-----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, CqAEZGh5tecPPvb2HNIvYFzP7KzIxqsgWDhIjvFkJ/9JlfNKdq8bE/Abd7UehP/+ Z9RcLFr1bXPhuZEgRehVqA== 0000950144-00-005730.txt : 20000511 0000950144-00-005730.hdr.sgml : 20000511 ACCESSION NUMBER: 0000950144-00-005730 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000501 DATE AS OF CHANGE: 20000510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGE INTERACTIVE INC CENTRAL INDEX KEY: 0001092605 STANDARD INDUSTRIAL CLASSIFICATION: 7389 IRS NUMBER: 650534535 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-29037 FILM NUMBER: 616282 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 10-K405/A 1 EMERGE INTERACTIVE, INC 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-2903-7
eMerge Interactive, Inc. (Exact name of registrant as specified in its charter) DELAWARE 65-0534535 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 10315 102ND TERRACE 32958 SEBASTIAN, FLORIDA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (561) 589-7331 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS: ON WHICH REGISTERED: ------------------------------ ------------------------------ None None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.008 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $746.1 million as of March 17, 2000, based upon the closing sale price per share of the common stock, as quoted on the Nasdaq National Market, excluding 17,959,515 shares of common stock held by directors, officers and stockholders with representatives on the board of directors whose ownership exceeds five percent of the common stock outstanding at March 17, 2000. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. The number of shares of the registrant's common stock outstanding as of March 17, 2000 was 33,031,395. DOCUMENTS INCORPORATED BY REFERENCE: Portions of eMerge Interactive, Inc. proxy statement for its 2000 Annual Meeting of Stockholders to be filed within 120 days after the end of the year covered by this Form 10-K Report are incorporated by reference into Part III of this Form 10-K. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 EMERGE INTERACTIVE, INC. FORM 10-K ANNUAL REPORT (FOR FISCAL YEAR ENDED DECEMBER 31, 1999) TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Market for Registrant's Common Equity and Related Item 5. Stockholder Matters......................................... 14 Item 6. Selected Financial Data..................................... 15 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations................................... 16 Item 7A Quantitative and Qualitative Disclosure About Market Risk... 30 Item 8. Financial Statements and Supplementary Data................. 30 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure.................................................. 30 PART III Item 10. Directors and Executive Officers of the Registrant.......... 31 Item 11. Executive Compensation...................................... 34 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................. 37 Item 13. Certain Relationships and Related Transactions.............. 39 PART IV Exhibits, Financial Statement Schedules and Reports on Form Item 14. 8-K......................................................... 42
i 3 This Report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding, among other things, electronic commerce strategy, acquisition and expansion strategy, development of services, use of proceeds, projected capital expenditures, the sufficiency of our liquidity and capital, development of additional revenue sources, market acceptance of the Internet, expansion into new market segments, technological advancement, ability to develop "brand" awareness and global expansion. Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this Report. Our subsidiaries include STS Agriventures, Ltd. ("STS"), a Canadian corporation and Cyberstockyard, Inc. ("Cyberstockyard"). ii 4 PART I ITEM 1. BUSINESS ITEM 1(A). GENERAL DEVELOPMENT OF THE BUSINESS COMPANY OVERVIEW We are a business-to-business electronic commerce company combining content, community and transaction services to create an online marketplace for the cattle industry. We offer our products and services to cattle industry participants through our family of integrated Web sites, our proprietary information management application and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. Our current products and services include: - Livestock procurement services consisting of cattle sales and auctions; - Daily performance analyses of a customer's feedlot operations; - Comparative cattle industry analysis and feedlot operations benchmarking studies; - Cattle inventory management tools; and - Livestock health management and quality enhancement products. THE ONLINE LIVESTOCK OPPORTUNITY We believe that the production chain of the cattle industry, which includes cattle producers, feedlots, packers and suppliers, contains inefficiencies that reduce animal health and value. These inefficiencies, which include excessive animal transportation and handling, result in additional transaction costs and reduced beef quality. Further, we believe that inadequate access to current and accurate data and a lack of integrated information management tools have limited the ability of industry participants to optimize their operating results and performance. Due to its functionality, scalability and accessibility, the Internet is emerging as a single destination for commerce and information related to the livestock industry. Many of the variables that affect beef quality and cattle performance can be addressed by using the Internet's open architecture, universal accessibility and ability to provide more timely and comprehensive information. We believe the Internet can create a more efficient marketplace for the exchange of cattle by directly connecting buyers and sellers and providing information related to the cattle for sale. A report by the National Association of Farm Broadcasters showed that as of February 1999, 45.5% of producers and 53.4% of feedlots used a personal computer for farm business, and 19.7% of producers and 29.1% of feedlots accessed Web sites for farm-related topics. According to a Gallup and Agricultural Publisher's Survey, it is estimated that by 2001 over 55% of large producers in the beef industry will use the Internet for primary information in the conduct of their daily business. According to Forrester Research, business-to-business electronic commerce in the United States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003. THE EMERGE INTERACTIVE SOLUTION We offer commerce, information and technology to cattle industry participants. Our complementary products and services are designed to reduce inefficiencies throughout the cattle production chain, improve cattle quality and improve overall productivity in the cattle industry. Our current products and services include the following: - Cyberstockyard.com, our online cattle sales and auction services Web site, allows our customers to participate in our live cattle sales and auctions, thereby providing efficient and effective access to an inventory of cattle by directly connecting buyers and sellers of cattle. We believe a less fragmented market for cattle sales may reduce the excessive handling of cattle that results from transportation and 5 commingling during transactions, thereby reducing animal stress, which can lead to improved cattle quality. In addition, by reducing the need for multiple transactions, we seek to lower overall transaction costs associated with cattle sales. - The Feedlot Information System, our cattle information management product, is designed to assist in the effective daily management of our customers' cattle operations. Using our proprietary information management application, subscribing feedlot customers transmit raw operating data to us on a daily basis over the Internet. We then use each subscribing customer's raw data to compile customer-specific information and performance data and analyses, such as feed consumption data, feed-to-gain ratios and a comprehensive summary of health results, which we disseminate daily to that customer over the Internet. - PCC-online.com, our Professional Cattle Consultants service, is designed to provide our customers with national, regional and customer-specific industry analysis services that are derived from our proprietary centralized database of cattle industry information. This information has been compiled from over 90 different feedlots over the last 26 years. These services include feed performance benchmarking services and monthly market analysis that we provide to subscribing customers on a periodic basis. PCC-online.com enables our feedlot customers to compare the performance of their feedlot to the average performance of other feedlots in our database. - NutriCharge, our therapeutic product for livestock, is a restorative feed supplement designed to reduce the effects of stress on the animals caused by transportation, handling and commingling. We sell our NutriCharge product over our Web sites and through our direct sales force. Our customers can access our family of integrated Web sites through our platform site, CattleInfoNet.com. This industry-specific Web site features general industry information, such as current industry news, links to commodities pricing and weather updates, as well as personalized information based upon customers' individual preferences and geographic location. CattleInfoNet.com also provides customers with an online community to facilitate the exchange of information among livestock producers, feedlots and packers and to provide access to our in-house cattle industry experts. We were incorporated in 1994 as a subsidiary of XL Vision, Inc. to develop and commercialize infrared technology applications. XL Vision is a private company that provides strategic, technical and business support to create technology companies. Our initial focus was on the transportation market in which we sold our navigational infrared imaging system, the AMIRIS system. The AMIRIS system uses infrared technology to create an image based on small differences in the temperatures of the objects being viewed, such as an iceberg in water. In 1997, we expanded our infrared applications to the animal sciences industry with the development of an equine imaging system to detect health problems. The equine imaging system enables veterinarians to visualize small differences in the surface temperature of horses, and therefore identify heat, a common sign of inflammation associated with injury at early stages. To expand our product base, in July 1998, we licensed a portfolio of patents from a division of the Canadian government relating to the application of infrared technology to the animal science field and a restorative feed supplement called NutriCharge. Under this agreement, we will begin paying royalties based on a percentage of sales beginning on July 29, 2000. In order to focus on the cattle industry, we discontinued production of the AMIRIS system. In January 1999, we entered into a license agreement with Sperry Marine, Inc., a subsidiary of Litton Industries, Inc., which granted them the right to become the sole producer of the AMIRIS system. In connection with this license, we will receive a royalty of 8% of sales of the AMIRIS system up to a maximum royalty of $4.3 million over a four-year period or up to a maximum royalty of $5.0 million if $4.3 million is not received within four years. Upon receipt of the maximum amount, we will transfer all rights, title and interest to the licensed intellectual property to Sperry. To date, we have not received any royalties from this license. Results from this line of business and the related loss on disposal have been segregated from continuing operations and included in discontinued operations in our financial statements. 2 6 In February 1999, we purchased substantially all of the assets of CIN, LLC, a company which collected, analyzed and distributed information for use in animal food sciences markets, for an aggregate purchase price of approximately $2.3 million. The purchase price consisted of 750,000 shares of our class A common stock valued at $720,000, the assumption of $812,000 of liabilities, a cash payment of $358,000, an agreement to pay the first $350,000 from Internet sales of third-party products over the Web site and transaction costs of $57,000. In March 1999, we purchased all of the outstanding stock of Cyberstockyard, Inc., a company selling cattle and other products through auction software over the Internet for approximately $542,000. The purchase price consisted of 250,000 shares of our class A common stock valued at $450,000, the assumption of $90,000 of liabilities and transaction costs of $2,000. In May 1999, we purchased substantially all of the assets of Professional Cattle Consultants, L.L.C. for an aggregate purchase price of approximately $1.8 million. The purchase price consisted of $1.8 million of cash, the assumption of $3,000 of liabilities and transaction costs of $25,000. The primary asset of Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and market information and analysis. For the past 26 years, Professional Cattle Consultants, L.L.C. has collected a variety of performance and other data from its subscribers' feedlot operations and provided subscribers with periodic analyses of certain performance characteristics of their feedlot operations and comparative analysis related to the performance of feedlots within their regions. In August 1999, we entered into an agreement to acquire 19% of the common stock of Turnkey Computer Systems, Inc., a provider of administrative/accounting legacy systems to feedlots, for an aggregate purchase price of $1.8 million. The purchase price consisted of 62,500 shares of our class A common stock, which is subject to redemption, $1.4 million of cash and $23,000 of transaction costs. In connection with this investment, we obtained the exclusive right to provide cattle sales and auction services and feed sales services to customers of Turnkey through Turnkey's system. This right will expire in August 2019. If we reach a specified level of revenue per feedlot and that feedlot is a customer of Turnkey, we will pay a fee to Turnkey. ITEM 1(B). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information for the Company's two operating segments for the three year period ended December 31, 1999, is contained in Note 11 to the Consolidated Financial Statements on page F-23. ITEM 1(C). NARRATIVE DESCRIPTION OF BUSINESS INDUSTRY BACKGROUND Beef Industry According to the National Cattlemen's Beef Association, or NCBA, the cattle industry is the largest single segment of the American agricultural economy. The U.S. Department of Agriculture reports that sales of cattle accounted for approximately $34 billion in 1998. On an annual basis, the U.S. beef production industry spends over $6 billion for feed and, based on our estimates, approximately $600 million for medication. At the retail level, the cattle industry generates over $51 billion in sales of beef. Furthermore, the NCBA estimates that worldwide cattle production is three times greater than U.S. production. Industry Participants The U.S. beef production chain can be classified into three primary segments: producers, feedlots, and packers. Producers According to the NCBA, there are approximately one million producers comprised of ranchers and small farm owners who breed and raise cattle. Most of the producers are independently owned and are dispersed throughout the United States. Each year these producers market approximately 35 million head of cattle that are eventually harvested for food, of which approximately 27 million are processed through feedlots. These 3 7 cattle, raised for 12-18 months in an average herd size of approximately 35 head, are often located in different geographic regions, aggregated into larger herds and then sold to centralized feedlots to increase their weight and value. Feedlots Feedlots typically purchase cattle weighing 300 to 900 pounds and manage the health and growth of the cattle for a period of 110 to 250 days. We estimate that during this time, each animal is fed on average 20-30 lbs. of grain per day. There are approximately 700 major feedlot operations concentrated in 10 Midwestern states. These feedlots can manage from 4,000 to 115,000 head of cattle at any given time. After reaching a weight of approximately 900 to 1,400 pounds, the animal is typically sold to a packer for harvesting. Packers Packers usually hold the cattle for 2 to 24 hours before harvesting and fabricating them for sale and eventual consumption. In addition to processing beef, packers inspect beef for cleanliness in preparation for quality grading. There are currently 64 major beef packing operations in the United States, which in total process approximately 35 million head of cattle into roughly 25 billion pounds of beef annually. Approximately 82% of the beef processed in the United States is processed by beef packing operations owned by IBP, Inc., Cargill, ConAgra, Inc., and Farmland Industries, Inc LIMITATIONS OF THE CURRENT SYSTEM The current cattle production chain contains a number of inefficiencies that reduce livestock quality and increase cost. These inefficiencies include multiple transaction costs, exposure to stress and disease, and the loss of important feeding and medication information. INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS As cattle move through the beef production chain, from an individual producer's ranch to a feedlot to a meat packing facility, the cattle may be bought, sold and transported three or four times. Due to the highly fragmented nature of the cattle producer segment, the majority of cattle are sold through traditional livestock sales and auctions, which bring together regional buyers and sellers. The cattle are then sold either directly to feedlots or sold once again to larger buyers and then onto feedlots. Typically, cattle sales and auctions are hosted at sale barns, where livestock brokers act as agents in the buying and selling of animals. The livestock broker is paid a fee or commission each time an individual lot of cattle is bought or sold. As a result of the geographic dispersion of producers and sale barns, buyers often purchase cattle from livestock brokers without having the opportunity to visually survey the cattle. In addition, this current method of exchange does not facilitate easy access to real-time price information or a geographically broad marketplace for the product. REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND PROFITABILITY The combination of the method of exchange used in traditional cattle sales and auctions and the fragmentation of the producer segment of the industry results in the repetitive transportation and handling of cattle. As cattle are moved from one environment to another throughout the production chain, they are commingled multiple times and can be exposed to contagious diseases. In addition, the transportation, handling and commingling of cattle often results in a predictable stress response, which may cause significant health deterioration. However, because there is currently no convenient or cost-effective method available to measure an animal's stress level, stress is not assessed today as a meaningful measure of health. Stress and exposure to disease often result in sub-optimal performance at the feedlot and reduced beef quality. A study conducted by researchers at Texas A&M University estimated that sick animals yield approximately $80 per head less than comparable healthy animals, which represents a significant loss based on the average value cited by the U.S. Department of Agriculture of $600 per head. 4 8 THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE We believe that industry participants generally collect and analyze information on cattle that go through the beef production process inconsistently and in a manual and time-consuming manner. Due to the nature of data collection and dissemination, cattle industry participants are unable to exchange critical information in an efficient and timely manner to optimize performance and beef quality. We believe that businesses in the cattle industry have not maximized the use of information to effectively address health, quality and performance issues. Producers Cattle producers typically do not receive data related to the weight of their animals upon arrival to and departure from feedlots or the quality grades of their animals, making herd management difficult. Animal-specific health and medication information is generally not passed on to subsequent buyers at or prior to the feedlot, which may result in unnecessary additional medication. Feedlots Feedlots are the primary source of information currently used in livestock management. As a general practice, information is collected manually on a daily basis and subsequently entered into multiple information systems that are typically not integrated. Given the time-intensive nature of aggregating data under the current process, it is difficult to collect, analyze and interpret this data in a meaningful way. Historically, feedlots collect and share industry-wide information for benchmarking and performance purposes by submitting reports to data warehouse services that aggregate and disseminate the combined results in monthly reports. Although these data warehouse services are valuable as general strategic and analytical tools, because of the delay in disseminating the information, they are less effective for daily cattle management decisions, such as decisions relating to feed and medication. Packers Packers, at the end of the cattle production chain, collect critical carcass and quality information such as weight, dimension, yield and meat quality grade after the animal is harvested. However, in 1997, only 47.5% of cattle harvested were purchased based on these measures. Therefore, feedlots receive carcass and quality data on less than half of harvested cattle. The remaining harvested cattle are sold to packers based strictly on live weight, and consequently very little health and quality data is provided to feedlots or producers on these cattle. We believe improved information flow between and within the three main groups of industry participants can significantly enhance product quality. There is currently no network or method for compiling and communicating information rapidly throughout all stages of the cattle production chain. Product performance information gathered by packers and feedlots will help refine and improve handling practices earlier in the production chain. Information relating to an animal's medical history will minimize redundant medication. In addition, we believe that information about an animal's genealogy disseminated by producers and feedlots will enable more accurate differentiation among breeds of cattle at the packer level and a more easily implemented quality branding strategy at the retail level. Finally, information linking handling, feeding and medication techniques and the ensuing performance results, gathered and disseminated on a daily basis by feedlots, can help the entire segment rapidly adopt best practices. OUR PRODUCTS AND SERVICES Our products and services can be accessed through our integrated Web sites. These sites include: - CattleInfoNet.com, the platform from which our customers can access our comprehensive product and services offerings; - Cyberstockyard.com, our online cattle sales and auction site; and - PCC-online.com, our cattle industry-specific information Web site. 5 9 In addition, through our Feedlot Information System, we provide our feedlot customers with daily analyses of their feedlot operations as well as information management products and services. THE EMERGE MARKETPLACE CATTLEINFONET.COM - Industry news - Regional weather - Links to commodity pricing - Expert corner - Reports online - Links to industry information ONLINE MARKETPLACE MANAGEMENT INFORMATION Cyberstockyard.com SOLUTIONS - - - Cattle sales Feedlot Information System - - - Cattle auctions - Feedlot specific content - - - Order fulfillment - Daily performance data - Web-enabled with graphical user interface - Analytical services eMerge Online Store Professional Cattle Consultants - - - eMerge branded products - Regional feedlot benchmarking data Specialized Database Services CATTLEINFONET.COM CattleInfoNet.com is our industry-specific Web site that serves as the platform from which participants in the cattle industry can access our comprehensive product and service offerings. This site features content to facilitate cattle management, including industry news, weather and links to commodities pricing. Also, through this site, our customers can access Cyberstockyard.com to purchase or sell cattle, and PCC-online.com, our information resource and database. In addition, our customers can use this Web site to purchase our NutriCharge product. ONLINE MARKETPLACE Cyberstockyard.com is our cattle sales and auction service Web site. Through Cyberstockyard.com, our customers utilize our online listing of cattle to obtain access to inventory and market pricing from various buyers and sellers located throughout the United States in an efficient and effective manner. In addition, our customers can access scheduled online video cattle auctions. We transmit inventory lists with detailed product descriptions to our customers by both e-mail and facsimile and periodically post schedules for live video auctions on the Web site. Cattle Sales We have developed a detailed posting and transaction process to ensure that adequate information is provided to the purchaser prior to the transaction. We verify the identity of a purchaser through use of a secure password system and verify credit-worthiness of each participant prior to enabling access to our system. Our expert livestock brokers in the field certify all cattle offered for sale through Cyberstockyard.com. We provide a detailed description of each lot of cattle, which can be accessed by a purchaser online. We update our inventory of cattle for sale daily and customers can review our full inventory listings. In addition, customers can post descriptions, quantity and pricing criteria for cattle they would like to purchase and our system will automatically search for a match. If a match is found, the customer is notified immediately online. If no match is found, the customer can choose to have our system perform a daily search for a match as new 6 10 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. We believe that because online procurement results in fewer cattle shipments and less handling, transaction costs are reduced and animals arrive at their destination healthier and less stressed, thereby increasing the value of the animals. We also believe that online cattle procurement creates a medium for obtaining access to market pricing from various buyers and sellers located throughout the United States. We believe that this may eventually reduce the amount of commission fees paid by the cattle industry as a whole, and thereby reduce the cost to produce cattle. Through this comprehensive online marketplace, we also have the ability to sell products and services that are designed to improve productivity within the livestock industry. We currently offer NutriCharge through our online marketplace to help our customers reduce the effects of pre-harvest stress in their cattle. MANAGEMENT INFORMATION SOLUTIONS The Feedlot Information System The Feedlot Information System provides feedlot customers daily information services. This secure proprietary information management application resides on our customers' operating systems and interfaces with our centralized database over the Internet. Our system integrates information contained in their disparate legacy systems into our database daily to create relevant customer-specific analyses and graphical presentations. Customers' information is automatically integrated into our database, analyzed and available for use on the following day. The analyses created include information and performance data designed to assist in the effective daily management of a feedlot business. These analyses include: - Feed consumption data; - Feed-to-gain ratios; and - A comprehensive summary of health results. The Feedlot Information System also enables our customers to compare their performance against other regional and national feedlot data and provides useful proprietary content for business management decisions. Our customers can use our system to manage their feedlot operations on a real-time basis using numerous performance variables and individual parameters. Customers can also access data and product performance results posted by practicing veterinarians to further refine their business practices. All of our Internet applications are easily accessible from our Feedlot Information System. In addition, our staff provides valuable analysis and interpretation of the information contained in the database. Professional Cattle Consultants Through PCC-online.com, our Professional Cattle Consultants service, we provide our customers access to services that are based on our confidential and proprietary database of cattle industry information. This database has been compiled over the last 26 years from over 90 different feedlots representing over 20% of the total cattle processed annually through U.S. feedlots. As part of their subscription, our customers submit 7 11 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. The camera is lightweight, portable and has a high degree of resolution and sensitivity. Our infrared camera and software allow a user to download thermal images to the user's computer to be viewed, catalogued, annotated and measured. Our system is used by veterinarians to detect heat, one of the first indicators of inflammation or injury, in horses and exotic animals. RESEARCH AND DEVELOPMENT We intend to continue to devote significant time and resources to enhance our current core technology to improve our existing products, expand our product line and enter into other market segments. Approximately $1.1 million during the year ended December 31, 1998 and approximately $4.3 million for the year ended December 31, 1999 were related to research and development. As of December 31, 1999 we had 36 employees dedicated to product development. We intend to continue to invest in research and development and focus on the recruitment of experienced scientists and engineers. Our current research and development activities are primarily focused on the development of information technologies to complement our products and services for the animal sciences industry. We have entered into agreements for the development of technology with a division of the Canadian government as represented by the Minister of Agriculture and Agri-Food Canada. We license patents and technology related to NutriCharge and our Animal Science Tracker infrared camera, which is currently under development. This agreement also gives us and the Canadian government, through the Lacombe Research Centre, the right to collaborate with the other on any project which relates to the license. Any improvements will be owned by the Canadian government and licensed to us on an exclusive basis. Please see the section entitled Intellectual Property for a description of the license. We have entered into a Research Support Agreement with the Canadian government, under which we provide the Lethbridge Research Centre with one of our infrared imaging systems, analytical software, and technical support in exchange for a right of first refusal to license any resulting technology. The Canadian government may terminate this agreement at any time. 8 12 We have entered into a cooperative research and development agreement with the USDA Agricultural Research Service and Iowa State University of Science and Technology, in which we have been granted exclusive rights and responsibilities for product development and commercialization of technology developed and patented by them for the detection of small, diluted quantities of mammalian fecal matter on animal carcasses. We will provide design and engineering expertise. When commercialized, we believe that this technology may reduce safety inspection and processing costs at packing plants while reducing e-coli contamination risks. The parties to the agreement may only terminate in the event of a breach by another party. In connection with this agreement, we have also entered into an exclusive license agreement with Iowa State University for patent rights relating to the research and development agreement. Under the license agreement, we have the right to make or have made, use, sell, offer to sell and import products using technical data and information owned by the Iowa State University Research Foundation, or ISURF. The license agreement applies to all present and future patents, patent applications and inventions relating to meat and carcass inspection technology. In exchange for the license, we paid a license fee in the amount of $10,000. We will also pay a royalty of six percent of the net sales of any licensed products. If we sublicense the technology, we will also pay ISURF 50% of any fees paid to us by the sublicensees. Currently, there are no licensed products and we have not made any royalty payments to date. The license will expire when the last of the patents covered by the license expire, unless we terminate earlier. SALES AND MARKETING Sales Our sales organization is structured around a direct sales team and an electronic commerce sales team. We have a staff of account managers who are responsible for sales of products and services through our electronic commerce platform to feedlot and packer customers in given geographic territories. We have a staff of cattle buying representatives who, along with independent buyer representatives with whom we have entered into relationships, are responsible for obtaining inventory for livestock sales from producers. We are assembling a dedicated team to increase advertising revenue and to add third party products to our electronic commerce offering. Marketing We seek to establish broad customer awareness of our technologies, products and services within the industries we serve. Our marketing efforts include direct advertising through trade journals and press releases coordinated by our communications and public relations firm. We also participate in professional societies and university programs and have developed strategic marketing relationships with industry professionals and academic institutions. Much of the initial interest in our products and services has been created through the extensive network of relationships we have in the cattle industry as well as through our sales organization. We are developing an international marketing effort to promote our products and services worldwide. OUR CUSTOMERS Our initial customer focus is the 300 largest feedlots in the United States. These feedlots manage 20.1 million head of cattle annually, accounting for 74% of cattle processed through feedlots in the United States. Currently, we sell our products and services to approximately 130 of those feedlots, which account for approximately 30% of the total cattle harvested in the U.S. We also offer our products and services to participants throughout the cattle production chain. CUSTOMER SERVICE Currently our order entry, e-commerce transactions and hardware and software support functions are conducted at our Sebastian, Florida facility. Our current field support organization is based in Meade, Kansas. We have a dedicated toll free number for customer calls, which is staffed from 8:00 a.m. to 8:00 p.m. EST. 9 13 INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS System Architecture Our Web sites use multiple front-end servers and a master database located at our Sebastian, Florida facility. We have implemented scalable Web site management, search, customer interaction, transaction processing and fulfillment services and systems. Our Web site and extranet provide customization, interactivity and performance required for business-to-business electronic commerce. We utilize applications for: - Accepting and validating customer orders; - Placing and managing orders with suppliers and manufacturers; - Notifying and updating customer order status; and - Management of shipment of products. All data communication between remotely located computers uses secure socket layer, or SSL, encryption technology. This allows the transfer of a local database from a feedlot to our main database which uses a Sun Enterprise 4500 server. Data Collection The data collection system for our Feedlot Information System gathers information from the accounting, feedbunk and hospital systems at the feedlot. This information is compared to a local database, and the changes and additions are encrypted and transmitted securely to our main database storage along with any orders that are being processed in the off-line batch mode. Once received, we add the data to our master database for statistical analysis and generate reports for individual site locations. The results are encrypted and sent back to the individual feedlots. All confirmations of placed orders are sent back to the feedlot that generated the order. Professional Cattle Consultants data is collected on a monthly basis using a variety of interfaces with feedlot software vendors. Data is transmitted electronically or by hard copy. This information is then imported into the Professional Cattle Consultants architecture where it is stored and utilized as necessary. Data Dissemination The data that is sent back to the feedlots includes video data for Cyberstockyard and daily content and statistical data for our information management products and services. This information is then stored in our local databases, which function as a backup for off-line operation. Professional Cattle Consultants provides information back to feedlots on a monthly basis either through electronic mail, a password-protected Internet site, or in hard copy form. Surveys are available only in hard copy form. Data Display at the Feedlot Our system uses a standard browser to connect to the CattleInfoNet.com Web site. A secure login is required for full access to Cyberstockyard.com, PCC-online.com and the Feedlot Information System. When logged on, the system downloads display applets, written in Java, to the user's system to display relevant information. The user can view auction videos and bid on cattle in real-time. INTELLECTUAL PROPERTY Our ability to protect and utilize our intellectual property rights is important to our continued success. We have filed applications to register Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the U.S. Patent and Trademark Office. We currently have three patent applications that are pending before the U.S. Patent and Trademark Office relating to: - Early detection of inflammation using our infrared imaging camera; - Feedlot information systems and methods; and - The cattle transaction process. 10 14 The intellectual property rights to use several patents that are critical to our products and services are licensed to us by third parties. The U.S. patents and corresponding international patent applications related to our NutriCharge products and infrared animal screening methods are licensed to us by the Canadian government under a master license agreement dated July 29, 1998. The master license provides us with an exclusive worldwide license to develop and sell products and services that utilize the inventions contained in the patents. The license continues until July 2018 and may be renewed after that time unless the license is terminated by the Canadian government upon our breach of and failure to cure a fundamental term of the license agreement, our commencement of bankruptcy or insolvency proceedings, or the assignment of the license agreement without Canada's prior written consent. In exchange for the license, we must pay the Canadian government a royalty on a semi-annual basis that is calculated as a percentage of the revenues we receive from the sale of products and services related to the license. Our obligation to pay this royalty begins July 29, 2000. Under the master license, we must achieve milestones in order to maintain the master license. To date we are achieving all required milestones. The U.S. patents relating to technology for detecting fecal contamination on meat carcasses during and after slaughter are licensed to us by the Iowa State University Research Foundation and the USDA under a license agreement entered into August 1999. The license provides us with an exclusive worldwide license until the patents expire on a country by country basis to develop and sell products and services that utilize the inventions contained in the patents. In exchange for the license, we are obligated to pay Iowa State University a royalty on revenues we receive from the sale of products and services related to the license. We believe our commercial success depends on our ability to protect our proprietary technology and enforce our rights in the technology we license to other parties. We currently rely on a combination of patents, copyrights and trade secrets to protect our proprietary technology. We are not aware of any patents held by others that would prevent us from manufacturing and commercializing our technology in the United States and abroad. We have filed an application to register eMerge Interactive and related service marks with the U.S. Patent and Trademark Office. We have received notice from a third party claiming superior rights to these marks and indicating an intent to oppose our registration of the marks in Patent and Trademark Office proceedings as well as oppose our commercial use of the marks. We believe that we will be able to ultimately overcome any such challenge. If we are unsuccessful, however, we may be required to cease using the eMerge marks at a future date. Purchase and License Agreement In January 1999, we granted a license to Sperry Marine, Inc., a subsidiary of Litton Industries, Inc., to design, manufacture and assemble infrared marine systems for worldwide sale. The license is exclusive and nontransferable and applies to infrared technology that is unrelated to our products and markets. Although we have not received any royalties to date, under the agreement, we will receive a royalty of 8% of system sales up to a maximum royalty of $4.3 million over a four year period or up to a maximum royalty of $5.0 million if $4.3 million is not received within four years. Upon receipt of the maximum amount, we will transfer all rights, title and interests to the licensed intellectual property. In connection with this license agreement, we also entered into an asset purchase agreement with Sperry for the sale of assets relating to the infrared systems for approximately $1.9 million. COMPETITION In the cattle sales and auction services market, we compete against traditional cattle auction services, as well as video cattle auction providers and other online cattle auction services. Currently, the majority of cattle and calf sales transactions occur through auctions held at traditional sale barns. These sale barn operations are 11 15 highly fragmented and vary in size. We believe that the primary competitive factors in the cattle sales and auction services market include: - Availability and quality of inventory; - Pricing; - Reliability of service; - Efficiency; - Brand awareness; - Customer service; and - Convenience and ease of use. We believe that we compete based on these factors, particularly due to our access to inventory, our focus on ensuring quality and reliability, the brand awareness developed through our comprehensive solution and the convenience and ease of use of our Web site. We compete against other companies in the information services segment, including established cattle and livestock information services. We also face competition from cattle industry product manufacturers who use information technology to promote the effectiveness of their products. These services are often provided in connection with the sale of products to industry participants. In addition, providers of software to feedlots also offer information services to their feedlot customers. We believe that the primary competitive factors in the information services market include: - Breadth of available data; - Quality of analyses; - Timeliness of information; - Brand recognition; - Value-added consulting services; and - Convenience and ease of use. We believe that we compete based on these factors particularly due to the size and quality of our proprietary database, the timeliness of our service offerings, the expertise of our professionals and the convenience and ease of use of our Web sites. Our current competitors may include large companies that have substantially greater market presence, brand-name recognition and financial resources than we do. Some of our smaller competitors may also enjoy greater recognition and close relationships within a particular community. EMPLOYEES As of December 31, 1999, we employed a total of 99 persons, including 36 persons in product development and engineering, 35 persons in marketing and sales, 18 persons in production and 10 persons in administration. We are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good. ITEM 1(D). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company does not have foreign sales and does not believe geographic sales are significant to obtain an understanding of its business operations during the three year period ended December 31, 1999. 12 16 ITEM 2. PROPERTIES Our corporate facilities located in Sebastian, Florida, occupy approximately 17,000 square feet. We sublease our facilities from XL Vision, which leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard. We believe that the rent that we pay pursuant to our lease is consistent with the market rent for similar space in the area. Our lease terminates on January 1, 2001, at which time we have the option to renew the lease for an additional one year term. We believe that this space is adequate to support our needs for the foreseeable future. We also maintain offices in Meade, Kansas; Denver, Colorado; Austin, Texas; and Weatherford, Oklahoma. ITEM 3. LEGAL PROCEEDINGS We have been named as a defendant in a lawsuit filed by Central Biotech, Inc. on January 12, 2000 in the Queen's Bench Judicial Centre of Regina, Province of Saskatchewan, Canada. The complaint alleges that eMerge and E-Y Laboratories Inc. were each subject to confidentiality agreements with the plaintiff, and subsequently engaged in discussions concerning a potential business arrangement allegedly in violation of these agreements. The complaint asserts damages, including punitive damages, from the defendants in the aggregate amount of $18 million (Canadian dollars), as well as injunctive relief. Although we have not yet completed our assessment of these claims, we believe that there are a number of substantive and procedural defenses that exist and intend to defend these claims vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1999. 13 17 PART II ITEM 5. MARKET FOR REREGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS RECENT SALES OF UNREGISTERED SECURITIES In February of 1999, eMerge Interactive issued 750,000 shares of class A common stock in connection with the acquisition of assets of CIN, LLC, at a price of $.96 per share. eMerge Interactive issued 250,000 shares of class A common stock in connection with the acquisition of 100% of the issued and outstanding stock of Cyberstockyard, Inc. on March 29, 1999, at a price of $1.80 per share. In August of 1999, eMerge Interactive issued 62,500 shares of class A common stock at $6.40 per share, for 19% of the common stock of Turnkey Computer Systems, Inc. All of such sales were made under the exemption from registration provided under Section 4(2) of the Act. The issuance to the stockholders of Cyberstockyard, Inc. was also made pursuant to Rule 504 under the Act. In May of 1999, we issued 1,000,000 shares of series C preferred stock to Safeguard 99 Capital L.P. and 100,000 shares to purchasers associated with Applewood Associates, L.P., now Wheatley Partners II, L.P., at a price of $5.00 per share. In November 1999, we issued 4,555,556 shares of series D preferred stock to Internet Capital Group, Inc. at a purchase price of $7.20 per share, payable in cash and a promissory note. In connection with the sale of preferred stock, we also issued to Internet Capital Group a warrant to purchase up to 1,138,889 shares of class B common stock. All of such sales were made under the exemption from registration provided under Section 4(2) of the Act. II-2 131 Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation Plans, eMerge Interactive granted options to purchase a total of 1,415,250 shares of common stock to its employees and certain other individuals in the year ended December 31, 1999 at a weighted average exercise price of $4.96 per share. In the year ended December 31, 1999, 200,819 shares were purchased pursuant to options at an average exercise price of $.93. In granting the options and selling the underlying securities upon exercise of the options, eMerge Interactive is relying upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Act Our common stock trades on the Nasdaq National Market under the symbol "EMRG." Prior to February 4, 2000, there was no established public trading market for any of our securities. The following table sets forth, for the periods indicated, the range of high and low closing sales prices for our common stock as reported on the Nasdaq National Market.
FISCAL 2000 HIGH LOW ----------- ------ ------ First Quarter (from February 4, 2000 through March 17, 2000)..................................................... $70.50 $39.00
On March 17, 2000, the last reported sale price of our common stock as reported on the Nasdaq National Market was $49.50 per share and we had 622 holders of record of our common stock. We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements and such other factors as the board of directors deems relevant. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 4, 2000, we commenced an initial public offering of our common stock. The registration statement relating to this offering (File No. 333-89815) was declared effective on February 3, 2000. Adams, Harkness & Hill, Inc., First Union Securities, Inc., and FAC Equities were the managing underwriters of the offering. As part of the offering, we offered 2,806,000 shares of our class A common stock at the public offering price to shareholders of Safeguard Scientifics, Inc., one of our principal stockholders, that owned at least 100 shares of common stock of Safeguard as of October 20, 1999 and Safeguard offered 694,000 shares to its shareholders. 14 18 The number of shares registered, the aggregate price of the offering amount registered, the amount of shares sold and the aggregate offering price of the shares sold were as follows:
SHARES OF COMMON AGGREGATE PRICE OF AMOUNT OF SHARES AGGREGATE PRICE REGISTERED SHARES REGISTERED SOLD OF SHARES SOLD - - ---------- ------------------ ---------------- --------------- 7,175,000 $107,625,000 7,175,000 $107,625,000
We incurred the following expenses with respect to the offering during the period from July 1998 through February 2000:
UNDERWRITING DISCOUNTS AND COMMISSIONS MANAGEMENT UNDERWRITERS' EXPENSES FEE FINDERS' FEES EXPENSES OTHER EXPENSES TOTAL EXPENSES - - ------------ ---------- ------------- ------------- -------------- -------------- $4,587,750.. $1,178,520 $ 0 $ 0 $2,000,000 $7,765,970
In addition, we issued 500,000 shares of class A common stock at $15.00 per share in a private placement that was completed concurrently with the offering. The net proceeds from the offering and the private placement after deducting the foregoing discounts, commissions, management fees, finders fees and expenses were $107.4 million. We have used the proceeds for payments to related parties and Turnkey Computer Systems, Inc. and for general working capital. None of the foregoing expenses constituted direct or indirect payments to our directors, officers, general partners or their associates or to persons owning 10% or more of any class of our equity securities or to our affiliates. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA All business activities from inception through 1996 related to the transportation segment which was disposed of in January 1999. As a result, we have not included operations data for the years ended December 31, 1994, 1995 and 1996. Selected consolidated financial data for the Company is set forth below for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue.................................................. $ -- $ 1,792 $ 43,783 Cost of revenue.......................................... -- 2,623 43,517 Operating expenses: Selling, general and administrative.................... 628 3,660 11,240 Research and development............................... 728 1,109 4,343 ------- ------- -------- Total operating expenses....................... 1,356 4,769 15,583 Interest expense/other income, net....................... (141) (332) (288) ------- ------- -------- Loss from continuing operations.......................... $(1,497) $(5,932) $(15,605) ======= ======= ======== Loss from continuing operations per common share basic and diluted............................................ $ (3.91) $ (1.36) $ (3.11) ======= ======= ======== Weighted average number of common shares outstanding -- basic and diluted....................... 382 4,357 6,795 ======= ======= ========
15 19 The following table summarizes our balance sheet data for the periods indicated:
DECEMBER 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 1999 ------- ------- ------- ------ ------- ----------- (IN THOUSANDS) PRO FORMA (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash................................... $ -- $ 2 $ -- $ -- $12,316 $107,673 Total assets................. 6 260 2,165 6,602 25,762 120,671 Total indebtedness........... 1,747 3,636 8,040 5,572 13,260 460 Total stockholders' equity (deficit).................. (1,742) (3,457) (6,875) 3 8,891 117,006
The unaudited pro forma consolidated balance sheet data give effect to: - The sale of 7,175,000 shares of class A common stock in our initial public offering; - The issuance of 500,000 shares of class A common stock in a concurrent private placement; - The automatic conversion of all outstanding shares of series A, series B, series C and series D preferred stock into shares of our common stock concurrent with the offering; - The termination of the redemption right relating to 62,500 shares of class A common stock, which occurs immediately prior to the consummation of the offering; - The repayment of $1.6 million of principal and interest owed to XL Vision as of December 31, 1999 - The repayment of $10.3 million of principal and interest owed to Safeguard as of December 31, 1999. - The repayment of a $900,000 note payable to Turnkey Computer Systems, Inc., as of December 31, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes included elsewhere in this document and which are deemed to be incorporated into this section. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including but not limited to, those set forth under and included in other portions of this document. REVENUE RECOGNITION We recognize revenue in accordance with the terms of the sale or contract, generally as products are shipped or services are provided. In cattle sales transactions we act as principal when purchasing cattle from suppliers and reselling them to customers. We take title when the supplier delivers the cattle to us, arrange for shipment to our customer, and own as inventory until delivered to and accepted by the buyer, typically a 24 to 48 hour period. We are responsible for the resale of the cattle, bear all risk associated with the cattle until resold, and bear the credit risk until full payment is received from our customers. We recognize revenue when cattle are shipped to the customer equal to the purchase price paid by the customer. Gross profit on cattle sale transactions is determined by the mark-up that we add to the price that we pay to purchase the cattle. Revenue from the sale of livestock health management and quality enhancement products, equine imaging cameras and NutriCharge, is recognized on shipment to the customer. Revenue from our information management products is recognized in the period in which the information or analysis is delivered to the customer, normally on a monthly basis. 16 20 ACQUISITIONS In February 1999, we purchased substantially all of the tangible and intangible assets of CIN, LLC for an aggregate purchase price of approximately $2.3 million. These assets included the Feedlot Information System, a proprietary, patent pending, information system for cattle feedlots. In addition, we acquired tangible assets including computers and office equipment and furnishings, which we are currently utilizing. The purchase price for the assets consisted of 750,000 shares of our class A common stock valued at $720,000, the assumption of $812,000 of liabilities, a cash payment due in October 1999 of $358,000, and an agreement to pay the first $350,000 from Internet sales of third-party products over the Web site and transaction costs of $57,000. In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc. for approximately $542,000. The purchase price consisted of 200,000 shares of our class A common stock valued at $450,000, the assumption of $90,000 of liabilities and transaction costs of $2,000. Through this acquisition, we obtained Cyberstockyard.com, our online cattle sales and auction services, and related software applications. Cyberstockyard.com has been integrated into our suite of products and services. During the three months ended June 30, 1999, we began executing cattle sales utilizing Cyberstockyard.com. In May 1999, we purchased substantially all of the tangible and intangible assets of Professional Cattle Consultants, L.L.C., a leading cattle industry information resource and database for approximately $1.8 million. The purchase price consisted of $1.8 million in cash, the assumption of approximately $3,000 in liabilities and transaction costs of $25,000. In June 1999, we began selling comparative analysis and market information for the feedlot industry with the assets acquired from Professional Cattle Consultants, L.L.C. Because of the significance of these acquisitions and the resulting additions to our products and services, the historical financial results are not indicative of future performance. We have incurred significant net losses since our inception. At December 31, 1999, we had an accumulated deficit of $32.4 million. The net losses and accumulated deficit resulted from our lack of substantial revenues, the costs of the significant personnel infrastructure and other costs incurred for the development and marketing of our initial products. We may never achieve significant revenue or profitability, or if we achieve significant revenue or profitability they may not be sustained. RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared to Year Ended December 31, 1999 Revenue increased from $1.8 million for the year ended December 31, 1998 to $43.8 million for the year ended December 31, 1999. Revenue from cattle sales increased to $42.3 million for the year ended December 31,1999. There was no revenue from cattle sales in 1998. Revenue from animal science products decreased by 17% from $1.8 million for the year ended December 31, 1998 to $1.5 million for the year ended December 31, 1999. This decrease is due primarily to lower revenue from sales of our equine imaging system due primarily to a decline in units sold. Increased sales of NutriCharge and the sale of subscriptions to our comparative feedlot analysis and market information service partially offset the decline in revenue from equine camera sales. Cost of revenue consists primarily of the direct cost to acquire cattle, NutriCharge and equine imaging systems components and indirect manufacturing overhead costs such as support personnel, facilities costs, supplies and depreciation, which were primarily associated with the production of the equine imaging system. Direct costs attributed to cattle sales were $41.7 million for the year ended December 31, 1999. There were no direct costs from cattle sales in 1998. Direct costs attributed to animal science products decreased by 38% from $901,000 for the year ended December 31, 1998 to $558,000 for the year ended December 31, 1999. This decrease is due principally to the decline in unit sales of equine imaging systems. We generated a gross loss of $831,000 for the year ended December 31, 1998 and a gross profit of $266,000 for the year ended December 31, 1999. The change from a gross loss to a gross profit is due primarily to the increase in revenue, while cost of goods, principally manufacturing overhead, did not increase in proportion to the increase in revenue. 17 21 Selling, general and administrative expenses increased 202% from $3.7 million for the year ended December 31, 1998 to $11.2 million for the year ended December 31, 1999. Sales and marketing expenses consist primarily of salaries and related costs, commissions for sales and marketing personnel, consulting fees, travel and entertainment, advertising and trade shows. Sales and marketing expenses increased 214% from $2.2 million for the year ended December 31, 1998 to $6.9 million for the year ended December 31, 1999. The increase is due primarily to expenses associated with expanding the number of personnel from 11 people at December 31, 1998 to 35 people at December 31, 1999 and consulting, travel and advertising costs to effect our business strategy. We expect these costs to continue to increase significantly as we continue to pursue additional sales and marketing opportunities. Our general and administrative expenses consist primarily of salaries, bonuses and related costs for executives, amortization of intangibles and administrative and professional service fees, including administrative support fees to XL Vision and Safeguard. We have contractual service agreements with XL Vision and Safeguard Scientifics. Under an administrative services agreement dated December 15, 1997, as amended on August 17, 1999, XL Vision and Safeguard provide us with management consultation, investor relations, financial management, human resource management, legal services, insurance programs, and administrative services. We pay a fee calculated pursuant to a formula that is based on a percentage of our revenue, not to exceed $300,000 annually. The fee is not due until we achieve positive cash flow from operations. The agreement extends through December 31, 2002 and continues unless terminated by either party. As of December 31, 1999, we have not paid any amounts due to XL Vision and Safeguard under these agreements. As of December 31, 1999 we owed XL Vision and Safeguard approximately $45,000 and $56,000, respectively, under these agreements. In addition, under a direct charge administrative services agreement dated April 14, 1997, XL Vision also provides us with management services on a time and materials basis. This agreement continues on a month-to-month basis, and may be terminated at any time by either party. As of December 31, 1999, we owed XL Vision $1,635,000 under this agreement. The amounts due under these agreements will continue to accrue as we use the services. General and administrative expenses increased 187% from $1.5 million for the year ended December 31, 1998 to $4.3 million for the year ended December 31,1999. The increase was primarily due to increased amortization of intangibles, increased expenses associated with expanding the number of personnel from 4 people at December 31, 1998 to 10 people at December 31, 1999 and increased legal and travel expenses required to support and grow our business. We expect these expenses to continue to increase as additional personnel are hired and additional expenses are incurred to support future growth. Our research and development expenses consist of salaries and related costs, payments to outside consultants, material costs for prototype imaging systems and, to a lesser extent, depreciation on equipment used for development. Our expenses increased 292% from $1.1 million for the year ended December 31, 1998 to $4.3 million for the year ended December 31, 1999. This increase in expenses was primarily due to increased consulting costs, an increase in personnel, and increased spending for materials and supplies. The increase in expenses was required to integrate and expand our product lines such as our online cattle sales and auction software, Feedlot Information System software, and continued development efforts on imaging systems. We expect these costs to increase significantly as we plan to invest heavily to develop and commercialize new products, expand our offerings and adapt our technologies to new markets. Interest expense/other income, net decreased 13% from $332,000 for the year ended December 31, 1998 to $288,000 for the year ended December 31, 1999. This decrease was primarily due to a lower average level of borrowing accompanied by an increase in interest income. Due to the losses incurred, we did not have any income tax expense for the year ended December 31, 1998 or the year ended December 31, 1999. As of December 31, 1999 we had approximately $28.0 million of federal income tax loss carry forwards that can be used to offset future taxable income. Our tax loss carry forwards begin to expire in 2012 and we are not currently aware of any limitation on our ability to offset future taxable income. 18 22 Year Ended December 31, 1997 Compared with Year Ended December 31, 1998 Substantially all of our 1998 revenue of $1.8 million was from the sale of equine imaging systems that we began selling in March of 1998. There was no revenue from equine imaging systems sales in 1997. Our gross loss of $831,000 in 1998 was due primarily to a substantial increase in manufacturing overhead as we built our manufacturing infrastructure. There was no manufacturing activity related to the production of equine imaging systems in 1997. Selling, general and administrative expenses increased 483% from $628,000 in 1997 to $3.7 million in 1998. Our sales and marketing expenses increased 527% from $344,000 in 1997 to $2.2 million in 1998. The increase in these expenses was due primarily to increased staffing and related costs, advertising, travel, trade shows and consulting fees in these areas to effect our business strategy. Our general and administrative expenses increased 430% from $284,000 in 1997 to $1.5 million in 1998. The increase in these expenses from 1997 to 1998 was primarily due to increases in the number of personnel and related support costs to expand and grow our business and increased administrative support fees to XL Vision and Safeguard. Our research and development expenses increased 52% from $728,000 in 1997 to $1.1 million in 1998. This increase was driven primarily by increased staffing of research and development personnel, related costs, and depreciation of development equipment costs necessary to further develop our products. Interest expense/other income, net increased 135% from $141,000 in 1997 to $332,000 in 1998. This increase was primarily due to a higher average level of borrowing. Due to the losses incurred, we did not have any income tax expense in 1997 or 1998. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data for the quarters ended March 31, June 30, September 30, and December 31, 1998, and March 31, June 30, September 30, and December 31, 1999. The information for each quarter has been prepared on substantially the same basis as the audited statements included in other parts of this annual report and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and the results of the interim periods are not indicative of results of any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, 1998 1998 1998 1998 1999 1999 1999 1999 -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA Revenue................................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 $15,761 $25,444 Cost of revenue........................... 459 578 649 937 540 2,228 15,514 25,235 Operating expenses........................ 930 948 1,237 1,654 1,962 3,557 4,777 5,287 Interest expense/other income, net........ (77) (85) (85) (85) (127) (162) (155) 155 ------- ------- ------- ------- ------- ------- ------- ------- (Loss) from continuing operations......... $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974) $(4,685) $(4,923) ======= ======= ======= ======= ======= ======= ======= ======= (Loss) from continuing operations per common share -- basic and diluted........ $ (0.35) $ (0.39) $ (0.30) $ (0.34) $ (0.33) $ (0.58) $ (0.67) $ (1.48) ======= ======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our operating and investing cash requirements principally through private equity financings and through borrowings from XL Vision and Safeguard Scientifics. As of December 31, 1999, we have raised approximately $45.6 million from the sale of our common stock and preferred stock. On November 16, 1999, we issued 4,555,556 shares of series D preferred stock and a warrant to purchase 1,138,889 shares of class B common stock to Internet Capital Group for aggregate consideration of $38.8 19 23 million. We received $18.0 million of this amount in cash on November 16, 1999 and $20.8 million in the form of a non-interest bearing note, which is due on November 16, 2000. Interest on the promissory note was imputed at 9.5%, or $2.2 million over the life of the note. At December 31, 1999, we had approximately $12.3 million in cash and indebtedness to XL Vision and its affiliates of $12.4 million. We repaid all of this outstanding debt balance in February 2000 with a portion of the cash proceeds from our Initial Public Offering. We have had significant negative cash flows from operating activities for each fiscal and quarterly period to date. Net cash used in operating activities was $1.7 million in 1996, $6.0 million in 1997, $8.9 million in 1998 and $15.6 million in 1999. Cash used in operating activities from inception through December 31, 1999 consisted mostly of net operating losses offset in part by increases in accrued liabilities. Net cash used in investing activities was $157,000 in 1996, $507,000 in 1997, $892,000 in 1998, and $1.60 million for the year ended December 31, 1999. Net cash used in investing activities in these periods consisted mostly of business acquisitions and capital expenditures. Net cash provided by financing activities was $1.9 million in 1996, $6.5 million in 1997, $9.8 million in 1998 and $29.5 million for the year ended December 31, 1999. Cash provided by financing activities consisted primarily of the sale of our stock and borrowings from Internet Capital Group, XL Vision and Safeguard. In August 1999, we entered into an agreement to acquire a 19% interest in the common stock of Turnkey Computer Systems, Inc. for a purchase price of 62,500 shares of our common stock valued at $400,000 and additional cash payments totaling $1.4 million, of which $900,000 was outstanding at December 31, 1999. We repaid all of this outstanding debt balance in February 2000 with a portion of the cash proceeds from our Initial Public Offering. Our Recent Initial Public Offering On February 17, 2000, we closed on our initial public offering, which generated net proceeds of $107.4 million, and a private placement of $7.5 million. Subsequent to the offering, approximately $12.8 million of the proceeds were used to pay amounts due to related parties and Turnkey Computer Systems. The Company's cash balances as of February 29, 2000, approximated $100.0 million. We believe that the net proceeds from the offering, together with our existing cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 24 months under our current business plan, which may change. To the extent we are required to raise additional capital, we may need to issue additional equity securities or incur additional debt. If additional funds are raised through the issuance of equity securities, our existing shareholders may experience significant dilution. Furthermore, additional financing may not be available when needed or, if available, such financing may not be on terms favorable to us. If such financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products and services. In addition, we may be unable to take advantage of business opportunities or to respond to competitive pressures. Any of these events could have a material adverse effect on our business, financial condition or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No. 133, Accounting for Derivatives and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of SFAS No. 133 is not expected to have a material impact on our results of operations, financial position or cash flows. 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. 20 24 FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS In addition to the other information included in this report, the following factors should be considered while evaluating the Company and its future prospects: our business, financial condition and results of operations. We commenced operations in 1994 and commercially released our initial product in November 1997. Accordingly, we have only a limited operating history upon which to evaluate our business. In addition, our business strategy and revenue model have changed significantly during the past year. Prior to this change, we generated revenue primarily from the sale and licensing of our AMIRIS product, a maritime navigational thermal imaging system, which we no longer sell, and our equine imaging system, an infrared product used to detect injuries in horses, which we continue to sell. We have sold the AMIRIS product line and have changed our business strategy to focus on business-to-business Internet commerce for the livestock industry. We only recently launched our commercial Web site for our initial target market, the cattle industry, in August 1999. Our limited operating history, combined with our recent shift in business strategy, makes predicting our future results of operations difficult. Our new business model has not been tested and, accordingly, we cannot be certain that our business strategy will be successful. Specific uncertainties relating to our new business model include our ability to: - Achieve acceptance of our Web site as a marketplace for electronic commerce; - Expand the number of cattle producers, feedlots and packers that utilize our services; - Develop and upgrade our products and technologies more effectively and rapidly than our competitors; and - Successfully implement our sales and marketing strategy. We have a history of net losses and expect to continue to incur losses for the foreseeable future. If we continue to incur losses, our business may not ultimately be financially viable. We have incurred significant net losses since inception. We reported a net loss of approximately $7.8 million for the year ended December 31, 1998, or 437% of total revenue, and approximately $15.6 million for the year ended December 31, 1999, or 36% of total revenue. As of December 31, 1999, we had accumulated net losses totaling approximately $32.4 million. Our operating expenses have increased significantly in each year of our operation, and we anticipate that such expenses will continue to increase over the next several years as we expand our operations. Our revenue may not grow or may not even continue at its current level and, as a result, our financial condition and results of our operations may be harmed and our business may not be financially viable in the future. To achieve profitability, we must successfully address the following risks: - Lack of commercial acceptance of our online cattle sales and auction services; - Failure to expand the number of livestock industry participants using our network; - Failure to obtain access to data from feedlots to adequately address the information needs of our customers; - Inability to respond to competitive developments; - Failure to achieve brand recognition; - Failure to introduce new products and services; and - Failure to upgrade and enhance our technologies to accommodate expanded product and service offerings and increased customer traffic. If we are unable to successfully address any of these risks, our business may be harmed. The Internet livestock products and services market, including, in particular, the online cattle sales and auction market, is new and uncertain and our business may not develop as we anticipate. 21 25 The Internet market for livestock products and services, including, in particular, the online cattle sales and auction market, has only recently developed, and its continued development is subject to substantial uncertainty. To date, we have not realized adequate revenues from this market to achieve profitability. We cannot be assured that this market will continue to develop as we expect, if at all. Our revenue model depends on the commercial acceptance of our Internet-based products and services. We do not know if our target customers will use the Internet as a means of purchasing products and services. Even if potential customers choose to purchase livestock products and services over the Internet, they may not choose our online services to do so. If the market for livestock products and services over the Internet does not develop as we anticipate, our business and the results of our operations will be harmed. To date, we have not achieved revenues from cattle sales and auction services over the Internet that are sufficient for us to determine whether these services will achieve commercial acceptance. Any failure to successfully gain commercial acceptance of these services would harm our business and the results of our operations. We recently completed significant acquisitions of businesses and technologies and we may make other business acquisitions in the future, which may be difficult to integrate into our business and may disrupt or negatively impact our business. We recently made, and will continue to make, investments in and acquisitions of complementary companies, technologies and assets that constitute critical aspects of our current and future business operations. If we fail to successfully integrate the operations of these companies, technologies or assets into our business, we may not be able to successfully execute our business strategy. We acquired substantially all of the assets of CIN, LLC in February 1999, and Professional Cattle Consultants, L.L.C. in May 1999. In connection with our acquisition of CIN, we hired Scott Crain, one of our key employees. We also acquired all of the issued and outstanding stock of Cyberstockyard, Inc. in March 1999. Each of these acquired businesses is critical to our current business operations and growth strategy. These and any future acquisitions may result in: - Difficulties in assimilating technologies, products, personnel and operations; - Diversion of our management's attention; - Entering markets in which we have no or limited prior experience; - Loss of key employees of acquired organizations; and - Capital requirements in excess of what we anticipate. In the future, acquiring companies, assets or technologies may also require us to make cash payments, assume debt, incur large write-offs related to intangible assets and issue equity, which will dilute ownership interest. If we fail to generate sufficient cash flows in the future, we may be unable to recover the carrying amount of our intangible assets, which would harm our results of operations and financial condition. As a result of our recent acquisitions of companies, technologies and assets, we have recorded $6.0 million of intangible assets on our balance sheet as of December 31, 1999. If we are unable to generate sufficient cash flows that are attributable to these intangible assets, we may be unable to recover all or a portion of the carrying amount of such assets. Therefore, we may be required to reduce the value of these assets as recorded on our balance sheet. This would require us to record an expense in our statement of operations. This would also reduce our net assets and increase our losses, or reduce our profits, as the case may be. Any negative impact on our results of operations or balance sheet could reduce the price of our common stock. For the year ended December 31, 1999, we derived over 96% of our revenue from products and services relating to the sale of cattle. If the demand for beef declines, the demand for our products and services would likely decline, and our results of operations would be harmed. If we are unable to manage our growth effectively, our business may be harmed. 22 26 We cannot assure that we will be able to effectively or successfully manage our growth. If we are unable to manage our growth effectively, our business operations would suffer. We seek to grow by increasing transaction and subscription volume, adding new products and services and by hiring additional employees. In particular, we are currently seeking to hire a Vice President of Human Relations and additional order buyers for our cattle auction and sales services. Our growth is likely to place a significant strain on our resources and systems. As we continue to increase the scope of our operations, we will need an effective planning and management process to implement our business strategy successfully and we will need to implement new and improve existing systems, procedures and controls. We will also need to expand, train and manage our workforce. We currently do not have an adequate corporate infrastructure to support our operations and we depend upon XL Vision and Safeguard to provide such services. We depend upon XL Vision and Safeguard for accounting, management and administrative resources. We are currently in the process of establishing our own corporate infrastructure. If our management team fails to manage this growth effectively, successfully establish our corporate infrastructure or if there are unanticipated costs or delays in the improvement and implementation of new and existing systems, procedures and controls, our business and financial condition may be harmed. If we are unable to protect our intellectual property rights, our business and competitive position will be harmed. Proprietary rights are important to our success and our competitive position. We protect our intellectual property through a combination of patent, copyright, trade secret and trademark law and confidentiality agreements with third parties. We currently have three pending U.S. patent applications, which relate to (i) the early detection of inflammation using our infrared imaging camera, (ii) feedlot information systems and methods and (iii) the cattle transaction process. We also have 31 pending U.S. trademark applications relating to our corporate identity, products and services. We cannot guarantee that any of our pending patent or trademark applications will be approved. Even if they are approved, the patents or trademarks may be challenged by other parties or invalidated. Because brand recognition is an important component of our business strategy, the protection of our trademarks is critical to our success. We also depend upon patents licensed to us by the Canadian government and trade secret law to protect the proprietary nature of our NutriCharge products. In addition, we depend upon our proprietary database of industry and client information to provide our clients with our information services. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and technology or obtain access to our confidential proprietary database. Other parties may also breach confidentiality agreements and other protective contracts. We may not become aware of these breaches or have adequate remedies available. In addition, effective copyright, patent and trademark protection may be unavailable in certain countries to which we might expand our operations. In technology markets, there is generally frequent and substantial intellectual property litigation. We may be subject to legal proceedings and claims, including claims that we infringe third-party proprietary rights. While we are not aware of any patents, copyrights or other rights that would prevent us from manufacturing and commercializing our products or services in the United States and abroad, there can be no assurance that other parties will not assert infringement claims against us. There also can be no assurance that former employers of our present and future employees will not claim that our employees have improperly disclosed confidential or proprietary information to us. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of our personnel. We have filed an application to register eMerge Interactive and related service marks with the U.S. Patent and Trademark Office. We have received notice from a third party claiming superior rights to these marks and indicating an intent to oppose our registration of the marks in Patent and Trademark Office proceedings as well as oppose our commercial use of the marks. If we are unsuccessful in defending any such opposition, we may be required to cease using the eMerge marks at a future date, which may cause us to change our name. A change in our name may be costly and may result in customer confusion, which could harm our business. 23 27 We typically assume the ownership of cattle sold through our Internet cattle marketplace and are subject to the risk of loss while we hold title and market risk. In the sales transactions conducted through our Internet cattle sales and auction services network, we typically contract to purchase cattle from a seller, identify a buyer for the cattle, take title to the cattle from the seller and then resell the cattle to the buyer. In this process, we enter into a contract to purchase cattle in advance of entering into a contract to sell the cattle. Therefore, until we actually complete a sale transaction, we are subject to the risk that we may be unable to sell cattle that we are contractually obligated to purchase. In addition, once we purchase the cattle, we assume title to the cattle for generally up to 48 hours. As a result, we assume the risk of liability, loss and deterioration in value of the cattle during that period. Although we review the background and credit history of our customers, we cannot assure that we will receive full and timely payment in each instance. If the buyer does not accept the cattle, we may not be able to sell the cattle to other buyers on the same terms, and our profitability may be harmed. If the cattle suffer from health deterioration or weight loss while in our ownership, the purchasers may assert claims against us. Our business and financial condition may be harmed if we have to defend any claims or pay any refunds. If the cattle are destroyed while we have ownership, we may be held responsible for the loss or may be obligated to purchase additional cattle to fulfill our delivery commitments. As a result, our business may be harmed. We depend on our key employees for our success. The loss of any of these persons could harm our ability to compete. Our success depends on the continued services of the following executive officers and key employees: - Charles L. Abraham; - T. Michael Janney; - Scott L. Mathews; - Marvin L. Slosman; - Arvind Subramanian; - J. Tom Brink; - Scott Crain, D.V.M.; and - Jim Gibb, Ph.D. The loss of the services of any of these persons could harm our business, including our ability to compete effectively. Our performance also depends on our ability to attract, retain and motivate additional key officers and employees. We may be unable to retain our employees or to attract, assimilate and retain other qualified employees with relevant livestock and electronic commerce industry skills in the future. If we fail to attract, retain and motivate qualified employees, our business will be harmed. We may face costly product liability claims that could result in significant awards against us or impair our ability to market and sell our products and services. A successful product liability claim brought against us could harm our financial condition and reputation in the industry. We may face product liability claims in connection with our cattle sales and auction services, feedlot operations analysis, comparative cattle industry analysis and benchmarking studies, cattle inventory management tools and NutriCharge, as well as future products and services. Even if unsuccessful, a product liability claim could result in costly litigation and divert management's attention and resources. We do not maintain product liability insurance. We expect our quarterly operating results to fluctuate. If we fail to meet the expectations of public market analysts and investors, the market price of our common stock could decline. We expect that our revenue and operating results will vary in the future as a result of a number of factors. Our quarterly results of operations may not meet the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Our operating results in the future may not follow any 24 28 prior trends and should not be relied as an indication of future results. The factors that affect our quarterly operating results include: - Our ability to retain existing customers and attract new customers; - Our ability to develop and market new and enhanced products and services on a timely basis; - The introduction of new or enhanced Web sites, products and services by us; - Continued purchases by our existing customers; and - Future revenues from our equine imaging system, a decline in which may result in disproportionate fluctuations in our results of operations, since related manufacturing costs to a large extent remain fixed regardless of the number of units sold. In addition, a number of factors that are beyond our control will also affect our quarterly operating results, such as: - Demand for our products and services; - Product and price competition; - The introduction of new or enhanced Web sites, products and services by our competitors; and - Significant downturns in our targeted markets. Our quarterly results could fluctuate as a result of seasonal fluctuations in the cattle industry. The cattle industry has historically experienced, and may continue to experience, seasonal fluctuations. These seasonal patterns may cause quarterly fluctuations in our operating results. In particular, a disproportionate number of cattle are sold to feedlots during the third and fourth quarters of each calendar year. Therefore, a greater number of sales transactions occur during these two calendar quarters. Due to our limited operating history and the recent changes in our business as a result of acquisitions, it is difficult to predict the effect that this seasonal pattern will have on our revenue and quarterly operating results. Our back-up mechanisms are unproven, and therefore are vulnerable to damage or interruption which would harm our ability to reliably service our customers. Our network server, satellites, computers and facilities are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, earthquakes, telecommunications failures, system failures, Internet brownouts, computer viruses, electronic break-ins and similar disruptions. We depend on these systems to provide our customers with online cattle sales and auction services, feedlot and cattle industry analyses, cattle inventory management tools and the sale of NutriCharge. During the past year, we experienced a system interruption caused by adverse weather conditions, which resulted in our system shutting down for approximately 24 hours. We may experience such an interruption in the future. Any substantial interruptions could result in the loss of data and could impair our ability to provide our products and services to customers and to generate revenues. Presently, we do not have a formal disaster recovery plan in effect. Moreover, our business interruption insurance may not be sufficient to compensate us for losses that may occur if any of our Internet-based services are interrupted. We intend to expand our business to international markets. The additional expenses and risks relating to our international expansion may harm our business, financial condition and results of operations. As part of our business strategy, we intend to expand internationally by offering our products and services in markets within North and South America, Asia/Pacific and Europe, although we have not yet completed the development of our plan for international expansion. International expansion may require significant management attention, which could negatively impact our business. We may also incur significant costs in 25 29 order to enter new international markets, which could harm our results of operations. Our business would be harmed if: - We experience difficulty expanding as a result of foreign laws and regulations, including export and import regulations applicable to commerce conducted across borders within regions; - We experience difficulty in tailoring our products and services to international markets; and - We experience difficulty in enforcing contractual obligations and intellectual property rights in foreign countries. If we successfully expand into foreign markets, our international business and our results of operations could be harmed as the result of: - Fluctuations in foreign exchange rates or rates of inflation; - Recessions in foreign countries; - Adverse U.S. and foreign tax laws; and - Political and economic instability. If electronic commerce does not continue to grow as expected, our business, financial condition and results of operations will be harmed. Our long-term success depends on widespread market acceptance of the Internet and online commercial services as a medium for commerce. If the Internet commerce market does not grow or grows more slowly than anticipated, our business, financial condition and results of operations will be harmed. A number of factors could prevent such acceptance, including: - The early stage of the Internet; - The lack of continued development of the Internet's technological infrastructure; and - Consumer concern about the security of electronic commerce transactions. If the Internet or our Web sites and systems cannot support the growth in electronic commerce, our business, financial condition and results of operations will be harmed. If the Internet fails to evolve to support growth in electronic commerce, our business, financial condition and results of operations will be harmed. Specifically, we would be harmed if: - The infrastructure of the Internet does not evolve to sufficiently support the substantial growth in usage of the Internet and therefore cannot process a growing number of transactions; and - The availability of telecommunication services is insufficient or telecommunication services do not evolve promptly to support real-time interactions with customers. If we do not continue to develop our Web sites and systems to sufficiently support growth in the demand for our services, our business will also be harmed. Specifically, we would be harmed if: - We fail to expand our infrastructure, including our Web sites, internet software and servers to accommodate an increased number of users; and - We fail to adapt our products and services to be compatible with new technology, and are therefore unable to provide our services to users of the new technology. We may also need to devote substantial resources to updating our Web sites and online services to support the growth of online commerce. Risks associated with the security of transactions and transmitting confidential information over the Internet may negatively impact our electronic commerce business. 26 30 We believe that concern regarding the security of confidential information transmitted over the Internet, such as credit card numbers and proprietary data, may prevent many potential customers from engaging in online transactions and may harm our business. We intend to use authentication technology, which requires passwords and other information to prevent unauthorized persons from accessing a customer's information, or encryption, which transforms information into a code designed to be unreadable by third parties, to protect confidential information. In addition, despite the measures we intend to take, our infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If our security measures are circumvented, proprietary information could be misappropriated or our operations could be interrupted. Security breaches that result in access to confidential information could expose us to a risk of loss or liability. If we do not adequately address these concerns or face any claims in connection with a breach of security, our business, financial condition and operating results could be harmed. We could face liability for information retrieved from or transmitted through our Web sites, which could result in high litigation or insurance costs. As a publisher and distributor of online content, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that we publish or distribute on our Web sites. Any imposition of liability could negatively impact our reputation and result in increased insurance costs. Claims have been successfully brought against online services. Although we carry general liability insurance, our insurance may not cover claims of these types or may not be adequate to cover us for all liability that may be imposed. Government regulation and legal uncertainties could result in additional burdens to doing business on the Internet. The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws including those governing intellectual property, privacy, libel and taxation apply to the Internet. Our business, results of operations and financial condition could be harmed by the adoption or modification of laws or regulations relating to the Internet that result in the imposition of additional cost on conducting business over the Internet or impose additional restrictions on our ability to conduct our business operations. In 1998, the Internet Tax Freedom Act placed a three-year moratorium on state and local taxes on Internet access, except for taxes imposed prior to October 1, 1998, and on taxes that discriminate against online commerce. However, Congress may not renew this legislation in 2001 and state and local governments would be able to impose Internet-specific taxes on goods purchased electronically, in addition to taxes that are otherwise imposed on sales transactions. Laws and regulations that apply to Internet communications, commerce and advertising could increase the costs of communicating on the Web and adversely affect the demand for our products and services and thereby harm our business, results of operations and financial conditions. In addition, as a general matter, laws and regulations may also be adopted in the future covering e-commerce issues such as user privacy, pricing, content, copyrights, distribution, antitrust matters, taxation and quality of products and services that may increase the cost of e-commerce. Several telecommunications carriers have asked the Federal Communications Commission to regulate telecommunications connections to the Internet, which could result in higher costs of doing business over the Internet. Legislation of these kinds could hinder growth in the use of the Internet and decrease the acceptance of the Internet as a communications and commercial medium. Due to the global nature of the Internet, it is possible that governments of foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities and we may incur significant costs to comply with foreign laws. Furthermore, the European Union recently adopted a directive addressing data privacy that may result in limits on the collection and use of user information. In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet. 27 31 There is intense competition for Internet products and services, which could reduce our market share and harm our financial performance. Competition for Internet products and services and electronic commerce is intense. We expect that competition will continue to intensify. Barriers to entry are minimal, and competitors can launch new Web sites at a relatively low cost. Our competitors, such as traditional cattle auction services, video cattle auction providers, online cattle auction services, cattle and livestock information services and cattle industry product manufacturers, may develop Internet products or services that are superior to, or have greater market acceptance, than our products and services. If we are unable to compete successfully against our competitors, our business, financial condition and operating results will be harmed. Internet Capital Group, Safeguard and XL Vision will be able to control matters requiring stockholder approval. The concentration of ownership of our common stock may delay, deter or prevent acts that would result in a change of control, which could reduce the market price of our common stock. Internet Capital Group and Safeguard are affiliated entities and Safeguard and XL Vision are affiliated entities. Internet Capital Group, Safeguard and XL Vision together have the power to vote approximately 66.4% (as of March 17, 2000) of the aggregate number of votes to which the holders of our common stock are entitled. In addition, Safeguard and Internet Capital Group are parties to a joint venture agreement under which they have agreed to use their best efforts to vote together on matters submitted to stockholders for approval. As a result, these stockholders will be able to control all matters requiring stockholder approval. Matters that typically require stockholder approval include: - Election of directors; - Approval of a merger or consolidation; and - Approval of a sale of all or substantially all of our assets. Of the seven members of our board of directors, the following four directors also serve as directors and/or officers of Internet Capital Group, Safeguard or XL Vision: - John S. Scott, Chairman of our board of directors, is the Chief Executive Officer and the Chairman of the board of directors of XL Vision; - Douglas A. Alexander, a member of our board of directors, is the Managing Director of Internet Capital Group; - Anthony A. Ibarguen, a member of our board of directors, is a Managing Director of Internet Capital Group; and - John W. Poduska, Sr., Ph.D., a member of our board of directors, is a member of the board of directors of Safeguard and a member of the board of directors of XL Vision. In addition, Internet Capital Group has the right to elect two directors to our board, one of which has not yet been designated. Under the joint venture agreement, Safeguard and Internet Capital Group have agreed to vote for two designees of Safeguard and two designees of Internet Capital Group in all future elections of directors. Safeguard, XL Vision and Internet Capital Group will therefore have the ability to significantly influence our management. The sale of outstanding shares in the market by our existing stockholders in the future may adversely affect our stock price. 28 32 If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, then the market price of our common stock could fall. Based upon the 33,031,395 shares outstanding as of March 17, 2000: - 8,675,000 shares are freely tradeable in the public market; - 24,007,080 shares may be sold subject to compliance with Rule 144, of which 11,312,633 shares may be sold without restriction under Rule 144(k) if they are not held by our affiliates; and - 349,315 shares may be sold 90 days after February 4, 2000, subject to compliance with Rule 701. Although 23,131,956 of the shares described above are subject to lock-up agreements, such shares may become tradeable, subject to compliance with Rule 144 or Rule 701, beginning 180 days after February 4, 2000. In addition, as of December 31, 1999 there are options to purchase 2,769,116 shares of class A common stock outstanding that were granted under our equity compensation plans. We intend to file a registration statement on Form S-8 to register the shares issued pursuant to the exercise of options granted under our equity compensation plans. There is also a warrant to purchase 1,138,889 shares of class B common stock outstanding. Our common stock price is likely to be highly volatile. The market price of our common stock, like the market for Internet-related and technology companies in general, has been and will likely continue to be highly volatile. Any significant fluctuations in the future might result in a material decline in the market price of our common stock. The price at which our common stock trades is likely to be highly volatile and may fluctuate substantially due to factors such as: - Actual or anticipated variations in quarterly operating results; - Announcements of technological innovations; - Conditions or trends in the cattle industry; - New sales formats of new products or services; - Changes in or failure by us to meet financial estimates of securities analysts; - Conditions or trends in the Internet industry; - Announcements by us or our competitors of significant acquisitions, strategic partnerships or joint ventures; - Capital commitments; - Additions or departures of key personnel; and - Sales of common stock. In addition, the U.S. stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies, particularly Internet companies. In the past, these broad market fluctuations have been unrelated or disproportionate to the operating performance of these companies. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts the attention and resources of management, which could harm our business and operating results. Our undesignated preferred stock may deter potential acquisition bids for our business. Our board of directors may issue up to 15,000,000 shares of preferred stock in one or more series. The board of directors can fix the number of shares of each class and the voting rights, preferences, limitations and special rights, if any, without any further vote or action by our stockholders. The issuance of shares of preferred stock without further action by our stockholders may delay or prevent a change in control 29 33 transaction. The issuance of shares of preferred stock may adversely affect your relative voting and other rights relating to your shares of common stock. Delaware law may deter potential bids for our business. We are subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. Delaware law prevents us from engaging in a business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a business combination includes a merger or consolidation involving us and the interested stockholder and the sale of more than 10% of our assets. In general, Delaware law defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Delaware law, a Delaware corporation may opt out of the anti-takeover provisions. We do not intend to opt out of these anti-takeover provisions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We held no derivative securities as of December 31, 1999. We are exposed to changes in interest rates as a result of our borrowings from XL Vision and Safeguard, which are based on the prime lending rate. A 10% increase in interest rates related to our borrowings would not have a material effect on our result of operations over the next fiscal year or the fair value of our borrowings. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company are submitted as a separate section of this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. This table sets forth information with respect to our executive officers, directors and key employees with significant industry expertise as of March 31, 1999.
NAME AGE POSITION - - ---- --- -------- EXECUTIVE OFFICERS AND DIRECTORS Charles L. Abraham................... 44 Chief Executive Officer and Director T. Michael Janney.................... 51 Chief Financial Officer and Treasurer Scott L. Mathews..................... 42 President and Chief Operating Officer Marvin L. Slosman.................... 36 Executive Vice President, Sales Arvind Subramanian................... 38 Executive Vice President, Marketing and E-Business John S. Scott, Ph.D.................. 48 Chairman of the Board Douglas A. Alexander................. 38 Director E. Michael Forgash................... 41 Director* Thomas C. Lynch...................... 57 Director Christopher Moller, Ph.D............. 46 Director John W. Poduska, Sr., Ph.D........... 62 Director Anthony A. Ibarguen.................. 40 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....................... 48 Director, Advanced Technologies
- - --------------- * Mr. Forgash resigned from the Board of Directors in March, 2000 and Mr. Ibarguen was appointed to the Board of Directors in March, 2000. EXECUTIVE OFFICERS AND DIRECTORS CHARLES L. ABRAHAM has served as Chief Executive Officer and as a member of the board of directors of eMerge Interactive since July 1998. From July 1997 until July 1998, Mr. Abraham was Vice President and General Manager with the Home Care Division of Nellcor Puritan Bennett Incorporated. From 1994 until July 1997, Mr. Abraham was Manager of the Global Vascular Business of General Electric Medical Systems, located in Paris, France. T. MICHAEL JANNEY has served as Chief Financial Officer and Treasurer of eMerge Interactive since November 1998. From March 1993 until October 1998, Mr. Janney was Senior Vice President and Chief Financial Officer of Datamax Corporation, a privately held company that designs, develops, manufactures and sells bar code printers worldwide. SCOTT L. MATHEWS has served as President of eMerge Interactive since November 1999, and as Chief Operating Officer of eMerge Interactive since April 1999. From May 1996 until April 1999, Mr. Mathews was Vice President and General Manager for Key Technology, Inc., a manufacturer of machine vision and material handling products for the food processing and pharmaceutical industries. From January 1994 until May 1996, Mr. Mathews was Manager of the Global Positron Emission Tomography business of General Electric Medical Systems, located in Waukesha, Wisconsin and Uppsala, Sweden. 31 35 MARVIN L. SLOSMAN has served as the Executive Vice President, Sales of eMerge Interactive since August 1998. From May 1996 until July 1998, Mr. Slosman was a Division Manager for Cordis, Johnson and Johnson. From April 1995 until May 1996, Mr. Slosman was a Vice President at GE Capital Corporation. From 1993 until April 1995, he served as a Programs Manager at General Electric Medical Systems. Mr. Slosman currently serves on the board of directors of ReMar, Inc. ARVIND SUBRAMANIAN has served as Executive Vice President, Marketing and E-business of eMerge Interactive since December 1999. From January 1997 until December 1999, Mr. Subramanian was a General Manager for General Electric Information Services. From September 1994 until December 1996, Mr. Subramanian was a Global Product Line Manager for General Electric Medical Systems. JOHN S. SCOTT, PH.D. has served as Chairman of the Board of eMerge Interactive since September 1994 and has served as Chief Executive Officer and Chairman of the Board of XL Vision, Inc. since its inception in May 1993. From August 1991 until July 1993, Dr. Scott was President of Lenzar Electro-Optics, Inc., a manufacturer of imaging devices. Dr. Scott also currently serves as Chairman of the Board of ChromaVision Medical Systems, Inc., a public company, and Who?Vision Systems, Inc., both of which are affiliated with Safeguard. DOUGLAS A. ALEXANDER has served as a member of the board of directors of eMerge Interactive since April 1999. Mr. Alexander is a managing director of Internet Capital Group, Inc., an affiliate of Safeguard and is Chairman of the Board of VerticalNet, Inc., a public company, and serves as a director of Arbinet Communications, Inc., Blackboard Inc., ComputerJob.com, Inc., Deja.com, Inc., LinkShare Corporation, SageMaker, Inc. and Star-Cite! Solutions, Inc., all of which are privately held companies that are affiliated with Internet Capital Group. Mr. Alexander co-founded Reality Online, Inc., a company that developed financial planning tools and online services aimed at the individual investor, and continued to serve as its President and Chief Executive Officer after its acquisition by Reuters Group PLC until September 1997. E. MICHAEL FORGASH served as a member of the board of directors of eMerge Interactive from March 1999 until his resignation in March 2000. Mr. Forgash held the position of Vice President, Operations at Safeguard Scientifics, Inc. from January 1998 until his resignation in March 2000. From August 1996 until October 1997, Mr. Forgash was President and Chief Executive Officer of Creative Multimedia, an interactive marketing agency that consulted, designed and delivered Web solutions for businesses. From November 1994 until July 1996, Mr. Forgash served as President of Continental Healthcare Systems, Inc., a leading supplier of departmental healthcare information systems and consulting in the United States and England. Mr. Forgash served as a director of Internet Capital Group, Inc. and US Interactive, Inc., both public companies, 4anything.com, Inc., Who?Vision Systems, Inc. and XL Vision, Inc., all of which are affiliated with Safeguard. Mr. Forgash was the Safeguard designee on our board of directors under a stockholders' agreement dated July 17, 1997. THOMAS C. LYNCH has served as a member of the board of directors of eMerge Interactive since June 1997 and currently serves as the President, Chief Operating Officer and a member of the board of directors of CompuCom, Inc., a public company, which is affiliated with Safeguard. From November 1995 until October 1998, Mr. Lynch held the position of Senior Vice President at Safeguard Scientifics, Inc. From September 1994 until October 1995, Mr. Lynch was Director of the Navy Staff, where he was responsible for coordinating Navy defense issues. Prior to August 1994, Mr. Lynch held several positions in the United States Navy, including Superintendent of the U.S. Naval Academy. CHRISTOPHER MOLLER, PH.D. has served as a member of the board of directors of eMerge Interactive since June 1997. Since 1990, he has served as Vice President of TL Ventures, a company which manages a series of private equity funds and is affiliated with Safeguard. Since 1994, Dr. Moller has served as a Managing Director of the following funds managed by TL Ventures: Radnor Venture Partners, Technology Leaders, Technology Leaders II, TL Ventures III and TL Ventures IV. He is also a Managing Director of TL Leaders Management II L.P. Dr. Moller is a director of Who?Vision Systems, Inc., an affiliate of Safeguard, Adolor Corporation and OraPharma, Inc. Dr. Moller serves on the medical advisory board of Lankenau Research Institute. Dr. Moller is the TL Ventures designated director on our board of directors, under a stockholder agreement dated July 17, 1997. 32 36 JOHN W. PODUSKA, SR., PH.D. has served as a member of the board of directors of eMerge Interactive since January 1997. Since 1992, Dr. Poduska, Sr. has served as the Chairman of Advanced Visual Systems Inc., a provider of visualization software. From December 1989 until December 1991, Dr. Poduska was President and Chief Executive Officer of Stardent Computer Inc., a computer manufacturer. Dr. Poduska is also a member of the board of directors of Safeguard Scientifics, Inc., Cambridge Technology Partners, Inc., an affiliate of Safeguard, and Union Pacific Resources Group Inc., all public companies, and XL Vision, Inc., an affiliate of Safeguard. ANTHONY A. IBARGUEN has served as a member of the board of directors of eMerge Interactive since March 2000 and is the President of Professional Services and managing director of operations of Internet Capital Group, Inc., an affiliate of Safeguard Scientifics, Inc. Mr. Ibarguen joined Internet Capital Group, Inc. in 1999. From 1996 to 1999, he was President, Chief Operating Officer and Board Director of Tech Data Corporation, a Fortune 150 global technology products and services provider offering pre- and post-sale training and technical support, financing options, configuration and assembly services as well as a range of electronic commerce solutions. Prior to joining Tech Data, Mr. Ibarguen served as Executive Vice President of ENTEX Information Services Inc., a $2 billion PC Systems Integrator. He co-founded ENTEX in 1993 through the management-led buyout of JWP's Information Services Division. Mr. Ibarguen joined JWP Inc. in 1990 as VP of Business Development and previously worked as a Development Associate with Trammell Crow Company. He began his career at IBM Corporation where he held a variety of sales and marketing line and staff positions spanning a seven-year period. Mr. Ibarguen also serves on the board of directors of Smartdisk Corporation, Inc., a public company, and CommerceQuest, Inc. KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERTISE J. TOM BRINK has served as the Director, Analytical Services of eMerge Interactive since April 1999. Mr. Brink focuses on marketing methods, feedlot and grid value, and cow production costs, and has conducted extensive research on cattle markets and price cycles. His articles have been featured in many key industry publications. From December 1996 to April 1999, Mr. Brink served as the Executive Director of the American Gelbvieh Association, a leading breed value-based marketer of feed cattle and the largest breed-coordinated alliance in the United States. From July 1992 until December 1996, Mr. Brink was the Director of Market Research of Cattle-Fax. SCOTT CRAIN, D.V.M. has served as the Executive Vice President, Professional Services of eMerge Interactive since March 1999. Since 1990, Dr. Crain has also maintained a veterinary feedlot practice. In 1995, Dr. Crain founded CIN, LLC, a company that established an information system for the beef industry, and served as its President and Chief Executive Officer until that company was acquired by eMerge Interactive in 1999. JIM GIBB, PH.D. has served as the Director, Advanced Technologies for eMerge Interactive since June 1999. Dr. Gibb identifies opportunities to implement and integrate new technology into eMerge Interactive's informations system. From May 1996 until June 1999, he served as the Vice President at the Center for Quality of the National Cattlemen's Beef Association. From 1991 until May 1996, Dr. Gibb served as the Executive Director of the American Gelbvieh Association. BOARD OF DIRECTORS Our board of directors is composed of seven members. All of our directors are elected to serve for one-year terms and are elected at each annual meeting of our stockholders. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company had no securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 during 1999 and, therefore, no Section 16(a) filings were required by the Company's officers, directors, or 10% or greater owners of the Company's securities during 1999. 33 37 ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The table below sets forth information concerning the compensation we paid to our chief executive officer and each executive officer who was paid compensation greater than $100,000 in 1999. In 1999, we did not pay any of our other executive officers salary and bonus exceeding $100,000. The amount appearing in the All Other Compensation column for Mr. Abraham for 1999 consists of $13,714 for reimbursement of relocation expenses, $11,050 for car allowance and $5,484 for 401(k) employer contributions and term life insurance and for 1998 consists of $34,663 for reimbursement of relocation expenses, $5,525 for car allowance and $1,690 for 401(k) employer contributions. The $3,771 for Mr. Janney consists of 401(k) employer contributions and term life insurance. For Mr. Mathews, the $65,935 consists of $63,435 for relocation expenses and $2,500 for 401(k) employer contributions and term life insurance. For Mr. Slosman the $48,309 consists of $46,586 for relocation expenses and $1,723 for 401(k) employer contributions and term life insurance. Mr. Abraham joined eMerge Interactive in April 1998. 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.......................... 1999 $175,791 $35,000 -- $30,248 Chief Executive Officer 1998 84,469 -- 750,000 41,878 T. Michael Janney........................... 1999 136,744 5,625 31,250 3,771 Chief Financial Officer and Treasurer Scott L. Mathews............................ 1999 113,136 50,000 225,000 65,935 President and Chief Operating Officer Marvin L. Slosman........................... 1999 144,517 18,670 31,250 48,309 Executive Vice President, Sales
The following table sets forth information regarding options granted in 1999 to the executive officers named in the Summary Compensation Table above. Charles L. Abraham was not granted any options during fiscal 1999. Amounts represent the hypothetical gains that could be achieved from the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date based upon the grant price. OPTION GRANTS DURING LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES INDIVIDUAL GRANTS OF STOCK PRICE --------------------------------------------------------------------------- APPRECIATED FOR NUMBER OF SHARES OPTION TERM UNDERLYING OPTIONS PERCENTAGE OF TOTAL EXERCISE PRICE -------------------- NAME GRANTED OPTIONS GRANTED ($/SHARE) EXPIRATION DATE 5% 10% ---- ------------------ ------------------- -------------- --------------- -------- --------- Charles L. Abraham............. -- -- -- -- -- -- T. Michael Janney.............. 31,250 2.2% $2.40 4/21/09 $47,167 $119,531 166,665 11.8 2.40 4/21/09 Scott L. Mathews............... 58,335 4.1 2.40 4/21/09 88,048 223,130 Marvin L. Slosman.............. 31,250 2.2 2.40 4/21/09 47,167 119,531
34 38 The following table sets forth information concerning year end option values for fiscal 1999 for the executive officers named in the Summary Compensation Table above. The value of unexercised in-the-money options is calculated based on an assumed value equal to the initial public offering price of $15.00 per share. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR END FISCAL YEAR END SHARES ACQUIRED --------------------------- --------------------------- NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ---- --------------- -------------- ----------- ------------- ----------- ------------- Charles L. Abraham............. 37,500 $60,000 150,000 562,500 $2,130,000 $7,987,500 T. Michael Janney.............. 3,313 33,788 82,625 101,563 1,160,775 1,404,690 Scott L. Mathews............... -- -- 56,250 168,750 708,750 2,126,250 Marvin L. Slosman.............. -- -- 85,938 101,563 1,207,815 1,404,690
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. In addition, Mr. Abraham received a one time bonus of $189,355 during April 2000 in connection with the Company's successful completion of its initial public offering. Mr. Abraham will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Abraham also holds options to purchase 750,000 shares of common stock at $0.80 per share, of which 25% or 187,500 shares, vest at the grant date with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. MARVIN L. SLOSMAN holds the position of Executive Vice President, Sales and receives an annual salary of $150,000 and a bonus of up to $60,000 based on the achievement of annual objectives. Mr. Slosman will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Slosman also holds options to purchase 156,250 shares of common stock at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. T. MICHAEL JANNEY holds the position of Chief Financial Officer and receives an annual salary of $150,000 and a bonus of up to $45,000 based on the achievement of annual objectives. Mr. Janney will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Janney also holds options to purchase 156,250 shares of common stock at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. SCOTT L. MATHEWS holds the position of President and Chief Operating Officer and receives an annual salary of $160,000 and a bonus of up to $64,000 based on the achievement of annual objectives. Mr. Mathews will receive continued salary and benefits for a period of six months if we terminate his employment without cause. Mr. Mathews also holds options to purchase 225,000 shares of our common stock at $2.40 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. ARVIND SUBRAMANIAN holds the position of Executive Vice President, Sales and E-Business and receives an annual salary of $150,000 and a bonus of up to $52,500 based on the achievement of annual objectives. Mr. Subramanian will receive continued salary and benefits for a period of twelve months if we terminate his employment without cause. Mr. Subramanian also holds options to purchase 187,500 shares of our common stock at $11.20 per share. These options vested 25% on the day of grant with the remaining options vesting in three annual installments of 25% each. If we experience a change of control, 100% of the options will automatically vest. 35 39 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 fiscal year 1999, our compensation committee consisted of Dr. Scott and Messrs. Forgash and Lynch. Dr. Scott is the Chief Executive Officer and Chairman of the Board of XL Vision and Mr. Forgash was an officer at Safeguard Scientifics, Inc. until his resignation in March 2000. At the end of fiscal year 1999, we owed XL Vision and Safeguard $1.7 million and $10.3 million, respectively. BOARD COMMITTEES We have established an audit committee and a compensation committee. Our audit committee consists of three independent directors. During 1999, our audit committee consists of Douglas A. Alexander, Christopher Moller, Ph.D. and John W. Poduska, Sr., Ph.D. The audit committee reviews the scope and result of the audit and other services provided by our independent auditors and reviews and evaluates our internal control functions. Our compensation committee consists of at least three disinterested directors who are non-employee directors. During 1999, 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. DIRECTOR COMPENSATION We reimburse each member of our board of directors for out-of-pocket expenses incurred in connection with attending board meetings. We do not pay our directors cash compensation for attending meetings of the board of directors and committee meetings. Directors are eligible to receive options to purchase common stock under our equity compensation plan. All options granted to directors have been approved by unanimous vote of the board of directors. In each of October 1997 and March 1999, we granted Dr. Poduska options to purchase 31,250 shares of our common stock under our 1996 Equity Compensation Plan at an exercise price of $0.80 and $1.60 per share, respectively. In April 1999, we granted Mr. Alexander options to purchase 100,000 shares of our common stock under our 1996 Equity Compensation Plan at an exercise price of $2.40 per share. EQUITY COMPENSATION Amended and Restated 1996 Equity Compensation Plan Our Amended and Restated 1996 Equity Compensation Plan was approved by our stockholders on January 26, 1996. The aggregate number of shares of common stock available for awards under the 1996 plan was 2,168,750 shares. No more than 625,000 shares in the aggregate may be granted to any individual in any calendar year. As of December 31, 1999, there were 1,866,991 shares issuable upon the exercise of outstanding options granted under the 1996 plan. 1999 Equity Compensation Plan Our 1999 Equity Compensation Plan was approved by our stockholders on May 10, 1999. The aggregate number of shares of common stock available for awards under the 1999 plan is 2,500,000 shares. No more than 625,000 shares in the aggregate may be granted to any individual in any calendar year. As of December 31, 1999, there were 902,125 shares issuable upon the exercise of outstanding options granted under the 1999 plan. General The 1996 and 1999 equity compensation plans provide for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance units to our designated employees, advisors and consultants, and to non-employee directors. The compensation committee of the board of 36 40 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. ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information regarding the beneficial ownership of eMerge Interactive's common stock as of April 13, 2000 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; and - All directors and executive officers as a group. 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 April 13, 2000 and shares acquirable upon conversion of our preferred stock. Applicable percentage ownership in the following table is based on 33,050,644 shares of common stock outstanding as of April 13, 2000. SHARES BENEFICIALLY OWNED
OUTSTANDING SHARES BENEFICIALLY SHARES OPTIONS OWNED ASSUMING BENEFICIALLY EXERCISABLE EXERCISE OF PERCENT OF NAME OF BENEFICIAL OWNER OWNED WITHIN 60 DAYS OPTIONS SHARES ------------------------ ------------ -------------- ------------------- ---------- Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087(1)(3)..................... 12,221,281 1,478,889 13,700,170 40.1% Internet Capital Group, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087(2)(3)..................... 12,221,281 1,478,889 13,700,170 40.1%
37 41
OUTSTANDING SHARES BENEFICIALLY SHARES OPTIONS OWNED ASSUMING BENEFICIALLY EXERCISABLE EXERCISE OF PERCENT OF NAME OF BENEFICIAL OWNER OWNED WITHIN 60 DAYS OPTIONS SHARES ------------------------ ------------ -------------- ------------------- ---------- XL Vision, Inc. 10315 102(nd) Terrace Sebastian, FL 32958(4).................... 5,533,125 0 5,533,125 16.7% Technology Leaders I 435 Devon Park Drive Building 700 Wayne, PA 19087(5)(7)..................... 854,062 0 854,062 2.6% Technology Leaders II 435 Devon Park Drive Building 700 Wayne, PA 19087(6)(7)..................... 920,000 0 920,000 2.8% Charles L. Abraham.......................... 67,500 307,500 375,000 1.1% Douglas A. Alexander........................ 0 25,000 25,000 * Anthony A. Ibarguen......................... 0 0 0 * Thomas Michael Janney....................... 3,313 90,435 93,748 * Thomas C. Lynch............................. 36,795 0 36,795 * Scott L. Mathews............................ 0 112,500 112,500 * Christopher Moller, Ph.D.................... 1,175 0 1,175 * John W. Poduska, Ph.D....................... 85,450 0 85,450 * John S. Scott, Ph.D.(8)..................... 25,000 0 25,000 * Marvin L. Slosman........................... 0 93,750 93,750 * All directors and executive officers as a group (11 persons)........................ 219,233 679,810 899,043 2.7%
- - --------------- * Applicable percentage ownership in the table is based on an aggregate of 33,050,644 shares of class A and class B common stock outstanding as of April 13, 2000. The symbol * means that the percentage is less than 1%. (1) Includes 1,122,915 shares owned by Safeguard Delaware, Inc., 4,153,921 shares owned by Safeguard Scientifics (Delaware), Inc., options held by Safeguard 98 Capital L.P. to acquire 340,000 shares of our stock that are currently owned by XL Vision, Inc., and the shares owned by Internet Capital Group, Inc. as outlined in footnote 2 below. Safeguard disclaims beneficial ownership of the shares owned by Internet Capital Group. Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. are wholly owned subsidiaries of Safeguard. Safeguard Delaware, Inc. is the sole general partner of Safeguard 98 Capital L.P. This number does not include 854,062 shares beneficially owned by Technology Leaders I and 920,000 shares beneficially owned by Technology Leaders II, private equity funds in which Safeguard has indirect general partnership and limited partnership interests. Safeguard disclaims beneficial ownership of the shares beneficially owned by each of Technology Leaders I and Technology Leaders II. (2) Includes 1,250,000 shares of class A common stock, 5,694,445 shares of class B common stock, a warrant to purchase 1,138,889 shares of class B common stock, and the shares owned by Safeguard as outlined in footnote 1 above. Internet Capital Group disclaims beneficial ownership of the shares owned by Safeguard. There are no other shares of class B common stock outstanding. The class B common stock is entitled to two and one-half votes per share. (3) Safeguard Scientifics and Internet Capital Group 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 Scientifics and two designees of Internet Capital Group in any elections of directors. (4) Includes 2,475,000 shares owned by XL Vision, Inc. and 3,058,125 shares owned by XL Partners, L.P. XL Vision, Inc. is the sole general partner of XL Partners, L.P. Included in the shares owned by XL 38 42 Vision, Inc. are 500,000 shares that are subject to an option to holders of its 6% convertible subordinated notes, and 75,000 shares that are subject to an option to certain XL Vision employees. (5) Technology Leaders I consists of Technology Leaders L.P. and Technology Leaders Offshore C.V. Technology Leaders Management L.P., the sole general partner of Technology Leaders L.P. and a co-general partner of Technology Leaders Offshore C.V. exercises, through its executive committee, sole investment, voting and dispositive power with respect to the Shares owned by such entities. Of the 854,062 Shares beneficially owned by Technology Leaders I, 398,761 Shares are owned by Technology Leaders L.P. and 455,301 Shares are owned by Technology Leaders MI Corp., a wholly owned subsidiary of Technology Leaders Offshore C.V. (6) Technology Leaders II consists of Technology Leaders II L.P. and Technology Leaders II Offshore C.V. Technology Leaders II Management L.P., the sole general partner of Technology Leaders L.P. and a co-general partner of Technology Leaders Offshore C.V. exercises, through its executive committee, sole investment, voting and dispositive power with respect to the Shares owned by such entities. Of the 920,000 Shares beneficially owned by Technology Leaders II, 512,716 Shares are owned by Technology Leaders II L.P. and 407,284 Shares are owned by Technology Leaders II Offshore C.V. (7) Technology Leaders L.P., Technology Leaders Offshore C.V., Technology Leaders Management L.P., Technology Leaders MI Corp., Technology Leaders II L.P., Technology Leaders II Offshore C.V., and Technology Leaders II Management L.P. may be deemed to be members of a group for purposes of Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. Technology Leaders I disclaims beneficial ownership of the securities owned by Technology Leaders II and Technology Leaders II disclaims beneficial ownership of the securities owned by Technology Leaders I. (8) John S. Scott, Ph.D. is Chief Executive Officer and Chairman of the Board of XL Vision, and disclaims beneficial ownership of the 5,533,125 shares held by XL Vision. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. EQUITY AND DEBT FINANCING AGREEMENTS WITH XL VISION We were incorporated in September 1994 as a subsidiary of XL Vision, Inc., a private company that provides strategic, technical and business support to create imaging-related technology companies. From our inception through June 1999, we have funded our operating and investing cash requirements principally through private placements of common stock and preferred stock and from borrowings from XL Vision. As of March 31, 2000, XL Vision owns 16.7% of our capital stock. In July 1997, we signed a subordinated purchase money note with XL Vision for $4.4 million related to the transfer of infrared technology to eMerge. Approximately $1.4 million was outstanding under the notes as of December 31, 1999. This balance was paid in full with the proceeds received from our February 4, 2000 initial public offering. In December 1998, we issued 2,400,000 shares of series B junior preferred stock to XLVision, one of our significant stockholders, at a purchase price of $2.00 per share. As payment for the shares, XL Vision cancelled our debt of $4.8 million owed to XL Vision related to working capital expenditures, which were incurred on our behalf by XL Vision. As a result of that transaction, XL Vision's ownership of our capital stock increased from 22.0% to 35.8% as of December 1998. XL Vision also canceled $7.5 million of debt related to working capital expenditures, which were incurred on our behalf by XL Vision as a contribution of debt to equity. The shares of series B junior preferred stock are also subject to the registration rights agreement executed in connection with the series A preferred stock. The shares of series A and series B preferred stock converted into shares of class A common stock concurrent with our February 4, 2000 initial public offering. In January 1999, we signed a revolving promissory note with XL Vision for up to $3.0 million, of which approximately $232,000 was outstanding as of December 31, 1999. The revolving promissory note bears interest at the prime lending rate plus 1% and was paid in full with the proceeds received from our February 4, 2000 initial public offering. 39 43 EQUITY AND DEBT FINANCING AGREEMENTS WITH AFFILIATES OF SAFEGUARD SCIENTIFICS, INC. In April 1999, we signed two promissory notes, totaling $1.1 million with Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics, Inc. and the sole general partner of Safeguard XL Capital and Safeguard 99 Capital L.P., two of our significant stockholders. Safeguard Scientifics, Inc. beneficially owns approximately 55% of the outstanding shares of capital stock of XL Vision. These promissory notes were paid in full with the proceeds of the sale of our series C preferred stock. In May 1999, we issued 1,000,000 shares of series C preferred stock to Safeguard 99 Capital L.P., an affiliate of Safeguard Scientifics, Inc., at a price of $5.00 per share. The shares of series C preferred stock are also subject to the registration rights agreement executed in connection with the series A preferred stock. The shares of C preferred stock converted into shares of class A common stock concurrent with our February 4, 2000 initial public 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%. The note was paid in full with the proceeds received from our February 4, 2000 initial public offering. In August 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In September 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.0 million. The note bears interest at the prime rate plus 1% and is payable on demand. In October 1999, we signed a demand note with Safeguard Delaware, Inc. in the principal amount of $2.5 million. The note bears interest at the prime rate plus 1% and is payable on demand. In October 1999, we cancelled these outstanding notes in exchange for a note in the amount of $7.1 million. As of December 31, 1999, we owed a total of approximately $10.3 million to Safeguard. This balance was paid in full with the proceeds received from our February 4, 2000 initial public offering. ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC. On November 16, 1999, we issued 4,555,556 shares of series D preferred stock and a warrant to purchase 1,138,889 shares of class B common stock for the aggregate consideration of $38.8 million to Internet Capital Group, Inc. We received $18.0 million of the total purchase price in cash and $23.0 million in the form of a promissory note. The note will be due and payable one year after its issue and does not bear interest. The note is secured by 2,555,556 shares of series D preferred stock (converted to 3,194,445 shares of class B common stock with completion of initial public offering). Interest on the promissory note was imputed at 9.5% and amounts to $2.2 million over the life of the note. In connection with the issuance of the stock and the warrant, we granted Internet Capital Group registration rights that are substantially the same as those that apply to our series A preferred stock. The series D preferred stock automatically converted into shares of class B common stock concurrent with our February 4, 2000 initial public 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 $15 per share. 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. Anthony A. Ibarguen, one of our directors, is a managing director of Internet Capital Group. Additionally, Safeguard Scientifics, Inc. beneficially owns approximately 13.8% of the outstanding shares of common stock of Internet Capital Group as of April 17, 2000. 40 44 Internet Capital Group and Safeguard are parties to a joint venture agreement under which each has agreed to: - Use best efforts to agree and vote on a course of action that is in the best interest of both parties in all matters submitted to the stockholders for approval; - Vote its shares for the election of two designees of Safeguard and two designees of Internet Capital Group in any election of directors of eMerge Interactive; - Offer shares of eMerge Interactive stock to the other party at the fair market price of the shares before offering the shares to any unaffiliated party, other than in a sale of all of its shares; and - Discuss its intentions with the other party before selling all of its shares to an unaffiliated party and use its best efforts to provide the other party with the opportunity to purchase or participate in the purchase of the shares. Together, Internet Capital Group and Safeguard beneficially own approximately 40.1% of our capital stock and as a result control approximately 48.6% of the voting power of our capital stock as of March 31, 2000. SERVICE AGREEMENTS WITH XL VISION AND SAFEGUARD SCIENTIFICS We have contractual service agreements with XL Vision and Safeguard Scientifics. Under an administrative services agreement dated December 15, 1997, as amended on August 17, 1999, XL Vision and Safeguard provide us with management consultation, investor relations, financial management, human resource management, legal services, insurance programs, and administrative services. We pay a fee pursuant to a formula that is based on a percentage of our revenue, not to exceed $300,000 annually. The fee is not due until we achieve positive cash flow from operations. We owe XL Vision and Safeguard each $18,600 under this agreement for fiscal 1998, and $26,600 for fiscal 1999. The agreement extends through December 31, 2002 and continues unless terminated by either party. Under a direct charge administrative services agreement dated April 14, 1997, XL Vision also provides us with management services on a time and materials basis. We owe XL Vision $460,000 under this agreement for fiscal 1998, and $455,000 for fiscal 1999. This agreement continues on a month-to-month basis, and may be terminated at any time by either party. REAL ESTATE LEASE WITH XL VISION We currently lease our facilities in Sebastian, Florida from XL Vision, Inc., which leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard Scientifics, Inc. We believe that the rent that we pay pursuant to our lease is consistent with the market rent for similar space in the area. Our lease terminates on January 1, 2001 and we will have the option to renew the lease for an additional one year term. LOAN AGREEMENT WITH MR. ABRAHAM On January 28, 2000, we entered into a term note with Charles L. Abraham, our Chief Executive Officer, under which Mr. Abraham borrowed $100,000. The note bears interest at the prime lending rate plus one percent, which as of February 1, 2000 equaled 9.5%. The note matures on the earlier of the second anniversary of the date of the note or the date on which Mr. Abraham receives a bonus from us relating to the successful completion of an initial public offering. The proceeds of the loan were used to finance the exercise of options to purchase 30,000 shares of our common stock and to pay taxes in connection therewith. The note is secured by shares of our common stock owned by Mr. Abraham pursuant to a pledge agreement. On April 18, 2000, the note was paid in full when Mr. Abraham received a bonus from us relating to the successful completion of our initial public offering on February 4, 2000. 41 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED WITH REPORT 1. The Consolidated Financial Statements and Schedules listed below are located after the signature page beginning on page F-1:
DESCRIPTION PAGE NO. ----------- -------- Independent Auditors' Reports............................... F-1 Consolidated Balance Sheets -- December 31, 1998 and 1999...................................................... F-2 Consolidated Statements of Operations -- December 31, 1997, 1998 and 1999............................................. F-3 Consolidated Statements of Stockholders' Equity -- December 31, 1998 and 1999......................................... F-4 Consolidated Statements of Cash Flows....................... F-5 Notes to Consolidated Financial Statements.................. F-7
2. Financial Statement Schedules: Not required or the information required to be included therein is reflected in the Financial Statements. 3. Exhibits
EXHIBIT NUMBER DESCRIPTION REFERENCE - - ------- ----------- --------- 1.1 Form of Underwriting Agreement.............................. * 1.2 Form of Standby Stock Purchase Agreement.................... * 3.1 Second Amended and Restated Certificate of Incorporation of eMerge Interactive.......................................... * 3.2 Amended and Restated Bylaws of eMerge Interactive........... * 10.1 Amended and Restated 1996 Equity Compensation Plan.......... * 10.2 1999 Equity Compensation.................................... * 10.3 Master License Agreement dated July 29, 1998 between eMerge Interactive and Her Majesty the Queen of Canada, as represented by the Minister of Agriculture and Agri-Food Canada...................................................... ** 10.4 Administrative Services Agreement dated December 15, 1997 between eMerge Interactive, Safeguard Scientifics, Inc. and XL Vision, Inc., as amended on August 17, 1999.............. * 10.5 Direct Charge Administrative Services Agreement dated April 15, 1997 between eMerge Interactive and XL Vision, Inc...... * 10.6 Asset Purchase Agreement dated February 24, 1999 between eMerge Interactive, CIN, LLC and Dr. Scott Crain............ * 10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge Interactive, Cyberstockyard, Inc. and J. Scott Sanders, David Sanders, Scott Calhoun and Dr. Duane Pankratz......... * 10.8 Stockholders Agreement dated July 29, 1998 among eMerge Interactive, and individuals designated as the former shareholders of STS Agriventures, Ltd....................... * 10.9 Purchase Agreement dated July 29, 1998 among eMerge Interactive, NutriCharge, J Technologies, LLC, and the Biegert Family Irrevocable Trust............................ * 10.10 Asset Purchase Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc................... * 10.11 Purchase and License Agreement dated January 15, 1999 between eMerge Interactive and Sperry Marine, Inc........... *
42 46
EXHIBIT NUMBER DESCRIPTION REFERENCE - - ------- ----------- --------- 10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge Interactive and Professional Cattle Consultants, L.L.C...... * 10.13 Letter of Agreement dated January 12, 2000 between eMerge Interactive and Southern States, Cooperative, Inc........... * 10.14 Subscription Agreement letter for purchase of Series B Junior Preferred Stock...................................... * 10.15 Preferred Stock Purchase Agreement dated April 1, 1999 (Series C Preferred Stock).................................. * 10.16 Common Stock Purchase Agreement dated August 16, 1999 between eMerge Interactive and Turnkey Computer Systems, Inc......................................................... * 10.17 Registration Rights Agreement dated July 18, 1997........... * 10.18 Real Property Sublease between XL Vision and eMerge Interactive, dated December 1999............................ * 10.19 Stockholders' and Registration Rights Agreement dated February 24, 1999........................................... * 10.20 Joinder and Correction to Stockholders and Registration Rights Agreement dated March 29, 1000....................... * 10.21 (a) Revolving Note dated July 21, 1999 from eMerge Interactive to Safeguard Delaware, Inc., Amended Revolving Note dated August 3, 1999,.................................. * (b) Second Amended Revolving Note dated October 25, 1999,... * (c) Third Amended Revolving Note dated December 6, 1999 and......................................................... * (d) Fourth Amended Revolving Note dated January 31, 2000.... * 10.22 Revolving Note dated January 1, 1999 from XL Vision to eMerge Interactive.......................................... * 10.23 Promissory Note dated August 31, 1999 from eMerge Interactive to Safeguard Delaware, Inc. (cancelled)......... * 10.24 Term note dated October 25, 1999 from eMerge Interactive to Safeguard................................................... * 10.25 Promissory Note dated October 6, 1999 from eMerge Interactive to Safeguard Delaware, Inc. (cancelled)......... * 10.26 Stockholders Agreement dated July 17, 1997 and Joinder to Stockholder's Agreement..................................... * 10.27 Subordinated Purchase Money Note from eMerge Interactive to XL Vision dated July 15, 1997............................... * 10.28 Toll Processing Agreement dated August 16, 1999 between eMerge Interactive and ADM Animal Health & Nutrition, a division of Archer-Daniels-Midland Company.................. * 10.29 Term Note dated October 25, 1999 from eMerge Interactive to Safeguard Delaware, Inc..................................... * 10.30 Securities Purchase Agreement dated October 27, 1999 between eMerge Interactive Technologies, LLC and Internet Capital Group, Inc.................................................. * 10.31 Registration Rights Agreement dated October 27, 1999 between eMerge Interactive and Internet Capital Group, Inc.......... * 10.32 Cooperative Research and development Agreement between USDA's Agricultural Research Service, eMerge and Iowa State University of Science and Technology concerning Methods for Detecting Fecal and Ingesta Contamination on Meat dated on Meat dated August 4, 1999................................... * 10.33 Exclusive License Agreement between Iowa State University Research Foundation, Inc., and eMerge dated August 3, 1999........................................................ * 10.34 Term Note and Pledge Agreement dated January 28, 2000 between eMerge and Charles Abraham.......................... *
43 47
EXHIBIT NUMBER DESCRIPTION REFERENCE - - ------- ----------- --------- 21.1 Subsidiaries of the Registrant.............................. * 27.1 Financial Data Schedule..................................... ** 99.1 Form letter from eMerge Interactive, Inc. to holders of more than 100 shares of Safeguard Scientifics, Inc. describing the Safeguard Subscription Program.......................... * 99.2... Form of letter from Adams, Harkness & Hill, Inc. to Safeguard Scientific Inc. shareholders...................... * 99.3... Form of letter from eMerge Interactive, Inc. to Brokers describing the Safeguard Subscription Program............... * 99.4... Form of Subscription Form for Safeguard Subscription Program..................................................... *
- - --------------- * Exhibit and exhibit number incorporated by reference to Registration Statement No. 333-89815, dated February 4, 2000. ** Filed herewith. 44 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 1, 2000 eMerge Interactive, Inc. By: /s/ CHARLES L. ABRAHAM President Chief Executive Officer and Director ------------------------------------------------- (Principal Executive Officer) Charles L. Abraham /s/ T. MICHAEL JANNEY Vice President and Chief Financial Officer ------------------------------------------------- (principal financial and accounting officer) T. Michael Janney
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the date indicated. NAME CAPACITY DATE - - ----------------------------------------------------- ------------------------------- -------------- /s/ CHARLES L. ABRAHAM President, Chief Executive May 1, 2000 - - ----------------------------------------------------- Officer and Director (principal Charles L. Abraham executive officer) /s/ MICHAEL JANNEY Vice Chairman and Chief May 1, 2000 - - ----------------------------------------------------- Financial Officer (principal Michael Janney financial and accounting officer) /s/ JOHN S. SCOTT Chairman of the Board May 1, 2000 - - ----------------------------------------------------- John S. Scott /s/ DOUGLAS A. ALEXANDER Director May 1, 2000 - - ----------------------------------------------------- Douglas A. Alexander /s/ THOMAS C. LYNCH Director May 1, 2000 - - ----------------------------------------------------- Thomas C. Lynch /s/ CHRISTOPHER MOLLER Director May 1, 2000 - - ----------------------------------------------------- Christopher Moller /s/ JOHN W. PODUSKA Director May 1, 2000 - - ----------------------------------------------------- John W. Poduska /s/ ANTHONY A. IBARGUEN Director May 1, 2000 - - ----------------------------------------------------- Anthony A. Ibarguen
45 49 INDEPENDENT AUDITORS' REPORT To the Board of Directors of eMerge Interactive, Inc.: We have audited the accompanying consolidated balance sheets of eMerge Interactive, Inc. as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eMerge Interactive, Inc. at December 31, 1998 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP Orlando, Florida February 7, 2000, except for Note 14 which is as of February 17, 2000 F-1 50 EMERGE INTERACTIVE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999
PROFORMA 1998 1999 1999 ------------ ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 268 $12,316,497 $12,316,497 Trade accounts receivable, less allowance for doubtful accounts of $0 in 1998 and $75,000 in 1999.............. 68,421 1,144,133 1,144,133 Inventories (note 3)...................................... 706,557 1,201,203 1,201,203 Cattle deposits........................................... -- 473,859 473,859 Prepaid expenses.......................................... 27,837 71,078 71,078 Net assets of discontinued operations (note 12)........... 2,285,341 297,003 297,003 Other current assets...................................... -- 136,349 136,349 ------------ ----------- ----------- Total current assets................................ 3,388,424 15,640,122 15,640,122 Property and equipment, net (note 4)........................ 513,837 1,895,754 1,895,754 Capitalized offering costs.................................. -- 447,644 447,644 Investment in Turnkey Computer Systems, Inc. (note 5)....... -- 1,822,833 1,822,833 Intangibles, net (note 6)................................... 2,699,828 5,955,360 5,955,360 ------------ ----------- ----------- Total assets........................................ $ 6,602,089 $25,761,713 25,761,713 ============ =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of capital lease obligation with related party (note 10)................................. $ 79,852 $ 82,320 $ 82,320 Note payable (note 5)..................................... -- 500,000 500,000 Accounts payable.......................................... 423,946 1,187,900 1,187,900 Accrued liabilities: Salaries and benefits................................... 283,103 967,749 967,749 Other................................................... 319,989 818,041 818,041 Advance payments from customers........................... -- 222,750 222,750 Due to related parties (note 10).......................... 5,187,334 12,053,715 12,053,715 ------------ ----------- ----------- Total current liabilities........................... 6,294,224 15,832,475 15,832,475 Capital lease obligation with related party, excluding current installments (note 10)............................ 305,018 224,068 224,068 Note payable (note 5)....................................... -- 400,000 400,000 ------------ ----------- ----------- Total liabilities................................... 6,599,242 16,456,543 16,456,543 ------------ ----------- ----------- Commitments and contingencies (notes 10 and 13) Subsequent event (note 14) Redeemable Class A common stock, no shares issued and outstanding in 1998, 62,500 shares issued and outstanding in 1999, no shares issued and outstanding pro forma (note 5)........................................................ -- 414,339 -- ------------ ----------- ----------- Stockholders' equity (notes 7, 9, 10 and 14): Preferred stock, $.01 par value, authorized 15,000,000 shares: Series A preferred stock, (aggregate involuntary liquidation preference of $7,386,314 in 1998 and $8,030,675 in 1999), designated 6,500,000 shares, issued and outstanding 6,443,606 shares in 1998 and 1999; no shares issued and outstanding proforma....... 64,436 64,436 -- Series B junior preferred stock, (aggregate involuntary liquidation preference of $4,801,315 in 1998 and $5,281,316 in 1999), designated 2,400,000 shares, issued and outstanding 2,400,000 shares in 1998 and 1999; no shares issued and outstanding proforma....... 24,000 24,000 -- Series C preferred stock, (aggregate liquidation preference of $0 in 1998 and $5,891,781 in 1999), designated 1,300,000 shares; issued outstanding -0- shares in 1998 and 1,100,000 shares in 1999; no shares issued and outstanding proforma....................... -- 11,000 -- Series D preferred stock, (aggregate liquidation preference of $0 in 1998 and $41,823,749 in 1999), designated 4,555,556 shares, issued and outstanding no shares in 1998 and 4,555,556 in 1999; no shares issued and outstanding proforma.............................. -- 45,556 -- Common stock, $.008 par value, authorized 100,000,000 shares: Class A common stock, designated 92,711,110 shares, issued and outstanding 5,845,625 shares in 1998 and 7,046,444 shares in 1999 and 19,538,452 shares proforma.............................................. 46,765 56,372 156,308 Class B common stock, designated 7,288,890 shares; no shares issued and outstanding in 1998 and 1999; 5,694,445 shares outstanding proforma................. -- -- 45,556 Additional paid-in capital................................ 16,648,286 62,312,315 62,726,154 Accumulated deficit....................................... (16,780,640) (32,375,926) (32,375,926) Subscription receivable from Internet Capital Group, Inc..................................................... -- (21,188,320) (21,188,320) Unearned compensation..................................... -- (58,602) (58,602) ------------ ----------- ----------- Total stockholders' equity.......................... 2,847 8,890,831 9,305,170 ------------ ----------- ----------- Total liabilities and stockholders' equity.......... $ 6,602,089 $25,761,713 $25,761,713 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-2 51 EMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ------------ ------------ ------------ Revenue (note 11).................................... $ -- $ 1,792,471 $ 43,783,124 Cost of revenue (including $-0-, $511,000 and $343,000 to related parties -- notes 10 and 11).... -- 2,623,447 43,517,459 ------------ ------------ ------------ Gross profit (loss)........................... -- (830,976) 265,665 ------------ ------------ ------------ Operating expenses: Selling, general and administrative (note 10)...... 627,606 3,659,810 11,239,188 Research and development (including $51,000, $119,000 and $233,000 to related parties -- note 10)............................................. 727,753 1,109,382 4,343,783 ------------ ------------ ------------ Total operating expenses................... 1,355,359 4,769,192 15,582,971 ------------ ------------ ------------ Profit (loss) from continuing operations...... (1,355,359) (5,600,168) (15,317,306) Related party interest expense (note 10)............. (141,167) (331,594) (764,042) Interest and other income............................ -- -- 475,642 ------------ ------------ ------------ Profit (loss) from continuing operations before income taxes........................ (1,496,526) (5,931,762) (15,605,706) Income tax expense (benefit) (note 8)................ -- -- -- ------------ ------------ ------------ Profit (loss) from continuing operations...... (1,496,526) (5,931,762) (15,605,706) Discontinued operations (note 12): Income (loss) from operations of discontinued transportation segment (including $814,000, $370,000 and $171,000 to related parties -- note 10)............................................. (3,987,097) (1,808,951) 10,420 Loss on disposal of transportation segment......... -- (91,415) -- ------------ ------------ ------------ Net profit (loss)............................. $ (5,483,623) $ (7,832,128) $(15,595,286) ============ ============ ============ Net profit (loss) attributable to common shareholders....................................... $ (5,483,623) $ (7,832,128) $(21,133,237) ============ ============ ============ Net profit (loss) from continuing operations per common share -- basic and diluted.................. $ (3.91) $ (1.36) $ (3.11) ============ ============ ============ Net profit (loss) per common share -- basic and diluted............................................ $ (14.34) $ (1.80) $ (3.11) ============ ============ ============ Weighted average number of common shares outstanding -- basic and diluted................... 382,273 4,356,926 6,794,755 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 52 eMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DECEMBER 31, 1998 AND 1999
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SERIES A SERIES B SERIES C ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------- --------- ------- --------- ------- Balances at December 31, 1996............................. -- $ -- -- $ -- -- $ -- Issuance of common stock to XL Vision, Inc., for cash at $.008 per share (note 10)................................ -- -- -- -- -- -- Sale of Series A preferred stock for cash at $1.00 per share (note 6)........................................... 6,443,606 64,436 -- -- -- -- Transfer of technology by XL Vision, Inc. (note 10)................................................ -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1997............................. 6,443,606 64,436 -- -- -- -- Contribution of debt to equity by XL Vision, Inc. (note 10)...................................................... -- -- -- -- -- -- Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (note 10)........................ -- -- 2,400,000 24,000 -- -- Issuance of common stock in connection with Nutri-Charge transaction at $0.80 per share (note 6).................. -- -- -- -- -- -- Contribution of put rights by XL Vision, Inc. (note 6).... -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1998............................. 6,443,606 64,436 2,400,000 24,000 -- -- Exercise of stock options for cash at $.80 per share...... -- -- -- -- -- -- Issuance of common stock in connection with CIN transaction at $0.96 per share (note 6).................. -- -- -- -- -- -- Issuance of common stock in connection with Cyberstockyard transaction at $1.80 per share (note 6).................. -- -- -- -- -- -- Issuance of Series C preferred stock at $5.00 per share (note 7)................................................. -- -- -- -- 1,100,000 11,000 Issuance of Series D preferred stock at $9.00 per share, including beneficial conversion feature of $5,523,612 (note 10)................................................ -- -- -- -- -- -- Beneficial conversion feature (note 10)................... -- -- -- -- -- -- Issuance of warrant (note 10)............................. -- -- -- -- -- -- Accretion to redemption value of Class A common stock issued in connection with the Turnkey Computer Systems, Inc. transaction (note 5)................................ -- -- -- -- -- -- Accretion of imputed interest on note receivable from Internet Capital Group, Inc. (note 10)................... -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- Unearned compensation (note 9)............................ -- -- -- -- -- -- Amortization of unearned compensation (note 9)............ -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balances at December 31, 1999............................. 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 ========= ======= ========= ======= ========= ======= PREFERRED STOCK COMMON STOCK COMMON STOCK SERIES D CLASS A CLASS B ------------------- ------------------- --------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------- --------- ------- ------ ------ Balances at December 31, 1996............................. -- $ -- 450,000 $ 3,600 -- $ -- Issuance of common stock to XL Vision, Inc., for cash at $.008 per share (note 10)................................ -- -- 2,808,125 22,465 -- -- Sale of Series A preferred stock for cash at $1.00 per share (note 6)........................................... -- -- -- -- -- -- Transfer of technology by XL Vision, Inc. (note 10)................................................ -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- --------- ------- --------- ------- ---- ---- Balances at December 31, 1997............................. -- -- 3,258,125 26,065 -- -- Contribution of debt to equity by XL Vision, Inc. (note 10)...................................................... -- -- -- -- -- -- Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (note 10)........................ -- -- -- -- -- -- Issuance of common stock in connection with Nutri-Charge transaction at $0.80 per share (note 6).................. -- -- 2,587,500 20,700 -- -- Contribution of put rights by XL Vision, Inc. (note 6).... -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- --------- ------- --------- ------- ---- ---- Balances at December 31, 1998............................. -- -- 5,845,625 46,765 -- -- Exercise of stock options for cash at $.80 per share...... -- -- 200,819 1,607 -- -- Issuance of common stock in connection with CIN transaction at $0.96 per share (note 6).................. -- -- 750,000 6,000 -- -- Issuance of common stock in connection with Cyberstockyard transaction at $1.80 per share (note 6).................. -- -- 250,000 2,000 -- -- Issuance of Series C preferred stock at $5.00 per share (note 7)................................................. -- -- -- -- -- -- Issuance of Series D preferred stock at $9.00 per share, including beneficial conversion feature of $5,523,612 (note 10)................................................ 4,555,556 45,556 -- -- -- -- Beneficial conversion feature (note 10)................... -- -- -- -- -- -- Issuance of warrant (note 10)............................. -- -- -- -- -- -- Accretion to redemption value of Class A common stock issued in connection with the Turnkey Computer Systems, Inc. transaction (note 5)................................ -- -- -- -- -- -- Accretion of imputed interest on note receivable from Internet Capital Group, Inc. (note 10)................... -- -- -- -- -- -- Net profit (loss)......................................... -- -- -- -- -- -- Unearned compensation (note 9)............................ -- -- -- -- -- -- Amortization of unearned compensation (note 9)............ -- -- -- -- -- -- --------- ------- --------- ------- ---- ---- Balances at December 31, 1999............................. 4,555,556 $45,556 7,046,444 $56,372 -- $ -- ========= ======= ========= ======= ==== ==== NOTE RECEIVABLE FROM ADDITIONAL INTERNET PAID-IN ACCUMULATED CAPITAL UNEARNED CAPITAL DEFICIT GROUP, INC. COMPENSATION TOTAL ----------- ------------ ------------ ------------ ----------- Balances at December 31, 1996............................. $ 3,816 $ (3,464,889) $ -- -- $(3,457,473) Issuance of common stock to XL Vision, Inc., for cash at $.008 per share (note 10)................................ -- -- -- -- 22,465 Sale of Series A preferred stock for cash at $1.00 per share (note 6)........................................... 6,379,170 -- -- -- 6,443,606 Transfer of technology by XL Vision, Inc. (note 10)................................................ (4,400,000) -- -- -- (4,400,000) Net profit (loss)......................................... -- (5,483,623) -- -- 5,483,623) ----------- ------------ ------------ -------- ----------- Balances at December 31, 1997............................. 1,982,986 (8,948,512) -- -- (6,875,025) Contribution of debt to equity by XL Vision, Inc. (note 10)...................................................... 7,500,000 -- -- -- 7,500,000 Issuance of Series B preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. at $2.00 per share (note 10)........................ 4,776,000 -- -- -- 4,800,000 Issuance of common stock in connection with Nutri-Charge transaction at $0.80 per share (note 6).................. 2,049,300 -- -- -- 2,070,000 Contribution of put rights by XL Vision, Inc. (note 6).... 340,000 -- -- -- 340,000 Net profit (loss)......................................... -- (7,832,128) -- -- (7,832,128) ----------- ------------ ------------ -------- ----------- Balances at December 31, 1998............................. 16,648,286 (16,780,640) -- -- 2,847 Exercise of stock options for cash at $.80 per share...... 185,798 -- -- -- 187,405 Issuance of common stock in connection with CIN transaction at $0.96 per share (note 6).................. 714,000 -- -- -- 720,000 Issuance of common stock in connection with Cyberstockyard transaction at $1.80 per share (note 6).................. 448,000 -- -- -- 450,000 Issuance of Series C preferred stock at $5.00 per share (note 7)................................................. 5,489,000 -- -- -- 5,500,000 Issuance of Series D preferred stock at $9.00 per share, including beneficial conversion feature of $5,523,612 (note 10)................................................ 40,967,503 -- (20,815,000) -- 20,198,059 Beneficial conversion feature (note 10)................... (5,523,612) -- -- -- (5,523,612) Issuance of warrant (note 10)............................. 3,325,553 -- -- -- 3,325,553) Accretion to redemption value of Class A common stock issued in connection with the Turnkey Computer Systems, Inc. transaction (note 5)................................ (14,339) -- -- -- (14,339) Accretion of imputed interest on note receivable from Internet Capital Group, Inc. (note 10)................... -- -- (373,320) -- (373,320) Net profit (loss)......................................... -- (15,595,286) -- -- (15,595,286) Unearned compensation (note 9)............................ 72,176 -- -- (72,126) -- Amortization of unearned compensation (note 9)............ -- -- -- 13,524 13,524 ----------- ------------ ------------ -------- ----------- Balances at December 31, 1999............................. 62,312,315 $(32,375,926) $(21,188,320) (58,602) $ 8,890,831 =========== ============ ============ ======== ===========
See accompanying notes to consolidated financial statements. F-4 53 EMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ------------ Cash flows from operating activities: Net profit (loss).................................... $(5,483,623) $(7,832,128) $(15,595,286) Adjustments to reconcile net profit (loss) to net cash used in operating activities: Depreciation and amortization................... 122,486 438,576 1,770,571 Accretion of imputed interest on note receivable................................... -- -- (373,320) Amortization of unearned compensation........... -- -- 13,524 Changes in operating assets and liabilities: Trade accounts receivable, net............... -- (368,421) (759,162) Inventories.................................. (635,963) (70,594) (494,646) Cattle deposits.............................. -- -- (473,859) Prepaid expenses and other assets............ (32,338) 5,805 (179,590) Net assets of discontinued operations........ (853,501) (1,140,425) -- Accounts payable............................. 719,694 (301,423) 593,645 Accrued liabilities.......................... 198,759 328,791 (343,729) Advance payments from customers.............. -- -- 222,750 ----------- ----------- ------------ Net cash used by operating activities........ (5,964,486) (8,939,819) (15,619,102) ----------- ----------- ------------ Cash flows from investing activities: Proceeds from sale of discontinued operations........ -- -- 1,927,230 Purchases of property and equipment.................. (506,540) (460,290) (1,672,461) Purchases of intangibles............................. -- (431,923) (25,002) Business combinations, net of cash acquired of $737.............................................. -- -- (1,799,263) Investment in Turnkey Computer Systems, Inc.......... -- -- (22,833) ----------- ----------- ------------ Net cash used by investing activities........ (506,540) (892,213) (1,592,329) ----------- ----------- ------------ Cash flows from financing activities: Net borrowings from related parties.................. 3,810 9,447,030 6,866,381 Proceeds from capital lease financing with related party............................................. -- 440,832 -- Payment on note payable.............................. -- -- (500,000) Payments on capital lease obligations................ -- (55,962) (78,482) Capitalized Offering costs........................... -- -- (447,644) Sale of preferred stock.............................. 6,443,606 -- 23,500,000 Sale of common stock................................. 22,465 -- 187,405 ----------- ----------- ------------ Net cash provided by financing activities.... 6,469,881 9,831,900 29,527,660 ----------- ----------- ------------ Net increase (decrease) in cash.............. (1,145) (132) 12,316,229 Cash -- beginning of period............................ 1,545 400 268 ----------- ----------- ------------ Cash -- end of period.................................. $ 400 $ 268 $ 12,316,497
F-5 54 EMERGE INTERACTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ------------ Supplemental disclosures: Cash paid for interest............................... $ -- $ 23,594 $ Non-cash investing and financing activities: Transfer of technology by XL Vision, Inc. (note 10)............................................. 4,400,000 -- -- Contribution of debt to equity by XL Vision, Inc. (note 10)....................................... -- 7,500,000 -- Issuance of preferred stock in exchange for contribution of debt to equity by XL Vision, Inc. (note 10).................................. -- 4,800,000 -- Non-cash issuance of Class A common stock in connection with Nutri-Charge transaction (note 6).............................................. -- 2,070,000 -- Contribution of put rights by XL Vision, Inc. (note 6)........................................ -- 340,000 -- Issuance of Class A common stock in connection with CIN transaction (note 6)................... -- -- 720,000 Issuance of Class A common stock with Cyberstockyard transaction (note 6)............. -- -- 450,000 Issuance of redeemable Class A common stock with Turnkey Computer Systems, Inc. transaction (note 5).............................................. -- -- 400,000 Issuance of note payable to Turnkey Computer Systems, Inc. (note 5).......................... -- -- 1,400,000
See accompanying notes to consolidated financial statements. F-6 55 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 (1) ORGANIZATION (a) OVERVIEW eMerge Interactive, Inc. (the "Company") is a Delaware corporation that was incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly owned subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was changed to eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge Interactive, Inc. on June 11, 1999. The Company was incorporated to develop and commercialize infrared technology focused on the transportation segment. In 1997, the Company entered a new business segment, animal sciences, by developing an infrared camera system for use primarily by veterinarians. The Company further expanded its operations in 1998 by licensing NutriCharge and infrared technology (see note 6) for commercialization. In December 1998, the Company's Board of Directors decided to dispose of the transportation segment. The Company's AMIRIS thermal imaging system, which was the sole product sold by the transportation segment, was sold on January 15, 1999. (b) BASIS OF PRESENTATION The consolidated financial statements include the accounts of eMerge Interactive, Inc. and its wholly-owned subsidiaries, STS Agriventures, Ltd. ("STS"), a Canadian corporation and Cyberstockyard, Inc. ("Cyberstockyard"). All significant intercompany balances and transactions have been eliminated upon consolidation. The proforma balance sheet as of December 31, 1999 assumes the conversion of all redeemable common stock and preferred stock into common stock upon an initial public offering ("IPO"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) REVENUE RECOGNITION The Company recognizes revenue in accordance with the terms of the sale or contract, generally as products are shipped or services are provided. The Company bears both the inventory and credit risk with respect to sales all of its products. In cattle sales transactions, the Company purchases cattle from the seller, takes title at shipment and records the cattle as inventory until delivered to and accepted buyer, typically a 24 to 48 hour period. In both cattle auction and resale transactions, the Company acts as a principal in purchasing cattle from suppliers and sales to customers so that the Company recognizes revenue equal to the amount paid by customers for the cattle. (b) INVENTORIES Inventories are stated at standard cost which approximates the lower of first-in, first-out cost or market. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Amortization of equipment under capital lease is computed over the shorter of the lease term or the estimated useful life of the related assets. (d) INTANGIBLES Intangibles are stated at amortized cost. Amortization is computed using the straight-line method over the estimated useful lives of the assets. (e) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ". This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be F-7 56 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell. (f) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (h) USE OF ESTIMATES The preparation of the Company's consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. (i) NET PROFIT (LOSS) PER SHARE Net profit (loss) per share is computed in accordance with SFAS No. 128, "Earnings Per Share," by dividing the net profit (loss) allocable to common stockholders (net profit (loss) less accretion related to redeemable Class A common stock and beneficial conversion feature related to Series D preferred stock) by the weighted average number of shares of common stock outstanding less the shares of redeemable Class A common stock. The Company's stock options (338,125 at December 31, 1997, 1,632,500 at December 31, 1998 and 2,769,116 at December 31, 1999) and convertible preferred stock (6,443,606 at December 31, 1997, 8,843,606 at December 31, 1998 and 14,499,162 at December 31, 1999), have not been used in the calculation of diluted net profit (loss) per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net profit (loss) per share allocable to common stockholders are equal. Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 98 and SEC staff policy, all common stock and common stock equivalents issued for nominal consideration during the periods presented herein and through the filing of the registration statement for the IPO are to be reflected in a manner similar to a stock split or stock dividend for which retroactive treatment is required in the calculation of net profit (loss) per share; the Company did not have any such issuances. (j) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, trade accounts receivable, note payable, accounts payable, accrued liabilities and amounts due to related parties reflected in the consolidated financial statements approximates fair value due to the short-term maturity of these instruments. F-8 57 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) INVENTORIES Inventories consist of:
1998 1999 -------- ---------- Raw materials............................................. $424,130 $ 658,454 Work-in-process........................................... 282,427 139,187 Cattle.................................................... -- 403,562 -------- ---------- $706,557 $1,201,203 ======== ==========
(4) PROPERTY AND EQUIPMENT Property and equipment consists of:
DECEMBER 31, ESTIMATED --------------------- USEFUL 1998 1999 LIVES -------- ---------- --------- Engineering and manufacturing equipment............... $366,150 $ 673,782 5 years Office and computer equipment....................... 259,462 1,896,741 3 years Furniture and fixtures.............................. 104,706 112,122 7 years Leasehold improvements.............................. 46,865 80,430 7 years Automobiles......................................... -- 54,717 5 years -------- ---------- 777,183 2,817,792 Less accumulated depreciation and amortization...... 263,346 922,038 -------- ---------- Property and equipment, net......................... $513,837 $1,895,754 ======== ==========
Assets under capital lease amounted to $440,832 as of December 31, 1998 and 1999. Accumulated amortization for assets under capital lease totaled approximately $152,300 and $239,200 as of December 31, 1998 and 1999, respectively. (5) INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC. On August 16, 1999, the Company acquired 19% of the common stock of Turnkey Computer Systems, Inc. ("Turnkey") for $1,822,833. The purchase price consisted of 62,500 shares of the Company's redeemable Class A common stock valued at $400,000, $1,400,000 in cash and $22,833 of transaction costs. The $1,400,000 is payable upon the earlier of the completion of the Company's IPO or $500,000 at December 31, 1999 (which was paid in December 1999,) $500,000 at December 31, 2000 and $400,000 at December 31, 2001. This investment is carried on the cost method since the Company does not have significant influence over Turnkey. The common stock purchase agreement with Turnkey contains a put right which allows Turnkey to have a one time right to put to the Company its 62,500 redeemable Class A common shares with a fixed purchase price of $500,000. The put right can only be exercised upon a change in control or after December 31, 2001, if the company has not completed an IPO. This redeemable Class A common stock is classified outside of stockholders' equity as of December 31, 1999. The difference between the carrying amount and the redemption amount of $500,000 is being accreted to redeemable Class A common stock as a charge to additional paid-in capital from issuance to December 31, 2001 using the effective interest method. F-9 58 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INTANGIBLES Intangible assets consist of:
DECEMBER 31, ESTIMATED ----------------------- USEFUL 1998 1999 LIVES ---------- ---------- --------- NutriCharge license................................ $2,273,538 $2,273,538 10 years Infrared technology license........................ 568,385 568,385 5 years Goodwill -- CIN.................................... -- 2,076,368 5 years Non-compete agreement -- CIN....................... -- 100,000 5 years Goodwill -- Cyberstockyard......................... -- 427,274 3 years Non-compete agreement -- Cyberstockyard............ -- 100,000 3 years Goodwill -- PCC.................................... -- 1,487,791 5 years Non-compete agreement -- PCC....................... -- 100,000 4 years ---------- ---------- 2,841,923 7,133,356 Less accumulated amortization...................... 142,095 1,177,996 ---------- ---------- Intangibles, net................................... $2,699,828 $5,955,360 ========== ==========
On July 29, 1998, the Company acquired licenses for NutriCharge and infrared technology. The purchase price of $2,841,923 (consisting of $300,000 in cash, 2,587,500 of the Company's Class A common shares valued at $0.80 per share, $131,923 in acquisition costs and the estimated fair value of put rights granted by XL Vision) was allocated to the acquired NutriCharge and infrared technology licenses based on estimated fair values determined by estimated cash flows from the underlying licensed product. In connection with the transaction, XL Vision granted a put right that allows the sellers to require XL Vision to purchase up to 1,250,000 shares of the Company's Class A common stock at $3.00 per share. The fair value of the put was estimated to be $340,000 and was credited to additional paid-in capital. The put right may only be exercised thirty days prior to or after the fourth anniversary of the agreement. The ultimate amount payable under the put agreement is reduced by the amount, if any, of indemnification obligations related to the transaction. The estimated fair value of the put was determined with the assistance of an independent third party valuation expert by calculating the net present value (at 10% interest) of the product of the $2,000,000 intrinsic value of the put adjusted for the 25% probability that the put would be exercised. On February 24, 1999, the Company acquired substantially all of the tangible and intangible assets of CIN, LLC d/b/a Cattle's Information Network ("CIN") for $2,296,610. The purchase price for the assets consisted of 750,000 shares of the Company's Class A common stock valued at $720,000, the assumption of $812,021 of liabilities, a cash payment of $357,816, and an agreement to pay the first $350,000 from Internet sales of third party products over the Company's Web site and transaction costs of $56,773. CIN is in the business of selling access to its cattle feedlot performance measurements database. On March 29, 1999, the Company acquired 100% of the stock of Cyberstockyard, Inc. for $542,265. The purchase price consisted of 250,000 shares of the Company's Class A common stock valued at $450,000, the assumption of $89,972 of liabilities and transaction costs of $2,293. Cyberstockyard, Inc. is in the business of selling cattle through its proprietary auction software over the Internet. On May 19, 1999, the Company acquired substantially all of the tangible and intangible assets of PCC, LLC d/b/a/ Professional Cattle Consultants, L.L.C. ("PCC") for $1,827,861. The purchase price consists of a cash payment of $1,800,000 and an assumption of $2,861 of liabilities and transaction costs of $25,000. PCC is in the business of providing comparative analysis and market information for the feedlot industry. Each acquisition was accounted for as a purchase and the results of operations of the acquired companies is included in the statement of operations since the respective date of acquisition. F-10 59 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate purchase price of the above acquisitions was approximately $4,666,736, which included related acquisition costs of approximately $84,000 and was allocated as follows: Goodwill.................................................. $3,991,433 Non-compete agreements.................................... 300,000 Equipment................................................. 358,016 Current assets, including cash acquired of $737........... 17,287 ---------- $4,666,736 ==========
Unaudited pro forma information for the Company as if the acquisition above had been consummated as of January 1, 1998 and 1999 follows:
1998 1999 ----------- ------------ Revenue.................................................. $ 2,282,893 $ 44,005,044 =========== ============ Net profit (loss)........................................ $(7,161,345) $(16,074,834) =========== ============ Net profit (loss) attributable to common shareholders.... $(7,161,345) $(21,612,785) =========== ============ Net profit (loss) per common share....................... $ (1.34) $ (3.10) =========== ============
(7) EQUITY COMMON STOCK As of December 31, 1999, the Company had authorized the issuance of 100,000,000 shares of common stock. Class A -- In 1999, the Company designated 92,711,110 as Class A common stock. Class B -- In 1999, the Company designated 7,288,890 shares as Class B common stock. Holders of Class B common stock are entitled to two and one-half votes for each share. The shares of Class A and Class B are identical in all other respects. PREFERRED STOCK As of December 31, 1999, the Company had authorized the issuance of 15,000,000 shares of preferred stock and had designated 6,500,000 as Series A shares, and 2,400,000 as Series B shares, 1,300,000 as Series C shares and 4,555,556 as Series D shares. Each share of preferred stock is convertible into 1.25 shares of Class A common stock at the option of the holder or upon the vote of holders of two-thirds of the respective preferred stock class outstanding except for Series D shares which are convertible at the offering price into 1.25 shares of class B common stock. Preferred stock is automatically converted into common stock upon a qualified IPO of at least $10 million with a Company valuation of at least $30 million or upon a public rights offering of the Company to shareholders of Safeguard Scientifics, Inc. Series A -- The Series A shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $1.00 per share plus an additional $.10 per year (pro rated for partial years) from July 16, 1997 or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. The holders of Series A preferred stock are entitled to vote as a separate class to elect two directors to the Board of Directors of the Company. Series B -- Series B shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $2.00 per share plus an additional $.20 for each year (pro rated for partial years) from December 31, 1998 or until the date of distribution of available assets or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. Series B shares are junior to Series A, C and D shares. Series C -- On April 15, 1999, the Company designated 1,100,000 as Series C shares. Series C shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $5.00 per share plus an additional $.50 for each year (pro rated for partial years) from April 15, 1999 or until F-11 60 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the date of distribution of available assets or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to Class A common stock prior to liquidation. Series C shares are on parity with Series A and D shares except as to voting rights. Series D -- Series D shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $9.00 per share plus an additional $1.00 for each year (pro rated for partial years) from October 27, 1999 or until the date of distribution of available assets or (b) the amount which would be distributed if all the preferred stock of the Company were converted to Class B common stock prior to liquidation. Series D shares are on parity with Series A and C shares except as to voting rights. Series D stockholders are entitled to two and one-half votes per share. (8) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liability are as follows:
1998 1999 ---------- ----------- Deferred tax assets: Net operating loss carryforwards.......................... $5,967,000 $10,903,000 Amortization of acquired technology from XL Vision (note 10).................................................... 1,704,000 1,500,000 Research and experimentation tax credits.................. 448,000 740,000 Other..................................................... 596,000 853,000 ---------- ----------- 8,715,000 13,996,000 Less valuation allowance.................................. 8,715,000 13,996,000 ---------- ----------- Net deferred tax assets........................... -- -- ========== ===========
The Company has available at December 31, 1999 for federal income tax purposes, unused net operating loss carryforwards of approximately $28,000,000 which may be applied against future taxable income and expires in years beginning in 2012. The Company also has approximately $740,000 in research and experimentation credits carryforwards. The research and experimentation credits, which begin to expire in 2012, can also be used to offset future regular tax liabilities. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The difference between the "expected" tax benefit (computed by applying the federal corporate income tax rate of 34% to the loss before income taxes) and the actual tax benefit is primarily due to the effect of the valuation allowance. (9) STOCK PLAN In January 1996, the Company adopted an equity compensation plan (the "1996 Plan") pursuant to which the Company's Board of Directors may grant shares of common stock or options to acquire common stock to certain directors, advisors and employees. The Plan authorizes grants of shares or options to purchase up to 2,168,750 shares of authorized but unissued common stock. Stock options granted have a maximum term of ten years and have vesting schedules which are at the discretion of the Compensation Committee of the Board of Directors and determined on the effective date of the grant. In May 1999, the Company's stockholders approved the 1999 Equity Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional 1,250,000 shares of authorized, unissued shares of common stock of the Company are reversed for issuance to employees, advisors and for non-exempt members of the Board of Directors. Option terms under the 1999 Plan may not exceed 10 years. F-12 61 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of option transactions follows:
WEIGHTED AVERAGE RANGE OF WEIGHTED REMAINING EXERCISE PRICE AVERAGE CONTRACTUAL SHARES PER SHARE EXERCISE PRICE LIFE (IN YEARS) --------- -------------- -------------- --------------- Balance outstanding, December 31, 1996.............................. 3,125 $ 0.80 $0.80 4.85 ========= ============= ==== Granted...................... 335,000 0.80 0.80 --------- ------------- Balance outstanding, December 31, 1997........................... 338,125 0.80 0.80 9.64 ========= ============= ==== Granted...................... 1,692,500 0.80 - 1.60 0.84 Canceled..................... (398,125) 0.80 0.80 --------- ------------- Balance outstanding, December 31, 1998........................... 1,632,500 0.80 - 1.60 0.84 9.48 ========= ============= ==== Granted...................... 1,415,250 1.60 - 11.20 4.96 Exercised.................... (200,819) 0.80 0.93 Cancelled.................... (77,815) 0.80 - 1.60 1.35 --------- ------------- ----- Balance outstanding, December 31, 1999........................... 2,769,116 $0.80 - 11.20 $2.93 9.01 ========= ============= ===== ====
At December 31, 1997, 1998 and 1999, there were 76,719, 414,375 and 761,045 shares exercisable, respectively, at weighted average exercise prices of $0.80. $0.82 and $1.68, respectively. At December 31, 1997, 1998 and 1999, 99,375, 511,250 and 1,597,875 shares were available for grant, respectively. The per share weighted-average fair value of stock options granted was $-0- in 1997, $0.08 in 1998 and $1.47 in 1999 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1997 1998 1999 ---- ---- ---- Volatility.......................................... 0% 0% 0% Dividend paid....................................... 0% 0% 0% Risk-free interest rate............................. 6.11% 4.73% 4.99% Expected life in years.............................. 6.75 5.57 6.75
No volatility was assumed due to the use of the Minimum Value Method of computation for options issued by the Company as a private entity through December 31, 1999 as prescribed by SFAS No. 123. All stock options granted, except as noted in the paragraph below, have been granted to directors or employees with an exercise price equal to the fair value of the common stock at the date of grant. The Company applies APB Opinion No. 25 for issuances to directors and employees in accounting for its Plan and, accordingly, no compensation cost has been recognized in the consolidated financial statements through December 31, 1998. On March 19, 1999, the Company granted 360,625 stock options with an exercise price of $1.60 and a fair value of $1.80. The Company recorded $72,126 of unearned compensation at the date of grant and is amortizing the unearned compensation over the vesting period. Compensation expense amounted to $13,524 for the year ended December 31, 1999. F-13 62 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
1997 1998 1999 ----------- ----------- ------------ Net loss as reported........................... $(5,483,623) $(7,832,128) $(15,595,286) =========== =========== ============ Pro forma net loss........................... $ 5,483,623) $ 7,865,031) $(16,049,980) =========== =========== ============ Net loss per share, as reported: Basic and diluted......................... $ (14.34) $ (1.80) $ (2.30) =========== =========== ============ Pro forma net loss per share: Basic and diluted......................... $ (14.34) $ (1.81) $ (3.17) =========== =========== ============
(10) RELATED PARTY TRANSACTIONS DUE TO RELATED PARTIES Due to related parties consist of:
1998 1999 ---------- ----------- XL Vision................................................... $5,158,436 $ 1,668,317 Safeguard Scientifics, Inc. and Safeguard Delaware, Inc.................................................... 28,898 10,385,398 ---------- ----------- $5,187,334 $12,053,715 ========== ===========
AMOUNTS DUE TO XL VISION Amounts due to XL Vision consist of: Balance as of December 31, 1996........................... $3,636,494 Allocation of costs and funding of working capital to the Company.......................................... 6,318,405 Technology transfer fee................................ 4,400,000 Interest charges on technology transferred............. 141,167 Proceeds from Series A Preferred Stock................. (6,443,606) Issuance of Class A common stock....................... (22,465) ---------- Balance as of December 31, 1997........................... 8,029,995 Allocation of costs and funding of working capital to the Company.......................................... 9,120,441 Interest charges on technology transferred............. 308,000 Contribution of debt to equity......................... (7,500,000) Contribution of debt to equity in exchange for Series B Preferred stock...................................... (4,800,000) ---------- Balance as of December 31, 1998........................... 5,158,436 Allocation of costs and funding of working capital to the Company.......................................... (3,771,964) Interest charges on technology transferred............. 281,845 ---------- Balance as of December 31, 1999........................... $1,668,317 ==========
The average outstanding balance due to XL Vision was approximately $6,239,600 in 1997, $12,782,400 in 1998 and $6,266,800 in 1999. On January 1, 1999, the Company signed a revolving promissory note with XL Vision for up to $3,000,000. The revolving promissory note bears interest at the prime rate plus 1% (9.5% at December 31, 1999) and is due in full when the Company completes an IPO or sells all of its assets of stock. F-14 63 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTES PAYABLE TO SAFEGUARD DELAWARE, INC. On July 21, 1999, the Company obtained a $3,000,000 revolving note payable from Safeguard Delaware, Inc. ("Safeguard"). The revolving note payable, as amended, bears interest payable monthly at the prime rate plus 1% (9.5% at December 31, 1999) and is due February 29, 2000. In August, September and October 1999, the Company signed demand notes with interest payable monthly at the prime rate plus 1% (9.5% at December 31, 1999) with Safeguard for $2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled in October 1999, in exchange for a $7,050,000 note due in full on October 25, 2000, the repayment of a promissory note issued concurrently with the sale of Series D preferred stock or an IPO, whichever is earlier. Interest expense was approximately $0 in 1997, $0 in 1998 and $454,800 in 1999. TECHNOLOGY FEE On July 15, 1997, the Company entered into an agreement with XL Vision for the transfer of certain technology that is sued by the Company in the sale of its products for a $4,400,000 note payable. The transfer was accounted for as a distribution to XL Vision as it represented amounts paid for an asset to en entity under common control in excess of the cost of such asset. The note payable (included in amounts due to XL Vision above) bears interest at 7% per annum. Interest expense was approximately $141,200 in 1997, $308,000 in 1998 and $281,800 in 1999. DIRECT CHARGE FEE Prior to April 1, 1997 personnel, and other services were provided by XL Vision and the costs were allocated to the Company. The Company believes that the allocation method used by XL Vision was reasonable. Effective April 1, 1997, the Company entered into a direct charge fee agreement with XL Vision which allows for cost-based charges based upon actual hours incurred. Costs allocated to or service fees charged by XL Vision were approximately $720,000 in 1997, $460,000 in 1998 and $455,000 in 1999. A portion of the fees in 1998 and all of the fees in 1997 were allocated to the discontinued transportation segment. ADMINISTRATIVE SERVICES FEE Effective December 15, 1997, the Company entered into an agreement which requires accrual of an administrative services fee based upon a percentage of gross revenues. The fee for administrative support services, including management consultation, investor relations, legal services and tax planning, is payable monthly to XL Vision and Safeguard Scientifics, Inc., the largest shareholder of XL Vision, based upon an aggregate of 1.5% of gross revenues with such service fees to be not more than $300,000 annually. Effective August 17, 1999, the agreement was amended such that the administrative services fee is applied to net contribution margin on cattle sales and gross revenue for all other sales. The fee is accrued monthly but is only payable in months during which the Company has achieved positive cash flow from operations. The agreement extends through December 31, 2002 and continues thereafter unless terminated by any party. Administrative service fees were approximately $10,300 in 1997, $37,200 in 1998 and $53,200 in 1999. LEASES The Company leases equipment under a capital lease, effective April 20, 1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments, including imputed interest at 7.53%, are $85,765 in 2000, $92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was approximately $23,600 in 1998 and $27,400 in 1999. The Company rents its facilities from XL Vision. Rent expense varies based on space occupied by the Company and includes charges for base rent, repairs and maintenance, telephone and networking expenses, real estate taxes and insurance. Rent expense was approximately $354,000 in 1997, $1,129,000 in 1998 and $985,000 in 1999. F-15 64 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SALE OF SERIES D PREFERRED STOCK On October 27, 1999, the Company agreed to issue 4,555,556 shares of Series D preferred stock and a warrant to acquire 1,138,889 shares of Class B common stock to Internet Capital Group, Inc., an affiliate of Safeguard. Each share of Series D preferred stock is convertible into 1.25 shares of Class B common stock at any time at the option of the holder or immediately upon an IPO. The warrant is exercisable at the Company's IPO price. In the event the Company does not complete an IPO, the warrant is exercisable at $9.00 after November 16, 2000 or earlier if the Company has an equity financing of not less than $20,000,000 from private investors. The warrant expires on November 16, 2002. In return for these instruments, the Company received $18,000,000 of cash in November 1999 and a $23,000,000 non-interest, bearing note receivable due on October 27, 2000. Imputed interest at 9.5% amounts to $2,185,000 over the life of the note. The net consideration of $38,815,000 was allocated to the warrant and preferred stock as follows. The warrant was valued at $3,325,553 using the Black-Scholes method and assuming a strike price of $11.20, expiration of three years, 90% volatility, and 5.8% interest. The remaining proceeds were allocated to preferred stock and amounted to $7.79 per preferred share ($6.23 per common share). The beneficial conversion feature was calculated as the difference between the conversion price ($6.23) and the fair value of the common stock ($7.20) multiplied by the number of Class B common shares into which the preferred stock is convertible (5,694,445) and amounts to $5,523,612. The note receivable is shown as a reduction of stockholders' equity, net of imputed interest. Interest income is accreted over the life of the note using the effective interest method. The value of the warrant was credited to additional paid-in capital. The beneficial conversion feature was credited to preferred stock with a corresponding charge to additional paid-in capital at issuance. The beneficial conversion feature reduces net income available to common shareholders. (11) SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, which requires the reporting of segment information using the "management approach" versus the "industry approach" previously required. The management approach requires the Company to report certain financial information related to continuing operations that is provided to the Company's chief operating decision-maker. The Company's chief operating decision-maker receives revenue and contribution margin (revenue less direct costs and excluding overhead) by source, and all other statement of operations data and balance sheet data on a consolidated basis. The Company's reportable segments consist of cattle sales and animal sciences products and services. While the Company operates entirely in the animal science marketplace, the contribution margin associated with cattle sales and the related prospects for this portion of the Company's business differ from the rest of the Company's product offerings. F-16 65 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:
DECEMBER 31, ------------------------- 1998 1999 ---------- ----------- Revenue: Cattle.............................................. $ -- $42,191,884 Animal sciences..................................... 1,792,471 1,591,240 ---------- ----------- Total............................................ $1,792,471 $43,783,124 ========== =========== Cost of revenue: Direct costs: Cattle........................................... $ -- $41,746,723 Animal sciences.................................. 900,824 558,243 ---------- ----------- Total direct costs............................... 900,824 42,304,966 Unallocated overhead................................ 1,722,623 1,212,493 ---------- ----------- Total............................................ $2,623,447 $43,517,459 ========== =========== Gross profit (loss): Contribution margin: Cattle........................................... $ -- $ 445,161 Animal sciences.................................. 891,647 1,032,997 ---------- ----------- Total............................................ 891,647 1,478,158 Unallocated overhead.................................. (1,722,623) (1,212,493) ---------- ----------- Gross profit (loss).............................. $ (830,976) $ 265,665 ========== ===========
The Company's assets and other statement of operations data are not allocated to a segment. (12) DISCONTINUED OPERATIONS In December 1998, the Company's Board of Directors decided to dispose of its transportation segment. The Company's AMIRIS thermal imaging system, which was the sole product sold in the transportation segment, was sold on January 15, 1999 to Sperry Marine, Inc. for approximately $1,900,000. The Company received $200,000 of cash at closing and collected an additional $1,388,000 through December 31, 1999. The remaining balance of approximately $294,142 is expected to be collected by April 30, 2000. The Company is entitled to a royalty of 8% of net AMIRIS system sales, up to a maximum royalty of $4.3 million over a four year period or up to a maximum royalty of $5.0 million, if $4.3 million is not received within four years. Net assets of the discontinued transportation segment consist of:
1998 1999 ---------- --------- Accounts receivable....................................... $ 381,435 $ 10,353 Inventory, net............................................ 2,020,625 123,093 Note receivable........................................... -- 294,142 Property and equipment, net............................... 134,098 -- Intangibles, net.......................................... 61,108 -- Accounts payable.......................................... (80,510) (28,185) Accrued liabilities including provision for operating loss during phase out period of $72,667 in 1998 and $0 in 1999................................................... (231,415) (102,400) ---------- --------- Net assets........................................... $2,285,341 $ 297,003 ========== =========
F-17 66 EMERGE INTERACTIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) COMMITMENTS AND CONTINGENCIES VOLUNTARY EMPLOYEE SAVINGS 401(k) PLAN The Company established a voluntary employee savings 401(k) plan in 1997 which is available to all full time employees 21 years or older. The plan provides for a matching by the Company of the employee's contribution to the plan for 50% of the first 6% of the employee's annual compensation. The Company's matching contributions were approximately $38,200 in 1997, $62,100 in 1998 and $81,700 in 1999. ROYALTIES In connection with the NutriCharge license, the Company is obligated to a royalty of 5% of gross revenues from the sale of NutriCharge products and infrared technology related to the Company's Canadian license agreement. Royalty expense in connection with this agreement was nominal through the period ended December 31, 1999. The Company is also obligated to a royalty of 6% of net revenues from product or services related to technology patented by Iowa State University. No such royalties have been paid as of December 31, 1999. LEGAL PROCEEDING The Company has been named as a defendant in a lawsuit filed by Central Biotech, Inc. on January 12, 2000 in the Queen's Bench Judicial Centre of Regina, Providence of Saskatchewan, Canada. The complaint alleges that eMerge and E-Y laboratories, Inc. were each subject to confidentiality agreements with the plaintiff, and subsequently engaged in discussions concerning a potential business arrangement in violation of such agreements. The complaint asserts damages, including punitive damages, from the defendants in the aggregate amount of $18,000,000 (Canadian dollars), as well as injunctive relief. Although the Company has not yet completed its assessment of these claims, the Company believes that there are a number of substantive and procedural defenses that exist and intends to defend these claims vigorously. (14) SUBSEQUENT EVENTS On February 17, 2000, the Company closed on its IPO and a concurrent private placement of common stock and raised net proceeds of approximately $107,400,000. Approximately $12,800,000 of the proceeds were used to pay amounts due to related parties (see note 10) and $900,000 was paid to Turnkey (see note 5). F-18 -----END PRIVACY-ENHANCED MESSAGE-----