiction. In the event that a party to this Agreement perceives the existence of a dispute with the other party concerning any right or duty provided for herein, the parties will, as soon as practicable, confer in an attempt to resolve the dispute. If the parties are unable to resolve such dispute amicably, then the parties hereby submit to the exclusive jurisdiction of and venue in the state and federal courts located in the State of Delaware with respect to any and all disputes concerning the subject of, or arising out of this Agreement. 8.9 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person or sent overnight delivery by Federal Express or by certified or registered mail, return receipt requested, or telexed in the case of non U.S. residents, and shall be deemed to have been given when hand delivered, one (1) day after mailing when mailed by overnight courier (e.a., Federal Express or Express Mail) or five (5) days after mailing by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to eVS, to: With a required copy to: eMerge Vision Systems, Inc. 103105 102nd Terrace Sebastian, Florida 32958 Attention: Charles L. Abraham, President Fax Number: (561) 589-2049 Fax Number: If to Stockholder, to: CIN, LLC or to such other names or addresses as a party to this Agreement, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section 8.9. 17 8.10 Binding Nature of Agreement and No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that- no party may assign or transfer its rights or obligations under this Agreement without the prior written consent of the other parties hereto, except by means of transfers permitted by Articles I or 2. 8.11 Counterparts, Headings and Exhibits. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. All Schedules and Exhibits hereto are hereby incorporated in this Agreement and made a part hereof 8.12 Integration. This Agreement, the Stock Purchase Agreement and the Purchase Agreement embody the entire agreement and understanding among the parties hereto and thereto supersede all prior agreements and understandings relating to the subject matter hereof or thereof. 8.13 Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, then such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. 8.14 Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided that if the final day of any time period falls on a Saturday, Sunday or holiday on which U.S. Federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. 18 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first above written. EMERGE VISION SYSTEMS, INC. By: /s/: Charles L. Abraham ----------------------- Name: Charles L. Abraham ------------------ Title: Chief Executive Officer ----------------------- THE STOCKHOLDERS: CIN, LLC By: /s/: Dr. Scott Crain -------------------- Dr. Scott Crain EX-10.20 19 JOINDER AND CORRECTION TO STOCKHOLDERS AND REG. 1 EXHIBIT 10.20 JOINDER AND CORRECTION TO STOCKHOLDERS' AND REGISTRATION RIGHTS AGREEMENT REFERENCE is made to a certain Stockholders' and Registration Rights Agreement dated as of February 24, 1999 *the "Agreement"), by and among eMerge Vision Systems, Inc., a Delaware corporation (the "Company"), and CIN, LLC, a Kansas limited liability company (the "CIN Stockholder"). BACKGROUND As of the date hereof, the Company entered into a Stock Purchase Agreement with Cyberstockyard, Inc. and its stockholders identified on Schedule I hereto (the "Common Stockholders") whereby the Company purchased from such stockholders 100% of the issued and outstanding stock of Cyberstockyard, Inc. in exchange for the issuance of an aggregate 200,000 shares of the Company's common stock. In connection with the issuance of such Company shares, the Common Stockholders wish to join into the Agreement. WITNESSETH The parties hereto, each intending to be legally bound and in exchange for the mutual covenants contained in the Agreement, incorporated herein by reference, agree as follows: 1. The Company hereby agrees to the joining into the Agreement by the Common Stockholders and to the other amendments set forth herein. 2. The undersigned CIN Stockholder hereby agrees to the joining into the Agreement by the Common Stockholders and to the other amendments set forth herein. 3. The undersigned Common Stockholders hereby join into the Agreement and each agrees to be bound by the terms and conditions contained therein and herein. 4. That the term "Stockholder" shall be deemed to include the CIN Stockholder and the Common Stockholders and their Permitted Transferees. 5. To correct a typographical error in the original agreement, Section 8.6 of the Agreement is hereby corrected to read in its entirety as follows: 8.6 Amendment, Modification and Termination. This Agreement may be amended, modified or terminated, or any provision or requirement hereof waived, at any time by an agreement in writing among the Company, and the holders of a 80% Company's common hares held 2 collectively by the Stockholders and governed by this Agreement (or the holders of 640,000 shares) and their Permitted Transferees; provided, that if this Agreement is amended, modified or terminated without the unanimous consent of all such Stockholders, all Stockholders that are not a party to such agreement shall be given prompt notice of such amendment, modification or termination. Any such amendment or waiver shall be effective with respect to all parties to this Agreement. Except as expressly set forth above, all other terms and conditions of the Agreement remain in full force and effect. 3 In WITNESS WHEREOF, the Company has executed and delivered this Agreement as of the 29th March, 1999. eMERGE VISION SYSTEMS, INC. By: /s/: Charles L. Abraham ----------------------- Name: Charles L. Abraham Title: Chief Executive Officer CIN, LLC By: /s/: Dr. Scott Crain -------------------- Dr. Scott Crain, Member COMMON STOCKHOLDERS /s/: J. Scott Sanders --------------------- J. Scott Sanders /s/: David Sanders ------------------ David Sanders /s/ Dr. Duane Pankratz ---------------------- Dr. Duane Pankratz /s/: J. Scott Calhoun --------------------- J. Scott Calhoun 4 SCHEDULE I COMMON STOCKHOLDERS
Shares of Shares of Name Cyberstockyard, Inc.* eMerge Vision Systems, Inc. - ---- --------------------- --------------------------- J. Scott 100 50,000 David Sanders 100 50,000 Dr. Duane Pankratz 100 50,000 J. Scott Calhoun 100 50,000
* To be exchanged for shares of eMerge Vision Systems, Inc. indicated above EX-10.21 20 REVOLVING NOTE DATED JULY 21, 1999 FROM EMERGE 1 EXHIBIT 10.21(a) REVOLVING NOTE (eMERGE INTERACTIVE, INC.) $3,000,000 Wayne, Pennsylvania July 21, 1999 FOR VALUE RECEIVED, eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), having an office at 10315 102nd Terrace, Sebastian, Florida 32958, hereby promises to pay to the order of Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), at the Lender's office located at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810 or at such other place in the continental United States as the Lender may designate in writing, upon demand, in lawful money of the United States, and in immediately available funds, the principal sum of up to THREE MILLION DOLLARS ($3,000,000), or so much thereof as shall have been advanced by the Lender to the Borrower as hereinafter set forth and then be outstanding, and to pay interest thereon monthly in arrears on the first business day of each calendar month at an annual rate equal to the announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus one percent (1%). All amounts advanced hereon, but not to exceed $3,000,000 at any one time outstanding in the aggregate, shall be so advanced upon the request of the Borrower. All amounts so advanced hereon and all payments made on account of the principal hereof shall be recorded in the books of the Lender, which records shall be final and binding, but failure to do so shall not release the Borrower from any of its obligations hereunder. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the event of default, interest shall continue to accrue on the Note at the rate set forth above and shall be payable on demand of the Lender. The outstanding principal amount of this Note may be prepaid by the Borrower upon notice to the Lender in whole at any time or in part from time to time without any prepayment penalty or premium; provided, that upon such payment any interest due to the date of such prepayment on such prepaid amount shall also be paid. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by the Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. An event of default hereunder shall consist of: 1 2 (i) a default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; (ii) an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money, beyond any applicable notice and/or grace period; (iii) institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of any event of default, interest shall accrue on the outstanding balance of this Note at the Prime Rate plus three percent (3%), the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of the Lender, without notice, become immediately due and payable, and the Lender shall thereupon have all the rights and remedies provided hereunder or now or hereafter available or now or hereafter available at law or in equity. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (vi) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of our otherwise related to this Agreement waives any and all rights to any such jury trial or to seek punitive damages. In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to this Agreement or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such 2 3 time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If a Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, at least one of whom shall be knowledgeable in general business matters and one of whom shall be an attorney. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but such remedies shall not be sought as a means to avoid or stay arbitration or a Summary Proceeding. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder, the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. Notices required to be given hereunder shall be deemed validly given (I) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by next day delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: Safeguard Delaware, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Chief Financial Officer 3 4 If to the Borrower: eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32858 Attn: Michael Janney, Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. This Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Revolving Note as of the date first written above. EMerge Interactive, Inc. By: /s/: Michael Janney ------------------- Michael Janney, Chief Financial Officer 4 5 EXHIBIT 10.21(b) AMENDED REVOLVING NOTE (eMERGE INTERACTIVE, INC.) $3,000,000 Wayne, Pennsylvania August 3, 1999 WHEREAS, Safeguard Delaware, Inc. (the "Lender") was the holder of a $3,000,000 Revolving Note dated July 21, 1999 (the $3,000,000 Note") made by eMerge Interactive, Inc. (the "Borrower"); and WHEREAS, Borrower and Lender desire to amend the terms of the $3,000,000 Note to provide for a 60 day term; NOW, THEREFORE, for valuable consideration, receipt of which is hereby acknowledged Borrower and lender hereby agree as follows: FOR VALUE RECEIVED, eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), having an office at 10315 102nd Terrace, Sebastian, Florida 32958, hereby promises to pay to the order of Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), at the Lender's office located at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810 or at such other place in the continental United States as the Lender may designate in writing, upon demand, in lawful money of the United States, and in immediately available funds, the principal sum of up to THREE MILLION DOLLARS ($3,000,000), or so much thereof as shall have been advanced by the Lender to the Borrower as hereinafter set forth and then be outstanding, and to pay interest thereon monthly in arrears on the first business day of each calendar month at an annual rate equal to the announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus one percent (1%). All amounts advanced hereon, but not to exceed $3,000,000 at any one time outstanding in the aggregate, shall be so advanced upon the request of the Borrower. All amounts so advanced hereon and all payments made on account of the principal hereof shall be recorded in the books of the Lender, which records shall be final and binding, but failure to do so shall not release the Borrower from any of its obligations hereunder. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the event of default, interest shall continue to accrue on the Note at the rate set forth above and shall be payable on demand of the Lender. The outstanding principal amount of this Note may be prepaid by the Borrower upon notice to the Lender in whole at any time or in part from time to time without any 5 6 prepayment penalty or premium; provided, that upon such payment any interest due to the date of such prepayment on such prepaid amount shall also be paid. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by the Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. An event of default hereunder shall consist of: a default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money, beyond any applicable notice and/or grace period; institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of any event of default, interest shall accrue on the outstanding balance of this Note at the Prime Rate plus three percent (3%), the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of the Lender, without notice, become immediately due and payable, and the Lender shall thereupon have all the rights and remedies provided hereunder or now or hereafter available or now or hereafter available at law or in equity. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (I) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (vi) waives its right to remove any 6 7 Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of our otherwise related to this Agreement waives any and all rights to any such jury trial or to seek punitive damages. In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to this Agreement or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If a Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, at least one of whom shall be knowledgeable in general business matters and one of whom shall be an attorney. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but such remedies shall not be sought as a means to avoid or stay arbitration or a Summary Proceeding. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder, the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. 7 8 Notices required to be given hereunder shall be deemed validly given (I) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by next day delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: Safeguard Delaware, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Chief Financial Officer If to the Borrower: eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32858 Attn: Michael Janney, Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. This Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Revolving Note as of the date first written above. EMerge Interactive, Inc. By: /s/: Michael Janney -------------------- Michael Janney, Chief Financial Officer 8 EX-10.23 21 PROMISSORY NOTE DATED AUGUST 31, 1999 FROM EMERGE 1 Exhibit 10.23 DEMAND NOTE (EMERGE INTERACTIVE, INC.) $2,500,000 August 31, 1999 In consideration of the loan (hereinafter referred to as a "Loan") Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), has made to eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), and for value received, the Borrower hereby promises to pay to the order of the Lender, at the Lender's office located at 103 Springer Building, 3411 Silverside Road, Wilmington, DE 19810, or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000). The unpaid principal balance of the Note shall be paid on the date which is 30 days after the date of demand for payment by the Lender. The Borrower hereby further promises to pay to the order of the Lender interest on the outstanding principal amount from the date hereof, at an annual rate equal to the announced prime rate of the PNC Bank, N.A. (the "Prime Rate") plus one percent (1%). Such interest rate shall be changed when and as the Prime Rate changes. In addition, the Borrower shall pay on demand interest on any overdue payment of principal and interest (to the extent legally enforceable) at the fluctuating Prime Rate plus three percent (3%). Interest shall be payable when the unpaid principal balance of the Note is paid. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the event of default, interest shall continue to accrue on the Note at the rate set forth above and shall be payable on demand of the Lender. The outstanding principal amount of this Note may be prepaid by the Borrower upon notice to the Lender in whole at any time or in part from time to time without any prepayment penalty or premium; provided, that upon such payment any interest due to the date of such prepayment on such prepaid amount shall also be paid. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by the Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. 2 An event of default hereunder shall consist of: (i) a default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; (ii) an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money, beyond any applicable notice and/or grace period; (iii) institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of any event of default, interest shall accrue on the outstanding balance of this Note at the Prime Rate plus three percent (3%), the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of the Lender, without notice, become immediately due and payable, and the Lender shall thereupon have all the rights and remedies provided hereunder or now or hereafter available at law or in equity. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to this Note, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (vi) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of or otherwise related to this Note and waives any and all rights to any such jury trial or to seek punitive damages. In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to this Note or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the 3 Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If a Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Note and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, at least one of whom shall be knowledgeable in general business matters and one of whom shall be an attorney. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but such remedies shall not be sought as a means to avoid or stay arbitration or a Summary Proceeding. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. Notices required to be given hereunder shall be deemed validly given (i) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by Federal Express Next Day Delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: Safeguard Delaware, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Michael W. Miles, Chief Financial Officer 4 If to the Borrower: eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32958 Attn: Michael Janney, Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. The Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Demand Note as of the date first written above. eMerge Interactive, Inc. By:/s/ Michael T. Janney ----------------------------- Michael T. Janney Chief Financial Officer EX-10.25 22 PROMISSORY NOTE DATED OCTOBER 6, 1999 FROM EMERGE 1 Exhibit 10.25 DEMAND NOTE (eMERGE INTERACTIVE, INC.) $2,500,000 October 6, 1999 In consideration of the loan (hereinafter referred to as a "Loan") Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), has made to eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), and for value received, the Borrower hereby promises to pay to the order of the Lender, at the Lender's office located at 103 Springer Building, 3411 Silverside Road, Wilmington, DE 19810, or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000). The unpaid principal balance of the Note shall be paid on the date which is 30 days after the date of demand for payment by the Lender. The Borrower hereby further promises to pay to the order of the Lender interest on the outstanding principal amount from the date hereof, at an annual rate equal to the announced prime rate of the PNC Bank, N.A. (the "Prime Rate") plus one percent (1%). Such interest rate shall be changed when and as the Prime Rate changes. In addition, the Borrower shall pay on demand interest on any overdue payment of principal and interest (to the extent legally enforceable) at the fluctuating Prime Rate plus three percent (3%). Interest shall be payable when the unpaid principal balance of the Note is paid. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the event of default, interest shall continue to accrue on the Note at the rate set forth above and shall be payable on demand of the Lender. The outstanding principal amount of this Note may be prepaid by the Borrower upon notice to the Lender in whole at any time or in part from time to time without any prepayment penalty or premium; provided, that upon such payment any interest due to the date of such prepayment on such prepaid amount shall also be paid. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, 2 and any excess payment of interest made by the Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. An event of default hereunder shall consist of: (i) a default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; (ii) an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money, beyond any applicable notice and/or grace period; (iii) institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of any event of default, interest shall accrue on the outstanding balance of this Note at the Prime Rate plus three percent (3%), the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of the Lender, without notice, become immediately due and payable, and the Lender shall thereupon have all the rights and remedies provided hereunder or now or hereafter available at law or in equity. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to this Note, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (vi) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of or otherwise related to this Note and waives any and all rights to any such jury trial or to seek punitive damages. 3 In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to this Note or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If a Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Note and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, at least one of whom shall be knowledgeable in general business matters and one of whom shall be an attorney. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but such remedies shall not be sought as a means to avoid or stay arbitration or a Summary Proceeding. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. Notices required to be given hereunder shall be deemed validly given (i) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by Federal Express Next Day Delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: Safeguard Delaware, Inc. 800 The Safeguard Building 4 435 Devon Park Drive Wayne, PA 19087 Attn: Michael W. Miles, Chief Financial Officer If to the Borrower: eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32958 Attn: Michael Janney, Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. The Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Demand Note as of the date first written above. eMERGE INTERACTIVE, INC. By:____________________________ Michael T. Janney Chief Financial Officer EX-10.26 23 STOCKHOLDERS AGREEMENT DATED JULY 18, 1997 1 EXHIBIT 10.26 STOCKHOLDERS' AGREEMENT THIS STOCKHOLDERS' AGREEMENT, is made as of July 18, 1997 (the "Effective Date") by and among eMerge Vision Systems, Inc., a Delaware corporation (the "Company"), XL Vision, Inc., a Delaware corporation ("XL"), John Scott, Scott Blackwell, Gregory Haskell, James Willmann, James Wellman, Dave Szostak, Frederic Derwitsch, Joel Hazlett, Richard Miles and Ottmar Dippold (the "EVS Stockholders") and each of the stockholders of the Company listed on Schedule I (the "Preferred Stockholders"). The EVS Stockholders and the Preferred Stockholders are sometimes referred to herein collectively as the "Stockholders." BACKGROUND The Preferred Stockholders are acquiring on or about the Effective Date shares of Series A Preferred Stock, par value $.01 per share, of the Company ("Preferred Stock"), in accordance with certain Stock Purchase Agreements. The Preferred Stock is convertible into shares of common stock, par value $.01 per share, of the Company ("Common Stock"). XL currently owns 94% of the outstanding shares of Common Stock of the Company. It is a condition to the obligations of the parties to consummate the transactions set forth in the Stock Purchase Agreement that the parties hereto enter into this Agreement. Additional Preferred Stockholders may join this agreement when they enter into stock purchase agreements with the Company. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS For convenience, certain terms used in several parts of this Agreement are listed in alphabetical order and defined or referred to below (such terms as well as other terms that are defined elsewhere in this Agreement shall be equally applicable to both singular and plural forms of the terms defined). "Affiliate" means, with respect to a particular party, any Person controlling, controlled by or under common control with that party, as well as any officer, director, partner and majority-owned entity of that party or of its other Affiliates, and in the case of a natural Person, any member of such Person's immediate family. "Agreement" means this Agreement. 2 "Board of Directors" means the Board of Directors of the Company. "Common Stock" is defined above in the Background section. "Company" is defined above in the preamble. "Effective Date" is defined above in the preamble. "EVS Stockholder" is defined above in the preamble. "Fully-Diluted Common Stock" means shares of the Common Stock now or hereafter issued and outstanding plus any additional shares of Common Stock that may be issuable upon the conversion, exercise or exchange of any rights that may be issued and outstanding, including with respect to any Preferred Stock. As to any Stockholder, such term means the shares of Common Stock owned by such Stockholder plus the shares of Common Stock issuable to such Stockholder pursuant to any such rights. "Non-Selling Stockholder" is defined in Section 3.2(a). "Offer" is defined in Section 3.2(a). "Offer Notice" is defined in Section 3.2(a). "Permitted Transfer" means, with respect to a particular Stockholder, any Transfer to (i) any Affiliate of such a Stockholder, (ii) any Person holding an equity interest in such a Stockholder, (iii) any investment fund in which such Stockholder or an Affiliate thereof has an economic interest, (iv) the spouse or children of such a Stockholder, (v) a trust or fiduciary that acts for the benefit of any such spouse or children, (vi) the Company, or (vii) any other Stockholder, and any Transfer that is part of a Public Offering. "Permitted Transferee" means a Transferee in a Permitted Transfer, other than the Company. "Person" means any natural person, corporation, partnership, proprietorship, association, trust or other legal entity. "Preferred Stock" is defined above in the Background section. "Public Offering" means a sale of any Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, that results in the Company receiving net proceeds of at least $10 million and a minimum $35 million pre-offering valuation of the Company or a rights offering of the Company's securities to the shareholders of Safeguard Scientifics, Inc. -2- 3 "Safeguard" means Safeguard Scientifics (Delaware), Inc. "Safeguard Director" is defined in Section 2.1(a). "Securities Act" means the Securities Act of 1933, as amended. "Selling Stockholder" is defined in Section 3.2(a). "Stockholders" is defined above in the preamble. "Stock" means (i) the Common Stock now or hereafter issued and outstanding, (ii) the Preferred Stock, (iii) any additional shares of capital stock of the Company hereafter issued and outstanding, and (iv) any securities convertible into or exercisable or exchangeable for any of the foregoing. "Stock Purchase Agreement" is defined above in the Background section. "Technology Leaders" means Technology Leaders L.P. and Technology Leaders II L.P. "Technology Leaders Directors" is defined in Section 2.1(a). "Transfer" means any actual or proposed disposition of all or a portion of an interest (legal or equitable) by any means, direct or indirect, absolute or conditional, voluntary or involuntary, including by sale, assignment, transfer, pledge, hypothecation, mortgage or other encumbrance, court order, operation of law, distribution, settlement, exchange, waiver, abandonment, gift, alienation, bequest or disposal; and the correlative terms "Transferred," "Transferring," "Transferor" and "Transferee" have corresponding definitions. ARTICLE II BOARD OF DIRECTORS Section 2.1. ELECTION OF DIRECTORS. (a) For so long as Safeguard and Technology Leaders are Preferred Stockholders, the Preferred Stockholders shall vote all shares of Preferred Stock, and otherwise use commercially reasonable efforts as stockholders of the Company, to cause and maintain from time to time the election to the Board of Directors the following: (i) one representative designated by Safeguard, which representative shall initially be Thomas Lynch (the "Safeguard Director"), and -3- 4 (ii) one representative designated by Technology Leaders which representative shall initially be Christopher Moller (the "Technology Leaders Director"). (b) Each of the Directors designated in Section 1.1 shall be elected at any annual or special meeting of the Company's stockholders (or by written consent in lieu of a meeting of stockholders) and shall serve until his successor is elected and qualified or until his earlier resignation or removal. The Company shall cause from time to time the nomination for election to the Board of Directors of the representatives set forth above. (c) Safeguard and Technology Leaders shall each have the right to remove its respective representative for the Board of Directors. In the case of any such removal, each Stockholder shall vote to remove a Safeguard Director or Technology Leaders Director as designated by Safeguard or Technology Leaders, respectively. (d) In the event of any vacancy on the Board of Directors, each Stockholder shall vote to fill such vacancy in such manner as to maintain a Safeguard Director and Technology Leaders Director on the Board of Directors as described above. ARTICLE III TRANSFERS OF SECURITIES Section 3.1. TRANSFER RESTRICTIONS. (a) None of the EVS Stockholders shall Transfer all or any part of the Stock owned by such Stockholder except in compliance with the terms of this Agreement, and any purported Transfer in violation thereof shall be null and void. (b) An EVS Stockholder shall be able to Transfer its Stock only by (i) offering to Transfer all, but not less than all, of its Stock under Section 3.2 below or (ii) a Permitted Transfer under paragraph (c) of this Section 3.1. (c) Notwithstanding the other restrictions herein, a EVS Stockholder shall be entitled to Transfer all or any part of the Stock owned by such Stockholder by means of a Permitted Transfer so long as the proposed Transferee becomes a party hereto in accordance with Section 3.3. Section 3.2. RIGHT OF FIRST REFUSAL ON DISPOSITIONS. If at any time any EVS Stockholder desires to Transfer all, but not less than all, of the Stock owned by such Stockholder (a "Selling Stockholder") to a third party (other than by a Permitted Transfer), the following provisions shall apply: -4- 5 (a) The Selling Stockholder shall give written notice (the "Offer Notice") of the proposed transaction to the Company, identifying the proposed Transferee and setting forth the terms of the proposed transaction, which shall be limited to transactions involving cash against delivery of the Stock. The giving by a Selling Stockholder of an Offer Notice shall be deemed to be an offer to the Company to Transfer Stock on the same terms and conditions and at the same price at which the Selling Stockholder is proposing to Transfer such Stock to such third party (the "Offer"). (b) If the Company desires to purchase any or all of the Stock offered for sale, it must accept the Offer within 20 days of receipt of such Offer Notice by giving notice of the acceptance to the Selling Stockholder. The Company may assign its right to purchase any or all of the offered Stock to any other person or persons in the Company's sole discretion. (c) Settlement for any Stock purchased by the Company shall be within 30 days of the date of its acceptance of the Offer. (d) If after compliance with the foregoing provisions, the Company does not purchase all of the Stock covered by an Offer Notice, the Selling Stockholder may, within 30 days from the date of the expiration of the 20-day acceptance period specified in Section 3.2(b), Transfer all, but not less than all, of the remaining Stock to such third party at the price and on the terms set forth in its Offer Notice, subject to Section 3.3. If such Stock is not so sold within such 30-day period, the Selling Stockholder shall not Transfer such Stock without again giving an Offer Notice under this Section 3.2. Section 3.3. JOINDER TO AGREEMENT. Any Transfer that is otherwise permissible under or in accordance with Section 3.1 or Section 3.2, and any Transfer by a Stockholder, shall not be effective unless and until the Transferee executes and delivers to the Company such documentation as the Company may request to require the Transferee to become a party to this Agreement. Upon any such Transfer, the Transferee will have a proportionate share of the rights of his, her or its Transferor as a Stockholder hereunder and will be bound by the obligations of such Transferor hereunder. The Company shall not recognize or record in the stock records of the Company any purported action that violates the restrictions hereof. ARTICLE IV MISCELLANEOUS Section 4.1. DURATION OF AGREEMENT. The rights and obligations of the Company and each Stockholder under this Agreement shall terminate immediately prior to the earliest to occur of the following: (a) the consummation of the first Public Offering, (b) the consummation of the -5- 6 sale of all, or substantially all, of the Company's assets or capital stock either through a direct sale, merger, reorganization, consolidation or other form of business combination in which control of the Company is being transferred or (c) the written consent to such termination by Preferred Stockholders holding two-thirds of the shares of capital stock held by all Preferred Stockholders. Section 4.2. LEGEND. Each certificate representing a share of capital stock beneficially owned by the Stockholders shall bear a legend in substantially the following form, until such time as the shares of capital stock, represented thereby are no longer subject to the provisions hereof: "The sale, transfer or assignment of the securities represented by this certificate are subject to the terms and conditions of a certain Stockholders' Agreement dated ____________, 1997, as amended from time to time, among the Company and certain holders of its outstanding capital stock. Copies of such Agreement may be obtained at no cost by written request made by the holder of record of this certificate to the Secretary of the Company." Section 4.3. FURTHER ACTIONS. Each party hereto shall vote all of the shares of Stock owned or otherwise held by him or it, or take all actions by written consent in lieu of a meeting, and execute such documents and take all such other actions within his or its power that may be necessary in order to carry out the provisions hereof and the actions contemplated hereby, including taking actions as Stockholders to cause to comply with the obligations imposed on the Company hereunder and causing any of such party's representatives or the Board of Directors to take certain actions. Section 4.4. CONTENTS OF AGREEMENT. This Agreement sets forth the entire under standing of the parties hereto with respect to the Transactions and supersedes all prior agreements or understandings among the parties regarding those matters. Section 4.5. AMENDMENT, PARTIES IN INTEREST, ETC. This Agreement may be amended, modified or supplemented only by a written instrument duly executed by the Company, XL, EVS Stockholders holding at least two-thirds of the shares of capital stock held by all EVS Stockholders, and Preferred Stockholders holding at least two-thirds of the shares of capital stock held by all Preferred Stockholders. If any provision of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, legal representatives, successors and permitted assigns of the parties hereto. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument duly executed by such party. -6- 7 Section 4.6. INTERPRETATION. Unless the context of this Agreement clearly requires otherwise, (a) references to the plural include the singular, the singular the plural, the part the whole, (b) references to one gender include all genders, (c) "or" has the inclusive meaning frequently identified with the phrase "and/or," (d) "including" has the inclusive meaning frequently identified with the phrase "but not limited to," and (e) references to "hereunder" or "herein" relate to this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. Section 4.7. NOTICES. All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered or sent by mail, facsimile message or Federal Express or other delivery service. Any notices shall be deemed given upon the earlier of the date when received at, or the third day after the date when sent by registered or certified mail or the day after the date when sent by Federal Express to, the address or fax number set forth below, unless such address or fax number is changed by notice to the other party hereto: If to the Stockholders, to each Stockholder at the address set forth in the Company's records. -7- 8 If to XL: Chief Operating Officer XL Vision, Inc. 10305 102nd Terrace Sebastian, FL 32952 If to the Company: President eMerge Vision Systems, Inc. 10305 102nd Terrace Sebastian, FL 32958 Section 4.8. SEVERABILITY; GOVERNING LAW. If any provisions of this Agreement shall be determined to be illegal or unenforceable by any court of law, the remaining provisions shall be severable and enforceable to the maximum extent possible in accordance with their terms. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, without regard to its provisions concerning conflict of laws. Section 4.9. INJUNCTIVE RELIEF. It is acknowledged that it will be impossible to measure the damages that would be suffered by a party if another party fails to comply with the provisions of this Agreement and that in the event of any such failure, each non-breaching party will not have an adequate remedy at law. Therefore, any party shall be entitled to obtain specific performance of another party's obligations hereunder and to obtain injunctive relief. No party shall argue, as a defense to any proceeding for such specific performance or injunctive relief, that another party has an adequate remedy at law. Section 4.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. Each such copy shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. -8- 9 IN WITNESS WHEREOF, the parties hereto have caused this Stockholders' Agreement to be executed as of the date first above written. eMerge Vision Systems, Inc. By:_____________________________ Title:____________________________ XL VISION, INC. By:_____________________________ Title:____________________________ ________________________________ John Scott ________________________________ Scott Blackwell ________________________________ Gregory Haskell ________________________________ James Willmann ________________________________ James Wellman ________________________________ Dave Szostak ________________________________ Frederic Derwitsch ________________________________ Joel Hazlett -9- 10 ________________________________ Richard Miles ________________________________ Ottmar Dippold [Preferred Stockholders have executed Counterpart Signature Pages to this Agreement.] -10- 11 PROMISSORY NOTE $3,000,000 January 1, 1999 In consideration of the advances (hereinafter referred to as a "Loan") XL Vision, Inc., a Delaware Corporation (the "Lender"), has made or may in the future make up to May 1, 1999, to or for the benefit of eMerge Vision System, Inc., a Delaware corporation (the "Borrower") and its predecessor, and for value received, the Borrower hereby promises to pay to the order of the Lender, at the Lender's office located at 10315 102nd Terrace, Sebastian, FL 32958, or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of up to THREE MILLION DOLLARS ($3,000,000), or so much thereof as shall have been advanced by the Lender to the Borrower from time to time as hereinafter set forth and then be outstanding. The parties agree that as of January 1, 1999, the outstanding advances were $300,000. 1. Rate of Interest. Interest on the principal amount outstanding under this Note shall accrue from and after the date hereof at an annual rate equal to the announced prime rate of PNC Bank, N.A, (the "Prime Rate") plus 1%. Such interest rate shall be changed when and as the Prime Rate changes, Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. 2. Advances and Repayments. Any amounts advanced hereon may be repaid and re-advanced from time to time. This Note shall evidence all advances made under this Note or Pursuant to any future agreement between the parties which specifically provides that advances shall be covered by this Note (collectively, "Advances"). All Advances and all payments made on account of the principal and interest hereof shall be recorded by Lender, which records shall be conclusive and binding on the Borrower; but Lender's failure to record shall not release Borrower from any of its obligations hereunder. 3. Payment of Interest and Principal. The outstanding principal amount of this Note and all accrued interest thereon shall be paid in fall on the first to occur of. (i) the closing of 12 Borrower's initial public offering of its equity securities; (ii) the sale of all or substantially all of the assets of Buyer; (iii) the sale or exchange of all of the outstanding capital stock of Borrower in a single transaction or series of related transactions, including pursuant to a merger or consolidation, as a result of which Lender and its affiliates and stockholders own less than majority of the voting securities of the surviving or resulting entity; or (iv) the dissolution or liquidation of the Borrower (the "Maturity Date"). 4. Method and Application of Payment. All amounts payable hereunder shall be paid by Borrower in immediately available and freely transferable funds at the place designated by Lender to Borrower for such payment. All payments made an this Note shall be applied to accrued interest, and then to principal. 5. Events or Default. Each of following events shall constitute an event of default (an "Event of Default) hereunder: a. If Borrower shall fail to pay when due any interest or principal or any other sum payable to Lender hereunder, and such failure shall continue unremedied for five (5) days after the due date thereof b. Other Defaults. There shall occur any event of default on the part of Borrower under any agreement. document or instrument for borrowed money in excess of $250,000, beyond any applicable grace and/or notice period. c. Insolvency and Related Proceeding 1.9. Insolvency and Related Proceeding 1.9. Insolvency and Related Proceeding Borrower shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors or any petition for an order for relief shall be filed by or against Borrower under the Bankruptcy Code (if against Borrower, the continuation of such proceeding for more than 60 days), or Borrower shall make any offer of settlement, extension or composition to its unsecured creditors generally. 6. Remedies. Upon the occurrence of any Event of Default, (9,) interest shall automatically and without notice begin to accrue on the outstanding balance of this Note at the Prime Rate plus 30/o, (b) the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of Lender upon notice to Borrower, become immediately due and payable, provided, that upon the occurrence of an Event of Default specified in subsection 5.c. above, principal and interest on this Note shall become automatically due and payable without declaration, notice or demand by Lender, (c) Lender shall have the right to offset all amounts owed by Borrower hereunder against any amounts owed by Lender in any capacity to Borrower, whether or not due, and (d) Lender shall thereupon have the immediate right to exercise from time to time all rights and remedies now or hereafter available at law or in equity, 13 including, if applicable, the rights of a secured party under the Uniform Commercial Code, all of which shall be cumulative in nature. Miscellaneous. Except as expressly set forth herein, Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by Lender. Borrower shall pay to Lender, upon demand, all costs and expenses that may be incurred by Lender in connection with the enforcement of this Note including, without limitation, fees and expenses of Lender's counsel. Any failure by Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the legality. validity or enforceability of the remainder hereof. This Note shall apply to and bind the successors of Borrower and shall inure to the benefit of Lender, its successors and assigns; provided, however, that Borrower may not assign its rights and obligations under this Note without the express prior written consent of Lender. The Note shall be governed by and interpreted in accordance with the laws of the State of Delaware, IN WITNESS WHEREOF, Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Note as of the date first written above. EMERGE VISION SYSTEMS, INC. By: /s/ T. Michael Janney ----------------------- Name: T. Michael Janney Title: 14 IN WITNESS WHEREOF, the parties hereto have caused this Stockholders' Agreement to be executed as of the date first above written. eMerge Vision Systems, Inc. By: /s/ Illegible Signature ----------------------- Title: Chairman XL VISION, INC. By: /s/ Illegible Signature ----------------------- Title: President /s/ John Scott --------------------------- John Scott /s/ Scott Blackwell --------------------------- Scott Blackwell /s/ Gregory Haskell --------------------------- Gregory Haskell /s/ James Willmann --------------------------- James Willmann /s/ James Wellman --------------------------- James Wellman /s/ Dave Szostak --------------------------- Dave Szostak /s/ Frederic Derwitsch --------------------------- Frederic Derwitsch /s/ Joel Hazlett --------------------------- Joel Hazlett -9- 15 /s/ Richard Miles ------------------------ Richard Miles /s/ O. Dippold ------------------------ Ottmar Dippold /s/ Linda Dippold ------------------------ Linda Dippold /s/ Everett Howard ------------------------ Everett Howard [Attached hereto are EVS Stockholder signature pages, Exhibit A, for subsequent transferees.] [Preferred Stockholders have executed Counterpart Signature Pages to this Agreement] -10- (Signature Page Continued) 16 SIGNATURE PAGE TO EVS STOCKHOLDERS' AGREEMENT OF AUGUST 8, 1997 The undersigned hereby agrees to be bound by the terms and provisions of the eMerge Vision Systems, Inc. Stockholders' Agreement dated August 8, 1997. /s/ Maria L. Blackwell ------------------------ Maria Lynn Blackwell 17 SIGNATURE PAGE TO EVS STOCKHOLDERS' AGREEMENT OF AUGUST 8, 1997 The undersigned hereby agrees to be bound by the terms and provisions of the eMerge Vision Systems, Inc. Stockholders' Agreement dated August 8, 1997. /s/ June Bennett -------------------------------- June Bennett /s/ Anne Jones --------------------------------- Anne Jones /s/ Diana Williams --------------------------------- Diana Williams /s/ Amy Wellman --------------------------------- Amy Wellman /s/ Darlene Baker --------------------------------- Darlene Baker /s/ Julie Poston --------------------------------- Julie Poston 18 EXHIBIT 10.26 JOINDER TO STOCKHOLDERS' AGREEMENT THIS JOINDER TO STOCKHOLDERS' AGREEMENT is made as of the 30th day of March, 1998 by and between eMerge Vision Systems, Inc., a Delaware corporation (the "Company"), and _____________________________________ (the "Stockholder"). BACKGROUND The Company is among the parties to a Stockholders' Agreement dated as of August 8, 1997 (the "Stockholders' Agreement"), by and among the Company and the securityholders of the Company, which restricts transfers of securities of the Company. Capitalized terms used herein but undefined herein have the meanings ascribed thereto in the Stockholders' Agreement. The Company and the Stockholder desire that the Stockholder become a "Stockholder" under the Stockholders' Agreement and be subject to the terms and conditions thereof. Under Section 3.3 of the Stockholders' Agreement, the Company is authorized to add as a party to the Stockholders' Agreement any subsequent holder of the Company's securities. WITNESSETH NOW, THEREFORE, in consideration of the transfer of the shares in the Company, and intending to be legally bound hereby, and pursuant to Section 3.3 of the Stockholders' Agreement the parties hereto agree that the Stockholder is hereby added as a party to the Stockholders' Agreement and shall henceforth be deemed to be a "Stockholder" for all purposes under the Stockholders' Agreement, and will have a proportionate share of the rights of his, her or its Transferor as a Stockholder under the Stockholders' Agreement and will be bound by the obligations of such Transferor under the Stockholders' Agreement. This Joinder may be executed in multiple counterparts each of which shall constitute an original and all of which shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Joinder as of the date first written above. EMERGE VISION SYSTEMS, INC. STOCKHOLDER By: /s/ J. Scott Blackwell ______________________________ ______________________________ SIGNATURE CEO ______________________________ PRINT NAME _________________________________ James W. Dillard and Kristie L. Dillard Kevin L. Johnson and Sue A. Johnson The Robert R. Johnson and Alice M. Johnson Living Trust Tommy J. Tompkins and Golda Tompkins EX-10.27 24 SUBORDINATED PURCHASE MONEY NOTE FROM EMERGE 1 EXHIBIT 10.27 SUBORDINATED PURCHASE MONEY NOTE $4,400,000 July 15, 1997 FOR VALUE RECEIVED, eMerge Vision Systems, Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of XL Vision, Inc. (the "Lender") at the Lender's office located at 10315 102nd Terrace, Sebastian, FL 32958 or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of FOUR MILLION FOUR HUNDRED THOUSAND DOLLARS ($4,400,000). This Note is being issued in connection with an Asset Purchase Agreement of even date herewith between Borrower and Lender for the transfer of the technology and assets from Lender to Borrower. The Borrower hereby farther promises to pay to the order of the Lender interest on the outstanding principal amount from the date hereof, at an annual rate equal to 7%. The principal amount of this Note shall be paid in full on the first to occur of the following: (i) the closing of Borrower's initial public offering of its equity securities; (ii) the sale of all or substantially all of the assets of Borrower; (iii) the sale or exchange of all of the outstanding capital stock of Borrower in a single transaction or series of related transactions, including pursuant to a merger or consolidation in which the holders of voting securities of Borrower immediately before the transaction own less than a majority of the voting securities of the surviving or resulting entity immediately after the transaction; or (iv) the dissolution or liquidation of the Borrower. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to principal. The outstanding principal amount of this Note may be prepaid in whole or in part without any prepayment penalty or premium at any time or from time to time by Borrower upon notice to the Lender. This Note is subordinate in right of payment to all classes and series of Preferred Stock of the Borrower which is now outstanding or which may be authorized and issued by the Company in the future while this Note remains outstanding. Borrower may not make any payments on this Note, and the holder may not enforce this Note, so long as any such class or series of Preferred Stock remains outstanding. 2 An event of default hereunder shall consist of: (i) a default in the payment by the Borrower to the Lender of principal under this Note as and when the same shall become due and payable; (ii) an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money in excess of $250,000, beyond any applicable notice and/or grace period; (iii) institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of an event of default hereunder, this Note shall automatically without any action or notice by Lender, be accelerated and become immediately due and payable, and Lender shall have all of the rights and remedies provided for in the Loan Agreement or otherwise available at law or in equity, all of which remedies shall be cumulative. Neither the reference to nor the provisions of any agreement or document referred to herein shall affect or impair the absolute and unconditional obligation of the Borrower to pay the principal of this Note as herein provided. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of costs, exceeds $ 1,000,000 ("Summary Proceeding"), arising out of or relating to this Note, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal Jurisdiction over it, (vi) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or 3 arising out of or otherwise related to this Note waives any and all rights to any such jury trial or to seek punitive damages. In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of costs, does not exceed $1,000,000 (a "Proceeding"), arising out of or relating to this Note or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, one of whom shall be an attorney. Judgment upon the arbitrators, award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including ,but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but shall not be sought as a means to avoid or stay arbitration or Summary Proceedings. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. 4 Notices required to be given hereunder shall be deemed validly given (i) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by Federal Express Next Day Delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: XL Vision, Inc. 10315 102nd Terrace Sebastian, FL 32958 Attn: Chief Financial Officer If to the Borrower: eMerge Vision Systems, Inc. 10315 102nd Terrace Sebastian, FL 32958 Attn: Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. This Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Purchase Money Note as of the date first written above. EMERGE VISION SYSTEMS, INC. By: /s/ David Szostak _________________________________________ Title: David P. SZOSTAK, Chief Financial Officer EX-10.29 25 TERM NOTE DATED OCTOBER 27, 1999 FROM EMERGE 1 Exhibit 10.29 term NOTE (eMERGE INTERACTIVE, INC.) $7,050,000 October 25, 1999 In consideration of the loan (hereinafter referred to as a "Loan") Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), has made to eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), and for value received, the Borrower hereby promises to pay to the order of the Lender, at the Lender's office located at 103 Springer Building, 3411 Silverside Road, Wilmington, DE 19810, or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of seven million fifty thousand DOLLARS ($7,050,000). The unpaid principal balance of the Note shall be paid on the earliest of: (1) the closing date of an underwritten public offering of the Company's common stock, (2) the repayment of a Promissory Note dated October 25, 1999, to Internet Capital Group, Inc. or (3) one year from the date hereof. The Borrower hereby further promises to pay to the order of the Lender interest on the outstanding principal amount from the date hereof, at an annual rate equal to the announced prime rate of the pnc Bank, N.A. (the "Prime Rate") plus one percent (1%). Such interest rate shall be changed when and as the Prime Rate changes. In addition, the Borrower shall pay on demand interest on any overdue payment of principal and interest (to the extent legally enforceable) at the fluctuating Prime Rate plus three percent (3%). Interest shall be payable when the unpaid principal balance of the Note is paid. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the event of default, interest shall continue to accrue on the Note at the rate set forth above and shall be payable on demand of the Lender. The outstanding principal amount of this Note may be prepaid by the Borrower upon notice to the Lender in whole at any time or in part from time to time without any prepayment penalty or premium; provided, that upon such payment any interest due to the date of such prepayment on such prepaid amount shall also be paid. Notwithstanding anything in this Note, the interest rate charged hereon shall not 2 exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by the Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note. An event of default hereunder shall consist of: (i) a default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; (ii) an event of default by the Borrower under any other obligation, instrument, note or agreement for borrowed money, beyond any applicable notice and/or grace period; (iii) institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated a bankrupt or insolvent. Upon the occurrence of any event of default, interest shall accrue on the outstanding balance of this Note at the Prime Rate plus three percent (3%), the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of the Lender, without notice, become immediately due and payable, and the Lender shall thereupon have all the rights and remedies provided hereunder or now or hereafter available at law or in equity. Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to this Note, or the breach, termination or validity thereof, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead or to make, any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (vi) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute and 3 (vii) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of or otherwise related to this Note and waives any and all rights to any such jury trial or to seek punitive damages. In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to this Note or the breach, termination or validity thereof is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of this Section relating to Summary Proceedings shall apply to such Proceeding. If a Summary Proceeding is not available to resolve any dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Note and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to the Lender's principal place of business by three arbitrators, at least one of whom shall be knowledgeable in general business matters and one of whom shall be an attorney. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 60 days prior thereto such party shall have given written notice to the other party of its intent to do so. Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but such remedies shall not be sought as a means to avoid or stay arbitration or a Summary Proceeding. The Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. Upon default hereunder the Lender shall have the right to offset the amount owed by the Borrower against any amounts owed by the Lender in any capacity to the Borrower, whether or not due, and the Lender shall be deemed to have exercised such right of offset and to have made a charge against any such account or amounts immediately upon the occurrence of an event of default hereunder even though such charge is made or entered on the books of the Lender subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note. 4 Notices required to be given hereunder shall be deemed validly given (i) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by Federal Express Next Day Delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand: If to the Lender: Safeguard Delaware, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Michael W. Miles, Chief Financial Officer If to the Borrower: eMerge Interactive, Inc. 10315 102nd Terrace Sebastian, FL 32958 Attn: Michael Janney, Chief Financial Officer or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns. The Note shall be governed by and interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending to be legally bound hereby, has duly executed this Term Note as of the date first written above. eMerge interactive, inc. By:__________________________________ Michael T. Janney Chief Financial Officer EX-21.1 26 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. STS Agriventures, Ltd. 2. Cyberstockyard, Inc. EX-23.1 27 CONSENT OF KPMG LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors eMerge Interactive, Inc. We consent to the use of our reports dated April 13, 1999 on the financial statements of Lost Pelican, L.L.C. as of December 31, 1997 and 1998 and for each of the years in the two-year period ended December 31, 1998, and April 20, 1999 on the consolidated financial statements of eMerge Interactive, Inc. as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, and July 7, 1999 on the financial statements of QDD Investment Company, L.L.C. as December 31, 1998 and for the year then ended included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/KPMG LLP Orlando, Florida October 27, 1999 EX-27.1 28 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EMERGE INTERACTIVE, INC. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 0 0 368 0 707 3388 777 263 6602 6294 0 0 88 47 (132) 6602 1792 1792 2623 2623 4769 0 332 (5932) 0 (5932) (1900) 0 0 (7832) (2.25) (2.25)
EX-27.2 29 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EMERGE INTERACTIVE, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 663 0 405 0 740 3587 1969 499 11928 10887 0 0 99 56 622 11928 2578 2578 2768 2768 5519 0 289 (5998) 0 (5998) 10 0 0 (5987) (1.15) (1.15)
EX-99.1 30 FORM LETTER TO HOLDERS OF MORE THAN 100 SHARES 1 EXHIBIT 99.1 [SAFEGUARD SCIENTIFICS, INC. LOGO] DIRECTED SHARE SUBSCRIPTION PROGRAM FOR eMERGE INTERACTIVE, INC. FOR HOLDERS OF 100 OR MORE SHARES OF SAFEGUARD SCIENTIFICS, INC. COMMON STOCK ON __________, 1999 Holders of fewer than 100 shares of Safeguard Scientifics, Inc. common stock on ________, 1999 are not eligible to participate in this offer. IF YOU HAVE ANY QUESTIONS REGARDING THE DIRECTED SHARE SUBSCRIPTION PROGRAM, PLEASE CALL SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE AT (888) SFE-1200 OR THE INFORMATION AGENT AT (877) 460-4356. PLEASE DO NOT CALL eMERGE INTERACTIVE WITH ANY QUESTIONS REGARDING THIS PROGRAM. ONLY SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE OR THE INFORMATION AGENT WILL BE ABLE TO ANSWER YOUR QUESTIONS. 2 _______, 1999 Dear Safeguard Stockholder: As you may know, we are undertaking an initial public offering of the common stock of eMerge Interactive. We are permitting Safeguard Scientifics to use its Directed Share Subscription Program so that we and the selling stockholders may offer you the opportunity to buy our common stock at our initial public offering price. We will be offering all of the _____________ shares under the program. Safeguard has previously sent you materials describing in general terms how the program works. Set forth below is a detailed description of how the program will work in connection with our offering. Please review this description and the attached prospectus carefully in deciding whether or not you wish to invest. Who can subscribe ONLY HOLDERS OF 100 OR MORE SHARES OF SAFEGUARD COMMON STOCK AS OF _________, 1999 ARE ELIGIBLE TO PURCHASE SHARES OF OUR COMMON STOCK IN THE PROGRAM. Holders of fewer than 100 Safeguard shares will not be eligible to participate in this program. You may not transfer your subscription offer The offer to purchase shares in this program may only be transferred by involuntary operation of law such as death or certain dissolutions. Number of shares for which you may subscribe To determine how many shares of our common stock you are eligible to purchase, divide the number of shares of Safeguard common stock that you owned as of ________, 1999 by _____ and round up to the nearest whole number. For example, if you held between _____ and _____ shares of Safeguard common stock as of this date, you may subscribe for ______shares of our common stock. You would have to have had at least _____ shares of Safeguard common stock to be eligible to subscribe for _____ shares of our common stock. You may not subscribe for a fractional share of our common stock. Minimum Subscription Size The minimum subscription that we will accept for any account is for 5 shares of our common stock. THEREFORE, HOLDERS OF FEWER THAN 100 SHARES OF SAFEGUARD COMMON STOCK AS OF _________, 1999 WILL NOT BE ABLE TO PURCHASE OUR SHARES UNDER THE PROGRAM. THIS LIMIT APPLIES TO EACH OF YOUR ACCOUNTS, NOT THE AGGREGATE OF ALL OF YOUR ACCOUNTS. If as of ________, 1999 you held ___ shares of Safeguard common stock in one account and another _____ shares in a different account, we will not consider you to be the owner of 100 shares of Safeguard common stock. Since none of your accounts contained at least 100 shares of Safeguard common stock, you would not be eligible to subscribe. You are under no obligation to subscribe, but if you subscribe for any shares it must be for at least __ shares in each account. For example, if you held _____ shares of Safeguard common stock in a single account as of __________, 1999 and you choose to purchase our shares under the program, you may purchase between __ and __ shares. Subscription Price The price per share under the program will be the same price that all investors will pay in our initial public offering. The price per share in the initial public offering will be determined by negotiations between us and the 3 underwriters of our offering. The factors that we expect to consider in these negotiations are described in the attached prospectus under the heading "Plan of Distribution." We currently anticipate that the offering price will be between $______ and $_______ per share. We will inform you of the initial public offering price as described below under "How to Subscribe." Stock Purchase Agreement with Safeguard Scientifics We and the selling stockholders intend to enter into a Stock Purchase Agreement with Safeguard. This agreement will provide that if all ______________ of the shares offered under the program are not purchased by Safeguard stockholders, then Safeguard will purchase the remaining shares at our initial public offering price. How to Subscribe TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE FOLLOWING PROCEDURES: - Subscriptions and payments will only be accepted after we have determined our initial public offering price. Any subscriptions or payments received before then will be returned to you. We expect to determine the initial public offering price in __________ 1999, but various factors could hasten or delay us. We will close the initial public offering and stop accepting subscriptions four business days after we determine the initial public offering price. - Time will not permit us to notify you directly of our initial public offering price and closing date. Instead, Safeguard will take the following actions: - publicize the offering price and the closing date on its Web site (www.safeguard.com) and through a press release; - make every effort to notify each broker, bank, trust company or other nominee that holds shares on behalf of Safeguard stockholders of the offering price and closing date; - make available an automated investor relations line (888-SFE-1200) on a 24-hour basis; - make available an information agent (877-460-4356); and - through its Web site, provide you with an opportunity to request e-mail notification (either directly to you or your designated representative). You will have to monitor these media to know when to place your order and deliver payment. ALSO, IF YOU DO NOT HOLD YOUR SAFEGUARD SHARES DIRECTLY, YOU WILL NEED TO KEEP IN CLOSE CONTACT WITH YOUR BROKER, BANK, TRUST COMPANY OR OTHER NOMINEE THAT HOLDS YOUR SAFEGUARD SHARES ON YOUR BEHALF SINCE THEY WILL NEED TO PROCESS THE SUBSCRIPTION FOR OUR SHARES AND PAYMENT ON YOUR BEHALF. - WE WILL STOP ACCEPTING ORDERS UNDER THE PROGRAM AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER WE DETERMINE THE INITIAL PUBLIC OFFERING PRICE. Subscriptions and payments that have not been received by ChaseMellon Shareholder Services, L.L.C. by this deadline will not be honored. For example, if we determine the initial public offering price on a Thursday, ChaseMellon must receive all orders and payments by 5:00 p.m. New York City time on the following Wednesday. This deadline would be extended to the following Thursday if there was an intervening holiday on which the Nasdaq National Market was closed. - To place an order for our shares under this program, you will have to take the following actions: - If you hold your Safeguard shares in your own name, you must complete and sign the subscription form included with this prospectus and return it with full payment to ChaseMellon. YOUR SUBSCRIPTION FORM AND PAYMENT MUST BE RECEIVED BY CHASEMELLON BEFORE 5:00 P.M. 4 NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER WE DETERMINE THE INITIAL PUBLIC OFFERING PRICE. We will not honor any subscription form received by ChaseMellon after that date. We suggest, for your protection, that you deliver your subscription form and payment to ChaseMellon by overnight or express mail courier (or by facsimile transmission if you intend to wire funds) as follows: By Hand Delivery: ChaseMellon Shareholder Services, L.L.C. Reorganization Department 120 Broadway - 13th Floor New York, NY 10271 By Overnight or Express Mail Courier: ChaseMellon Shareholder Services, L.L.C. Reorganization Department 85 Challenger Road Mail Drop Reorg Ridgefield Park, NJ 07660 By Facsimile Transmission and Wire Transfer: ChaseMellon Shareholder Services, L.L.C. Facsimile Transmission: (201) 296-4293 To confirm fax, call: (201) 296-4860 Wire instructions: Wire to: The Chase Manhattan Bank, New York, NY ABA #: 021000021 Attention: ChaseMellon Shareholder Services Account: Reorg Account 323-859577 For: Safeguard Scientifics, Inc./eMerge Interactive Reference: FBO [insert your name as it appears on the your subscription form]
- If you hold your Safeguard shares through a broker, bank, trust company or other nominee, then after we determine the initial public offering price, you will have to contact the nominee that holds your Safeguard shares if you wish to place an order and arrange for payment. WE CAUTION YOU THAT BROKERS AND OTHER NOMINEES WILL REQUIRE SOME TIME TO PROCESS SUBSCRIPTIONS FROM SAFEGUARD STOCKHOLDERS. THEREFORE, THEY MOST LIKELY WILL STOP ACCEPTING SUBSCRIPTIONS EARLIER THAN THE FOURTH BUSINESS DAY AFTER WE DETERMINE THE INITIAL PUBLIC OFFERING PRICE. - YOU MUST PAY THE SUBSCRIPTION PRICE BY VALID CHECK OR MONEY ORDER IN U.S. DOLLARS PAYABLE TO "CHASEMELLON SHAREHOLDER SERVICES, L.L.C." OR BY WIRE TRANSFER. UNTIL THIS OFFERING HAS CLOSED, YOUR PAYMENT WILL BE HELD IN ESCROW BY CHASEMELLON SHAREHOLDER SERVICES, L.L.C. - We will provide to each broker, bank, trust company, and other nominee who holds Safeguard shares for the account of other persons copies of the preliminary and final prospectus to provide to these persons. Each of those entities will be responsible for providing you with a copy of the preliminary and final prospectus. ChaseMellon Shareholder Services will mail copies of the preliminary and final prospectus to all record holders of Safeguard common stock as of _________, 1999. 5 - Safeguard will decide all questions as to the validity, form and eligibility (including times of receipt, beneficial ownership and compliance with minimum exercise provisions). Safeguard also will determine the acceptance of subscriptions and the aggregate price. Alternative, conditional or contingent subscriptions will not be accepted. Safeguard reserves the absolute right to reject any subscriptions not properly submitted. In addition, Safeguard may reject any subscription if the acceptance of the subscription would be unlawful. Safeguard also may waive any irregularities or conditions in the subscription for our shares, and Safeguard's interpretation of the terms and conditions of the program will be final and binding. - Once your Subscription Form and payment have been received and accepted, your subscription may not be revoted by you. - We are not obligated to give you notification of defects in your subscription. We will not consider a subscription to be made until all defects have been cured or waived. If your subscription is rejected, your payment of the exercise price will be promptly returned by ChaseMellon. - Sales under the directed share subscription program will close on the same business day as the closing of the sale of the other shares offered to the public. If you purchase your shares through a broker, bank, trust company or similar nominee, we expect that your purchase will be reflected in your account with the nominee as soon as practicable after the closing of these sales. Otherwise, ChaseMellon will mail a stock certificate to you as soon as practicable after the closing of these sales. Cancellation of Initial Public Offering WE MAY CANCEL OUR INITIAL PUBLIC OFFERING AT ANY TIME UP UNTIL THE CLOSING. IF THE INITIAL PUBLIC OFFERING IS CANCELED, SAFEGUARD WILL PUBLICIZE THE CANCELLATION ON ITS WEB SITE AND THROUGH A PRESS RELEASE. THE PROGRAM GIVES YOU NO RIGHTS TO PURCHASE SHARES OF OUR COMMON STOCK IF WE CANCEL OUR INITIAL PUBLIC OFFERING AND ANY FUNDS PREVIOUSLY SUBMITTED BY YOU WILL BE RETURNED PROMPTLY. SAFEGUARD AND/OR EMERGE INTERACTIVE ALSO MAY CANCEL OR MODIFY, IN WHOLE OR IN PART, THE DIRECTED SHARE SUBSCRIPTION PROGRAM. Federal Tax Consequences We believe that you will not be considered to have received a taxable distribution of property as a result of your having the opportunity to participate in this offering. The Internal Revenue Service is not bound by this position, and you are encouraged to consult with your tax advisors about the federal, state and other tax consequences of the program. Stabilization The underwriters of our initial public offering may engage in certain transactions that stabilize the price of our common stock. We make no representation as to the direction or magnitude of any effect that these transactions may have on the price of our common stock. Risk Factors Investing in our common stock involves certain risks which are disclosed on page 6 of the attached preliminary prospectus. Certain Restrictions In managing the program, we and Safeguard will take reasonable steps to comply with the laws of the different countries in which Safeguard stockholders live. If compliance is too burdensome in one or more countries, Safeguard stockholders residing in those countries will not be offered the opportunity to purchase our shares under the program. * * * 6 IF YOU HAVE ANY QUESTIONS REGARDING THE DIRECTED SHARE SUBSCRIPTION PROGRAM, PLEASE CALL SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE AT (888) SFE-1200 OR INFORMATION AGENT AT (877) 460-4356. PLEASE DO NOT CALL eMERGE INTERACTIVE WITH ANY QUESTIONS REGARDING THIS PROGRAM. ONLY SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE OR INFORMATION AGENT WILL BE ABLE TO ANSWER YOUR QUESTIONS. Sincerely, Charles Abraham Chief Executive Officer EX-99.3 31 FORM OF LETTER FROM EMERGE INTERACTIVE, INC. 1 EXHIBIT 99.3 ____________, 1999 Dear Broker: As you may know, we are undertaking an initial public offering of our shares of common stock. We are permitting Safeguard Scientifics, Inc. to use its Directed Share Subscription Program to offer Safeguard stockholders the opportunity to buy shares of our common stock at the initial public offering price. The price per share under this program will be the same price that all investors will pay in our initial public offering. The enclosed questions and answers will provide you with the key terms of the Directed Share Subscription Program. IF YOU HAVE ANY QUESTIONS REGARDING THE DIRECTED SHARE SUBSCRIPTION PROGRAM, PLEASE CALL SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE AT (888) SFE-1200 OR CORPORATE INVESTOR COMMUNICATIONS, THE INFORMATION AGENT FOR THIS OFFER, AT (877) 460-4356. PLEASE DO NOT CALL eMERGE INTERACTIVE REGARDING THIS PROGRAM. You also may find information about this program on Safeguard's web site at www.safeguard.com. Preliminary prospectuses for distribution to Safeguard stockholders are being distributed through Corporate Investor Communications, Attention: Processing Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201) 896-1900. Please call Corporate Investor Communications if you do not receive a sufficient number of prospectuses for distribution to Safeguard stockholders. You should provide a copy of the preliminary prospectus to each Safeguard stockholder on whose behalf you hold shares. Sincerely, Charles Abraham Chief Executive Officer 2 SAFEGUARD SCIENTIFICS, INC. DIRECTED SHARE SUBSCRIPTION PROGRAM FOR eMERGE INTERACTIVE, INC. Q: WHO IS ELIGIBLE TO PARTICIPATE IN THE DIRECTED SHARE SUBSCRIPTION PROGRAM FOR EMERGE INTERACTIVE, INC.? A: Only record holders of at least 100 shares of Safeguard stock on ______, 1999. Q: HOW WAS THE OPPORTUNITY TO PURCHASE IPO SHARES ALLOCATED TO SAFEGUARD STOCKHOLDERS? A: Safeguard stockholders received a subscription offer to purchase ____ share of eMerge Interactive for each ____ shares of Safeguard owned on _______, 1999, subject to the minimum purchase requirement. If a Safeguard stockholder owned at least 100 shares of Safeguard common stock but the number of shares was not evenly divisible by _____, Safeguard will round up the subscription offer to the next whole number. The Depository Trust Company will notify its participants of the date by which the roundup requests must be submitted. The offer to purchase shares under the directed share subscription program is nontransferable and cannot be combined among multiple accounts. There will not be an oversubscription privilege under this program. Q: IS THERE A MINIMUM PURCHASE REQUIREMENT? A: The minimum subscription that will be accepted is for ____ shares of eMerge Interactive common stock. Therefore, holders of fewer than 100 Safeguard shares as of ________, 1999 will be unable to purchase shares in the directed share subscription program for eMerge Interactive. Q: HOW WILL I KNOW WHEN THE OFFERING PRICES AND WHAT THE EXPIRATION DATE FOR THE OFFERING WILL BE? A: When the offering is declared effective by the SEC and the offering price is set, Safeguard will - issue a press release to the wire services - send you an e-mail alert if you signed up for this on its Web page at www.safeguard.com - post this information on its Web page - update its automated investor relations line (888) SFE-1200 through which you will be able to listen to the text of the press release announcing the price and the expiration date or request a faxed copy of the release - update the information available through its information agent, who can be reached at (877) 460-4356 - notify the New York Stock Exchange, which will notify all of its members - notify the Depository Trust Company, which will electronically notify all of its participants 3 Q: WHEN CAN SUBSCRIPTIONS AND PAYMENT BE SUBMITTED? A: Subscriptions and payment will only be accepted by the offering agent after the initial public offering price of the eMerge Interactive common stock has been determined. ChaseMellon Shareholder Services, L.L.C. is the offering agent. THE OFFERING AGENT WILL STOP ACCEPTING SUBSCRIPTIONS AND PAYMENTS AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER THE IPO PRICE HAS BEEN SET. The Depository Trust Company will handle subscriptions on behalf of its participants. When you subscribe for shares of eMerge Interactive through DTC's automated subscription system, you will be required to confirm that you are subscribing only on behalf of holders that meet the minimum per account purchase requirement of ___ shares. EX-99.4 32 FORM OF SUBSCRIPTION FORM FOR DIRECTED SHARE 1 EXHIBIT 99.4 - ------------------- Subscription Number - ---------------------------- ------------------------ ------------------ Shares of eMerge Interactive Share Subscription Offer Record Date Shares Eligible to Subscribe SAFEGUARD SCIENTIFICS, INC. DIRECTED SHARE SUBSCRIPTION PROGRAM - -------------------------------------------------------------------------------- EMERGE INTERACTIVE, INC. SUBSCRIPTION FORM The shareholder named above has the right to purchase, pursuant to the terms and conditions of the Safeguard Scientifics, Inc. Directed Share Subscription Program, the number of fully paid and non-assessable shares of common stock, $.001 par value, of eMerge Interactive, Inc. indicated above at a subscription price that will be determined as outlined below. THE DIRECTED SHARE SUBSCRIPTION PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. As described in the preliminary prospectus accompanying this Subscription Form, each holder of at least 100 shares of Safeguard Scientifics, Inc. common stock may subscribe for _____ share of eMerge Interactive common stock for every ____ shares of Safeguard Scientifics common stock held as of __________, 1999, in any account, rounded upward. THE MINIMUM SUBSCRIPTION THAT WE WILL ACCEPT IS FOR __SHARES OF eMERGE INTERACTIVE PER ANY INDIVIDUAL ACCOUNT. Therefore, holders with accounts containing fewer than 100 shares of Safeguard common stock as of __________, 1999, will not be able to subscribe for shares of eMerge Interactive. The right to participate in this program and purchase shares of eMerge Interactive is nontransferable except involuntarily by operation of law (e.g. death or certain dissolutions). Should an involuntary transfer occur by operation of law, please contact ChaseMellon Shareholder Services, L.L.C., the agent for the program, by telephone at 800-777-3674 for appropriate instructions. The subscription price per share under the program will be the same price that all investors will pay in eMerge Interactive's initial public offering. The price per share will be determined by negotiations between eMerge Interactive and the underwriters of the offering. The factors to be considered in these negotiations are described in the preliminary prospectus accompanying this Subscription Form. eMerge Interactive currently anticipates that its initial public offering price will be determined in __________ 1999 but various factors could hasten or delay this determination. Time will not permit eMerge Interactive to notify you directly of the subscription price and the expiration date for this offering, but Safeguard Scientifics will take the actions described in the accompanying preliminary prospectus to publicize this information. No offer to buy securities can be accepted, and no part of the subscription price can be received, until the initial public offering price has been determined and the registration statement, of which the preliminary prospectus accompanying this Subscription Form is a part, has been declared effective. Any Subscription Forms or payments received before then will be returned to you. All persons electing to subscribe for shares of eMerge Interactive, Inc. must complete the Election to Purchase on the reverse side of this Subscription Form and return the Subscription Form, together with full payment of the subscription price, to ChaseMellon at the addresses on the back of this Subscription Form. If you do not properly complete and sign this Subscription Form, it may be rejected. Once your Subscription Form and payment have been received and accepted, your subscription may not be revoked by you. THE SUBSCRIPTION FORM AND FULL PAYMENT OF THE SUBSCRIPTION PRICE MUST BE RECEIVED BY CHASEMELLON NO LATER THAN 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. CHASEMELLON WILL NOT HONOR ANY SUBSCRIPTIONS RECEIVED AFTER THAT TIME AND DATE. If you do not wish to subscribe for shares, you do not need to return this Subscription Form. Before completing and returning this Subscription Form, you are urged to read carefully the preliminary prospectus mailed to you with this Subscription Form for a more complete explanation of the offering and for information about eMerge Interactive. If eMerge Interactive cancels the initial public offering, you will have no rights to purchase shares of eMerge Interactive and any funds previously submitted by you will be returned. eMerge Interactive and/or Safeguard also may cancel or modify, in whole or in part, the directed share subscription program. 2 YOU SHOULD NOT RETURN THIS SUBSCRIPTION FORM OR DELIVER ANY PAYMENT UNTIL AFTER EMERGE INTERACTIVE HAS DETERMINED ITS INITIAL PUBLIC OFFERING PRICE. ANY SUBSCRIPTION FORMS OR PAYMENT RECEIVED BEFORE THEN WILL BE RETURNED TO YOU. Once the initial public offering price has been determined, Safeguard Scientifics will take the actions described in the preliminary prospectus to publicize the subscription price and the date by which you must respond to the offer that has been made to you under this program. If you wish to subscribe for shares at that time, you should complete this Subscription Form and deliver payment of the subscription price to ChaseMellon. CHASEMELLON MUST RECEIVE THE PROPERLY COMPLETED AND SIGNED SUBSCRIPTION FORM AND FULL PAYMENT OF THE SUBSCRIPTION PRICE BY 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER EMERGE INTERACTIVE DETERMINES ITS INITIAL PUBLIC OFFERING PRICE. CHASEMELLON WILL STOP ACCEPTING SUBSCRIPTION FORMS AFTER THAT TIME AND DATE. We suggest, for your protection, that you deliver the completed Subscription Form and payment of the subscription price to ChaseMellon Shareholder Services, L.L.C. by overnight or express mail courier, or by facsimile transmission and wire transfer. The addresses for ChaseMellon are as follows: By Hand Delivery: By Overnight Delivery/Express Mail Courier ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. Attn: Reorganization Dept. Attn: Reorganization Dept. 120 Broadway, 13th Floor 85 Challenger Road, Mail Drop -- Reorg New York, NY 10271 Ridgefield Park, NJ 07660 By Facsimile Transmission and Wire Transfer: ChaseMellon Shareholder Services, L.L.C. Wire to: The Chase Manhattan Bank, New York, NY Facsimile Transmission: (201) 296-4293 ABA # 021000021 To confirm fax, call: (201) 296-4860 Attention: ChaseMellon Shareholder Services Account: Reorg Account 323-859577 For: Safeguard Scientifics, Inc./eMerge Interactive Reference: FBO [insert your name as it appears on the reverse side of this form]
SUBSCRIPTION FORM -- ELECTION TO PURCHASE Subject to the terms and conditions of the Directed Share Subscription Program described in the preliminary prospectus, receipt of which is hereby acknowledged, the undersigned hereby elects to purchase shares of common stock of eMerge Interactive, Inc. as indicated below. Number of shares purchased(1) (NOTE: 5 SHARE MINIMUM REQUIRED IN EACH ACCOUNT)(2) -------------------------- Per share subscription price $ -------------------------- Payment submitted(3) $ --------------------------
(1) You may only purchase up to the number of shares specified on the reverse side of this form. If the amount submitted is not sufficient to pay the subscription price for all shares that are stated to be purchased, or if the number of shares being purchased is not specified, the number of shares purchased will be assumed to be the maximum number that could be purchased upon payment of such amount. Any remaining amount will be returned to the purchaser. (2) Any order for less than the minimum purchase requirement will be rejected. (3) The subscription price must be paid by valid check or money order in U.S. dollars payable to ChaseMellon Shareholder Services, L.L.C. or by wire transfer as described above. The payment submitted should equal the total shares purchased multiplied by the per share subscription price. Shares of common stock of eMerge Interactive, Inc. will be issued promptly following the closing of the directed share subscription program. The shares will be registered in the same manner set forth on the face of this Subscription Form. If your shares are held in joint ownership, all joint owners must sign this election to purchase. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. If signing for a corporation, an authorized officer must sign and provide title. If signing for a partnership, an authorized partner must sign and indicate title. Please provide a telephone number at which you can be reached in the event that we have questions regarding the information that you have supplied. Daytime Telephone Number ( ) ----------------------------------- Evening Telephone Number ( ) ----------------------------------- (IF JOINTLY OWNED, BOTH MUST SIGN) SIGNATURE(S): ------------------------------- ------------------------------- Dated: , 1999 ----------- NOTE: The above signature(s) must correspond with the name(s) as written upon the face of this Subscription Form in every particular without alteration. SUBSTITUTE FORM W-9 DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE -- PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) FAILURE TO COMPLETE THIS FORM MAY SUBJECT YOU TO 31% FEDERAL INCOME TAX WITHHOLDING. Part 1: PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE SPACE TIN PROVIDED AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW ------------------------------------------------- Social Security or Employer Identification Number Part 2: Check the box if you are awaiting a TIN / /
Part 3: CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the number shown on this form is my correct taxpayer identification number (or a TIN has not issued to me but I have mailed or delivered an application to receive a TIN or intend to do so in the near future), (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or the IRS has notified me that I am no longer subject to backup withholding, and (3) all other information provided on this form is true, correct and complete. Dated: , 1999 SIGNATURE: ------------ -------------------------------- You must cross out item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). -----END PRIVACY-ENHANCED MESSAGE-----