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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 September 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10305 102nd Terrace Sebastian, Florida 32958
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(Address of principal executive offices)
(561) 299-8000
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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 November 12, 2001, was 39,597,172. There were 33,902,727
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 Nine Months Ended September 30, 2001)
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2000 and September 30, 2001.............3
Condensed Consolidated Statements of Operations for the three months ended September 30,
2000 and 2001....................................................................................4
Condensed Consolidated Statements of Operations for the nine months ended September 30,
2000 and 2001....................................................................................5
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 2001...............................................................................6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 2001....................................................................................7
Notes to Condensed Consolidated Financial Statements.............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........18
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................32
Part II OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................32
Item 2. Changes in Securities and Use of Proceeds.......................................................32
Item 4. Submission of Matters to a Vote of Security Holders.............................................33
Item 6. Exhibits and Reports on Form 8-K................................................................33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
Current assets:
Cash and cash equivalents $ 42,811,572 $ 18,226,784
Trade accounts receivable, less allowance for doubtful accounts of $167,937 in 2000
and $351,862 in 2001 12,141,867 20,616,353
Inventories (note 3) 3,704,250 4,306,699
Cattle deposits 2,185,670 4,404,211
Prepaid expenses 1,070,674 2,529,996
Other current assets 697,536 227,670
Due from related parties (note 4) 3,479,492 2,730,524
------------- -------------
Total current assets 66,091,061 53,042,237
Property, plant and equipment, net of accumulated depreciation of $2,899,321 in 2000 and
$5,409,117 in 2001 20,567,939 16,758,471
Investment in Turnkey Computer Systems, Inc. 3,010,603 2,835,889
Intangible assets, net of accumulated amortization of $8,131,310 in 2000 and $18,342,089
in 2001 57,377,620 8,341,358
Restricted cash 1,505,000 1,983,131
------------- -------------
Total assets $ 148,552,223 $ 82,961,086
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligations $ 216,516 $ 337,743
Line of credit (note 5) -- 14,573,870
Accounts payable 9,509,316 11,946,402
Accrued liabilities:
Purchase consideration 4,800,000 --
Salaries and benefits 850,533 711,320
Other 1,124,649 579,271
Advance payments from customers 663,850 681,790
Due to related parties (note 4) 1,219,417 202,150
------------- -------------
Total current liabilities 18,384,281 29,032,546
Capital lease obligations, excluding current installments 90,820 635,522
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Total liabilities 18,475,101 29,668,068
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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 33,902,727 shares in 2001 235,561 271,221
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 195,347,598 200,239,033
Accumulated deficit (65,511,023) (147,215,180)
Unearned compensation (40,570) (47,612)
------------- -------------
Total stockholders' equity 130,077,122 53,293,018
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Total liabilities and stockholders' equity $ 148,552,223 $ 82,961,086
============= =============
See accompanying notes to condensed consolidated financial statements.
3
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
Three Months
Ended
September 30,
2000 2001
------------- -------------
Revenue (including sales to related parties of approximately $119,700,000
in 2000 and $90,808,000 in 2001, note 4) $ 277,350,736 $ 246,757,224
Cost of revenue (including purchases from related parties of approximately
$20,500,000 in 2000 and $17,249,000 in 2001, note 4) 273,644,888 243,382,940
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Gross profit 3,705,848 3,374,284
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Operating expenses:
Selling, general and administrative 6,613,397 5,511,172
Technology and development 2,382,535 933,334
Impairment, restructuring and related charges (note 10) -- 39,755,186
Depreciation and amortization of intangibles 3,278,072 4,280,402
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Total operating expenses 12,274,004 50,480,094
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Operating loss (8,568,156) (47,105,810)
Equity loss in unconsolidated investee -- (77,137)
Interest expense (104,789) (159,618)
Interest and other income, net 1,395,152 92,102
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Net loss $ (7,277,793) $ (47,250,463)
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Net loss per common share - basic and diluted $ (0.21) $ (1.32)
============= =============
Weighted average number of common shares outstanding - basic and diluted 34,553,454 35,761,243
============= =============
See accompanying notes to condensed consolidated financial statements.
4
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
Nine Months
Ended
September 30,
2000 2001
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Revenue (including sales to related parties of approximately $178,200,000 $ 476,319,721 $ 898,553,598
in 2000 and $257,614,000 in 2001, note 4)
Cost of revenue (including purchases from related parties of approximately
$36,400,000 in 2000 and $64,752,000 in 2001, note 4) 470,903,797 888,198,539
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Gross profit 5,415,924 10,355,059
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Operating expenses:
Selling, general and administrative 18,851,666 20,925,414
Technology and development 5,823,984 3,566,931
Impairment, restructuring and related charges (note 10) -- 53,960,795
Depreciation and amortization of intangibles 5,808,334 13,625,427
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Total operating expenses 30,483,984 92,078,567
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Operating loss (25,068,060) (81,723,508)
Equity loss in unconsolidated investee -- (174,714)
Interest expense (104,789) (161,326)
Interest and other income, net 4,405,416 588,079
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Loss from continuing operations (20,767,433) (81,471,469)
Income from operations of discontinued transportation segment 84,634 --
Cumulative effect of a change in accounting principle -- (232,688)
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Net loss $ (20,682,799) $ (81,704,157)
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Net loss from continuing operations per common share - basic and diluted $ (0.68) $ (2.30)
============= =============
Net loss per common share - basic and diluted $ (0.68) $ (2.30)
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Weighted average number of common shares outstanding - basic and diluted 30,604,604 35,578,598
============= =============
See accompanying notes to condensed consolidated financial statements.
5
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Common Stock Common Stock
Class A Class B
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Shares Amount Shares Amount
---------- -------- --------- -------
Balances as of December 31, 2000 29,445,228 $235,561 5,694,445 $45,556
Issuance of 188,356 shares of common
stock in connection with business
combinations (note 9) 188,356 1,507 -- --
Exercise of stock options for cash
(note 8) 269,143 2,153 -- --
Issuance of 4,000,000 shares of
common stock for cash 4,000,000 32,000 -- --
Issuance of 764,328 common stock
purchase warrants (note 6) -- -- -- --
Net loss -- -- -- --
Unearned compensation -- -- -- --
Amortization of unearned compensation -- -- -- --
---------- -------- --------- -------
Balances as of September 30, 2001 33,902,727 $271,221 5,694,445 $45,556
========== ======== ========= =======
Additional
Paid-in Accumulated Unearned
Capital Deficit Compensation Total
----------- ------------- ------------ ------------
Balances as of December 31, 2000 195,347,598 $ (65,511,023) $ (40,570) $130,077,122
Issuance of 188,356 shares of common
stock in connection with business
combinations (note 9) 685,993 -- -- 687,500
Exercise of stock options for cash
(note 8) 299,288 -- -- 301,441
Issuance of 4,000,000 shares of
common stock for cash 2,662,418 -- -- 2,694,418
Issuance of 764,328 common stock
purchase warrants (note 6) 914,376 -- -- 914,376
Net loss (81,704,157) -- (81,704,157)
Unearned compensation 329,360 (329,360) --
Amortization of unearned compensation -- -- 322,318 322,318
----------- -------------- --------- ------------
Balances as of September 30, 2001 200,239,033 $(147,215,180) $ (47,612) $ 53,293,018
=========== ============== ========= ============
See accompanying notes to condensed consolidated financial statements.
6
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
2000 2001
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Cash flows from operating activities:
Net loss $ (20,682,799) $(81,704,157)
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 5,897,287 13,737,081
Accretion to redemption value of note receivable (1,642,474) --
Equity loss (income) in unconsolidated investee -- (29,712)
Non-cash compensation 1,339,268 301,156
Amortization of unearned non-cash compensation 13,524 21,161
Impairment and related charges -- 51,784,210
Provision for obsolescence -- 265,000
Increase in fair value of derivatives -- (551,735)
Changes in operating assets and liabilities:
Trade accounts receivable, net (31,802,505) (8,474,486)
Inventories (2,702,287) (593,784)
Cattle deposits (3,865,781) (1,485,161)
Prepaid expenses and other assets 489,092 (285,093)
Restricted Cash (1,505,000) (478,131)
Net assets of discontinued operations 297,003 --
Due from related parties, net (7,576,027) (268,299)
Accounts payable and accrued liabilities 19,289,369 1,840,199
Advance payments from customers 1,030,835 17,940
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Net cash used in operating activities (41,420,489) (26,187,022)
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Cash flows from investing activities:
Business combinations, net of cash acquired (33,081,917) (9,311,770)
Purchase of short term investments (1,290,000) --
Purchase of property, plant and equipment (10,143,412) (6,457,640)
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Net cash used in investing activities (44,515,329) (15,769,410)
------------- ------------
Cash flows from financing activities:
Net borrowings on line of credit -- 14,573,870
Net payments to related parties (11,399,344) --
Payment on note payable (900,000) --
Payments on capital lease obligations (306,388) (198,087)
Net proceeds from issuance of common stock 107,962,304 2,995,859
------------- ------------
Net cash provided by financing activities 95,356,572 17,371,642
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Net change in cash 9,420,754 (24,584,788)
Cash and cash equivalents, beginning of period 12,316,497 42,811,572
------------- ------------
Cash and cash equivalents, end of period $ 21,737,251 $ 18,226,784
============= ============
Supplemental disclosures:
Cash paid for interest $ 359,721 $ 141,813
Issuance of Class A common stock in connection with
business combinations (note 9) 21,802,500 687,500
Acquisition of equipment through capital lease obligations -- 864,015
Issuance of warrants for debt issue costs -- 914,376
Liabilities incurred in connection with business
combination 6,675,000 --
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.
7
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
nine months ended September 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 September 30, 2001, and the results of its operations
and cash flows for the periods ended September 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 individual animal. Actual
market prices could be materially different from the carrying
cost at the time the cattle are sold.
8
(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 values of the Company's assets are reduced to
their estimated fair value.
(g) Investment Securities
As of September 30, 2001, the Company held approximately
$119,000 of highly liquid debt instruments with maturities of
90 days or less included in cash equivalents and approximately
$1,983,000 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 September 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.
9
(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, line of credit, accounts payable, accrued
liabilities and advance payments from customers approximates
their fair value at December 31, 2000 and September 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 and takes title from
the seller, records the cattle as inventory until delivered to
an accepted buyer and is exposed to both the inventory and
credit risk that results from the transaction. In these types
of transactions, the Company records the gross revenue earned
and related product costs incurred. For cattle sales
transactions in which the Company acts as an agent, the
Company sells cattle consigned to it on a commission basis,
where it is subject to inventory and credit risk, or the
Company sells cattle on a fee basis. 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.
10
(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 4,839,352
shares at September 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 $232,700. As of September 30, 2001, the Company
has cattle futures contracts with purchase commitments of
approximately $55 million and sales commitments of
approximately $14 million. The change in fair value of all
derivative contracts amounted to approximately $552,000 for
the nine months ended September 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.
11
(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 nine months ended September 30, 2000
and 2001. Thus, comprehensive loss is the same as net loss for
each of the three and nine-month periods ended September 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 to 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 a
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 $10.4 million, all of which will be subject to
the transition provisions of SFAS No. 141 and 142.
Amortization expense related to intangible assets was
approximately $7,855,000 and $10,122,000 for the year ended
December 31, 2000 and nine months ended September 30, 2001,
respectively. As a result of the impairment charges recorded
during the nine months ended September 30, 2001, the Company
does not expect adoption of SFAS No. 141 and 142 will have a
material effect on the Company's financial statements.
12
(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
---------- ----------
Cattle 3,315,407 3,891,781
Other 388,843 414,918
---------- ----------
$3,704,250 $4,306,699
========== ==========
(4) RELATED PARTY TRANSACTIONS
Amounts due from related parties consist of:
2000 2001
---------- ----------
Eastern Livestock, Inc. $2,424,264 $1,289,719
Employees and shareholders 1,055,228 1,440,805
---------- ----------
$3,479,492 $2,730,524
========== ==========
Amounts due to related parties consist of:
2000 2001
---------- --------
XL Vision $ 313,009 $ --
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc.
Eastern Livestock, Inc. 12,115 --
Employees and shareholders 321,362 123,157
572,931 78,993
---------- --------
$1,219,417 $202,150
========== ========
The Company has both cattle sales and purchase transactions with
Eastern Livestock, Inc., certain employees and shareholders' related
businesses in the ordinary course of business. These sales and
purchases are made on trade accounts with the same credit terms of the
Company's other customers and suppliers. Cattle sales to related
parties amounted to $178,200,000 and $257,614,000 for the nine months
ended September 30, 2000 and 2001, respectively. Cattle purchases from
related parties amounted to $36,400,000 and $64,752,000 for the nine
months ended September 30, 2000 and 2001, respectively.
13
(5) LINE OF CREDIT
In August 2001, the Company entered into a $30 million revolving line
of credit agreement (the "LOC") from The CIT Group/Business Credit,
Inc. ("CIT"). The LOC is secured primarily by receivables and
inventories, bears interest at the Company's option of Prime or LIBOR
plus 300 basis points, payable monthly. The LOC may be utilized for
working capital purposes and matures in 24 months. The loan agreement
includes various loan covenants and restrictions of a customary nature
which may, under certain circumstances, limit our ability to undertake
additional acquisitions, make certain changes in management, or
otherwise limit obligations undertaken by, or operations of, eMerge.
One of the loan covenants requires the Company achieve quarterly
EBITDA of a loss no greater than $1.5 million. The Company did not
comply with this covenant for the quarter ended September 30, 2001 as
it had an EBITDA loss of $3.1 million. As of September 30, 2001, there
were borrowings of $14,573,870 outstanding under this arrangement with
CIT, but as of November 8, 2001 the balance on this line of credit was
$0. The Company does not currently expect to make additional
borrowings under this facility. However, if additional borrowings are
required, the Company will likely be required to obtain a waiver in
order to access this facility. Failure to obtain a waiver will require
the Company to seek other funding alternatives. There are no
assurances that a waiver or additional funding can be obtained.
(6) STOCK PURCHASE WARRANTS
In connection with the line of credit agreement, the Company entered
into a warrant purchase agreement with certain stockholders who are
providing, in the aggregate, $9 million in standby letters of credit on
the Company's behalf as additional collateral for the LOC. As part of
this agreement, the Company issued 764,328 stock purchase warrants to
these stockholders as consideration for providing and maintaining the
letters of credit. The warrants are exercisable at $1.55 per share and
expire on August 24, 2004. The warrants were valued using the
Black-Scholes model with the following assumptions: expected term - 3
years, risk free interest rate - 4.25% and volatility - 135.0%. These
assumptions yielded a value of $914,376, which was charged to debt
issue costs and is being amortized on a straight line basis to interest
expense over the two year term of the LOC.
In addition to the warrants issued with the closing of the LOC
agreement, these certain stockholders are eligible to receive
additional stock purchase warrants under the following schedule:
February 28, 2002 - 764,328 shares; August 31, 2002 - 764,328 shares;
February 28, 2003 - 764,328 shares if the letters of credit remain in
place as of these dates. The number of shares into which these
additional warrants may be exercised will be reduced on a pro rata
basis in conjunction with a reduction in the amount covered by the
standby letters of credit. Additional warrants of up to 764,328 shares
of eMerge common stock could be issued if the lender draws upon the
letters of credit. In addition to the stock purchase warrants, the
Company is required to reimburse each of these certain stockholders
for their expenses associated with the letters of credit plus 1%.
The maximum term of the warrant purchase agreement is not to exceed 24
months and ends simultaneously with the loan agreement. 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
stockholders will have the right to convert the outstanding amounts
under the letters of credit into shares of common stock up until the
principal amount is repaid. However, the maximum amount of common
shares issuable in connection with the agreement is 3,821,640. Common
shares that would otherwise be issuable but for this restriction, will
require approval by a majority of our stockholders.
(7) 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:
14
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 2001 2000 2001
------------- ------------ ------------- -------------
Revenue:
Cattle $ 276,745,885 $246,311,138 $ 474,564,732 $ 897,005,033
Other 604,851 446,086 1,754,989 1,548,565
------------- ------------ ------------- -------------
Total $ 277,350,736 $246,757,224 $ 476,319,721 $ 898,553,598
============= ============ ============= =============
Cost of revenue:
Cattle $ 272,988,081 $243,054,819 $ 469,070,148 $ 886,183,040
Other 656,807 328,121 1,833,649 2,015,499
------------- ------------ ------------- -------------
Total $ 273,644,888 $243,382,940 $ 470,903,797 $ 888,198,539
============= ============ ============= =============
Gross profit (loss):
Cattle $ 3,757,804 $ 3,256,319 $ 5,494,584 $ 10,821,993
Other (51,956) 117,965 (78,660) (466,934)
------------- ------------ ------------- -------------
Total $ 3,705,848 $ 3,374,284 $ 5,415,924 $ 10,355,059
============= ============ ============= =============
The Company's assets and other statement of operations data are not
allocated to a segment.
(8) STOCK PLAN
A summary of stock option transactions for the nine months ended
September 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 3,084,500 0.68-5.73 1.96
Exercised (269,143) 0.80-2.40 1.13
Cancelled (2,143,132) 0.80-62.37 10.69
---------- ------------ -------
Balance outstanding, September 30, 2001 4,839,352 $ 0.80-62.38 $ 3.98 8.77
========== ============ ======= ====
For the nine months ended September 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.
15
(9) ACQUISITIONS
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Bluegrass Stockyards ("Bluegrass") and its
shareholders. In connection with this purchase, the Company acquired
all of the tangible and intangible property of Bluegrass relating to
its business of purchasing and reselling cattle through its auction
facility. The purchase price for these assets was $1,500,000 in cash.
Concurrent with the purchase and sale of assets, the Company also
closed on a Contract for Sale and Purchase of Real Estate with the
shareholders of Bluegrass. The Company purchased land and buildings
used in the above-described business for a purchase price of $2,000,000
in cash. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $2,164,800 was recorded as intangibles
and is being amortized over five years.
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Runnells-Peters Cattle Company
("Runnells-Peters") and its shareholders for the purchase of certain
tangible and intangible assets. Runnells-Peters engages in the buying
of cattle for immediate or short-term resale. The purchase price for
these assets consisted of (i) $500,000 in cash and (ii) 136,986 shares
of eMerge's common stock valued at $500,000. The acquisition was
accounted for as a purchase and the estimated excess of the purchase
price over the fair value of net assets acquired of approximately
$1,018,400 was recorded as intangibles and is being amortized over five
years.
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Pennell Cattle Company ("Pennell") and its sole
shareholder for the purchase of certain tangible and intangible assets.
Pennell engages in the buying of cattle for immediate or short-term
resale. The purchase price for these assets consisted of (i) $187,500
in cash and (ii) 51,370 shares of eMerge's common stock valued at
$187,500. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $395,200 was recorded as intangibles
and is being amortized over five years.
In addition to the above payments, the Company paid approximately
$4,800,000 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 Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
2000 2001 2000 2001
------------- ------------- ------------- -------------
Revenue $ 282,133,149 $ 246,757,224 $ 497,077,555 $ 898,553,598
Net loss (7,528,070) (47,250,463) (21,160,051) (81,704,156)
Net loss per share $ (0.22) $ (1.32) $ (0.69) $ (2.30)
16
(10) IMPAIRMENT, RESTRUCTURING AND RELATED CHARGES
From May 2000 through January 2, 2001, we made nine acquisitions
consisting of cattle order buying or livestock marketing facilities,
for approximately $72.3 million. Approximately 89.6% of the purchase
price was allocated to intangible assets. In September 2001, the
Company determined that it needs to continue its focus on opportunities
that have significant, sustainable revenues with meaningful gross
margins. The Company also determined that this focus is not best served
by owning and operating these businesses. Accordingly, the Company is
entering into lease and operating agreements for its cattle brokerage
operations with several key individuals that currently manage these
businesses. In general, the terms of the lease and operating agreements
provide for 1) the sharing of profits and losses, with the majority
allocated to eMerge, 2) each facility securing its own line of credit
for working capital purposes and 3) each facility being responsible for
its entire operation, including payroll and operating expenses. The
Company anticipates completing the transactions during the fourth
quarter of 2001 and expects the net effect of these transactions to
ongoing operating cash flow, before interest, taxes, depreciation and
amortization, to be neutral.
In connection with these transactions and pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company evaluated the recoverability of
the long-lived assets, including intangibles of its cattle order buying
and livestock marketing businesses. Since the acquisition of these
businesses the cattle industry has experienced difficulties due to an
extended drought in the southern plains and the southeast which led to
a decrease in the availability of feeder cattle for sale, which has led
to a significantly reduced number of head sold in each quarter of 2001.
As a result of this evaluation, the Company determined that many of
these acquired facilities estimated future undiscounted cash flows were
below the carrying value of the associated long-lived assets.
Accordingly, as of September 30, 2001, the Company adjusted the
carrying value of the acquired facilities long-lived assets, primarily
intangible assets to their estimated fair value of approximately $6.6
million, resulting in a noncash impairment loss of approximately $39.4
million ($1.10 per share). The estimated fair value was based on
anticipated future cash flows discounted at a rate of 10%.
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 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.
During the three months ended September 30, 2001, additional
restructuring charges of $307,000 (as shown in the following table)
were incurred for employee severance and related benefits for several
employees notified after June 30, 2001 and additional costs incurred in
sub-leasing the closed facility.
A summary of activity in the restructuring liability (included in
accrued salaries and benefits in the accompanying condensed
consolidated balance sheets) for the nine months ended September 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
===========
New charges 307,174
Cash payments (1,064,115)
Other adjustments --
-----------
Balance at September 30, 2001 $ 288,511
===========
17
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.
OVERVIEW
We are a technology company providing individual-animal tracking data
management and supply procurement services to the $40 billion U.S.
beef-production industry. Our technologies primarily focus on
information-management, individual-animal tracking such as CattleLog, our
exclusive individual-animal data collection and reporting system that enables
beef-verification and branding and other technologies designed to enhance
consumer confidence in beef safety. Our cattle marketing operation is the
largest in the U.S. and consists of regional livestock marketing and order
buying facilities, a nationwide network of cattle representatives and an online
auction and brokerage service that combined have the capacity to market four
million head of cattle annually. 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 SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
REVENUE
Revenue decreased from $277.3 million for the quarter ended September
30, 2000 to $246.8 million for the quarter ended September 30, 2001. Revenue
from cattle sales decreased from $276.7 million for the quarter ended September
30, 2000 to $246.3 million for the quarter ended September 30, 2001. This
decrease reflects a lower volume of cattle sales transactions brought about
primarily by a decrease in feeder cattle available for sale. During the quarter
ended September 30, 2001, we sold approximately 582,900 head of cattle versus
632,800 head sold in the comparable prior year period. Revenue from other
products and services decreased by 26% from $605,000 for the quarter ended
September 30, 2000 to $446,000 for the quarter ended September 30, 2001. This
decrease is due primarily to a decline of approximately $277,100 in sales of our
equine imaging systems and Nutricharge products. 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, and advertising was offset in part by an
increase in revenues of approximately $16,000 in sales generated from our
on-line information services and $112,000 derived from sales of cattle-related
products and services, such as feed and veterinary services offered through our
assimilation facilities, and also included approximately $96,000 in revenue
generated from a pre-conditioning program that was discontinued during a
previous quarter. We expect that cattle revenue, whether direct or through the
lease and operating agreements, 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.
18
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, which are primarily associated
with supporting our on-line products and services. Cost of revenue attributed to
cattle sales decreased from $273.0 million for the quarter ended September 30,
2000 to $243.1 million for the quarter ended September 30, 2001, corresponding
with the decreased cattle sales activity. Cost of revenue attributed to other
products and services decreased by 50% from $657,000 for the quarter ended
September 30, 2000 to $328,000 for the quarter ended September 30, 2001. This
decrease is due principally to lower production costs due to the discontinuation
of support for certain on-line product and service offerings, such as
Interactive manager and our on-line storefront. We generated a gross profit of
$3.7 million and $3.4 million for the quarters ended September 30, 2000 and
2001, respectively. The decrease in gross profit is due primarily to the
decrease in cattle revenue and a comparable decrease in cost of goods,
principally direct cost to acquire cattle. 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 decreased 17% from $6.6
million for the quarter ended September 30, 2000 to $5.5 million for the quarter
ended September 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 35%
from $4.3 million for the quarter ended September 30, 2000 to $2.8 million for
the quarter ended September 30, 2001. The decrease in selling expenses was
primarily associated with the impacts of cost saving initiatives begun during
the previous quarter, which included workforce reductions. We anticipate selling
expenses to continue to decline slightly in the foreseeable future as the
impacts of cost saving initiatives begun during the previous 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 17% from $2.3 million for the quarter ended September 30, 2000 to
$2.7 million for the quarter ended September 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 September 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 $231,000 during the quarter ended
September 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
second quarter of 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
61% from $2.4 million for the quarter ended September 30, 2000 to $933,000 for
the quarter ended September 30, 2001. The decrease was primarily associated with
the impacts of cost saving initiatives begun during the previous quarter, which
included workforce reductions. In addition materials, supplies and consulting
expenses had significant decreases during the quarter. Furthermore, the Company
has fewer products under development and products such as CattleLog, our
exclusive individual-animal data collection and reporting system, is essentially
complete. The primary focus of our development team is our fecal detection
technology. 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
continue to decrease slightly in the fourth quarter as the impact of the cost
savings initiatives begun during the second quarter of 2001, which included
workforce reductions, become fully realized.
19
IMPAIRMENT, RESTRUCTURING AND RELATED CHARGES
From May 2000 through January 2, 2001, we made nine acquisitions
consisting of cattle order buying or livestock marketing facilities, for
approximately $72.3 million. Approximately 89.6% of the purchase price was
allocated to intangible assets. In September 2001, the Company determined that
it needs to continue its focus on opportunities that have significant,
sustainable revenues with meaningful gross margins. The Company also determined
that this focus is not best served by owning and operating these businesses.
Accordingly, the Company is entering into lease and operating agreements for its
cattle brokerage operations with several key individuals that currently manage
these businesses. In general, the terms of the lease and operating agreements
provide for 1) the sharing of profits and losses, with the majority allocated to
eMerge, 2) each facility securing its own line of credit for working capital
purposes and 3) each facility being responsible for its entire operation,
including payroll and operating expenses. The Company anticipates completing the
transactions during the fourth quarter of 2001 and expects the net effect of
these transactions to ongoing operating cash flow, before interest, taxes,
depreciation and amortization, to be neutral.
In connection with these transactions and pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company evaluated the recoverability of the long-lived
assets, including intangible assets of its cattle order buying and livestock
marketing businesses. Since the acquisition of these businesses the cattle
industry has experienced difficulties due to an extended drought in the southern
plains and the southeast which led to a decrease in the availability of feeder
cattle for sale, which has led to a significantly reduced number of head sold in
each quarter of 2001. As a result of this evaluation, the company determined
that many of these acquired facilities estimated future undiscounted cash flows
were below the carrying value of the associated long-lived assets. Accordingly,
as of September 30, 2001, the Company adjusted the carrying value of the
acquired facilities long-lived assets, primarily intangible assets, to their
estimated fair value of approximately $6.6 million, resulting in a noncash
impairment charge of approximately $39.4 million ($1.10 per share). The
estimated fair value was based on anticipated future cash flows discounted at
10%.
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 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. During the quarter ended September 30, 2001, additional
restructuring charges of $307,000 were incurred for employee severance and
related benefits for several employees notified after June 30, 2001 and
additional costs incurred in sub-leasing the closed facility.
The majority of the employee termination benefits accrued as of June
30, 2001 were paid and funded with working capital during the third quarter of
2001. For the quarter ended September 30, 2001 we had reductions in payroll
compared to the quarter ended June 30, 2001 of approximately $53,000 in general
and administrative expenses, of approximately $699,000 in sales and marketing
expenses and approximately $330,000 in technology and development. In addition,
we had a reduction in depreciation and amortization expenses of approximately
$280,000 compared to the quarter ended June 30, 2001. We anticipate that the
actions taken in the previous quarter will continue to result in additional cost
savings during the fourth quarter of 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 30% from $3.3 million
for the quarter ended September 30, 2000 to $4.3 million for the quarter ended
September 30, 2001. The increase was primarily related to additional
amortization charges of $634,000 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 $325,000
during the quarter ended September
20
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 facility closing, as
well as, the impairment of intangibles will cause a significant reduction in
depreciation and amortization in future periods. The write down of non-strategic
assets associated with discontinued product lines and the facility closing
caused a reduction in depreciation and amortization expenses of approximately
$280,000 in the quarter ended September 30, 2001 compared to the quarter ended
June 30, 2001.
OTHER INCOME AND EXPENSE
Interest and other income, net decreased from $1.4 million for the
quarter ended September 30, 2000 to $92,000 for the quarter ended September 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
$567,000 during the quarter ended September 30, 2000. Currently, we invest
the majority of our cash balances in debt instruments of high-quality corporate
issuers.
Interest expense was $105,000 for the quarter ended September 30, 2000
compared to $160,000 for the quarter ended September 30, 2001. This increase is
due primarily to interest expense incurred on the balance outstanding on our
line of credit, which was entered into on August 27, 2001.
Due to the losses incurred, we did not recognize income tax expense for
the quarter ended September 30, 2000 or the quarter ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
REVENUE
Revenue increased from $476.3 million for the nine months ended
September 30, 2000 to $898.6 million for the nine months ended September 30,
2001. Revenue from cattle sales increased from $474.6 million for the nine
months ended September 30, 2000 to $897.0 million for the nine months ended
September 30, 2001. This increase reflects a higher volume of cattle sales
transactions brought about primarily through our acquisition activities. During
the nine months ended September 30, 2001, we sold approximately 1.9 million head
of cattle versus 1.0 million head sold in the comparable prior year period.
Revenue from other products and services decreased by 17% from $1.8 million for
the nine months ended September 30, 2000 to $1.5 million for the nine months
ended September 30, 2001. This decrease is due primarily to a decline of
$862,000 in sales of our equine imaging systems and Nutricharge products, a
$114,000 decrease in advertising revenues and a $206,000 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 $529,000 derived from
sales of cattle-related products and services, such as feed and veterinary
services offered through our assimilation facilities, and also included
approximately $455,000 in revenue generated from a pre-conditioning program that
was discontinued during a previous quarter. We expect that cattle revenue,
whether direct or through the lease and operating agreements, 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 $469.1 million for the nine months ended September
30, 2000 to $886.2 million for the nine months ended September 30, 2001,
corresponding with the increased cattle sales activity. Cost of revenue
attributed to other products and services increased by 11% from $1.8 million for
the nine months ended September 30, 2000 to $2.0 million for the nine
21
months ended September 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 $647,000 in costs associated with a
pre-conditioning program that was discontinued during a previous quarter. We
generated a gross profit of $5.4 million and $10.4 million for the nine months
ended September 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 10% from $18.9
million for the nine months ended September 30, 2000 to $20.9 million for the
nine months ended September 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 5% from $12.0 million for the nine months ended September
30, 2000 to $12.6 million for the nine months ended September 30, 2001. Selling
expenses for the nine months ended September 30, 2000 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 increased approximately $1.9 million or 18% for the
nine months ended September 30, 2001 versus the same period a year ago. The
overall 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 nine month period ended September 30, 2001. The
acquisitions expanded the number of personnel within the selling organization
and caused a corresponding increase in salaries and related benefits costs.
Overall, selling expenses rose approximately $5 million during the nine months
ended September 30, 2001, because of the addition of the acquired businesses. 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 56% from $5.4 million for the nine months
ended September 30, 2000 to $8.4 million for the nine months ended September 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 nine month period ended
September 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 nine months ended September 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
38% from $5.8 million for the nine months ended September 30, 2000 to $3.6
million for the nine months ended September 30, 2001. The decrease was primarily
associated with the impacts of cost saving initiatives begun during the previous
quarter, which included workforce reductions. In addition materials, supplies
and consulting expenses had significant decreases during the quarter.
Furthermore, the Company has fewer products under development and products such
as CattleLog, our exclusive individual-animal data collection and reporting
system, is essentially complete. The primary focus of our development team is
our fecal detection technology. 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
22
impacts of cost saving initiatives begun during the quarter ended June 30, 2001,
which included workforce reductions, become fully realized.
IMPAIRMENT, RESTRUCTURING AND RELATED CHARGES
From May 2000 through January 2, 2001, we made nine acquisitions
consisting of cattle order buying or livestock marketing facilities, for
approximately $72.3 million. Approximately 89.6% of the purchase price was
allocated to intangible assets. In September 2001, the Company determined that
it needs to continue its focus on opportunities that have significant,
sustainable revenues with meaningful gross margins. The Company also determined
that this focus is not best served by owning and operating these businesses.
Accordingly, the Company is entering into lease and operating agreements for its
cattle brokerage operations with several key individuals that currently manage
these businesses. In general, the terms of the lease and operating agreements
provide for 1) the sharing of profits and losses, with the majority allocated to
eMerge, 2) each facility securing its own line of credit for working capital
purposes and 3) each facility being responsible for its entire operation,
including payroll and operating expenses. The Company anticipates completing the
transactions during the fourth quarter of 2001 and expects the net effect of
these transactions to ongoing operating cash flow, before interest, taxes,
depreciation and amortization, to be neutral.
In connection with these transactions and pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company evaluated the recoverability of the long-lived
assets, including intangible assets of its cattle order buying and livestock
marketing businesses. Since the acquisition of these businesses the cattle
industry has experienced difficulties due to an extended drought in the southern
plains and the southeast which led to a decrease in the availability of feeder
cattle for sale, which has led to a significantly reduced number of head sold in
each quarter of 2001. As a result of this evaluation, the Company determined
that many of these acquired facilities estimated future undiscounted cash flows
were below the carrying value of the associated long-lived assets. Accordingly,
as of September 30, 2001, the Company adjusted the carrying value of the
acquired facilities long-lived assets, primarily intangible assets, to their
estimated fair value of approximately $6.6 million, resulting in a noncash
impairment charge of approximately $39.4 million ($1.10 per share). The
estimated fair value was based on anticipated future cash flows discounted at
10%.
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 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. During the quarter ended September 30, 2001, additional
restructuring charges of $307,000 were incurred for employee severance and
related benefits for several employees notified after June 30, 2001 and
additional costs incurred in sub-leasing the closed facility.
The majority of the employee termination benefits accrued as of June
30, 2001 were paid and funded with working capital during the third quarter of
2001. For the quarter ended September 30, 2001 we had reductions in payroll of
approximately $53,000 in general and administrative expenses, of approximately $
699,000 in sales and marketing expenses and approximately $330,000 in technology
and development. In addition, we had a reduction in depreciation and
amortization expenses of approximately $280,000. We anticipate that the actions
taken in previous quarters will continue to result in additional cost savings
during the fourth quarter of 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 135% from $5.8 million
for the nine months ended September 30, 2000 to $13.6 million for the nine
months ended September 30, 2001. The increase was primarily related to
additional amortization
23
charges of $5.6 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 $2.2
million during the nine months ended September 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,
non-strategic assets associated with discontinued product lines and a facility
closing and the impairment of intangibles will cause a significant reduction in
depreciation and amortization in future periods.
OTHER INCOME AND EXPENSE
Interest and other income, net decreased from $4.4 million for the nine
months ended September 30, 2000 to $588,000 for the nine months ended September
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
$1.6 million during the nine months ended September 30, 2000. Currently, we
invest the majority of our cash balances in debt instruments of high-quality
corporate issuers.
Interest expense was $105,000 for the nine months ended September 30,
2000 compared to $161,000 for the nine months ended September 30, 2001. This
increase is due primarily to interest expense incurred on the balance
outstanding on our line of credit, which was entered into on August 27, 2001.
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 nine months ended September 30, 2000 or the nine months ended September 30,
2001.
LIQUIDITY AND CAPITAL RESOURCES
In August 2001, the Company entered into a $30 million revolving line
of credit agreement (the "LOC") from The CIT Group/Business Credit, Inc ("CIT").
The LOC is secured primarily by receivables and inventories, bears interest at
our option of Prime or LIBOR plus 300 basis points, payable monthly. The LOC may
be utilized for working capital purposes and matures in 24 months. The loan
agreement includes various loan covenants and restrictions of a customary nature
which may, under certain circumstances, limit our ability to undertake
additional acquisitions, make certain changes in management, or otherwise limit
obligations undertaken by, or operations of, eMerge. One of the loan covenants
requires the Company achieve quarterly EBITDA of a loss no greater than $1.5
million. For the quarter ended September 30, 2001 the Company had an EBITDA loss
of $3.1 million. As of September 30, 2001, there were borrowings of $14,573,870
outstanding under this arrangement with CIT, but as of November 8, 2001 the
balance on this line of credit was $0. The Company does not currently expect to
make additional borrowings under this facility. However, if additional
borrowings are required, the Company will likely be required to obtain a waiver
in order to access this facility. Failure to obtain a waiver will require the
Company to seek other funding alternatives. There are no assurances that a
waiver or additional funding can be obtained.
As of September 30, 2001, we had cash and cash equivalents totaling
$18.2 million compared to $42.8 million at December 31, 2000, and $8.1 million
as of June 30, 2001. Our working capital balance as of September 30, 2001, was
$24.0 million compared to $47.7 million as of December 31, 2000, and $24.7
million as of June 30, 2001.
We have had significant negative cash flows from operating activities
for each fiscal and quarterly period to date. For the nine months ended
September 30, 2001, net cash used in operating activities was $25.4 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 decrease
24
into the foreseeable future with the anticipated decrease in cattle sales
activity brought about by the implementation of the lease and order buying
agreements during the fourth quarter of 2001.
Net cash used in investing activities was $16.6 million for the nine
months ended September 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 paid
the former shareholders of Eastern Livestock, Inc. ("Eastern") $4.5 million in
cash during the nine months ended September 30, 2001, pursuant to an asset
purchase agreement dated May 1, 2000. We also paid $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 $17.3 for the nine months
ended September 30, 2001. Cash provided by financing activities was principally
due to net borrowings on the line of credit with CIT. In addition, we received
$2.8 million from Allflex USA, Inc., a wholly-owned subsidiary of Allflex
Holdings Inc., for the purchase of 4,000,000 restricted common shares of stock
in association with a strategic technology alliance between Allflex and eMerge.
These shares were priced to reflect the sale restrictions and strategic value of
our alliance with Allflex based on a discount to market using the average share
price over the previous month as determined on August 23, 2001, the day after
the announcement of the strategic technology alliance between the two parties.
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
period fourth quarter of our fiscal year. We currently expect that we will
complete lease and operating agreements with most of our order buying facilities
during the fourth quarter of 2001. With the completion of these lease and
operating agreements, we anticipate an influx of capital and that we will no
longer need to draw on the line of credit.
CATTLE ORDER BUYING LEASE AND OPERATING AGREEMENTS
During September 30, 2001, the Company began the process of entering
into lease and operating agreements related to its order buying businesses.
Subsequent to the end of the quarter the Company reached agreements with three
of its order buying businesses and anticipates completing this process prior to
the end of this fiscal year. Cattle sales relating to these order-buying
businesses have historically been recorded on a gross basis. Upon completion of
these contracts, the Company will no longer be a principle to these cattle
transactions. Accordingly, the Company will recognize these cattle sales on a
net basis. Revenues in future periods will be significantly reduced as a result
of this change. The Company will add a reportable segment to reflect this
change.
The following unaudited pro forma information below assumes the lease
and operating agreements had been effective as of July 1, 2001 and that 30% of
the lease and operating agreement revenue had been paid to the facility managers
as a profit sharing allocation. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the agreements been
completed at that time:
25
THREE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
Revenue:
Cattle $246,311,138 $(216,543,006) $29,768,132
Lease and operating agreements -- 1,374,755 1,374,755
Other 446,086 (66,772) 379,314
------------ ------------- -----------
Total $246,757,224 $(215,235,023) $31,522,201
============ ============= ===========
Cost of revenue:
Cattle $243,054,819 $(214,584,892) $28,469,927
Other 328,121 (60,951) 267,170
------------ ------------- -----------
Total $243,382,940 $(214,645,843) $28,737,097
============ ============= ===========
Gross profit (loss)
Cattle $ 3,256,319 $ (1,958,114) $ 1,298,205
Lease and operating agreements -- 1,374,755 1,374,755
Other 117,965 (5,821) 112,144
------------ ------------- -----------
Total $ 3,374,284 $ (589,180) $ 2,785,104
============ ============= ===========
The following unaudited pro forma information below assumes the lease
and operating agreements had been effective as of January 1, 2001 and that 30%
of the lease and operating agreement revenues had been paid to the facility
managers as a profit sharing allocation. The pro forma information is presented
for informational purposes only and is not necessarily indicative of the results
of operations that actually would have been achieved had the agreements been
completed at that time:
NINE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------------- ------------- ------------
Revenue:
Cattle $ 897,005,033 $(789,689,567) $107,315,466
Lease and operating agreements -- 4,381,028 4,381,028
Other 1,548,565 (236,414) 1,312,151
------------- ------------- ------------
Total $ 898,553,598 $(785,544,953) $113,008,645
============= ============= ============
Cost of revenue:
Cattle $ 886,183,040 $(783,456,951) $102,726,089
Other 2,015,499 (210,418) 1,805,081
------------- ------------- ------------
Total $ 888,198,539 $(783,667,369) $104,531,170
============= ============= ============
Gross profit (loss):
Cattle $ 10,821,993 $ (6,232,616) $ 4,589,377
Lease and operating agreements -- 4,381,028 4,381,028
Other (466,934) (25,996) (492,930)
------------- ------------- ------------
Total $ 10,355,059 $ (1,877,584) $ 8,477,475
============= ============= ============
26
Three of the lease and operating agreements have been completed as of
November 1, 2001 and the remaining four agreements are expected to be
completed during the remainder of the fourth quarter of 2001. The lease
and operating agreements in effect convert accounts receivable,
inventory and deposits to cash over a short period of time following
the effective dates of these agreements. The following pro forma
condensed balance sheet as of September 30, 2001 reflects the changes
expected the Company's working assets if all lease and operating
agreements had been effective January 1, 2001, thus allowing time to
complete the expected conversion of assets to cash, the issuance of
notes receivable relating to the agreements and allowing repayment of
the line of credit and other payable obligations. The pro forma
information is presented for informational purposes only and is not
necessarily indicative of the Company's position had the contracts been
completed at that time.
SEPTEMBER 30, 2001
-----------------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
Current assets:
Cash and cash equivalents $18,226,784 $ (2,281,860) $15,944,924
Trade accounts receivable 20,616,353 (16,274,468) 4,341,885
*Notes receivable -- 3,600,000 3,600,000
Inventories 4,306,699 (3,155,411) 1,151,288
Deposits 4,404,211 (3,377,038) 1,027,173
Other current assets 5,488,190 (2,955,698) 2,532,492
----------- ------------ -----------
Total current assets $53,042,237 $(24,444,475) $28,597,762
=========== ============ ===========
Current liabilities:
Line of credit $14,573,870 $(14,573,870) $ --
Accounts payable 11,946,402 (8,977,642) 2,968,760
Advance payments from
customers 681,790 (493,616) 188,174
Other current liabilities 1,830,484 (399,347) 1,431,137
----------- ------------ -----------
Total current liabilities $29,032,546 $(24,444,475) $ 4,588,071
=========== ============ ===========
Net working capital $24,009,691 $ -- $24,009,691
=========== ============ ===========
-----------------
* The notes receivable have been agreed to in the completed lease and operating
agreements. However, as of November 13, 2001, the loans have not been made.
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.
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.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
In addition to the other information included in this report and our
other public filings and releases, the following factors should be considered
while evaluating our business, financial condition, results of operations and
prospects:
We have an unproven business model. As a result, we may not be able to
accurately predict future results and our business strategy may not be
successful.
While we commenced operations in 1994 and commercially released our
initial product in November 1997 our business model and strategy has continued
to change significantly. Accordingly, we have only a limited operating history
upon which to evaluate our business. This change 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.
27
Specific uncertainties relating to our new business model include our
ability to:
- achieve acceptance of our Web site as a marketplace for
electronic commerce;
- expand the number of cattle producers, feedlots and packers
that utilize our services;
- develop and upgrade our products and technologies more
effectively and rapidly than our competitors; and
- successfully implement our sales and marketing 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 $81.7 million for the nine
months ended September 30, 2001, or 9% of total revenue. As of September 30,
2001, we had accumulated net losses totaling approximately $147 million. Our
operating expenses for the quarter ended September 30, 2000 declined, reflecting
our recent cost reduction and restructuring initiatives and we anticipate such
expenses to remain relatively flat under our current business strategy. 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 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 nine months ended September 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
28
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 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
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improperly disclosed confidential or proprietary information to us. Any of these
claims, with or without merit, could subject us to costly litigation and divert
the attention of our personnel.
We typically assume the ownership of cattle sold through our Internet
cattle marketplace and are subject to the risk of loss while we hold title and
market risk.
In the sales transactions conducted through our Internet cattle sales
and auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume the risk of
liability, loss and deterioration in value of the cattle during that period. As
a result, our business may be harmed.
We depend on our key employees for our success. The loss of any of
these persons could harm our ability to compete.
The loss of the services of any key person could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
We expect our quarterly operating results to fluctuate. If we fail to
meet the expectations of public market analysts and investors, the market price
of our common stock could decline.
We expect that our revenue and operating results will vary in the
future as a result of a number of factors. Our quarterly results of operations
may not meet the expectations of securities analysts and investors, which could
cause the price of our common stock to decline. Our operating results in the
future may not follow any prior trends and should not be relied upon as an
indication of future results. The factors that affect our quarterly operating
results include:
- our ability to retain existing customers and attract new
customers;
- our ability to develop and market new and enhanced products
and services on a timely basis;
- the introduction of new or enhanced Web sites, products and
services by us; and
- continued purchases by our existing customers.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- demand for our products and services;
- product and price competition;
- the introduction of new or enhanced Web sites, products and
services by our competitors; and
- significant downturns in our targeted markets.
Our quarterly results could fluctuate as a result of seasonal
fluctuations in the cattle industry.
The cattle industry has historically experienced, and continues to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. Generally, a higher number of cattle are
sold to feedlots during the third and fourth quarters as compared to the first
and second quarters of each calendar year. Therefore, a greater number of sales
transactions occur during these two calendar quarters. 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.
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Our ability to develop new products is uncertain and our products may
not develop as we anticipate.
The outcome of the lengthy and complex process of developing new
products is inherently uncertain. Prospective products, such as our fecal
inspection & removal verification device, require time and resources to develop,
may not ultimately be commercially viable, may not achieve commercial acceptance
in the marketplace and may fail to receive regulatory approval, if required. In
addition, new products by competitors could adversely affect the realization of
products that are commercially successful.
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.
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 52% (as of September 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.
31
In addition, currently four 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 September 30, 2001, we had cattle futures contracts with purchase
commitments of $55 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.
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 September 30, 2001, our
investments consisted of $119,000 in cash equivalents with maturities of less
than three months and $2.0 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
32
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.
ALLFLEX COMMON STOCK TRANSACTION
Effective September 28 2001, we sold 4,000,000 shares of our common
stock to AllFlex Holdings, Inc. for $2.8 million in cash.
WARRANT PURCHASE AGREEMENT
On August 24, 2001, we issued 764,328 stock purchase warrants to
certain stockholders as consideration for providing and maintaining $9 million
in standby letters of credit. The warrants are exercisable at $1.55 per share
and expire on August 24, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the third quarter of 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
10.1 Investment Agreement, effective as of August 29, 2001, by and
between eMerge Interactive, Inc. and Allflex Holdings, Inc. (Exhibit 10.1) (1)
10.2 Amendment No. 1 to Investment Agreement, dated September 20, 2001, by and between
eMerge Interactive, Inc. and Allflex Holdings, Inc. (Exhibit 10.2) (1)
10.3 Registration Rights Agreement, effective as of August 29, 2001, by and between eMerge
Interactive, Inc. and Allflex Holdings, Inc. (Exhibit 10.3) (1)
10.4 Financing Agreement, dated August 24, 2001, by and among the Financial Institutions
party thereto from time to time, as Lenders. The CIT Group/Business Credit, Inc.,
as Agent and eMerge Interactive, Inc. *
10.5 Lease and Operating Agreement, dated as of October 16, 2001, by and between
Eastern Livestock Co., LLC and eMerge Interactive, Inc. *
10.6 Financing and Warrant Purchase Agreement, dated as of August 24, 2001, by and among
Safeguard Delaware, Inc., ICG Holdings, Inc., Biegert, Inc. and eMerge Interactive, Inc. *
-------------------
* Filed herewith.
(1) Incorporated by reference from exhibits shown in parentheses
contained in the Company's Registration Statement on Form S-3
(No. 333-71538), filed with the Commission on October 12,
2001.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended September
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: November 14, 2001 eMerge Interactive. Inc.
By: /s/ David C. Warren
--------------------------------------
David C. Warren
President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ Reid Johnson
--------------------------------------
Reid Johnson
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
34