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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2001,
Or
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
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Commission File Number: 000-29037
EMERGE INTERACTIVE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 65-0534535
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10305 102nd Terrace Sebastian, Florida 32958
---------------------------------------------
(Address of principal executive offices)
(561) 589-5310
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Registrant's telephone number, including area code:
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 [ ]
The number of shares of the registrant's common stock, $0.008 par value,
outstanding as of August 10, 2001, was 35,589,357. There were 29,894,912 shares
of Class A common stock outstanding and 5,694,445 shares of Class B common
outstanding as of this date.
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EMERGE INTERACTIVE, INC.
FORM 10-Q QUARTERLY REPORT
(For Six Months Ended June 30, 2001)
TABLE OF CONTENTS
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001........................ 3
Condensed Consolidated Statements of Operations for the three months ended June 30, 2000 and 2001...... 5
Condensed Consolidated Statements of Operations for the six months ended June 30, 2000 and 2001........ 6
Condensed Consolidated Statement of Stockholders' Equity as of June 30, 2001........................... 7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 2001........ 8
Notes to Condensed Consolidated Financial Statements................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 24
Part II OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 25
Item 2. Changes in Securities and Use of Proceeds............................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 25
Item 6. Exhibits and Reports on Form 8-K........................................................................ 26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS DECEMBER 31, JUNE 30,
2000 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 42,811,572 $ 8,121,127
Trade accounts receivable, less allowance for doubtful accounts of $167,937 in 2000 and
$426,326 in 2001 12,141,867 18,891,430
Inventories (note 3) 3,704,250 6,040,167
Cattle deposits 2,185,670 4,904,856
Prepaid expenses 1,070,674 1,232,906
Other current assets 697,536 235,336
Due from related parties (note 4) 3,479,492 2,824,499
------------ ------------
Total current assets 66,091,061 42,250,321
Property, plant and equipment, net of accumulated depreciation of $2,899,321 in 2000
and $4,345,349 in 2001 20,567,939 16,408,727
Investment in Turnkey Computer Systems, Inc. 3,010,603 2,913,027
Intangible assets, net of accumulated amortization of $8,131,310 in 2000 and $13,669,926 57,377,620 51,038,813
in 2001
Restricted cash 1,505,000 1,868,628
------------ ------------
Total assets $148,552,223 $114,479,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligation $ 216,516 $ 144,664
Accounts payable 9,509,316 12,738,522
Accrued liabilities:
Purchase consideration 4,800,000 300,000
Salaries and benefits 850,533 1,912,956
Other 1,124,649 585,647
Advance payments from customers 663,850 779,561
Due to related parties (note 4) 1,219,417 1,078,518
------------ ------------
Total current liabilities 18,384,281 17,539,868
Capital lease obligation, excluding current installments 90,820 15,719
------------ ------------
Total liabilities 18,475,101 17,555,587
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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Common stock, $.008 par value, authorized 100,000,000 shares:
Class A common stock, designated 92,711,110 shares, issued and outstanding
29,445,228 shares in 2000 and 29,894,912 shares in 2001 235,561 239,159
Class B common stock, designated 7,288,890 shares, 5,694,445 shares issued and
outstanding in 2000 and 2001 45,556 45,556
Additional paid-in capital 195,347,598 196,656,051
Accumulated deficit (65,511,023) (99,964,717)
Unearned compensation (40,570) (52,120)
------------ ------------
Total stockholders' equity 130,077,122 96,923,929
------------ ------------
Total liabilities and stockholders' equity $148,552,223 $114,479,516
============ ============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
THREE MONTHS
ENDED
JUNE 30,
2000 2001
------------- -------------
Revenue (including sales to related parties of approximately $58,500,000 in $ 160,416,086 $ 326,588,135
2000 and $90,808,000 in 2001, note 4)
Cost of revenue (including purchases from related parties of approximately
$15,900,000 in 2000 and $17,249,000 in 2001, note 4) 158,967,116 323,336,551
------------- -------------
Gross profit 1,448,970 3,251,584
Operating expenses:
Selling, general and administrative 7,117,355 7,593,433
Technology and development 2,155,387 1,203,530
Restructuring and related charges (note 8) -- 14,205,609
Depreciation and amortization of intangibles 1,982,796 4,560,084
------------- -------------
Total operating expenses 11,255,538 27,562,656
============= =============
Operating loss (9,806,568) (24,311,072)
Equity loss in unconsolidated investee -- (59,314)
Interest and other income, net 1,868,713 138,231
------------- -------------
Loss from continuing operations (7,937,855) (24,232,155)
Income from operations of discontinued transportation segment 41,606 --
------------- -------------
Net loss $ (7,896,249) $ (24,232,155)
============= =============
Net loss from continuing operations per common share - basic and diluted $ (0.23) $ (0.68)
============= =============
Net loss per common share - basic and diluted $ (0.23) $ (0.68)
============= =============
Weighted average number of common shares outstanding - basic and diluted 33,899,540 35,580,420
============= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,
2000 2001
------------- -------------
Revenue (including sales to related parties of approximately $58,500,000 in $ 198,968,985 $ 651,796,375
2000 and $190,860,000 in 2001, note 4)
Cost of revenue (including purchases from related parties of approximately
$15,900,000 in 2000 and $50,171,000 in 2001, note 4) 197,258,909 644,827,089
------------- -------------
Gross profit 1,710,076 6,969,286
Operating expenses:
Selling, general and administrative 12,218,246 15,366,432
Technology and development 3,441,450 2,633,597
Restructuring and related charges (note 8) -- 14,205,609
Depreciation and amortization of intangibles 2,550,284 9,345,026
------------- -------------
Total operating expenses 18,209,980 41,550,664
------------- -------------
Operating loss (16,499,904) (34,581,378)
Equity loss in unconsolidated investee -- (97,576)
Interest and other income, net 3,010,264 457,948
------------- -------------
Loss from continuing operations (13,489,640) (34,221,006)
Income from operations of discontinued transportation segment 84,634 --
Cumulative effect of a change in accounting principle -- (232,688)
------------- -------------
Net loss $ (13,405,006) $ (34,453,694)
============= =============
Net loss from continuing operations per common share - basic and diluted $ (0.47) $ (0.96)
============= =============
Net loss per common share - basic and diluted $ (0.47) $ (0.97)
============= =============
Weighted average number of common shares outstanding - basic and diluted 28,598,587 35,505,304
============= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF JUNE 30, 2001
(UNAUDITED)
COMMON STOCK COMMON STOCK
CLASS A CLASS B
------------------------ --------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- --------- -------
Balances at December 31, 2000 29,445,228 $235,561 5,694,445 $45,556
Issuance of 188,356 shares of Class A common stock in
connection with business combinations (note 7) 188,356 1,507 -- --
Exercise of stock options for cash (note 6) 261,328 2,091 -- --
Net loss -- -- -- --
Unearned compensation -- -- -- --
Amortization of unearned compensation (note 6) -- -- -- --
---------- -------- --------- -------
Balances at June 30, 2001 29,894,912 $239,159 5,694,445 $45,556
========== ======== ========= =======
ADDITIONAL
PAID-IN ACCUMULATED UNEARNED
CAPITAL DEFICIT COMPENSATION TOTAL
------------ ------------ ------------ -------------
Balances at December 31, 2000 $195,347,598 $(65,511,023) $ (40,570) $ 130,077,122
Issuance of 188,356 shares of Class A common stock in
connection with business combinations (note 7) 682,575 -- -- 684,082
Exercise of stock options for cash (note 6) 296,518 -- -- 298,609
Net loss -- (34,453,694) -- (34,453,694)
Unearned compensation 329,360 -- (329,360) --
Amortization of unearned compensation (note 6) -- -- 317,810 317,810
------------ ------------ ------------ -------------
Balances at June 30, 2001 $196,656,051 $(99,964,717) $ (52,120) $ 96,923,929
============ ============ ========= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
2000 2001
------------- ------------
Cash flows from operating activities:
Net loss $ (13,405,006) $(34,453,694)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of a change in accounting principle -- 232,688
Depreciation and amortization 2,574,742 9,513,314
Accretion to redemption value of note receivable (1,075,213) --
Equity loss (income) in unconsolidated investee -- (38,708)
Non-cash compensation 1,339,268 301,156
Amortization of unearned non-cash compensation 9,016 16,654
Impairment and related charges -- 12,360,759
Reserve for obsolescence -- 205,000
Fair value of financial instruments -- (434,472)
Changes in operating assets and liabilities:
Trade accounts receivable, net (22,721,408) (6,749,563)
Inventories (5,660,667) (2,267,252)
Cattle deposits (3,491,651) (1,985,806)
Prepaid expenses and other assets (2,250,088) (390,937)
Net assets of discontinued operations 297,003 --
Due from related parties, net -- 514,094
Accounts payable and accrued liabilities 9,855,120 4,140,332
Advance payments from customers 987,575 115,711
------------- ------------
Net cash used in operating activities (33,541,309) (18,920,724)
------------- ------------
Cash flows from investing activities:
Business combinations, net of cash acquired (23,478,230) (9,311,770)
Purchase of short term investments (311,914) --
Purchase of property, plant and equipment (6,129,825) (6,606,189)
------------- ------------
Net cash used in investing activities (29,919,969) (15,917,959)
------------- ------------
Cash flows from financing activities:
Net payments to related parties (10,952,539) --
Payment on note payable (900,000) --
Payments on capital lease obligations (306,388) (146,953)
Net proceeds from issuance of common stock 107,909,134 295,191
------------- ------------
Net cash provided by financing activities 95,750,207 148,238
------------- ------------
Net change in cash 32,288,929 (34,690,445)
Cash and cash equivalents, beginning of period 12,316,497 42,811,572
------------- ------------
Cash and cash equivalents, end of period $ 44,605,426 $ 8,121,127
============= ============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
2000 2001
----------- --------
Supplemental disclosures:
Cash paid for interest $ 433,039 $ 52,913
Issuance of Class A common stock in connection
with business combinations (note 7) 14,500,000 687,500
Liabilities incurred in connection with business
combination 4,500,000 --
Conversion of Series A, B, and C preferred stock
and redeemable Class A common stock into Class
A common stock 513,775 --
Conversion of Series D preferred stock into Class B
common stock 45,556 --
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) ORGANIZATION
(a) Basis of Presentation
The condensed consolidated financial statements include the
accounts of eMerge Interactive, Inc. and its wholly-owned
subsidiaries, Cyberstockyard, Inc. ("Cyberstockyard"), a
Mississippi corporation, eMerge San Saba, Inc., eMerge
Okolona, Inc., eMerge Gaffney, Inc. and eMerge Bluegrass,
Inc., all Delaware corporations. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
The Company's investment in Turnkey Computer Systems, Inc.
("Turnkey") is included in the accompanying condensed
consolidated financial statements using the equity method of
accounting. Accordingly, the Company's share of Turnkey's
earnings and losses is reflected in the caption "equity income
(loss) in unconsolidated investee" in the condensed
consolidated statements of operations. The Company's carrying
value of Turnkey includes the unamortized excess of the cost
of the Company's interest in Turnkey over its equity in the
underlying net assets determined at the date of acquisition.
This excess is amortized on a straight-line basis over 10
years and the related amortization is also included in "equity
income (loss) in unconsolidated investee" in the condensed
consolidated statements of operations.
The Company's condensed consolidated balance sheet as of
December 31, 2000, has been derived from the Company's audited
balance sheet as of that date. The Company's condensed
consolidated financial statements as of and for the three and
six months ended June 30, 2000 and 2001, have not been
audited. In the opinion of management, the unaudited condensed
consolidated financial statements include all adjustments and
accruals (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position
as of June 30, 2001, and the results of its operations and
cash flows for the periods ended June 30, 2000 and 2001.
Results of interim periods are not necessarily indicative of
the results to be expected during the remainder of the current
year or for any future period. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted or condensed. The accounting
policies used in preparing these consolidated financial
statements are the same as those described in our Form 10-K
and the consolidated financial statements incorporated by
reference therein.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
Cash and cash equivalents include amounts on deposit with
financial institutions and investments with maturities of 90
days or less. For the purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with
maturities of 90 days or less to be cash equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market and
consist primarily of stocker cattle awaiting immediate resale.
All cattle are acquired in groups and the costs of cattle are
accumulated by groups rather than
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individual animal. Actual market prices could be materially
different from the carrying cost at the time the cattle are
sold.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated using the straight-line method over the estimated
useful lives of the assets. Equipment under capital leases is
stated at the present value of future minimum lease payments.
Estimated useful lives range from 15 to 20 years for buildings
and improvements, 3 to 5 years for computer equipment and
software, 2 to 7 years for furniture, fixtures, and equipment,
and 5 years for vehicles. Leasehold improvements and equipment
under capital leases are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful
life of the assets.
(d) Capitalized Software Costs
The Company accounts for the software components of its
websites in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". Accordingly, certain costs to
develop internal-use computer software are capitalized after
the Company has completed a preliminary project assessment and
management, with relevant authority, commits to funding the
related software project and it is probable that the project
will be completed and the software will be used to perform the
function intended. The costs capitalized by the Company relate
principally to the Company's internet site development and
will be amortized to operations over the assets' estimated
useful life of 3 years upon completion of the application
development stage.
(e) Intangibles
Intangibles consist principally of goodwill, which is the
excess of the purchase price over the net tangible assets of
businesses acquired. Intangibles are stated at amortized cost
and are amortized on a straight-line basis over the estimated
useful lives of the assets, which range from 3 to 5 years.
(f) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with
the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS No. 121).
In the event that facts and circumstances indicate that the
carrying amount of long-lived assets may be impaired, the
recoverability of the assets to be held and used is measured
by comparing the carrying amount of the assets to the future
net cash flows expected to be generated by those assets. If
this review indicates that the assets will not be recoverable,
the carrying value of the Company's assets are reduced to
their estimated fair value.
(g) Investment Securities
As of June 30, 2001, the Company held approximately $117,000
of highly liquid debt instruments with maturities of 90 days
or less included in cash equivalents and approximately
$1,869,000 in certificates of deposit with maturities of 180
days or less included in restricted cash. The Company accounts
for all of these investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". As of June 30, 2001, all of the Company's debt
instruments and investments were classified as
held-to-maturity and their amortized cost approximated fair
value due to their short-term nature.
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(h) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade
accounts receivable, restricted cash, amounts due to and from
related parties, accounts payable, accrued liabilities and
advance payments from customers approximates their fair value
at December 31, 2000 and June 30, 2001, due to the short-term
maturity of these instruments.
(i) Revenue Recognition
The Company generates the majority of its revenue from cattle
sales transactions where it acts as either a principal or
agent in the purchase and sale of cattle. For cattle sales
transactions where the Company is the principal in the
arrangement, the Company purchases cattle from the seller,
records the cattle as inventory until delivered to an accepted
buyer and is exposed to both the inventory and credit risk
that results from the transaction. In these types of
transactions, the Company records the gross revenue earned and
related product costs incurred. For cattle sales transactions
in which the Company acts as an agent, the Company sells
cattle consigned to it on a commission basis, where it does
not take title to the cattle but is subject to certain credit
and other risks, or the Company sells cattle on a fee basis.
In these types of transactions, revenue is recorded on a net
basis. For all other products and services offered by the
Company, the Company acts as a principal to the transaction
and gross revenue and related product cost are recognized as
products are shipped or services are provided.
In December 1999, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 was
followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101," in March 2000 and
by Staff Accounting Bulletin No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"), in
June 2000. In October 2000, the SEC issued a Frequently Asked
Questions and Answers document to provide additional guidance.
These documents summarize certain views of the SEC regarding
applying generally accepted accounting principles to revenue
recognition in financial statements. The SEC has provided this
guidance due, in part, to the large number of revenue
recognition issues that registrants encounter. Management
believes that its current revenue recognition principles
comply with SAB 101.
(j) Income Taxes
The asset and liability method is used in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized for operating losses and tax credit
carryforwards and for the future tax consequences attributable
to differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to the
taxable income in years in which those temporary differences
are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless
it appears more likely than not that such assets will be
realized.
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(k) Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the
Company measures compensation cost in accordance with
Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related
interpretations and elects to provide the pro-forma net income
and earnings per share disclosures required by the standard.
Accordingly, no accounting recognition is given to stock
options issued to employees that are granted at or above fair
market value. Stock options issued to non-employees are
recorded at fair value at the date of grant. Fair value is
determined using the Black-Scholes method and the expense is
amortized over the vesting period.
(l) Net Loss Per Share
Net loss per share is computed in accordance with SFAS No.
128, "Earnings Per Share," by dividing the net loss allocable
to common stockholders by the weighted average number of
shares of common stock outstanding. The Company's stock
options (4,167,127 shares at December 31, 2000 and 5,066,649
shares at June 30, 2001) have not been used in the calculation
of diluted net loss per share because to do so would be
anti-dilutive. As such, the numerator and the denominator used
in computing both basic and diluted net loss per share
allocable to common stockholders are equal.
Pursuant to SEC Staff Accounting Bulletin No. 98 and SEC staff
policy, all common stock and common stock equivalents issued
for nominal consideration during the periods presented herein,
and through the anticipated effective date of an IPO, are
required to be reflected in a manner similar to a stock split
or stock dividend for which retroactive treatment is required
in the calculation of net income (loss) per share. The Company
had no such issuances for the periods presented.
(m) Hedging Activities
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133 was amended by SFAS No. 137
in June 1999 to require implementation of the standard
beginning January 1, 2001. SFAS No. 133 was amended further by
SFAS No. 138 in June 2000. The Company adopted the provisions
of SFAS No. 133, as amended, on January 1, 2001, and recorded
a cumulative effect of a change in accounting principle of
approximately $233,700. As of June 30, 2001, the Company has
cattle futures contracts with purchase commitments of
approximately $74 million and sales commitments of
approximately $14 million. The change in fair value of all
derivative contracts amounted to approximately $435,000 for
the six months ended June 30, 2001 and is included in cost of
cattle revenues. The contract lives are generally less than
six months.
In the ordinary course of business, the Company enters into
purchase and sale contracts for cattle that require delivery
at a future date. Management believes that these transactions
fall under the "normal purchases and normal sales" exception
described within SFAS No. 133, as amended. The Company also
enters into a limited number of cattle futures transactions.
Currently, the Company chooses not to maintain the
documentation required by the standard to qualify for hedge
accounting with respect to cattle futures transactions.
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(n) Comprehensive Income (Loss)
Comprehensive income (loss) is net income (loss) plus the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. The Company has no such transactions, events or
circumstances during the six months ended June 30, 2000 and
2001. Thus, comprehensive loss is the same as net loss for
each of the three and six month periods ended June 30, 2000
and 2001.
(o) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make certain estimates and
assumptions that affect the reported results of operations,
financial position, and various disclosures. Actual results
could differ from those estimates.
(p) Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated and
completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase
business combination must meet to be recognized and reported
apart from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least
annually in accordance with the provisions of the new
standard. For intangible assets with definite useful lives,
SFAS No. 142 will require continued amortization of those
assets over their respective useful lives to their estimated
residual values, and reviewed for impairment in accordance
with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No.
141 immediately and SFAS No. 142 by January 1, 2002. Goodwill
and intangible assets acquired in business combinations
completed before July 1, 2001, will continue to be amortized
and reviewed for impairment in accordance with SFAS No. 121
prior to the adoption of SFAS No. 142. SFAS No. 141 will
require upon adoption of SFAS No. 142 that the Company
evaluate its existing goodwill and intangible assets that were
acquired in prior purchase business combinations and make the
necessary reclassifications in order to conform with the new
criteria for recognition apart from goodwill. Following
adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations
and make the necessary amortization period adjustments by
March 31, 2002. To the extent an intangible asset is
identified as having an indefinite useful life, the Company
will be required to test the asset for impairment in
accordance with provisions of the new standard with any
resulting impairment loss measured as of January 1, 2002, and
recognized as a cumulative effect of a change in accounting
principle during the quarter ended March 31, 2002.
SFAS No. 142 will also require the Company perform an
assessment of whether there is an indication that goodwill,
including equity-method goodwill, is impaired as of the date
of adoption. The Company will have up to twelve months from
the date of adoption to determine whether impairment exists.
Any transitional impairment loss that is identified as of
result of adopting SFAS No. 142 will be recognized as a
cumulative effect of a change in accounting principle in the
Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company
expects to have unamortized goodwill and intangible assets of
approximately $46,884,000, all of which will be subject to the
transition provisions of SFAS No. 141 and 142. Amortization
expense related to goodwill and intangible assets was
approximately $7,855,000 and $6,990,000 for the year ended
December 31, 2000 and six months ended June 30, 2001,
respectively. Because of the extensive effort required to
comply with SFAS No. 141 and 142, it is not currently
practicable to reasonably estimate the impact of adopting
these standards on the Company's financial statements,
including whether any
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transitional impairment losses will be required to be
recognized as a cumulative effect of a change in accounting
principle.
(q) Reclassifications
Certain reclassifications have been made to the 2000 condensed
consolidated financial statements in order to conform to 2001
classifications. The changes had no effect on previously
reported operations.
(3) INVENTORIES
Inventories consist of:
2000 2001
---------- ----------
Raw materials $ 121,219 $ 47,214
Work-in-process -- --
Cattle 3,315,407 5,791,242
Other 267,624 201,711
---------- ----------
$3,704,250 $6,040,167
========== ==========
(4) RELATED PARTY TRANSACTIONS
Amounts due from related parties consist of:
2000 2001
---------- ----------
Eastern Livestock, Inc. $2,424,264 $1,816,826
Employees and shareholders 1,055,228 1,007,673
---------- ----------
$3,479,492 $2,824,499
========== ==========
Amounts due to related parties consist of:
2000 2001
---------- ----------
XL Vision $ 313,009 $ --
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc. 12,115 --
Eastern Livestock, Inc. 321,362 67,280
Employees and shareholders 572,931 1,011,238
---------- ----------
$1,219,417 $1,078,518
========== ==========
The Company has both cattle sales and purchase transactions with
Eastern Livestock, Inc., certain employees and shareholders' related
businesses in the ordinary course of business. These sales and
purchases are made on trade
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accounts with the same credit terms of the Company's other customers
and suppliers. Cattle sales to related parties amounted to $58,500,000
and $190,860,000 for the six months ended June 30, 2000 and 2001,
respectively. Cattle purchases from related parties amounted to
$15,900,000 and $50,171,000 for the six months ended June 30, 2000 and
2001, respectively.
(5) SEGMENT INFORMATION
The Company's reportable segments consist of cattle sales and other
products and services. The gross profit (loss) associated with cattle
sales and the related prospects for this portion of the Company's
business differs from the Company's other products and service
offerings.
The following summarizes revenue, cost of revenue and gross profit
(loss) information related to the Company's two operating segments:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2000 2001 2000 2001
------------- ------------- ------------- -------------
Revenue:
Cattle $ 159,807,763 $ 326,164,977 $ 197,818,847 $ 650,693,896
Other 608,323 423,158 1,150,138 1,102,479
------------- ------------- ------------- -------------
Total $ 160,416,086 $ 326,588,135 $ 198,968,985 $ 651,796,375
============= ============= ============= =============
Cost of revenue:
Cattle $ 158,270,165 $ 322,596,741 $ 196,082,067 $ 643,140,162
Other 696,951 739,810 1,176,842 1,686,927
------------- ------------- ------------- -------------
Total $ 158,967,116 $ 323,336,551 $ 197,258,909 $ 644,827,089
============= ============= ============= =============
Gross profit (loss):
Cattle $ 1,537,598 $ 3,568,236 $ 1,736,780 $ 7,553,734
Other (88,628) (316,652) (26,704) (584,448)
------------- ------------- ------------- -------------
Total $ 1,448,970 $ 3,251,584 $ 1,710,076 $ 6,969,286
============= ============= ============= =============
The Company's assets and other statement of operations data are not allocated
to a segment.
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(6) STOCK PLAN
A summary of stock option transactions for the six months ended June
30, 2001, follows:
WEIGHTED
WEIGHTED AVERAGE
RANGE OF AVERAGE REMAINING
EXERCISE PRICE EXERCISE CONTRACTUAL
SHARES PER SHARE PRICE LIFE (IN YEARS)
--------- -------------- -------- ---------------
Balance outstanding, December 31, 2000 4,167,127 $ 0.80 - 62.38 $ 8.73 8.60
====
Granted 2,484,000 0.89 - 5.73 2.11
Exercised (261,330) 0.80 - 2.40 1.14
Cancelled (1,323,148) 0.80 - 47.31 9.25
---------- -------------- ------ ----
Balance outstanding, June 30, 2001 5,066,649 $ 0.80 - 62.38 $ 5.75 8.84
========== ============== ====== ====
For the six months ended June 30, 2001, the Company recognized
approximately $318,000 of stock compensation expense resulting from the
accelerated vesting of stock options. Stock compensation expense of
approximately $226,000 and $92,000 is included in restructuring and
related charges and selling, general and administrative expenses,
respectively, within the condensed consolidated statements of
operations.
(7) ACQUISITIONS
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Bluegrass Stockyards ("Bluegrass") and its
shareholders. In connection with this purchase, the Company acquired
all of the tangible and intangible property of Bluegrass relating to
its business of purchasing and reselling cattle through its auction
facility. The purchase price for these assets was $1,500,000 in cash.
Concurrent with the purchase and sale of assets, the Company also
closed on a Contract for Sale and Purchase of Real Estate with the
shareholders of Bluegrass. The Company purchased land and buildings
used in the above-described business for a purchase price of $2,000,000
in cash. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $2,164,800 was recorded as intangibles
and is being amortized over five years.
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On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Runnells-Peters Cattle Company
("Runnells-Peters") and its shareholders for the purchase of certain
tangible and intangible assets. Runnells-Peters engages in the buying
of cattle for immediate or short-term resale. The purchase price for
these assets consisted of (i) $500,000 in cash and (ii) 136,986 shares
of eMerge's common stock valued at $500,000. The acquisition was
accounted for as a purchase and the estimated excess of the purchase
price over the fair value of net assets acquired of approximately
$1,018,400 was recorded as intangibles and is being amortized over five
years.
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Pennell Cattle Company ("Pennell") and its sole
shareholder for the purchase of certain tangible and intangible assets.
Pennell engages in the buying of cattle for immediate or short-term
resale. The purchase price for these assets consisted of (i) $187,500
in cash and (ii) 51,370 shares of eMerge's common stock valued at
$187,500. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $395,200 was recorded as intangibles
and is being amortized over five years.
In addition to the above payments, the Company paid approximately
$4,500,000 of additional purchase consideration in 2001 related to
purchase business combinations closed during 2000.
Management is primarily responsible for estimating the fair value of
the assets acquired, and has conducted due diligence in determining the
fair value. Management has made estimates and assumptions that affect
the reported amounts of assets, liabilities, and expenses resulting
from such acquisitions. Actual results could differ from those amounts.
The results of operations of the acquired companies are included in the
condensed consolidated statements of operations since the respective
dates of acquisition.
The following unaudited proforma financial information presents the
combined results of operations of eMerge, Bluegrass, Runnells-Peters
and Pennell, as if the acquisitions occurred on January 1, 2000, after
giving effect to certain adjustments, including amortization of
goodwill. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred
had these entities constituted a single entity during such periods.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 2001 2000 2001
----------- ------------ ------------ ------------
Revenue $168,037,288 $326,588,135 $214,944,406 $651,796,375
Net loss (8,016,871) (24,232,155) (13,655,958) (34,453,694)
Net loss per share $ (0.24) $ (0.68) $ (0.47) $ (0.97)
(8) RESTRUCTURING AND RELATED CHARGES
On May 14, 2001, the Company's Board of Directors approved a plan
designed to enhance the growth of the Company's information-management
technologies and cattle marketing business and increase overall Company
profitability. Pursuant to the plan, the Company recorded restructuring
and related charges of approximately $14,206,000 for asset impairment
charges, employee severance and
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19
related benefit costs, and estimated contract termination fees. The
charge includes $12,361,000 for asset write-downs associated with
discontinued product lines and a planned facility closing, accrued
charges of $1,619,000 (as shown in the following table) for employee
severance and related benefit costs and estimated contract termination
fees, and $226,000 for stock compensation charges associated with the
accelerated vesting of stock options for certain terminated employees.
A summary of activity in the restructuring liability (included in
accrued salaries and benefits in the accompanying condensed
consolidated balance sheets) for the six months ended June 30, 2001,
follows:
2001
-----------
Balance at December 31, 2000 $ --
New charges 1,619,212
Cash payments (573,760)
Other adjustments --
-----------
Balance at June 30, 2001 $ 1,045,452
===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the condensed consolidated financial
statements and the related notes included elsewhere in this report.
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains statements
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
the use of predictive, future tense or forward-looking terminology, such as
"anticipates," "believes," "estimates," "expects," "intends," "may," "will" and
words of similar meaning. These statements include statements regarding, among
other things, our electronic commerce strategy, acquisition and expansion
strategy, product and service development, projected capital expenditures,
liquidity and capital, development of additional revenue sources, expansion into
new market segments, technological advancement, ability to develop "brand"
awareness and the market acceptance of the Internet as a medium of commerce.
These statements are based on management's current expectations and are subject
to a number of uncertainties and risks that could cause actual results to differ
significantly from those described in the forward-looking statements, including
the acceptance by our customers of electronic commerce as a means of conducting
business, our ability to grow revenue, our ability to increase margins, our
ability to implement our acquisition and expansion strategy, the impact of
competition on pricing, general economic conditions, employee turnover, the
impact of litigation and other factors. Other factors that may cause such a
difference include, but are not limited to, those discussed in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in "Factors Affecting Our Business, Financial Condition and
Results of Operation," as well as those discussed elsewhere in this report and
as set forth from time to time in our other public filings and public
statements. Readers of this report are cautioned to consider these risks and
uncertainties and to not place undue reliance on these forward-looking
statements.
OVERVIEW
We are a technology and interactive cattle-marketing company in the $40
billion U.S. beef-production industry. Our technologies primarily focus on
information-management, individual-animal tracking and other technologies
designed to enhance consumer confidence in beef safety. We operate 12
interactive livestock marketing and order buying facilities, maintain a
nationwide network of 80 cattle representatives and host an online auction and
brokerage service that combined have the capacity to market four million head
of cattle annually, representing a 14% U.S. market share. We offer our products
and services to cattle industry participants through our web-based business
network, our proprietary information management applications and our direct
sales force. Our current products and services include:
- Livestock procurement services consisting of on-site and on-line
cattle sales and auctions; and
- CattleLog, our exclusive individual-animal data collection and
reporting system.
Our business strategy is to utilize our information management,
electronic cattle commerce and technology resources to develop and offer
complementary products and services that reduce inefficiencies throughout the
cattle production chain, improve cattle quality and improve overall
productivity in the cattle industry.
Through this strategy, we intend to improve meat quality, meat safety
and to positively affect the manufacturing process in the cattle industry by
adding previously unrealized value to the nation's beef supply system. We
intend to implement this strategy through our existing CattleinfoNet business
network, which is comprised of our information-management infrastructure, an
electronic commerce platform and value enhancing technologies.
We believe that our network of Interactive Marketing Facilities will
allow us to more accurately gather, track and analyze information through our
information management infrastructure, more productively operate our electronic
commerce platform and more uniformly implement and monitor our technologies. As
a result, we believe that by combining our CattleinfoNet business network with
our network of Interactive Marketing Facilities we will be able to more
effectively and rapidly reduce the inefficiencies in the cattle industry and
provide ranchers and producers with increased product quality, consistency,
yield and safety.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 2001
REVENUE
Revenue increased from $160.4 million for the quarter ended June 30, 2000
to $326.6 million for the quarter ended June 30, 2001. Revenue from cattle sales
increased from $159.8 million for the quarter ended June 30, 2000 to $326.2
million for the quarter ended June 30, 2001. This increase reflects a higher
volume of cattle sales transactions brought about primarily through our
acquisition activities. During the quarter ended June 30, 2001, we sold
approximately 667,000 head of cattle versus 342,500 head sold in the comparable
prior year period. Revenue from other products and services decreased by 30%
from approximately $608,000 for the quarter ended June 30, 2000 to approximately
$423,000 for the quarter ended June 30, 2001. This decrease is due primarily to
a decline of approximately $323,000 in sales of our equine imaging systems and
Nutricharge products, a $41,000 decrease in advertising revenues and a $33,000
decline in sales generated from our on-line information services. The decline in
Nutricharge and equine imaging systems sales coincided with our announcement in
January 2001 to discontinue support of these cattle-related products. The
decline in sales of Nutricharge, equine imaging systems, on-line information
services and advertising was offset in part by incremental revenues of
approximately $211,000 derived from sales of cattle-related products and
services, such as feed and veterinary services offered through our assimilation
facilities, and also included approximately $67,000 in revenue generated from a
pre-conditioning program that was discontinued during a previous quarter. We
expect that cattle revenue will continue to account for the majority of our
revenue base for the foreseeable future, while revenue from other products and
services are expected to remain flat or decline slightly.
COST OF REVENUE
Cost of revenue consists primarily of the direct cost to acquire cattle
and cattle-related products. In addition, cost of revenue also includes the
indirect overhead costs, such as support personnel, facilities costs,
telecommunication charges and material purchases, that are primarily associated
with supporting our on-line products and services. Cost of revenue attributed to
cattle sales increased from $158.3 million for the quarter ended June 30, 2000
to $322.6 million for the quarter ended June 30, 2001, corresponding with the
increased cattle sales activity. Cost of revenue attributed to other products
and services increased by 6% from $697,000 for the quarter ended June 30, 2000
to $739,800 for the quarter ended June 30, 2001. This increase is due
principally to higher costs for cattle-related products and services, such as
feed and veterinary services, and also included approximately $244,000 in costs
associated with a pre-conditioning program that was discontinued during a
previous quarter. We generated a gross profit of $1.4 million and $3.3 million
for the quarters ended June 30, 2000 and 2001, respectively. The increase in
gross profit is due primarily to the increase in cattle revenue as cost of
goods, principally direct cost to acquire cattle, did not increase in proportion
to the increase in revenue. We expect that cost of revenue, in particular the
direct costs to acquire cattle, will continue to account for the majority of our
total costs of revenue for the foreseeable future and will fluctuate
proportionately with the changes in volume of cattle sales. We anticipate that
costs of revenue associated with other products and services will decline in the
near term as we discontinue support for certain on-line product and service
offerings, such as Interactive Manager and our on-line storefront.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 7% from $7.1
million for the quarter ended June 30, 2000 to $7.6 million for the quarter
ended June 30, 2001.
Our selling expenses consist primarily of salaries and related benefit
costs for sales and marketing personnel, material and supply purchases,
telephone, and advertising and media expenses. Selling expenses decreased by 19%
from $5.4 million for the quarter ended June 30, 2000 to $4.4 million for the
quarter ended June 30, 2001. This decrease included a $1.3 million non-cash
compensation charge recorded during the quarter ended June 30, 2000, that was
associated with employee separations. Excluding this compensation charge,
selling expenses rose approximately $300,000 or 7% for the quarter ended June
30, 2001 versus the same period a year ago. The increase in selling expenses was
primarily associated with the businesses acquired during 2000 and January 2001,
the operations of which were included for the entire quarter ended June 30,
2001. The acquisitions expanded the number of personnel within the sales
organization and caused a corresponding increase in salaries and related benefit
costs. Overall, selling expenses rose approximately $1.6 million during the
quarter ended June 30, 2001, because of the addition of the acquired businesses.
These expenses were partially offset by reductions in bonus, travel, consulting
and advertising expenses in both the sales and marketing organizations. We
anticipate selling expenses to decline slightly in the foreseeable future as the
impacts of cost saving initiatives begun during the quarter, which included
workforce reductions, become fully realized.
Our general and administrative expenses consist primarily of salaries and
related benefit costs for executive, administrative, and finance personnel,
insurance program charges, public company and investor relations expenses,
telephone and professional service fees. General and administrative expenses
increased by 191% from $1.7 million for the quarter ended June 30, 2000 to $3.2
million for the quarter ended June 30, 2001. The overall increase in general and
administrative expenses was primarily associated with the businesses acquired
during 2000 and January 2001, the operations of which were included for the
entire quarter ended June 30, 2001. The acquisitions expanded the number of
personnel within the administrative organization and caused a corresponding
increase in salaries and related benefits costs. Overall, general and
administrative expenses rose approximately $1.0 million during the quarter ended
June 30, 2001, because of the addition of the acquired businesses. We expect
general and administrative expenses to decline slightly in the foreseeable
future as the impacts of cost saving initiatives begun during the quarter, which
included workforce reductions, become fully realized.
TECHNOLOGY AND DEVELOPMENT
Our technology and development expenses consist primarily of salaries
and related benefit costs, payments to outside consultants, software purchases
and maintenance charges and project material costs. Our expenses decreased by
44% from $2.2 million for the quarter ended June 30, 2000 to $1.2 million for
the quarter ended June 30, 2001. Reductions were made in consulting and project
material costs ($450,000 and $90,000, respectively), following the completion or
cancellation of certain projects, and declines were also recognized in travel
expenses ($80,000), maintenance and repair costs ($35,000), bonus expense
($40,000) and project labor charges ($41,000). We expect to continue to incur
costs to develop and commercialize new products, expand our offerings and adapt
our technologies to new markets. However, we anticipate that our technology and
development expenses will decrease in the foreseeable future as the impacts of
cost saving initiatives begun during the quarter, which included workforce
reductions, become fully realized.
RESTRUCTURING AND RELATED CHARGES
In an effort to reset our cost structure to the current business level,
and focus on those products and services that have the most potential to add to
our gross margin and help us achieve our near-term profitability goals, we
announced plans on May 15, 2001, to reduce our workforce by approximately 60
personnel and write-down to fair value the value of non-strategic assets.
Pursuant to these plans, we recorded restructuring and related charges of $14.2
million for the quarter ended June 30, 2001. The charge included $12.4 million
for asset write-downs, primarily associated with discontinued product lines and
a planned facility closing, an accrual for involuntary employee termination
benefits and contract termination fees of $1.6 million, and stock compensation
charges of $226,000 associated with the accelerated vesting of stock options for
certain terminated employees. We expect the majority of the accrued employee
termination benefits will be paid and funded with working capital during the
third quarter of 2001. We anticipate that these actions will result in
additional costs savings beginning during the third quarter of 2001, taking the
form of reduced payroll, depreciation and amortization charges. We expect
payroll reductions in general and administrative expenses of approximately
$200,000, sales and marketing expenses of approximately $375,000, and technology
and development expenses of approximately $700,000 during the third and fourth
quarters of 2001, respectively. We also expect depreciation and amortization
expenses will decline by approximately $850,000 during both third and fourth
quarters of 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 130% from $2.0 million
for the quarter ended June 30, 2000 to $4.6 million for the quarter ended June
30, 2001. The increase was primarily related to additional amortization charges
of $1.8 million resulting from business acquisitions completed throughout 2000
and during January 2001. Increases in capital spending to support our
infrastructure build-up also drove depreciation higher by $800,000 during the
quarter ended June 30, 2001. We expect depreciation and amortization will
decrease for the foreseeable future as major projects have been placed into
service and our acquisition activity has subsided. In addition, the write-down
of non-strategic assets associated with discontinued product lines and a planned
facility closing will also cause a reduction in depreciation and amortization
expenses.
OTHER INCOME AND EXPENSE
Interest and other income, net decreased from $1.9 million for the
quarter ended June 30, 2000 to $138,200 for the quarter ended June 30, 2001.
This decrease was primarily due to a reduction in interest income generated by
short-term investments and the repayment of a related party note receivable in
November 2000, which generated interest income of approximately $547,000 during
the quarter ended June 30, 2000. Currently, we invest the majority of our cash
balances in debt instruments of high-quality corporate issuers.
Due to the losses incurred, we did not recognize income tax expense for
the quarter ended June 30, 2000 or the quarter ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 2001
REVENUE
Revenue increased from $199.0 million for the six months ended June 30,
2000 to $651.8 million for the six months ended June 30, 2001. Revenue from
cattle sales increased from $197.8 million for the six months ended June 30,
2000 to $650.7 million for the six months ended June 30, 2001. This increase
reflects a higher volume of cattle sales transactions brought about primarily
through our acquisition activities. During the six months ended June 30, 2001,
we sold approximately 1.3 million head of cattle versus 409,000 head sold in the
comparable prior year period. Revenue from other products and services decreased
by 4% from approximately $1.2 million for the six months ended June 30, 2000 to
$1.1 million for the six months ended June 30, 2001. This decrease is due
primarily to a decline of approximately $614,000 in sales of our equine imaging
systems and Nutricharge products, a $77,000 decrease in advertising revenues and
a $71,000 decline in sales generated from our on-line information services. The
decline in Nutricharge and equine imaging systems sales coincided with our
announcement in January 2001 to discontinue support of these cattle-related
products. The decline in sales of Nutricharge, equine imaging systems, on-line
information services and advertising was offset in part by incremental revenues
of approximately $715,000 derived from sales of cattle-related products and
services, such as feed and veterinary services offered through our assimilation
facilities, and also included approximately $357,000 in revenue generated from a
pre-conditioning program that was discontinued during a previous quarter. We
expect that cattle revenue will continue to account for the majority of our
revenue base for the foreseeable future, while revenue from other products and
services are expected to remain flat or decline slightly.
COST OF REVENUE
Cost of revenue consists primarily of the direct cost to acquire cattle
and cattle-related products. In addition, cost of revenue also includes the
indirect overhead costs, such as support personnel, facilities costs,
telecommunication charges and material purchases, that are primarily associated
with supporting our on-line products and services. Cost of revenue attributed to
cattle sales increased from $196.1 million for the six months ended June 30,
2000 to $643.1 million for the six months ended June 30, 2001, corresponding
with the increased cattle sales activity. Cost of revenue attributed to other
products and services increased by 42% from $1.2 million for the six months
ended June 30, 2000 to $1.7 million for the six months ended June 30, 2001. This
increase is due principally to higher costs for cattle-related products and
services, such as feed and veterinary services, and also included approximately
$644,000 in costs associated with a pre-conditioning program that was
discontinued during a previous quarter. We generated a gross profit of $1.7
million and $7.0 million for the six months ended June 30, 2000 and 2001,
respectively. The increase in gross profit is due primarily to the increase in
cattle revenue as cost of goods, principally direct cost to acquire cattle, did
not increase in proportion to the increase in revenue. We expect that cost of
revenue, in particular the direct costs to acquire cattle, will continue to
account for the majority of our total costs of revenue for the foreseeable
future and will fluctuate proportionately with the changes in volume of cattle
sales. We anticipate that costs of revenue associated with other products and
services will decline in the near term as we discontinue support for certain
on-line product and service offerings, such as Interactive Manager and our
on-line storefront.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 26% from $12.2
million for the six months ended June 30, 2000 to $15.4 million for the six
months ended June 30, 2001.
Our selling expenses consist primarily of salaries and related benefit
costs for sales and marketing personnel, material and supply purchases,
telephone, travel, consulting and advertising and media expenses. Selling
expenses increased by 10% from $9.0 million for the six months ended June 30,
2000 to $9.9 million for the six months ended June 30, 2001. This increase
included a $1.3 million non-cash compensation charge recorded during the quarter
ended June 30, 2000, that was associated with employee separations. Excluding
this compensation charge, selling expenses rose approximately $2.2 million or
29% for the six months ended June 30, 2001 versus the same period a year ago.
The increase in selling expenses was primarily associated with the businesses
acquired during 2000 and January 2001, the operations of which were included for
the entire six month period ended June 30, 2001. The acquisitions expanded the
number of personnel within the sales organization and caused a corresponding
increase in salaries and related benefit costs. Overall, selling expenses rose
approximately $3.2 million during the six months ended June 30, 2001, because of
the addition of the acquired businesses. These expenses were partially offset by
reductions in bonus, relocation, travel, consulting and advertising expenses in
both the sales and marketing organizations. We anticipate selling expenses on a
quarterly basis to decline slightly in the foreseeable future as the impacts of
cost saving initiatives begun during the quarter ended June 30, 2001, which
included workforce reductions, become fully realized.
Our general and administrative expenses consist primarily of salaries and
related benefit costs for executive, administrative, and finance personnel,
insurance program charges, public company and investor relations expenses,
telephone travel costs, and professional service fees. General and
administrative expenses increased by 172% from $3.2 million for the six months
ended June 30, 2000 to $5.5 million for the six months ended June 30, 2001. The
overall increase in general and administrative expenses was primarily associated
with the businesses acquired during 2000 and January 2001, the operations of
which were included for the entire six month period ended June 30, 2001. The
acquisitions expanded the number of personnel within the administrative
organization and caused a corresponding increase in salaries and related
benefits costs. Overall, general and administrative expenses rose approximately
$2 million during the six months ended June 30, 2001, because of the addition of
the acquired businesses. We expect general and administrative expenses on a
quarterly basis to decline slightly in the foreseeable future as the impacts of
cost saving initiatives begun during the quarter ended June 30, 2001, which
included workforce reductions, become fully realized.
TECHNOLOGY AND DEVELOPMENT
Our technology and development expenses consist primarily of salaries
and related benefit costs, payments to outside consultants, software purchases
and maintenance charges and project material costs. Our expenses decreased by
24% from $3.4 million for the six months ended June 30, 2000 to $2.6 million for
the six months ended June 30, 2001. Reductions were made in consulting and
project material costs ($300,000 and $126,000, respectively), following the
completion or cancellation of certain projects, and declines were also
recognized in travel expenses ($165,000), bonus expense ($65,000) and project
labor charges ($71,000). We expect to continue to incur costs to develop and
commercialize new products, expand our offerings and adapt our technologies to
new markets. However, we anticipate that our technology and development expenses
will decrease in the foreseeable future as the impacts of cost saving
initiatives begun during the quarter ended June 30, 2001, which included
workforce reductions, become fully realized.
RESTRUCTURING AND RELATED CHARGES
In an effort to reset our cost structure to the current business level,
and focus on those products and services that have the most potential to add to
our gross margin and help us achieve our near-term profitability goals, we
announced plans on May 15, 2001, to reduce our workforce by approximately 60
personnel and write-down to fair value the value of non-strategic assets.
Pursuant to these plans, we recorded restructuring and related charges of $14.2
million for the quarter and six months ended June 30, 2001. The charge included
$12.4 million for asset write-downs, primarily associated with discontinued
product lines and a planned facility closing, an accrual for involuntary
employee termination benefits and contract termination fees of $1.6 million, and
stock compensation charges of $226,000 associated with the accelerated vesting
of stock options for certain terminated employees. We expect the majority of the
accrued employee termination benefits will be paid and funded with working
capital during the third quarter of 2001. We anticipate that these actions will
result in additional costs savings beginning during the third quarter of 2001,
taking the form of reduced payroll, depreciation and amortization charges. We
expect payroll reductions in general and administrative expenses of
approximately $200,000, sales and marketing expenses of approximately $375,000,
and technology and development expenses of approximately $700,000 during the
third and fourth quarters of 2001, respectively. We also expect depreciation and
amortization expenses will decline by approximately $850,000 during both the
third and fourth quarters of 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 260% from $2.6 million
for the six months ended June 30, 2000 to $9.3 million for the six months ended
June 30, 2001. The increase was primarily related to additional amortization
charges of $4.9 million resulting from business acquisitions completed
throughout 2000 and during January 2001. Increases in capital spending to
support our infrastructure build-up also drove depreciation higher by $1.8
million during the six months ended June 30, 2001. We expect depreciation and
amortization will decrease for the foreseeable future as major projects have
been placed into service and our acquisition activity has subsided. In addition,
the write-down of non-strategic assets associated with discontinued product
lines and a planned facility closing will also cause a reduction in depreciation
and amortization expenses.
OTHER INCOME AND EXPENSE
Interest and other income, net decreased from $3.0 million for the six
months ended June 30, 2000 to $457,900 for the six months ended June 30, 2001.
This decrease was primarily due to a reduction in interest income generated by
short-term investments and the repayment of a related party note receivable in
November 2000, which generated interest income of approximately $1.1 million
during the six months ended June 30, 2000. Currently, we invest the majority of
our cash balances in debt instruments of high-quality corporate issuers.
On January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended, and
recorded a charge to operations of $232,688, which is included as a cumulative
effect of a change in accounting principle in the condensed consolidated
financial statements.
Due to the losses incurred, we did not recognize income tax expense for
the six months ended June 30, 2000 or the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, our primary source of liquidity consisted of cash,
highly liquid, high quality debt instruments, trade accounts receivable and
cattle inventories. At June 30, 2001, we had cash and cash equivalents totaling
$8.1 million compared to $42.8 million at December 31, 2000, and $10.3 million
at March 31, 2001. Our working capital balance at June 30, 2001, was $24.7
million compared to $47.7 million at December 31, 2000, and $34.4 million at
March 31, 2001.
We have had significant negative cash flows from operating activities for
each fiscal and quarterly period to date. For the six months ended June 30,
2001, net cash used in operating activities was $18.9 million and primarily
consisted of net operating losses, increases in trade accounts receivable,
inventories, cattle deposits and prepaid expenses which were offset in part by
an increase in accounts payable. The increase in working capital requirements
corresponded with a rise in cattle sales activity during the periods following
the seasonal slowdown at fiscal year end. We expect that working capital
requirements will continue to increase into the foreseeable future with the
anticipated increase in cattle sales activity, particularly during the period
from August through mid-December.
Net cash used in investing activities was $15.9 million for the six
months ended June 30, 2001. Our investing activities included the acquisitions
of Bluegrass, Runnells-Peters, and Pennell for a combined $4.8 million of cash
and capital expenditures of $6.6 million. In addition, we also paid the former
shareholders of Eastern Livestock, Inc. ("Eastern") $4.5 million in cash during
the six months ended June 30, 2001, pursuant to an asset purchase agreement
dated May 1, 2000. We are scheduled to pay $300,000 in cash during August 2001
to the former shareholders of LeMaster Livestock, Inc. ("LeMaster") in
connection with an asset purchase agreement executed in August 2000. We expect
continued capital expenditures for the foreseeable future as we continue to
effect our business strategy. However, we expect future spending on capital
expenditures to be at a significantly lower rate than experienced during 2000.
Net cash provided by financing activities was $148,000 for the six months
ended June 30, 2001. Cash provided by financing activities was principally the
result of stock option exercises offset in part by payments made on a capital
lease obligation.
Our future working capital requirements will depend on a variety of
factors including our ability to successfully implement our current business
plan, reduce our net cash outflow and manage the working capital required by
seasonal fluctuations in cattle sales, particularly during the peak demand
periods of the third and fourth quarters of our fiscal year. We currently
expect that we will need additional debt or equity financing in the near term
to fund our continuing operations at projected levels. If we are unable to
obtain acceptable debt or equity financing, we may be required to significantly
curtail our cattle sales activities which would negatively impact our financial
condition.
We currently expect to meet our near term capital requirements through
use of a working capital line of credit. In this regard, we announced on July
18, 2001, the receipt of a commitment from the CIT Group/Business Credit, Inc.
for a two-year $30 million revolving line of credit. The working capital line
of credit is to be secured primarily by our accounts receivable and inventory
and will bear interest, at our option, of Prime or LIBOR plus 300 basis points.
Terms of this commitment include maintenance of certain financial covenants and
is subject to customary closing contingencies, such as executing definitive loan
documentation and materially adverse changes in the condition, financial or
otherwise, of our business. We expect to close on this agreement with the lender
prior to the expiration of the commitment on August 23, 2001.
In connection with the announced lending commitment, we also intend to
enter into a warrant purchase agreement with certain of our shareholders who
will provide, in the aggregate, $9 million in standby letters of credit on our
behalf as additional collateral for the credit facility. Execution of this
agreement will require that we issue warrants for our common stock to these
shareholders as consideration for providing and maintaining the letters of
credit. The agreement provides for the issuance of warrants that are exercisable
for an aggregate amount of up to 8% of the total outstanding common shares of
the Company. Additional warrants of up to 2% of the total outstanding common
shares of the Company could be issued if the letters of credit are drawn upon by
the lender.
The maximum term of the warrants is not to exceed 24 months and they will
be issued at specified intervals and amounts beginning on the closing date of
the credit facility. In the event the letters of credit are drawn upon by the
lender and the drawn principal amount remains unpaid by the Company for 30 days,
the shareholders will have the right to convert the outstanding amounts under
the letters of credit into shares of our common stock up until the principal
amount is repaid. However, the maximum amount of common shares issuable in
connection with the agreement is 20% of the total outstanding shares of the
Company as of the facility closing date. Common shares that would otherwise be
issuable but for this restriction, will require approval by a majority of our
shareholders. In addition to amortizing the fair value of the warrants over the
term of the proposed line of credit, we will also be required to pay certain
fees and expenses to these shareholders as consideration for providing and
maintaining the letters of credit.
As of July 31, 2001, we had approximately $23.4 million of working
capital. Additionally, we have an informal agreement with a related party
order-buyer to provide us up to $10 million of working capital support should
the need arise before we secure our working capital line of credit. The working
capital support will take the form of accelerated payments of amounts due to us
and the purchase of inventory from us.
We continue to explore other debt or equity financing alternatives to
meet our working capital requirements. If additional funds are raised through
the issuance of equity securities or through alternative debt financing that
provides for the issuance of equity securities, our stockholders may experience
significant dilution. Furthermore, there can be no assurance that any additional
funding will be available when needed, or that if available, such financing will
include favorable terms. See also " Factors Affecting our Business, Financial
Condition, and Results of Operations" below.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
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In addition to the other information included in this report and our
other public filings and releases, the following factors should be considered
while evaluating our business, financial condition, results of operations and
prospects:
We have a limited operating history and unproven business model. As a
result, we may not be able to accurately predict future results and our business
strategy may not be successful.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which to evaluate our business. In addition, our business strategy and
revenue model has changed significantly during the past 24 months. Our limited
operating history, combined with our shift in business strategy, makes
predicting our future results of operations difficult. Our new business model
has been tested over a limited period of time 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 acquisition, sales and marketing
strategies.
We have a history of net losses and expect to continue to incur net
losses for the foreseeable future. If we continue to incur net losses, our
business may not ultimately be financially viable.
We have incurred significant net losses since inception. We reported a
net loss of approximately $33.1 million for the year ended December 31, 2000, or
4% of total revenue, and a net loss of approximately $34.5 million for the six
months ended June 30, 2001, or 5% of total revenue. As of June 30, 2001, we had
accumulated net losses totaling approximately $100 million. Our operating
expenses have increased significantly in each year of our operation, and we
anticipate that such expenses may continue to increase over the next several
years, albeit at a lesser rate than previously experienced, as we expand our
operations and execute on our business strategies. Our revenue may not grow or
may not even continue at its current level and, as a result, our financial
condition and results of our operations may be harmed and our business may not
be financially viable in the future.
To achieve profitability, we must successfully address the following
risks:
- lack of wide-scale commercial acceptance of our Internet
cattle sales and services;
- failure to expand the number of livestock industry
participants currently using our network;
- inability to respond promptly to competitive and industry
developments;
- failure to curtail spending in response to rapid fluctuations
in the demand for cattle and cattle-related products and
services;
- failure to achieve brand recognition;
- failure to introduce new products and services; and
- failure to upgrade and enhance our technologies to accommodate
expanded product and service offerings and increased customer
traffic.
If we are unable to successfully address any of these risks, our
business may be harmed.
The Internet livestock products and services market, including, in
particular, the cattle sales market, is new and uncertain and our business may
not develop as we anticipate.
The Internet market for livestock products and services, including, in
particular, the cattle sales market, has only recently developed, and its
continued development is subject to substantial uncertainty. To date, we have
not realized adequate revenues and gross margins from this market to achieve
profitability. We cannot be assured that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based
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products and services. We do not know if our target customers will use the
Internet as a regular means of purchasing products and services. Even if
potential customers choose to purchase livestock products and services over the
Internet, they may not choose our online services to do so. If the market for
livestock products and services over the Internet does not develop as we
anticipate, our business and the results of our operations will be harmed.
For the six months ended June 30, 2001, we relied on cattle sales for
over 99% of our revenue and we expect to rely on the success of our cattle sales
and auction services for a significant majority of our revenue for the
foreseeable future. As a result, our ability to achieve commercial acceptance of
our cattle sales is critical to our ability to obtain future revenue. To date,
we have not achieved enough revenues from internet-based cattle sales that are
sufficient for us to determine whether these services will achieve commercial
acceptance. Any failure to successfully gain commercial acceptance of these
services would harm our business and the results of our operations. In addition,
as the result of our dependence on cattle sales, if the demand for beef
declines, the demand for our products and services would likely decline, and our
results of operations would be harmed.
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 investments in and acquisitions of complementary
companies, technologies and assets that constitute critical aspects of our
current and future business operations. If we fail to successfully integrate the
operations of these companies, technologies or assets into our business, we may
not be able to successfully execute our business strategy. In connection with a
number of our acquisitions we hired key employees. The businesses we have
acquired are critical to our current business operations and growth strategy.
Our acquisitions may result in:
- difficulties in assimilating technologies, products, personnel
and operations;
- diversion of our management's attention;
- entering markets in which we have no or limited prior
experience;
- loss of key employees of acquired organizations; and
- capital requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also
require us to make cash payments, assume debt, incur large write-offs related to
intangible assets and issue equity, which will dilute ownership interest.
If we are unable to manage our growth effectively, our business may be
harmed.
We cannot assure that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume and adding new products and services. Our growth is likely
to place a significant strain on our resources and systems. As we continue to
manage 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 train and manage our workforce effectively.
If we are unable to protect our intellectual property rights, our
business and competitive position will be harmed.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We cannot guarantee that any of our pending patent or trademark
applications will be approved. Even if they are approved, the patents or
trademarks may be challenged by other parties or invalidated. Because brand
recognition is an
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important component of our business strategy, the protection of our trademarks
is critical to our success. In addition, we depend upon our proprietary database
of industry and client information to provide our clients with our information
services. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and technology or obtain access to our
confidential proprietary database. Other parties may also breach confidentiality
agreements and other protective contracts. We may not become aware of these
breaches or have adequate remedies available. In addition, effective copyright,
patent and trademark protection may be unavailable in certain countries to which
we might expand our operations.
In technology markets, there is generally frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
We typically assume the ownership of cattle sold through our Internet
cattle marketplace and are subject to the risk of loss while we hold title and
market risk.
In the sales transactions conducted through our Internet cattle sales
and auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume the risk of
liability, loss and deterioration in value of the cattle during that period. As
a result, our business may be harmed.
We depend on our key employees for our success. The loss of any of
these persons could harm our ability to compete.
The loss of the services of any key person could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
We expect our quarterly operating results to fluctuate. If we fail to
meet the expectations of public market analysts and investors, the market price
of our common stock could decline.
We expect that our revenue and operating results will vary in the
future as a result of a number of factors. Our quarterly results of operations
may not meet the expectations of securities analysts and investors, which could
cause the price of our common stock to decline. Our operating results in the
future may not follow any prior trends and should not be relied upon as an
indication of future results. The factors that affect our quarterly operating
results include:
- our ability to retain existing customers and attract new
customers;
- our ability to develop and market new and enhanced products
and services on a timely basis;
- the introduction of new or enhanced Web sites, products and
services by us; and
- continued purchases by our existing customers.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
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- demand for our products and services;
- product and price competition;
- the introduction of new or enhanced Web sites, products and
services by our competitors; and
- significant downturns in our targeted markets.
Our quarterly results could fluctuate as a result of seasonal
fluctuations in the cattle industry.
The cattle industry has historically experienced, and continues to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. Generally, a higher number of cattle are
sold to feedlots during the third and fourth quarters as compared to the first
and second quarters of each calendar year. Therefore, a greater number of sales
transactions occur during these two calendar quarters. 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.
While we have recently implemented a disaster recovery plan, our
network server, satellites, computers and facilities are vulnerable to damage or
interruption from a number of sources, including fire, flood, power loss,
earthquakes, telecommunications failures, system failures, Internet brownouts,
computer viruses, electronic break-ins and similar disruptions. We depend on
these systems to provide our customers with online cattle sales and auction
services, feedlot and cattle industry analyses, and cattle inventory management
tools. Any substantial interruptions could result in the loss of data and could
impair our ability to provide our products and services to customers and to
generate revenues. Moreover, our business interruption insurance may not be
sufficient to compensate us for losses that may occur if any of our
Internet-based services are interrupted.
Risks associated with the security of transactions and transmitting
confidential information over the Internet may negatively impact our electronic
commerce business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers and
proprietary data, may prevent many potential customers from engaging in online
transactions and may harm our business. Despite the measures we intend to take
to enhance our Internet security, our infrastructure is potentially vulnerable
to physical or electronic break-ins, viruses or similar problems. If our
security measures are circumvented, proprietary information could be
misappropriated or our operations could be interrupted. Security breaches that
result in access to confidential information could expose us to a risk of loss
or liability. If we do not adequately address these concerns or face any claims
in connection with a breach of security, our business, financial condition and
operating results could be harmed.
We could face liability for information retrieved from or transmitted
through our Web sites, which could result in high litigation or insurance costs.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we carry
general liability insurance, our insurance may not cover claims of these types
or may not be adequate to cover us for all liability that may be imposed.
Government regulation and legal uncertainties could result in
additional burdens to doing business on the Internet.
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The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional costs on conducting business over the Internet or
impose additional restrictions on our ability to conduct our business
operations. In 1998, the Internet Tax Freedom Act placed a three-year moratorium
on state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes that discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
Internet Capital Group and Safeguard will be able to control matters
requiring stockholder approval.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities. Internet Capital Group and Safeguard together have the
power to vote approximately 56% (as of June 30, 2001) of the aggregate number of
votes to which the holders of our common stock are entitled. As a result, these
stockholders will be able to control all matters requiring stockholder approval.
In addition, currently five of the nine members of our board of
directors also serve as directors and/or officers of Internet Capital Group and
Safeguard. Internet Capital Group has the right to elect two directors to our
board. Under the joint venture agreement, Safeguard and Internet Capital Group
have agreed to vote for two designees of Safeguard and two designees of Internet
Capital Group in all future elections of directors. Internet Capital Group and
Safeguard will therefore have the ability to significantly influence our
management.
Our common stock price is likely to be highly volatile.
The market price of our common stock, like the market for
Internet-related and technology companies in general, has been and will likely
continue to be highly volatile. Any significant fluctuations in the future might
result in a material decline in the market price of our common stock. These
fluctuations may be caused by factors such as:
- actual or anticipated variations in quarterly operating
results;
- announcements of technological innovations;
- conditions or trends in the cattle industry;
- new sales formats of new products or services;
- changes in or failure by us to meet financial estimates of
securities analysts;
- conditions or trends in the Internet industry;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2001, we had cattle futures contracts with purchase
commitments of $74 million and sales commitments of $14 million. The contract
lives are generally less than six months. Any changes in the value of the
futures contracts is generally balanced by an offsetting position in the cash
market prices of the delivered livestock. However, we are exposed to market
risk for futures contracts that are not balanced with an offsetting position.
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Our exposure to market risk relates to changes in interest rates and
their potential impact on our investment portfolio. We invest in marketable debt
securities that meet high credit quality standards and limit our credit exposure
to any one issue, issuer and type of investment. As of June 30, 2001, our
investments consisted of $117,000 in cash equivalents with maturities of less
than three months and $1.9 million in certificates of deposit with a maturity of
less than six months. Due to the short-term, conservative nature of our
investment portfolio, a 10% increase or decrease in interest rates would not
have a material effect on our results of operations or the fair value of our
portfolio. The impact on our future results of operations and the future value
of our portfolio will depend largely on the gross amount of our investments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings
previously reported.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
STOCK OPTION EXCHANGE PROGRAM
On June 29, 2001, we commenced a voluntary offer to eligible employees to
exchange currently outstanding stock options for new options. The offer expired
on August 6, 2001 and, effective on that date, we accepted for exchange options
to purchase an aggregate of 197,125 shares of our Class A common stock. The
stock options accepted for exchange were cancelled on August 6, 2001, and are
expected to be granted on or after February 11, 2002.
PROPOSED CREDIT FACILITY AND WARRANT PURCHASE AGREEMENT
In connection a lending commitment received on July 18, 2001, we intend
to enter into a warrant purchase agreement with certain of our shareholders who
will provide, in the aggregate, $9 million in standby letters of credit on our
behalf as additional collateral for the proposed credit facility. Execution of
this agreement will require that we issue warrants for our common stock to these
shareholders as consideration for providing and maintaining the letters of
credit. The agreement provides for the issuance of warrants that are exercisable
for an aggregate amount of up to 8% of the total outstanding common shares of
the Company. Additional warrants of up to 2% of the total outstanding common
shares of the Company could be issued if the letters of credit are drawn upon by
the lender.
The maximum term of the warrants is not to exceed 24 months and they will be
issued at specified intervals and amounts beginning on the closing date of the
credit facility. In the event the letters of credit are drawn upon by the lender
and the drawn principal amount remains unpaid by the Company for 30 days, the
shareholders will have the right to convert the outstanding amounts under the
letters of credit into shares of our common stock up until the principal amount
is repaid. However, the maximum amount of common shares issuable in connection
with the agreement is 20% of the total outstanding shares of the Company as of
the credit facility closing date. Common shares that would otherwise be issuable
but for this restriction, will require approval by a majority of our
shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on May 24, 2001. At the
meeting, the shareholders voted in favor of the following item listed in our
Proxy Statement dated April 19, 2001:
I. Election of Eight Directors
The number of votes cast for or withheld with respect to the election
of each of the directors is set forth below:
FOR WITHHELD
---------- --------
Charles L. Abraham 36,933,138 941,890
John S. Scott, Ph.D 36,894,261 980,767
Douglas A. Alexander 37,721,786 153,242
Thomas C. Lynch 37,734,529 140,499
John W. Poduska, Sr., Ph.D 37,822,834 52,194
James P. Ebzery 37,814,232 60,796
Christopher J. Davis 37,781,829 93,199
Thomas L. Tippens 37,822,043 52,985
There were no broker non-votes with respect to the election of
directors.
Subsequent to our Annual Meeting of Stockholders, the Board of
Directors elected to increase the size of our Board from eight to ten members
and simultaneously elected Messrs. John C. Foltz and Robert E. Drury to serve as
directors until our next Annual Meeting of Stockholders. In addition, the Board
accepted the resignation of Thomas C. Lynch as director and elected James S.
Adams to serve as director until our next Annual Meeting of Stockholders. The
Board also accepted the resignation of Charles L. Abraham as CEO and director
and appointed Thomas L. Tippens as interim CEO.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
There were no exhibits required to be filed for the quarter ended June
30, 2001.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended June 30,
2001.
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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: August 14, 2001 eMerge Interactive. Inc.
By:
President, Chief Executive
/s/ Thomas L. Tippens Officer and Director (Principal
--------------------- Executive Officer)
Thomas L. Tippens
Vice President and Chief Financial
/s/ Reid Johnson Officer (Principal Financial and
--------------------- Accounting Officer)
Reid Johnson
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