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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x Annual |
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Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 |
Or
¨ Transition |
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Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from to |
Commission File Number: 000-29037
eMerge Interactive, Inc.
(Exact name of registrant as specified in its charter)
| Delaware |
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65-0534535 |
| (State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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| 10305 102nd Terrace Sebastian, Florida
32958 |
| (Address of principal executive offices) |
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| (772) 299-8000 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class: |
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Name of each exchange on which registered: |
| none |
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none |
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.008
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
The approximate aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $18 million as of March 25, 2002, based upon the closing sale price per share of the common stock as quoted
on the NASDAQ National Market. For the purposes of determining this amount only, the Company has excluded shares of common stock held by directors, officers, and stockholders with representatives on the board of directors whose ownership exceeds
five percent of the common stock outstanding at March 25, 2002. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management
or policies of the registrant, or that such person is controlled by or under common control with the registrant.
The number of
shares of the registrant’s common stock, $0.008 par value, outstanding as of March 25, 2002 was 39,634,170. There were 33,939,725 shares of Class A common stock outstanding and 5,694,445 shares of Class B common stock outstanding as of this
date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of eMerge Interactive, Inc.’s definitive proxy statement for its 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days
after the end of the year covered by this Form 10-K Report are incorporated by reference into Part III of this Report.
eMerge Interactive, Inc.
FORM 10-K ANNUAL REPORT
(For Fiscal Year Ended December 31, 2001)
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| Item 7A. |
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| Item 13. |
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Part IV |
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ITEM 1(A). GENERAL DEVELOPMENT OF THE BUSINESS
COMPANY OVERVIEW
We are a technology and
interactive cattle-marketing company serving the $40-billion U.S. beef production industry. Our technologies focus primarily on information-management and individual-animal tracking tools, as well as other food-safety technologies designed to
enhance consumer confidence in beef safety. Our cattle-marketing operation, the largest in the U.S., consists of livestock-marketing and order-buying facilities, a nationwide network of 80 cattle representatives and an online auction and brokerage
service.
Our goal is to develop broad industry adoption of our information management system, subsequently establishing it as
the standard for individual-animal tracking and procurement in order to facilitate the safe, timely flow of source- and process-verified cattle and beef products within the beef-production supply chain. We believe that by accomplishing our goal, we
can improve the industry’s productivity and profitability and help its participants enhance beef quality, safety and market share. Thus, our mission is to enable the delivery of a large, brandable supply of beef that 1) differentiates the beef
products, 2) opens new markets for beef and 3) creates new value for the industry and consumers.
We offer our products and
services to cattle industry participants through our proprietary information management applications, our direct sales force and our web-based business network. Our current and planned products and services include:
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CattleLog™, our individual-animal
data-collection and reporting system. Using the eMerge network as its backbone, CattleLog allows owners to electronically document the histories of individual animals from conception through harvest—and therefore to sell them based on detailed
specifications, in order to earn greater than market per-pound averages. It also allows buyers to capitalize on the predictable performance needed for efficient feeding and for producing beef products of consistent quality.
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Our Cattle Marketing and Procurement services. These services include the largest real-time Internet Auction and Brokerage Service, some of the nations largest and most
progressive livestock markets, a leading video auction service, and a network of more than 80 professional cattle order buyers, providing eMerge customers the marketing options they need anywhere in the United States.
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VerifEYE™, our development stage meat
inspection system that was developed and patented by scientists at Iowa State University and the Agricultural Research Service of the USDA for which we hold exclusive rights to its commercialization. While we are currently determining the
specifications for commercialization, this technology promises to help meat processors detect contamination and verify extensive safeguards already in place to minimize the possibility of outbreaks of such bacterial infections as E. coli 0157:H7. We
have not yet begun to commercialize this technology and cannot be sure that we will be able to create an economically viable product from this technology. |
Our business strategy is to utilize our $20 million technology infrastructure investment to drive industry adoption of our technologies and solutions to provide branded value-added
alternatives. Our livestock marketing facilities, Internet auction and supply chain management services are integral components of this strategy as they provide a means to introduce our tracking technologies. Additionally, we will pursue expanding
our relationships with those entities in the beef industry that have been the innovators and early adapters of technologies that enable individual animal management and the systems that provide source and process verification.
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COMPANY BACKGROUND
We were incorporated in 1994 as a subsidiary of XL Vision, Inc. (“XL Vision”) to develop and commercialize imaging technology applications. XL Vision was a private company that provided 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. In 1998, we licensed a portfolio of patents from a division of the Canadian government relating to the application of
infrared technology to the animal science field and a restorative feed supplement called NutriCharge.
In 1999, we discontinued
production of the AMIRIS system and 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. Beginning in the second quarter of 2002, we will begin to receive 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.
During 1999, 2000 and 2001, we embarked upon a series of acquisitions aimed at increasing our presence and market share within the cattle industry. The discussion of these acquisitions is incorporated by reference
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth in Item 7 of this Form 10-K Report.
In February 2000, we completed our initial public offering (“IPO”) of 7,175,000 common shares and a private placement of 500,000 common shares, which generated net proceeds of $107.1 million. In 2000,
approximately $12.8 million of the proceeds were used to pay amounts due to related parties and Turnkey Computer Systems, $37.7 million was used for acquisitions of other businesses, and $16.3 million was used for capital expenditures and general
working capital purposes. In 2001, an additional $10.3 million of the proceeds were used for the acquisitions of other businesses or as additional payments for the businesses acquired during 2000, $7.9 million was used for capital expenditures and
the balance was used for general working capital.
In 2000, we discontinued the commercialization development of our NutriCharge
product as we determined that the additional resources required to successfully commercialize did not fit our business strategy.
In 2001, we began to focus our efforts on primarily two business models, supply-chain management and food safety technology. Accordingly, a series of restructurings occurred in an effort to fund our operations from existing cash flows,
which resulted in a 50 percent reduction in our corporate overhead and a restructuring charge of $57.4 million including $54.5 million in noncash asset impairment charges, $1.6 million in severance and related employee costs and $1.3 million in
other closure, employee and professional costs. We also restructured our cattle brokerage operations by entering into operating agreements with several key individuals that currently manage these businesses in order to provide profit-sharing
incentives to these individuals to enhance volumes, improve margins and increase revenues. The discussion of these agreements are incorporated by reference under “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” as set forth in Item 7 of this Form 10-K Report.
In August, 2001, we structured a strategic technology
alliance with two privately held companies; 1) Allflex Holdings Inc, a global leader in visual and electronic animal-identification systems, and 2) Farmexpress S.A.
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from Europe, a provider of livestock-industry information technology, setting in motion a global effort to create the industry standard in individual animal tracking solutions for the beef
industry. As part of this alliance, we sold four million restricted common shares to Allflex and received $2.7 million in cash.
Throughout 2001, the industry continued to adopt our technologies and solutions for providing branded value-added alternatives. New customers and milestones included:
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Selected by Kansas’ Beef Marketing Group, whose members feed more than 450,000 cattle annually, to manage their individual-animal identification program utilizing our
exclusive CattleLog™ system—a system that integrates such tools as electronic identification tags
(“EIDs”), handheld computers and proprietary software to capture individual animal data. |
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Reached an agreement with the Oklahoma Cattlemen’s Association (OCA) to manage the individual-animal tracking and marketing systems of the Association’s new Oklahoma
Quality Beef Network (OQBN)—a program designed to help member producers, representing 85% of the state’s cattle-production capacity of nearly 2 million head, capture the value they have added to their cattle and capitalize on the growing
demand for preconditioned, process-verified cattle. |
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Held Kentucky’s first live/internet cattle auction, improving producers’ earnings on more than 7,600 head of cattle by generating $25 to $50 per head premiums. Buyers
from 19 states helped Bluegrass Stockyards post a one-day volume record. |
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Selected by Five States Beef Initiative to manage individual-animal data-collection and information-management for its new, vertically coordinated beef-production, marketing
and information-sharing system. The system is designed exclusively for eastern corn-belt cattlemen in Kentucky, Ohio, Indiana, Michigan, and Illinois. |
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Selected by Ranchers Renaissance™, one of
the largest beef-production cooperatives in the U.S., to provide individual-animal tracking and data-management services for the cooperative’s quality-controlled, grain-fed cattle for the third straight year. These technologies enable the
Ranchers Renaissance cooperative to provide a source- and process-verified supply of cattle for the Cattlemen’s Collection brand, currently retailed by Kroger. |
In 2002, we announced an agreement to integrate our VerifEYE™ meat inspection system into Excel Corporation’s beef operations to finalize specifications for commercialization. Excel Corporation is a leading U.S. beef processor and a wholly-owned subsidiary of Cargill
Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products and services with 90,000 employees in 57 countries.
ITEM 1(B). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information for the Company’s three operating segments for the three-year period ended December 31, 2001, is contained in Note 15 to the Consolidated Financial Statements beginning on page F-21.
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, generating $95 billion in annual sales. The U.S. Department
of Agriculture reports that sales of cattle account for approximately $34 billion in annual sales. On an annual basis,
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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.
The U.S. beef production chain can be classified into three primary segments: producers, feedlots, and packers.
PRODUCERS
According to the NCBA, there are approximately one million producers comprised of ranchers and small
farm owners who breed and raise cattle. Most of the producers are independently owned and are dispersed throughout the United States. Each year these producers market approximately 35 million head of cattle that are eventually harvested for food, of
which approximately 27 million are processed through feedlots. These cattle, raised for 12-18 months in an average herd size of approximately 35 head, are often located in different geographic regions, aggregated into larger herds and then sold to
centralized feedlots to increase their weight and value.
FEEDLOTS
Feedlots typically purchase cattle weighing 300 to 900 pounds and manage the health and growth of the cattle for a period of 110 to 250 days. We estimate that during this time, each
animal is fed on average 20-30 lbs. of grain per day. There are approximately 700 major feedlot operations concentrated in 10 Midwestern states. These feedlots can manage 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 two 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 Incorporated, 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, most importantly, the loss of important
feeding and medication information.
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.
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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.
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.
We believe, and the industry is rapidly acknowledging, that an 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. There is also a growing retail demand for verified processed beef that has created an opportunity for our cattle marketing
operations to be the logistical provider of this type of product. Therefore, our products and services are directed at individual-animal tracking, supply-chain procurement and food safety in order to facilitate the safe, timely flow of source- and
process-verified cattle and beef products within the Beef-Production Supply Chain. We believe our products and services can improve the industry’s productivity and profitability and help its participants enhance beef quality, safety and market
share.
OUR PRODUCTS AND SERVICES
INDIVIDUAL
ANIMAL-TRACKING SOLUTIONS
CattleLog™
The CattleLog individual-animal data-collection and
reporting system is designed to help cattle operations process-verify and “de-commoditize” electronically tracked animals—and therefore to deliver cattle offering predictable performance, in order to streamline management, lower costs
and improve profitability for every segment in the beef-supply chain.
CattleLog users can create continuously updated profiles
that follow animals from birth through harvest—specifications covering everything from genetics to health management. Prior and subsequent owners can then easily access the information via a password-protected area of eMerge’s web site, in
order to:
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Predict each animal’s performance |
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Determine the best management techniques to apply |
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Deliver the source- and process-verification that are essential to successful beef branding |
In addition, CattleLog is designed to help maintain consumer confidence in the safety of U.S. beef in the unlikely event that a large-scale bovine-health issue should arise in this
country. Once wide-scale adoption has been achieved, it would help officials quickly trace disease sources, focus remedial action only where it is needed, and help ensure consumers that the beef they’re buying is safe.
Components range from the affordable CattleLog ME to the highly automated CattleLog LT. The portfolio combines our proprietary, Internet-based
data-transfer architecture with the advanced data-encryption techniques used by major global financial institutions. Our information-management system integrates Sun® servers,
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Oracle® RDBMS database systems, and electronic-identification
ear tags embedded with radio-frequency transponders. Our data-collection tools include data-acquisition software written for desktop PCs, and, to support data collection in the field, for Hewlett-Packard Jornada hand-held computers.
Web-based reports
CattleLog allows
users easy, secure access to an array of sophisticated, web-based reports to streamline decision-making. Users simply log on to www.emergeinteractive.com to access an array of interactive reports—both standardized and customizable reports
accommodating more than 400 fields of data. Here, they will find their own operations’ data presented in easy-to-interpret formats. They can manipulate this information for detailed analysis and benchmarking of their operations’
performance, print out the resulting reports, even e-mail them to suppliers or customers.
CATTLE MARKETING AND PROCUREMENT
We offer multiple options to market cattle throughout the supply chain through our unique cattle-marketing network of livestock markets,
Internet and video auctions, order buyers and brokerage services.
Cattle Brokerage Services
Through our brokerage network, which is supported by a team of more than 80 of the nation’s top cattle-sales representatives, buyers are provided a ready supply of calves,
yearlings and breeding stock. As eMerge’s brokers have exposure to the entire market and not just a limited region, they enable producers to manage for the seasonality of the cattle market. All of our brokerage representatives provide
personalized, on-site service, and all are connected through our Austin, Texas and New Albany, Indiana hubs.
Internet Auction and Brokerage
We have developed a detailed posting and transaction process for our on-line brokering services to ensure that adequate
information is provided to the purchaser prior to the transaction. We verify the identity of a purchaser through use of a secure password system and verify credit-worthiness of each participant prior to enabling access to our system. Our expert
livestock brokers in the field verify all cattle offered for sale through the Internet channel. We provide a detailed description of each lot of cattle, which can be accessed by a purchaser online. We update our inventory of cattle for sale daily
and customers can review our full inventory listings. In addition, customers can post descriptions, quantity and pricing criteria for cattle they would like to purchase and our system will automatically search for a match. If a match is found, the
customer is notified immediately online. If no match is found, the customer can choose to have our system perform a daily search for a match as new inventory is added to our system. Notification of a match is sent to the customer by e-mail 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. In addition to our on-line brokering services, we also purchase and resale cattle through an integrated network of order buyers
and sales representatives.
Cattle Auctions
In addition to our brokering service, we offer cattle for sale through our online video auctions and traditional livestock market auctions. Several eMerge livestock markets and several others “franchising”
our technology and process also offer eMerge’s Premium Sales where all cattle, no matter the herd size, are preconditioned, electronically identified, commingled, sorted and sold in larger groups for greater producer profits.
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Although not necessary to facilitate cattle sales transactions, video and still images are also
available to customers online. 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.
Video
Auction
Live video auctions from eMerge’s Mountain Plains Video Auction give buyers access to ranch-direct cattle
while exposing sellers to more buyers. With video auctions, the customer is no longer limited by location since they can view cattle from any remote area.
DATA MANAGEMENT
We also offer tools to help industry participants understand the data they have collected. Our
Professional Cattle Consultants group (“PCC”), which we acquired in 1999, can provide customers with accurate analysis and market information for the feeding industry. PCC is in the business of collecting, calculating and disseminating
feedlot data. PCC has spent 26 years refining its comparative analysis program and our staff has a complete understanding of the modern feeding industry—ensuring collected data is accurate and complete.
We provide customers with easy-to-read tables and graphs monthly as a comparative analysis report allowing them to compare the performance of their yard
with regional averages. The analysis also helps customers see a broader view of the feedlot industry. Customers get detailed information on feed ingredient costs, industry profits and market trends.
FOOD SAFETY SOLUTIONS
VerifEYE™
VerifEYE is our development stage meat inspection system that was developed and patented by scientists at Iowa State University and the Agricultural Research Service of the USDA for which we hold exclusive rights to its commercialization.
VerifEYE is a real-time, electronically controlled optical instrument that creates images of carcasses and displays them on a nearby monitor. The technology promises to help meat processors detect contamination and verify extensive safeguards
already in place to minimize the possibility of outbreaks of such bacterial infections as E. coli 0157:H7.
The USDA
Agricultural Research Service, on trials conducted at Oklahoma State University and at the University of Florida, has confirmed that this imaging technology can detect even microscopic traces of fecal material on freshly harvested
beef—including beef that has been subjected to such pathogen interventions as acid washes and steam pasteurization.
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February 5, 2002, we announced an agreement to integrate our VerifEYE™ meat inspection system into Excel
Corporation’s beef operations to finalize specifications for commercialization. Excel Corporation is a
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leading U.S. beef processor and a wholly-owned subsidiary of Cargill Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products
and services with 90,000 employees in 57 countries.
We are currently developing derivative products using this technology for
alternative applications, including hand-scan units for use in facilities ranging from restaurants to hospitals and daycare centers.
TECHNOLOGY AND
DEVELOPMENT
We intend to continue to devote time and resources to enhance our current core technology to improve our
existing products, expand our product line and enter into other market segments. Approximately $4.5 million during the year ended December 31, 2001 and approximately $7.7 million for the year ended December 31, 2000 were related to technology and
development spending. Our current technology and development activities are primarily focused on developing our CattleLog and VerifEYE products.
SALES AND MARKETING
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 to producer, 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 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, the press, and at
local, state, and national industry meetings and events. 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.
OUR CUSTOMERS
Our customer focus is the cattle cow/calf producer, the stocker and
backgrounder, the feedyard operator, the packer or beef processor, various state beef quality assurance programs and branded beef alliances supporting retailers within the entire beef production chain.
INTELLECTUAL PROPERTY
Our ability to protect and
utilize our intellectual property rights is important to our continued success. We currently have multiple patent applications that are pending before the U.S. Patent and Trademark Office relating to:
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Livestock management systems and methods and |
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Systems and methods for the detection of organic contamination. |
The U.S. patent number 5,914,247, relating to technology for detecting organic 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 in 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.
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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 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.
COMPETITION
In the cattle sales and auction services market, we compete against traditional cattle auction services, as well as video cattle auction providers and other online cattle auction services. Currently, the majority of cattle and calf sales
transactions occur through auctions held at traditional sale barns. These sale barn operations are highly fragmented and vary in size. We believe that the primary competitive factors in the cattle sales and auction services market include:
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Availability and quality of inventory; |
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Reliability of service; |
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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 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. We believe that the primary competitive
factors in the information services market include:
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Breadth of available data; |
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Timeliness of information; |
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Value-added consulting services; and |
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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.
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EMPLOYEES
As of December 31, 2001, we employed a total of 287 persons, 150 of whom work with us on a full-time basis. We are not subject to any collective bargaining agreements and we believe that our relationship with our
employees is good.
ITEM 1(D). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
We do not have foreign sales and do not
believe geographic sales are significant to obtain an understanding of our business operations during the three-year period ended December 31, 2001.
The location and general description of our properties as of March 1, 2002, are as
follows:
Corporate Headquarters
Our corporate facility is currently located at 10305 102nd Terrace in Sebastian, Florida, where we occupy
approximately 32,000 square feet of office, administrative, and data center space. We lease our facilities from XL Realty, Inc., a subsidiary of Safeguard Scientifics, Inc. Our lease for this facility expires on March 31, 2003.
Other Facilities
We maintain sales
and support offices in Meade, Kansas; Weatherford, Oklahoma; and Austin, Texas. We also maintain cattle assimilation and auction facilities which are located in Lexington, Kentucky; Gaffney, South Carolina; and in San Saba, Brownwood, Mason, and
Laredo, Texas. We own and lease certain of our properties in Okolona, Mississippi and Chilton, Texas.
We have been named as a defendant in a lawsuit filed by Central Biotech, Inc. on
January 12, 2000 in the Queen’s Bench Judicial Centre of Regina, Province of Saskatchewan, Canada. The complaint alleges that we and E-Y Laboratories Inc. were each subject to confidentiality agreements with the plaintiff, and subsequently
engaged in discussions concerning a potential business arrangement allegedly in violation of these agreements. The complaint asserts damages, including punitive damages, from the defendants in the aggregate amount of $18 million (Canadian dollars),
as well as injunctive relief.
In 2000, our motion to dismiss the case based on jurisdiction and venue was denied at the trial
court level in Saskatchewan, as was the similar motion by co-defendant E-Y Laboratories. Both defendants have appealed that decision, and are in the process of presenting their position to the appeals court. We continue to believe that the matter
should be dismissed, but it is not possible to predict whether the appellate court in Canada will reverse the lower court decision. If the case is not dismissed, it will proceed in Canada. We believe the case to be without merit and intend to defend
it vigorously.
We have also been named as a defendant in a lawsuit by Stonebridge Acquisition, Inc. on January 18, 2002 in the
County Court of Dallas County at Law No. 2, Dallas County, Texas. The complaint alleges that we did not permit Stonebridge to complete services per a consulting services agreement and did not pay for services performed. The complaint asserts
damages, from the defendants in the aggregate amount of $1.0 million, as well as injunctive relief. We have filed a motion to dismiss the complaint, which is pending and we believe we have valid defenses to the action.
12
We are involved in various other claims and legal actions arising in the ordinary course of
business. Our opinion is that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
No matter was submitted to a vote of security
holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2001.
13
Our common stock trades in the NASDAQ National Market under the symbol “EMRG”. Prior to our February 4, 2000, IPO there was no established public trading market for any of our
securities. The price range per share reflected in the table below is the highest and lowest sale price for our stock as reported by the NASDAQ National Market during each quarter of the last two fiscal years:
| |
|
High
|
|
Low
|
| February 4, 2000 to March 31, 2000 |
|
$ |
70.50 |
|
$ |
25.00 |
| April 1, 2000 to June 30, 2000 |
|
$ |
30.19 |
|
$ |
8.56 |
| July 1, 2000 to September 30, 2000 |
|
$ |
31.00 |
|
$ |
15.00 |
| October 1, 2000 to December 31, 2000 |
|
$ |
16.50 |
|
$ |
2.88 |
| January 1, 2001 to March 31, 2001 |
|
$ |
5.88 |
|
$ |
3.41 |
| April 1, 2001 to June 30, 2001 |
|
$ |
3.77 |
|
$ |
.89 |
| July 1, 2001 to September 30, 2001 |
|
$ |
2.28 |
|
$ |
.66 |
| October 1, 2001 to December 31, 2001 |
|
$ |
1.82 |
|
$ |
1.25 |
As of March 25, 2002, the last reported sale price for our common stock on the
NASDAQ National Market was $0.76 per share and we had 594 registered holders of record of our common stock.
We have never
declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future
determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements and such other factors as the board of directors deems relevant.
Recent Sales of Unregistered Securities
On January 8, 2001, we purchased certain tangible and intangible assets in connection with the acquisition of Timothy R. Pennell’s (“Pennell”) livestock resale business. As part of the exchange, we
issued 51,370 shares of our Class A common stock with an aggregate value of $187,500.
On January 11, 2001, we purchased certain
tangible and intangible assets in connection with the acquisition of Runnells Peters Cattle Company (“Runnells Peters”). As part of the exchange, we issued 136,986 shares of our Class A common stock with an aggregate value of $500,000.
On September 28, 2001, we sold 4,000,000 shares of our common stock to Allflex Holdings, Inc. (“Allflex”) for $2.7
million in cash.
All of the above referenced shares were issued pursuant to an exemption by reason of Section 4(2) of the
Securities Act of 1933. Shares issued in connection with option exercises were issued either pursuant to an exemption by reason of Rule 701 and Section 4(2) of the Securities Act of 1933 or were issued pursuant to the Company’s Registration
Statement on Form S-8. The sales were made without general solicitation or advertising. Each purchaser represented that he, she, or it was acquiring the shares without a view to distribute and was afforded an opportunity to review all documents and
ask questions of our officers pertaining to matters they deemed material to an investment in our Class A common stock.
14
We have also been named as a defendant in a lawsuit filed by Stonebridge Acquisition, Inc. on
January 18, 2002 in the County Court of Dallas County at Law No. 2, Dallas County, Texas. The complaint alleges that we did not permit Stonebridge to complete services per a consulting services agreement and did not pay for services
Changes in Securities and Use of Proceeds
On February 4, 2000, we commenced an initial public offering of our common stock. Our registration statement on Form S-1 (File No. 333-89815) covering the offering of 7,175,000 shares was declared effective on February 3, 2000. Adams,
Harkness & Hill, Inc., First Union Securities, Inc. and FAC Equities were the managing underwriters of the offering. As part of the offering, we sold 2,806,000 shares of our class A common stock at the public offering price to shareholders of
Safeguard Scientifics, Inc. (“Safeguard”), one of our principal stockholders, that owned at least 100 shares of common stock of Safeguard as of October 20, 1999, and Safeguard sold 694,000 of its eMerge Interactive shares to its
shareholders. In addition, we issued 500,000 shares of class A common stock at $15.00 per share in a private placement that was completed simultaneously with the offering.
The net proceeds from the offering and the private placement after deducting discounts, commissions, management fees, finder’s fees and expenses was $107.1 million. During 2000, we
used $12.8 million of the proceeds from this offering for payments to related parties and Turnkey Computer Systems, Inc., $37.7 million for acquisitions, $16.3 million for capital expenditures, and for general working capital purposes. In 2001, an
additional $10.3 million of the proceeds were used for the acquisitions of other businesses or as additional payments for the businesses acquired during 2000, $7.9 million was used for capital expenditures and the balance was used for general
working capital. None of the foregoing expenses or remaining payments constituted direct or indirect payments to our directors, officers, general partners or their associates or to persons owning 10% or more of any class of our equity securities or
to our affiliates.
The financial information set forth below may not be indicative
of our future performance and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto which are included in
this Form 10-K Report.
| |
|
Year Ended December 31,
|
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
| |
|
(in thousands, except per share data) |
|
| Revenue |
|
$ |
1,195,303 |
|
|
$ |
803,020 |
|
|
$ |
43,783 |
|
|
$ |
1,792 |
|
|
$ |
— |
|
| Cost of revenue |
|
|
1,181,681 |
|
|
|
793,860 |
|
|
|
43,517 |
|
|
|
2,623 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
|
13,622 |
|
|
|
9,160 |
|
|
|
266 |
|
|
|
(831 |
) |
|
|
— |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, general and administrative |
|
|
27,541 |
|
|
|
26,963 |
|
|
|
9,864 |
|
|
|
3,484 |
|
|
|
567 |
|
| Technology and development |
|
|
4,481 |
|
|
|
7,688 |
|
|
|
4,156 |
|
|
|
1,047 |
|
|
|
667 |
|
| Depreciation and amortization |
|
|
15,453 |
|
|
|
10,053 |
|
|
|
1,563 |
|
|
|
238 |
|
|
|
122 |
|
| Impairment and related charges |
|
|
57,412 |
|
|
|
2,491 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
104,887 |
|
|
|
47,195 |
|
|
|
15,583 |
|
|
|
4,769 |
|
|
|
1,356 |
|
| Interest expense/other income, net |
|
|
(920 |
) |
|
|
4,815 |
|
|
|
(288 |
) |
|
|
(332 |
) |
|
|
(141 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing operations |
|
$ |
(92,185 |
) |
|
$ |
(33,220 |
) |
|
$ |
(15,605 |
) |
|
$ |
(5,932 |
) |
|
$ |
(1,497 |
) |
| |
|
|
|
|
|
|