U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
July 31, 1999 0-25109
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(For the Fiscal Year Ended) (Commission No.)
Integrated Food Resources, Inc.
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(Name of Small Business Issuer in Its Charter)
State of Nevada 93-1255001
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6700 S.W. Sandburg Street, Tigard, Oregon 97223
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(Address of Principal Executive Offices)
503-598-4375
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(Issuer's Telephone No.)
Securities to be registered pursuant to Section 12(b) of the Act:
None
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(Title of class)
Securities of be registered pursuant to Section 12(g) of the Act:
Class A Voting Common Stock
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(Title of class)
Checkwhether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period than the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [x]
Revenues for the fiscal year ended July 31, 1999 were $917,839.
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $22,266,645 as June 29, 1999.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
History
Integrated Food Resources, Inc. ("the Company") was originally
organized in the State of Oregon on September 12, 1966 under the name of The
Oregon Trail Company. The original business of the Company was the development
of a family-oriented recreational theme park on the Oregon coast. In May 1968,
the Company changed its name to Pixieland Corporation, and the development of
the theme park continued under the new corporate entity. The theme park opened
in 1968 and closed in October 1978. The closure was caused by poor attendance
and lack of public support of the theme park concept. At that time, the Company
stopped all of its operations and remained an inactive corporation until May
1989.
At various times since May 1989, the Company changed its name to
American Business Associates, Inc.; Cyberwin Corporation; and back to Pixieland
Corporation. These name changes were made in conjunction with several efforts to
acquire or merge with existing businesses. None of these business ventures
developed into the on-going, successful enterprise that was contemplated. In
October 1996, the Company changed its state of incorporation to Nevada.
Pursuant to a renewed effort at a reorganization, on September 25, 1997
the Company changed its name to Integrated Food Resources, Inc. and installed
its current management team. On September 29, 1997, the Company signed a Share
Exchange Agreement with Seabourne Ventures, Inc. ("Seabourne"), a newly formed
Oregon corporation organized by the current management of the Company. Seabourne
was organized as a wholly-owned subsidiary of the Company to operate its
business of harvesting, processing and distributing seafood and seafood-related
food products.
On July 31, 1998, the Company signed an Asset Acquisition Agreement and
Plan of Reorganization with Clipper Cubed Corporation ("Clipper Cubed"), a
Nevada corporation whereby the Company purchased all of the assets of Clipper
Cubed in exchange for common stock of the Company. In conjunction with the
agreement, the Company formed ClipperNet Corporation ("ClipperNet"), an Oregon
corporation, and the assets purchased from Clipper Cubed were transferred to
ClipperNet. ClipperNet became a wholly-owned subsidiary of the Company, and
Clipper Cubed stopped doing business. ClipperNet has developed a proprietary
high-speed wireless, microwave communications technology with broad applications
for the Internet including Internet access, voice transmission,
video-conferencing, document sharing and audio and video streaming.
In June of 1999, the Company's Board of Directors passed a resolution
creating Morningstar Finance, Inc. ("Morningstar"), a newly formed Oregon
corporation. Morningstar was organized as a wholly-owned bankruptcy remote
subsidiary of the Company to operate its business of raising money, prudently
managing the investment of those proceeds and supporting the Company's capital
projects and food trading programs. On June 14, 1999, the Company filed Restated
Articles of Incorporation with the Secretary of State of the State of Oregon on
behalf of Morningstar. Restated Articles of Incorporation were again filed with
the Secretary of State of Oregon on September 7, 1999 to change the name from
Morningstar to Integrated Food Finance Corp. ("IFFC").
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As used in this annual report, whenever reference is made to the
Company, it shall include Seabourne, ClipperNet and Morningstar, if the context
is appropriate.
Business and Operating Plan
The Company is engaged in the business of procuring, processing,
marketing and distributing private-label food products for large retail food
chains in the United States and Canada. The Company obtains its food products
from non-affiliated production facilities located throughout the world which are
in turn supplied to retail food chain clients by International Trade Group, LLC
("ITG"), an affiliated company.
ITG is an Oregon limited liability company of which Alain L. de la
Motte, the Chairman, Chief Executive Officer and director of the Company, owns a
90% controlling interest. Formed in 1992, ITG is an independent, privately-held
company. It serves as the central international sourcing and procurement arm for
such major U.S. food retail chains as the Kroger Company, Western Family Foods,
Aldi and Safeway. Where these chains could invest the time and financial
resources to become international sourcing experts, they have found it more
economical and efficient to entrust their private label food product procurement
to ITG. ITG's international business expertise lies in global procurement
operations, foreign factory audits, process control systems, quality control
management, trade financing, global logistics, import administration,
governmental regulatory compliance and domestic warehousing and distribution.
The collective volume requirements of these retailers represents a significant
position of purchasing strength which ITG leverages to negotiate advantageous
supplier contracts throughout the world. The Company will be one of the
suppliers from whom ITG will procure foreign produced private-label food
products. ITG's purchases from the Company are arms-length transactions
reflecting market prices and customary profit margins.
Seabourne is in the business of harvesting, processing, marketing and
distributing seafood products, principally canned tuna fish and tuna-related
products. Seabourne will use proprietary harvesting techniques for catching tuna
in the open seas and factory ships for initial processing of the tuna. This
harvesting and processing system will allow Seabourne to offer canned tuna and
tuna-related products that are superior in quality and that is priced below
established national brands. Seabourne is a source of tuna and other
seafood-related products for the Company. Prior to being acquired by the
Company, Seabourne had entered into an Asset Acquisition Agreement with ITG on
July 1, 1997 whereby Seabourne acquired, among other things, certain tuna
processing equipment and other related assets.
In fiscal year 1998, the Company and the Republic of Guinea ("Guinea"),
a French-speaking, West African nation, entered into three separate Project
Development Agreements ("Agreements") covering agricultural and aquacultural
development. One agreement deals with the establishment of prawn farms and a
processing facility. Another covers the development of tropical fruit
plantations and a processing facility. The third one covers the issuance fishing
permits for the country's territorial waters as well as the development of
facilities for fish processing and cold storage. Subsequent to the signing of
the Agreements, the Guinean government transferred to the Company approximately
35,000 acres of prime coastal agricultural and aquacultural land for the purpose
of implementing the Agreements. The land is owned by the Company free of
encumbrances and obligations, including the specific obligations to develop the
land as previously required by the Agreements. The government of Guinea expects
significant economic benefits from the land grant to the Company such as
employment opportunities, infrastructure development and the generation of hard
currency reserves through the export of the food products processed by the
Company.
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ClipperNet provides high-speed, wireless Internet access services to
business and residential customers in Oregon's Willamette Valley. This service
is delivered using point-to-point microwave technology as an alternative to
traditional Internet access. ClipperNet's microwave network technology can be
installed quickly and efficiently. It requires that a small antenna be installed
on the roof of an office building or a home. Microwave transmissions carrying
the digitized data are received by the antenna and carried through a transceiver
to a router which distributes incoming and outgoing data to and from individual
workstations. The system is suited for video conferencing, web hosting, web
browsing, e-mail and Internet faxing.
ClipperNet's growth is tied in large part to the acquisition of
existing and complementary Internet service provider networks. An example of how
this growth is anticipated to transpire occurred in November 1998 when
ClipperNet purchased the assets of Netbridge Internet Access Services, an
Internet service provider located in Newport and Lincoln City, Oregon.
ClipperNet competes in the Internet access industry against three
primary delivery technologies:
o Telecommunication Networks: Over the next 3-4 years, data
transmissions are expected to account for about 95% of the $192
billion annual revenues of the U.S. local and long distance
communication industry. This delivery system is principally
targeted at the business-user segment. The industry is investing
in fiber optics for its main trunk systems, but there is still
limited availability of this broadband infrastructure at the
user sites. Major players in this group include AT&T (which owns
TCI), MCI Worldcom, Sprint, Bell Atlantic and GTE.
o Internet Service Providers: This market for service to U.S.
homes is estimated at an annual volume of $4.2 billion. Most
providers have yet to invest in broadband infrastructure, but
this is expected to change as the demand for high speed access
grows. Major providers include AOL, Microsoft Network,
Mindspring/Netcom, Earthlink and the services provided by
companies such as AT&T and MCI.
o Television Cable Companies: This market is estimated at an
annual volume of $30 billion. The revenue share derived from
data transmissions is expected to grow as the industry upgrades
its network infrastructure with high-speed two-way hybrid fiber
optic coaxial cable which will enable the home user market to
make better use of this service. Major cable companies include
TCI (owned by AT&T), Time Warner, Comcast, Cox, Cablevision and
Media One.
On January 26, 1999, the Company's Board of Directors announced the
acquisition of a 20 year exclusive worldwide licensing agreement for Project
Harvest(R). Project Harvest(R) is a proprietary e-commerce system that will link
buyers and sellers of food products throughout the world via secure Internet
connections. The pending patents for Project Harvest(R) represent a series of
consecutive separate process patent application filed from early 1995 through
late 1998. All the patents were subsequently incorporated in a combined omnibus
patent application containing 17 families of patents with a total of 190
individual claims. This asset of the Company represents a formidable barrier to
competition, and the Company intends to aggressively defend against possible
infringement of its proprietary rights.
Using Project Harvest(R), buyers will be able to identify specific
suppliers who can meet their customized requirements for product specifications,
food safety, process control, hygiene, manufacturing practices, financial
stability and product quality. In the same manner that a rating from Standard &
Poors or Moody's turns a financial instrument into a marketable security,
Project Harvest(R) will create the first global standard for the rating of
factories and product
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quality. This business to business e-commerce technology is expected to
revolutionize the way food products are bought and sold worldwide. It is
anticipated that Project Harvest(R) will be reflective of the Company's core
business strategy in the years to come.
Traditional global sourcing of food products is done in one of two
ways. In "cold calling", manufacturer directories and similar reference sources
are used to identify foreign companies who become the recipients of unsolicited,
broadcast-fax offers to buy or sell a product. "Brokered relationship" involves
a buyer in one country, a seller in another and one or more middlemen between
the principals. Both approaches are inefficient. The former requires the
repetitive exchange of verbal and written communications to qualify the separate
parties' ability to perform and to verity the validity of the unsolicited offer.
In the latter, product quality can become a secondary consideration to the
spread created between seller and buyer prices, and the middlemen guardedly
protect their interests by withholding the identity of the principals.
Project Harvest(R) eliminates these inefficiencies and simplifies the
consummation of the global transactions. Selected, prequalified buyers and
suppliers from throughout the world will be invited to participate in Project
Harvest(R) and to register specific information about themselves. A buyer can
access the database to identify supplier contacts, product specifications,
product ingredients, quality control procedures, labelling options, seasonal
availability, factory locations and trade and banking references. A supplier can
rely on this tool to review similar information in the buyer database. The
databases are accurate, password protected and firewall insulated, and they will
enable buyers and sellers to quickly identify and confidently qualify potential
business partners throughout the world.
Modules within Project Harvest(R) automatically format the buyer's
product requirements into a clear and concise Request for Quotation ("RFQ")
which is then sent directly to the potential supplier. The supplier's quote goes
directly back to that genuinely interested, well-qualified buyer. The open and
direct communication allows transactions to be completed with fewer obstacles
and in less time than under the traditional approaches. The RFQ and the quote
can also be posted on the Project Harvest(R) trading floor where other
registered buyers and sellers can determine their interest. This market making
service extends the opportunity to consummate a transaction beyond the initial
contact to all registered participants in the Project Harvest(R) system.
Project Harvest(R) includes a translator program that allows the users
to communicate in multiple foreign languages. A buyer can create an RFQ in his
native language, and Project Harvest(R) will translate that communication into
the language of the recipient. In return, the supplier's quote is prepared in
his native language which is then translated for the buyer.
One of Project Harvest(R)'s distinct innovations is the incorporation
of standardized factory ratings. It is very unlikely that the same food product
from different suppliers was produced under the same manufacturing conditions.
Given these inherent variances, a buyer's quality assurance department must
visit and review each potential supplier's manufacturing processes, sanitation
standards, employee health practices, quality control procedures, process
engineering controls and regulatory requirement compliance. Given the number of
potential suppliers, a buyer's investment in time and money can be considerable.
This expenditure is compounded by the fact that the same supplier is visited and
reviewed by every buyer in the industry.
Project Harvest(R) simplifies factory evaluation and approval by
standardizing the rating process. The Company has drawn upon its industry
experience to develop a list of criteria which form the basis for the Project
Harvest(R) factory rating standard. Recognized authorities with experience in
global food processing and regulatory compliance will use this rating system to
conduct on-site evaluations around the world. Buyers will be able to rely on
factory ratings to
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discern a supplier's commitment to quality assurance, process control and
manufacturing procedures. Project Harvest(R) will alert registered buyers when a
query identifies a unrated prospective supplier.
Morningstar was formed to provide for the Company's financing
requirements. Its principal function is to raise capital and to manage the
investment of that capital to generate proscribed rates of return. Morningstar
purchases marketable investment grade securities as specifically permitted by
agreement with its lenders. The loans or the proceeds from the investing
activities will be a major source of funding for the Company's various capital
development projects. Proceeds will also used to mitigate currency risk by
purchasing forward currency contracts and through other hedging activities.
Morningstar was structured as a bankruptcy remote company to enhance its
attractiveness to lenders as a worthy borrower. Morningstar will also directly
and/or indirectly participate in the Company's food trading and arbitrage
activities. Given ITG's strategic alliances with major retailers, private label
distributors, food service groups and national brokerage organizations, the
Company anticipates these trading activities will prove to be successful.
The U.S. Food and Drug Administration ("FDA") is the principal
governmental regulatory agency involved with the Company's products. The FDA
sets standards for domestically produced and imported food products to ensure
they will not have a pernicious or deleterious impact on U.S. consumers.
Information from all import shipments of foreign-produced food products is
submitted to the FDA for review. Among the attributes of interest to the FDA are
foreign production facility, country-of-origin, food type, container type,
processing controls and labelling characteristics. If it is satisfied with the
information presented, the FDA will advise the importer the food products are
released for entry into the commerce of the United States. If its review of the
information indicates a likelihood the food product is not fit for human
consumption, the FDA can reject the shipment and deny distribution. Such action
is generally not taken until after samples of the food product have been
collected and sent to a food laboratory for testing and analysis. The Company
accepts that a small percentage of its product will be subject to in-transit
delay due to FDA review and that some rejections for reasons beyond the
Company's control may occur. It is recognized that such delays and possible
rejections are an inherent risk of the imported food products industry. There
are no specific environmental laws to which the Company and its product line is
subject.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarter offices are located in the Western Family
Foods Building at 6700 S. W. Sandburg Street., Tigard, Oregon 97223, a 36,000
square foot, free standing, Class A corporate headquarter office building with
full facilities and amenities. The Seabourne and Morningstar corporate offices
are also located at this site. The Company's space is secured by a
month-to-month lease. Seabourne also maintains an office in Seattle, Washington.
ClipperNet rents approximately 1800 square feet of office space at 2295 Coburg
Rd., Suite 105, Eugene, Oregon 97401. ClipperNet's network operations center
occupies 400 square feet of leased office space at 2300 Oakmont Way, Eugene,
Oregon 97401. Management believes that its current space is suitable for its
intended purpose. The Company's offices are adequately covered by insurance.
The Company owns approximately 35,000 acres of coastal land in the west
African nation of the Republic of Guinea ("Guinea"). This land is free and clear
of encumbrances by the Guinean government, and the Company intends to use it,
its buildings and other improvements to develop and operate a tuna processing
plant, a shrimp farm and tropical fruit plantations.
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ITEM 3. LEGAL PROCEEDINGS
On December 1, 1998, the Company, as plaintiff, filed a 7-count civil
action in the Superior Court of New Jersey, Bergen County Law Division, docket
no. BER-L, against Kennedy Funding, Inc., ("KFI"), a commercial lending
institution organized under the laws of New Jersey, as defendant, alleging,
among other complaints, breach of written and oral contract, failure to perform
and equitable estoppel.
The Company entered into a negotiation with KFI for a $16,000,000 loan
that was to be secured by the land in Guinea and other assets. The Company
intended to use the proceeds of this loan to finance its food trading activities
and to cover certain underwriting expenses and fees associated with the closing
of $400 million funding transaction that was being negotiated with a major
investment firm. KFI predicated granting the loan on the Company meeting
specific conditions and collateralization requirements, and it required a
deposit of $90,000 in prepaid fees and legal expenses. The Company delivered
this sum with KFI with the written understanding that the deposit was fully
refundable should the loan fail to close for any reason whatsoever. The Company
complied with all conditions of the collateralization. KFI failed to grant the
loan, declared the deposit to be non-refundable and withheld return of the
$90,000.
KFI, as defendant, has filed a counterclaim in which KFI alleges that
the Company failed to meet the terms of the loan commitment. In its
counterclaim, KFI seeks damages of $375,000 plus attorney's fees.
During the deposition phase of the proceedings, certain facts deemed
detrimental to the defendant were discovered, and the Company's complaint has
been broadened to include two additional counts of fraud. The Company intends to
vigorously pursue its action against KFI and to defend against the counterclaim.
The Company is confident it will receive a favorable judgment, and no adverse
material outcome is expected.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On June 23, 1999, the shareholders holding a majority of the voting
power of the Company's issued and outstanding common stock executed a written
consent pursuant to the provisions of the Nevada Business Corporation Act
amending the Company's Articles of Incorporation to increase the authorized
Series A Preferred Stock to 10,000,000 shares and to establish the conversion
rights of said Series A Preferred Stock. The consenting shareholders held an
aggregate of 8,446,201 shares representing 52.1% of the Company's total of
16,198,966 issued and outstanding shares of common stock as of the date of the
written consent.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is authorized to issue 50,000,000 shares of Class A common
stock and 50,000,000 shares of Class B common stock. As of July 31, 1999, there
are 16,198,966 shares of Class A common stock issued and outstanding. This is an
increase of 14,323 shares since the end of the previous fiscal quarter. These
shares were authorized by the Board of Directors for inclusion in severance
packages offered to several employees of ClipperNet. No shares of Class B common
stock are issued and outstanding. Each share of Class A common stock entitles
the shareholder (a) to one non-cumulative vote for each share held of record on
all matters submitted to a vote of the stockholders, (b) to participate equally
and to receive
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dividends as may be declared by the Board of Directors and (c) to participate
pro rata in any distribution of assets available for distribution upon
liquidation of the Company. Stockholders have no preemptive rights to acquire
additional shares of common stock or any other securities. The Company's common
stock is not subject to redemption, carries no rights to purchase other
securities of the Company and is non-assessable.
The Company's common stock has been traded in the over-the-counter
market since January 1998 and prices for the common stock are published on the
OTC Bulletin Board under the symbol "IFGR.OB". This market is limited and the
common stock prices quoted by brokers is not a reliable indication of the value
of the common stock.
The following table sets forth the range of high and low bid prices for
the Company's common stock during each quarter of the reporting period.
Quarter Ending High Low
October 31, 1998 $4.50 $0.375
January 31, 1999 $2.00 $0.6875
April 30, 1999 $3.875 $0.60
July 31, 1999 $3.50 $2.00
These prices may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual purchases and sales by
investors.
The Company has never paid cash dividends on its common stock; however,
dividends may be paid in the future if the Company's earnings justify it. There
are approximately 4,100 shareholders of the Company's common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Review of Financial Condition
As of July 31, 1999 and 1998, the Company had total assets of $149,000
and $6,650,000, respectively. As of July 31, 1999, the Company's current assets
were $138,000 and its current liabilities were $292,000 resulting in a deficit
working capital position of $154,000. As of July 31, 1998, the Company had
current assets of $1,041,000 and current liabilities of $4,670,000, which
resulted in a deficit working capital position of $3,269,000. The changes in
assets and working capital are attributable to the Company's write-off of its
tuna processing facilities and the divestiture of its internet access service
segment during the year ended July 31, 1999. Assets written off during 1999
included all of the Company's remaining plant facilities located in Ensenada,
Mexico which had a recorded book value of $896,000 at the time of disposal and
$4,171,000 in unamortized goodwill previously recognized from the Company's
acquisition of ClipperNet Corporation in 1998.
To mitigate losses incurred from operations in 1999, the Company's
primary creditors, International Trade Group, LLC and ITG Finance LLC, which are
related parties to the Company, exchanged $4,050,000 in outstanding current debt
for preferred shares in the Company. The preferred shares have voting and
dividend rights equal to those of all common shareholders. In addition,
preferred shareholders enjoy liquidation preferences superior to existing common
shareholders and have rights to convert their holdings into common stock. These
preferred shares may be voluntarily exchanged for common stock at a rate of $1
per share, which will become subject to adjustment should changes arise in the
Company's
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capitalization. Mandatory conversion of preferred shares to common stock will
occur upon the earlier of a 30-day written notice from the Company or
immediately prior to the closing of a public offering by the Company. Despite
the conversion of related party debt to preferred stock during 1999, the Company
had a deficit equity position of $144,000 at July 31, 1999 compared to
stockholders' equity of $1,564,000 at July 31, 1998.
Included among the Company's assets as of July 31, 1999 and 1998 was
land held for future development of $74,498,000 offset by an equal amount
recorded as an adjustment for foreign land grant. The land was acquired as a
land grant from Guinea, and was recorded on the basis of appraised value.
However, the value of the land has been offset by the adjustment for foreign
land grant in accordance with international accounting standards. The adjustment
balance will be amortized to income in future years in amounts that will offset
depreciation or amortization expense arising form assets acquired or constructed
for use in conjunction with the foreign land grant. The land was received by the
Company free of encumbrance and without any commitment or obligation to Guinea.
Management believes development of properties in Guinea will require a
significant commitment of funds to realize its potential operating value.
Accordingly, the Company continues to pursue and evaluate viable sources of
long-term financing for future agricultural and aquacultural operations in the
Guinea.
Subsequent to July 31, 1999, the Company was in the process of
finalizing negotiations and receiving a letter of commitment for approximately
$200 million in senior secured notes to assist in funding operations and
financing the construction of fishing vessels for the Company's food processing
operations. Once funding is finalized, management intends to place the debt and
related funds in a newly established special-purpose subsidiary, Integrated Food
Finance Corp. Since it has no active operations as of July 31, 1999, the
Company's closing of this financing arrangement, or its ability to obtain other
debt or equity funding, will be critical for future operations. In addition, the
Company's ability to utilize additional financing in profitable operations will
be essential for its future viability. Management is confident that the proposed
financing will be closed to allow suitable funding for anticipated future
operations.
Review of Operating Results
During the 1st quarter of fiscal year 1999, the Company decided to
revise its strategy for packing tuna in Mexico. When the Company first became a
supplier of canned tuna fish, it contracted with Agroindustrias Rowen S.A. de
C.V. ("Rowen"), an independent, non-related processing facility in Ensenada,
Mexico, for product that would be sold at fixed prices. This proved to be a
satisfactory source of supply until the market pricing for raw materials and
finished goods deviated from the underlying cost assumptions of the model. The
El Nino conditions that prevailed in the Eastern Pacific Ocean disrupted the
supply chain for tuna, and prices for high-quality, dolphin-safe frozen tuna
reached such record high levels that fully compensatory pricing for finished
goods was pushed beyond what the market would bear.
Despite the unfavorable combination of increasing costs and declining
revenues, the Company felt an obligation to fulfill its customer commitments,
and it is the fulfillment of these commitments that ultimately accounts for the
negative performance reported by the Company in this segment of its business.
Given these current and projected marketplace dynamics, all indications were
that an on-going operation at the Rowen plant would continue to result in a
negative gross margin to the detriment of shareholder interest. On July 12,
1999, the Company sent Rowen written notification of its intent to terminate the
Toll Packing Agreement. The Company also decided to hold in abeyance its option
to acquire the Rowen cannery until such time as it can deliver a dependable
supply of competitively priced, dolphin-safe raw material through its own
fishing operations.
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For the year ended July 31, 1999, the Company experienced a loss from
continuing operations of $1,934,000 or $.12 per share of common stock and, after
deducting losses from discontinued operations of $4,000,000, experienced a
consolidated net loss of $5,934,000 or $.37 per share of common stock.
Operating revenues from continuing operations were only $108,000 for
the year ended July 31, 1999 and were derived exclusively from tuna processing
sales. Sales in this segment of the Company's business were limited by the
adverse operating environment in Mexico and by the difficulty in bringing to a
conclusion the Rowen bankruptcy proceedings. Given termination of the Toll
Packing Agreement, all assets pertaining to the Mexican tuna packing operations
were liquidated or written off by July 31, 1999. As a result, the Company wrote
off accounts receivable, inventories and plant assets, net of certain
liabilities, totaling $997,000 in disposing of its seafood processing plant
assets. As of July 31, 1999, the Company continues to hold land held for future
development in the Republic of Guinea which management intends to utilize in the
future to support long-term agriculture and aquaculture projects.
Throughout 1999, the Company also operated an Internet access service
enterprise through its wholly-owned subsidiary ClipperNet. While its promise
remains strong, ClipperNet's growth and operating results were less than
satisfactory, and continued financing of its operations was becoming
particularly burdensome to the consolidated group. For the year ended July 31,
1999, ClipperNet lost $740,000 from operations on sales of $809,000. As of July
31, 1999, ClipperNet had a deficit working capital position of approximately
$430,000. On September 9, 1999, the Company's Board of Directors approved a
reorganization plan enabling ClipperNet's management group to take control of
that company. The Company discontinued operating in this segment of business
effective July 31, 1999.
The Company's divestiture of ClipperNet was accomplished through a
series of transactions. First, ClipperNet completed a 20-for-1 reverse split of
its outstanding common stock. This resulted in the Company receiving 50,000
shares of common stock for the 1,000,000 shares of ClipperNet common stock it
held prior to the split. ClipperNet then issued 1,870,479 shares of its common
stock to former shareholders in exchange for 1,015,702 shares the same former
shareholders held in the Company's common stock and $693,849 in debt owed to
them by ClipperNet. These transactions resulted in the Company owning
approximately 2.6% of the outstanding common stock of ClipperNet and ClipperNet
owning approximately 6.3% of the Company as of July 31, 1999. Management of the
Company determined that its remaining investment in ClipperNet as of July 31,
1999 was of no value and, as a result, all of the Company's investment in
ClipperNet of $3,260,000 was written of as of July 31, 1999. The Company's
statement of operations for the year ended July 31, 1999 reflects a total loss
from the disposal of ClipperNet and discontinuance of its operating segment of
$4,000,000 or $.25 per share of common stock.
Under the reorganization agreement, the 1,015,702 shares of the
Company's common stock surrendered by the ClipperNet management group were
surrendered to and are being held by an escrow agent, and the Company has an
unconditional, ten-year option to repurchase these shares. This option can be
exercised at the Company's discretion by tendering to ClipperNet whichever of
the following has the lesser monetary value: 1) a cash payment of $4,570,659 or
2) its 50,000 shares of ClipperNet common stock. The cash payment is calculated
on the basis of 1,015,702 shares multiplied by an agreed upon share value of
$4.50. The value of the Company's 50,000 shares will be based on the market
price of the ClipperNet stock at the time the option is exercised.
Further to the reorganization agreement, Ransom R. Southerland tendered
his resignation without reservation from the Company's Board of Directors, and
Alain L. de la Motte and James M. McKenzie tendered their respective
resignations also without reservation from
10
<PAGE>
ClipperNet's Board of Directors. All resignations have been unanimously
approved. Closing on the terms and conditions of the reorganization took place
on October 1, 1999.
For the year ended July 31, 1999, the Company suffered a gross loss
from continuing operations of $27,000 on sales of $108,000. This compares to a
gross loss of $560,000 on sales of $5,379,000 for the year ending July 31, 1998.
Selling, general and administrative expenses of $521,000 caused a loss from
operations of $548,000. After the recognition of losses for the disposal of
seafood processing plant assets of $997,000, a write-down for the impairment of
assets of $99,000, depreciation and amortization expenses of $174,000 and
interest of $115,000, the Company incurred losses from continuing operations of
$1,934,000. This compares to operating losses of $2,452,000 for the year ending
July 31, 1998. With operating losses and write-off of the Company's remaining
investment in its internet access segment, net losses for the year were
$5,934,000. The Company's net loss from continuing operations was $.12 per share
of common stock while discontinued operations caused additional losses of $.25
per share of common stock. Overall, for the year ended July 31, 1999,
shareholders realized a $.37 loss per share of common stock ownership in the
Company. For the year ending July 31, 1998, the Company reported losses per
share of common stock of $.15.
Capital Needs and Future Requirements
Capital-Intensive Projects
When the Company and Guinea signed the Agreements, it was
optimistically felt that the necessary financing could be secured in a timely
manner, and clauses were written into the Agreements indicating the projects
would be completed by the end of fiscal year 1998. This expectation proved to be
overly aggressive, and the projects were targeted for initiation during fiscal
year 1999. Despite diligent efforts, the Company has been unable to obtain the
necessary financing. Consequently, the projects have not been initiated.
Moreover, given changing priorities since the signing of the Agreements, the
Company has decided to delay further consideration of these projects until it
can again devote the necessary attention to obtaining the funding. The Company
has not set a date for when it will renew this effort. The Agreements have not
been cancelled and remain in full force and effect. At this time, there are no
plans to begin the development of the projects. The Company has communicated its
intentions for these projects to its contacts in Guinea who have reiterated
their long-term support of and commitment to the Agreements and to their
relationship with the Company.
It was the Company's intent to initiate several capital development
projects during fiscal year 1999. These projects included 1) the acquisition of
two modernized tuna processing facilities in Mexico, Indonesia or Thailand, 2)
the construction of twelve bait boats and 3) the project development activities
in Guinea under the Agreements. The Company, however, has been unable to take
these steps due to the unanticipated delays it has experienced in obtaining
financing. As a result, the Company has withdrawn its intentions to move forward
on these projects. It is unlikely that the Company will revive its interest in
the acquisition of the processing facilities or in the construction of the bait
boats, and its intention to postpone the development of the projects covered by
the Agreements has previously been discussed.
The Company continues to actively pursue the construction of six
combination fishing/factory ships with an approximate cost of $180 million. The
design of these fishing vessels has been completed. During fiscal year 1998, no
expenses were incurred for ship design services. During fiscal year 1999, the
Company paid Tomra Engineering AS of Norway $6,000 for design services relative
to the fishing vessels. These design service expenses have been accounted for in
the Company's financial statements under the category of prepaid
11
<PAGE>
expenses. It is anticipated that the first of these vessels will be operational
by the third quarter of fiscal year 2000.
The Company is also prepared to move ahead on finalizing the
development of Project Harvest(R). As previously discussed, Project Harvest(R)
will permit any buyer or seller with an Internet connection to engage in global
business to business E-commerce transactions. The Company's long-term strategy
for Project Harvest(R) envisions the building of business relationships with
highly skilled and experienced Internet technology companies. The services of
some will be engaged on a contract basis to complete the design and programming
of Project Harvest(R) and its operating systems. The services of others, such as
ClipperNet, will be secured through lease arrangements to support the
connections through which the E-commerce transactions will be conducted.
The Company received a Letter of Commitment dated November 17, 1999
from an institutional lender which is the U.S. affiliate of a major European
financial institution. The commitment is for $200 million. The loan will be made
to IFFC, the Company's wholly-owned subsidiary which was organized for the
purpose of obtaining debt financing for the Company's projects, specifically the
construction of the fishing vessels and Project Harvest(R). When the commitment
is funded, IFFC will issue its 7% Senior Notes which will be due in December
2001. The loan will be collateralized by a stand-by letter of credit issued by a
major European bank. The Company expects the financing to be completed on or
before the end of calendar year 1999.
These projections are based on forward-looking events and occurrences
which involve risks and uncertainties including, without limitation, demand and
competition for the Company's products, relations with suppliers, the ability of
the Company to control costs and expenses, the ability of the Company to
penetrate its chosen distribution channels, foreign currency risks,
international political and trade relations and general economic conditions.
There may be other factors not mentioned above that may cause actual results to
differ materially from any forward-looking information.
Year 2000 Compliance
The Company's reliance on the use of computers and automated systems in
its business operations creates a potential vulnerability to the effects of the
Year 2000 issue ("Y2K"). The Company has made a preliminary determination that
led to the upgrading of software programs with recently-released Y2K compliant
versions. The Company also identified those assets in its hardware inventory
that required attention, and steps have been taken to upgrade or replace the Y2K
deficient components. Additional upgrades to its software programs and automated
systems are scheduled for completion by the third calendar quarter of 1999. The
cost to upgrade existing software, convert to new software and correct existing
data records is estimated at $10,000.
By the end of the fiscal year, the Company will have incurred
approximately $2,000 in Y2K compliance expenses. The Company believes its
compliance strategy will support timely reaction to new difficulties as they
manifest themselves and will enable effective implementation of the necessary
remedial actions.
The Company has no control over the computer systems of its banks,
vendors, customers or other third parties, and disruptions to these systems
could impair the Company's ability to obtain product or to sell to or service
its customers. Information made available to the Company indicates these
unrelated parties have taken and are continuing to take the necessary steps to
achieve Y2K compliance. The Company's planning strategy also anticipates the
12
<PAGE>
potential effects of Y2K in the third world countries in which it conducts its
business. Where the Company expands its foreign operations prior to the end of
1999, it will assess the host country's state of Y2K preparedness. Should a
country be deemed to lack the technical expertise or financial capabilities to
achieve Y2K preparedness, the Company anticipates direct investment in or
partnered financing for the resources necessary to ensure it can effectively
operate in the local environment. The costs for such a contingency are included
in the Company's estimates listed above. The Company is engaged in an on-going
effort to avoid disruptions that may be caused by the computer programs or
systems of third parties, or that may arise from its foreign operations.
However, should such disruption occur, there can be no assurance that it will
not have a material adverse impact on the Company's financial condition and
results of operations.
ITEM 7. FINANCIAL STATEMENTS
The schedules required for this item appear herein beginning on page 18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants during the
Company's past fiscal year.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This table describes the Company's directors and executive officers, as
of July 31, 1999:
Name Age Title
Alain L de la Motte 49 Chairman and Chief Executive Officer
James M. McKenzie 56 Secretary and Director
Hugh Latif 47 Director
Alan J. Resnik 54 Director
Ransom R. Southerland 50 Director
Alain L. de la Motte has been Chief Executive Officer and Chairman of
the Board of Directors since the inception of the Company's current business
operations in July 1997. Mr. de la Motte is also Chief Executive Officer of ITG
which is involved in world-wide sourcing and procuring of food products for the
largest grocery chains in the United States. ITG has participated in this
business since 1992 when it operated as a partnership prior to its
reorganization as a limited liability company. ITG is a shareholder in the
Company. Prior to ITG, Mr. de la Motte served as founder, President and chairman
of TRADE, Inc. which amassed a proprietary database of all U.S. imports. Mr. de
la Motte was educated at L'Ecole Nationale de Commerce in Paris and is fluent in
English and French.
James M. McKenzie has been corporate secretary and a director of the
Company since the inception of its current business operations in July 1997. Mr.
McKenzie is the President of CUI Stack, Inc., a joint venture with Stack
Electronics of Japan, which is involved in the distribution of electronic
components in the United States. He had been with CUI Stack since 1989. Mr.
McKenzie earned an MBA in finance from the University of Chicago.
13
<PAGE>
Hugh Latif has been a director since the inception of the Company's
current business operations in July 1997. Since 1996, Mr. Latif has been
President of Hugh Latif & Associates, a management consulting firm. From 1992 to
1996, he was Managing Director of A.C. Nielsen Co. of Canada Ltd., a marketing
research firm. Mr. Latif has also served as General Manager of Dunn & Bradstreet
France and Dun & Bradstreet Brazil. Mr. Latif holds a BA in economics from Cairo
University in Egypt.
Alan J. Resnik has been a director since the inception of the Company's
current business operations in July 1997. Dr. Resnik is currently a professor of
marketing in the School of Business Administration, Portland State University.
Since 1978 he has been the President of Market Insights, Inc., a consulting
firm. From 1994 to 1995, he was Executive Vice President of Widmer Brewing Co.
From 1995 to 1996, Dr. Resnik was Senior Vice President of Gentle Dental, a
dental services company. From 1992 to 1996, he was a director of Gentle Dental.
Dr. Resnik received a BS degree in economics from the Wharton School of the
University of Pennsylvania, an MBA from Tulane University and his PhD from
Arizona State University.
Ransom R. Southerland was appointed a director in October 1998. He
brings to the Board 25 years of business management experience from the
technology industry. He was one of the founders of Clipper Cubed Corporation and
has served as the President of ClipperNet since its inception. In the preceding
years he filled various management positions with PacTel InfoSystems, Byte Shops
Northwest, Omnitek Information Systems and Business Systems Group.
Philip M. Chrusz was appointed a director on November 2, 1998. Mr.
Chrusz tendered his resignation from the Board of Directors on February 11,
1999. Brian E. Bittke was a director at the beginning of the period covered by
this annual report. Mr. Bittke tendered his resignation from the Board of
Directors on March 18, 1999. Both resignations were tendered without reservation
or disagreement.
Directors serve in their positions until the next annual meeting of the
stockholders or until the directors' successors have been elected and qualified.
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
ITEM 10. EXECUTIVE COMPENSATION
The Company has not paid any compensation to Alain L. de la Motte, its
Chairman and CEO, or to any of its other executive officers since it began its
current business operations in July 1997. The Company does not have any written
employment agreements with its executive officers at this time. The Company will
enter into employment agreements with its executive officers and key employees
and begin paying appropriate salaries and other plan and non-plan compensation
when it determines that its financial condition is such that it can pay such
salaries and compensation.
On October 20, 1998, the Board of Directors approved a non-qualified
stock option program for key employees, directors and new Company hires. The
salient points of this program as of the date of this Board action are:
- 1.7 million shares of common stock allocated for the program
- directors to be issued options for 150,000 shares with vesting to occur
over 3 years at the rate of 50,000 per year
- options set to expire on October 20, 2008
- exercise price of the options set at $1.03125 (the trading price at the
time of the Board's decision)
14
<PAGE>
- shares proportionally vested if a director resigns for any reason
- option plan subject to review by corporate legal counsel
Option/SAR Grants in Last Fiscal Year Table
Individual Grants
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#) Fiscal Year Price ($/sh) Date
Alain L. de la Motte 150,000 16.7% $1.03125 10/20/2008
Chairman/CEO
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table describes the current ownership of the Company's issued and
outstanding common stock as of July 31, 1999 by (a) the officers and directors,
(b) persons known by the Company to own more than 5% of the outstanding common
stock and (c) all of the officers and directors as a group.
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownerership of Class
Common Stock (a) Alain L. de la Motte 2,642,708 16.2%
6700 SW Sandburg St.
Tigard, OR 97223
Common Stock (a) James M. McKenzie 496,125 3.0%
9615 SW Allen Blvd.
Portland, OR 97005
Common Stock (a) Ransom R. Southerland (i) 317,550 1.9%
2295 Coburg Road, Suite 105
Eugene, OR 97401
Common Stock (a) Alan J. Resnik 75,000 4.4%
1016 SW Davenport St.
Portland, OR 97201
Common Stock (a) Hugh Latif 38,000 *
135 Park Ave.
Toronto, Ontario, Canada
Common Stock (b) Harald A. Kvalo 1,320,000 8.1%
2334 West Plymouth St.
Seattle, WA 98119
Common Stock (b) International Trade Group, LLC (ii) 1,987,368 12.2%
6700 SW Sandburg St.
Tigard, OR 97223
15
<PAGE>
Common Stock (b) ITG Finance, LLC (iii) 2,000,000 12.3%
6700 SW Sandburg St.
Tigard, OR 97223
Common Stock (c) All officers and Directors as a group3,569,383 21.9%
- - ------------------------------------
* refers to less than one percent
(i) Ransom R. Southerland, the President of ClipperNet, became a
director of the Company in October 1998.
(ii) International Trade Group, LLC is an Oregon limited liability
company organized in March 1994. Alain L. de la Motte is a member of this LLC
and directly and indirectly owns a 90% interest in it. The remaining 10% is
owned by Sower Ministries International, a tax-exempt religious organization
founded by Mr. de la Motte and for which Mr. de la Motte serves as one of
several directors.
(iii) ITG Finance, LLC is an Oregon limited liability company organized
in October 1997 and of which Alain L. de la Motte is a managing member.
International Trade Group, LLC owns an 80% interest in ITG Finance, LLC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 25, 1999 the Company entered into a Technology and Trademark
License Agreement with Alain L. de la Motte, its Chairman and Chief Executive
Officer. The license agreement grants the Company the right to utilize certain
technology, patents, trademarks and trade names for a period of 20 years with
two 20 year renewal options. In exchange for the license, the Company has agreed
to pay a $200,000 fee to Mr. de la Motte at such time as the Company's
consolidated stockholders' equity exceeds $15,000,000 or it successfully raises
$15,000,000 in additional debt. The Company will also pay the Chief Executive
Officer royalty fees measured at 7.5% of the gross profits realized from
commercial use of the technology and the rights granted through the agreement.
Neither the debt nor equity milestones have been met, and the Company has yet to
make commercial use of the technology, patents, trademarks and trade names. No
license or royalty fees have been paid, and the Company's contingent liability
under the agreement will only be recognized in the future when the financing
milestones or operating results from commercial applications of the technology
and rights occur.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed on the Index to Exhibits following the signature
page herein are filed as part of this Form 10-KSB.
No Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Integrated Food Resources, Inc.
(Registrant)
By /s/ Alain L. de la Motte
------------------------
Alain de la Motte
Chairman, CEO and Director
Dated: December 12, 1999
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
By /s/ Alain L. de la Motte
------------------------
Alain L. de la Motte
Chairman, CEO & Director
By /s/ James M. McKenzie
------------------------
James M. McKenzie
Secretary &Director
By /s/ Hugh Latif
------------------------
Hugh Latif
Director
By /s/ Alan J. Resnik
------------------------
Alan J. Resnik, Ph.D.
Director
17
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
18
<PAGE>
CONTENTS
- - --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2 - 3
Statements of operations 4
Statements of changes in stockholders' (deficit) equity 5
Statements of cash flows 6 - 7
Notes to consolidated financial statements 8 - 21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Integrated Food Resources, Inc.
We have audited the accompanying consolidated balance sheets of Integrated Food
Resources, Inc., as of July 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' (deficit) equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Food
Resources, Inc., as of July 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/Moss Adams LLP
Portland, Oregon
November 3, 1999
1
<PAGE>
<TABLE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
JULY 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,528 $ 215,097
Receivables:
Trade - 63,458
Related-party 33,852 520,324
Employees - 8,421
Inventory - 223,883
Prepaid expenses 102,217 9,782
------------- -------------
Total current assets 137,597 1,040,965
------------- -------------
PLANT AND EQUIPMENT
Tuna packing plant - 918,617
Furniture and equipment 12,351 296,051
Accumulated depreciation (6,422 (36,757)
------------- -------------
5,929 1,177,911
------------- -------------
LAND HELD FOR FUTURE DEVELOPMENT 74,498,400 74,498,400
ADJUSTMENT FOR FOREIGN LAND GRANT (74,498,400) (74,498,400)
------------- -------------
Land held for future development, net of adjustment - -
------------- -------------
GOODWILL - 4,411,434
OTHER ASSETS 5,100 19,496
------------- -------------
Total assets $ 148,626 $ 6,649,806
============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
JULY 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 60,379 $ 254,657
Accrued liabilities - 33,453
Related-party notes payable 232,100 4,261,500
Current portion of long-term debt - 113,800
Current portion of capital lease obligation - 6,425
------------- -------------
Total current liabilities 292,479 4,669,835
------------- -------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion - 407,507
Long-term capital lease obligation - 8,032
------------- -------------
Total long-term liabilities - 415,539
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $.001 par 4,067 1
value, 10,000,000 shares
authorized, 4,067,087 and 799
issued and outstanding in 1999
and 1998, respectively
Class A common stock, $.001 par 16,199 16,085
value, 50,000,000 shares
authorized, 16,198,966 and
16,084,643 issued and
outstanding in 1999 and 1998,
respectively
Class B common stock, $.001 par - -
value, 50,000,000 shares
authorized, none issued and
outstanding
Additional paid-in capital 8,275,574 4,054,078
Accumulated deficit (8,439,693) (2,505,732)
------------- -------------
Total stockholders' (deficit) equity (143,853) 1,564,432
------------- -------------
Total liabilities and stockholders' $ 148,626 $ 6,649,806
(deficit) equity
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JULY 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET SALES
Seafood processing sales $ 108,426 $ 5,378,691
COST OF SALES
Seafood processing costs 135,734 5,938,232
------------- -------------
Gross loss (27,308) (559,541)
------------- -------------
SELLING, GENERAL, AND ADMINISTRATIVE
Administrative and consulting (195,007) (1,118,832)
Other selling and general (326,171) (415,678)
------------- -------------
Total selling, general, and administrative expenses (521,178) (1,534,510)
------------- -------------
Operating loss (548,486) (2,094,051)
------------- -------------
OTHER EXPENSES
Loss on disposal of seafood processing plant assets (996,890) -
Write-down of impaired assets (99,448) -
Depreciation and amortization (173,845) (36,757)
Interest (115,292) (321,030)
------------- -------------
Total other expenses (1,385,475) (357,787)
------------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS (1,933,961) (2,451,838)
DISCONTINUED OPERATIONS
Loss from operations of Internet access services segment (739,941) -
Loss on disposal of Internet access services segment (3,260,059) -
------------- -------------
(4,000,000) -
------------- -------------
NET LOSS $ (5,933,961) $ (2,451,838)
============= ==============
BASIC AND DILUTED LOSS PER SHARE
Continuing operations $ (0.12) $ (0.15)
Discontinued operations (0.25) -
------------- --------------
$ (0.37) $ (0.15)
============= ==============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
INTEGRATED FOOD RESOURCES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
-------------------- ------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ------- ---------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1997 4,335,855 $ 4,336 6,637 7 $ 65,791 $ (53,894) 16,240
Issuance of common stock to 10,523,620 10,524 0 (10,524) - 0
Seabourne Ventures, Inc. -
Issuance of common stock for
professional services 30,000 30 - 0 - - 30
Issuance of common stock for 1,183,432 1,183 - 0 3,998,817 - 4,000,000
acquisition of Clipper Cubed
Corporation
Conversion of preferred stock
to common stock 11,736 12 (5,868) (6) (6) - 0
Net loss - - - 0 - ( 2,451,838) (2,451,838)
----------- ------- ---------- ------- ----------- ------------ -------------
BALANCE, July 31, 1998 16,084,643 16,085 799 1 4,054,078 ( 2,505,732) 1,564,432
Conversion of related-party - 4,050,000 4,050 4,045,950 - 4,050,000
notes payable to preferred -
stock
Issuance of preferred stock - - 16,288 16 16,272 - 16,288
Issuance of common stock in
business acquisition 20,000 20 - 0 59,980 - 60,000
Issuance of common stock for
professional services 80,000 80 - 0 59,920 - 60,000
Issuance of common stock to
employees 14,323 14 - 0 39,374 - 39,388
Net loss
- - - 0 - (5,933,961) (5,933,961)
----------- ------- ---------- ------- ----------- ------------ -------------
BALANCE, July 31, 1999 16,198,966 $16,199 4,067,087 $4,067 $8,275,574 $(8,439,693) ($143,853)
=========== ======= ========= ====== ========== ============ =============
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
JULY 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net loss (5,933,961) (2,451,838)
Adjustments to reconcile net loss to net cash from
operations:
Loss on investment in ClipperNet 3,260,059 -
Loss on disposal of seafood processing assets 996,890 -
Expense recognized for issuance of common stock 60,000 -
Write-down of impaired of assets 99,448 -
Depreciation and amortization 542,200 36,757
Decrease (increase) in assets:
Receivables 426,363 (530,004)
Inventories 125,522 (223,883)
Prepaid expenses (93,851) (9,782)
Other assets 15,577 14,931
Increase (decrease) in liabilities:
Accounts payable (94,006) 216,062
Accrued liabilities 129,308 12,560
--------------------- ---------------------
Net cash from operating activities (466,451) (2,935,197)
--------------------- ---------------------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchase of equipment (81,015) (187,348)
Cash paid for business acquisition (42,076) -
Seafood processing plant costs - (918,617)
--------------------- ---------------------
Net cash from investing activities (123,091) (1,105,965)
--------------------- ---------------------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Proceeds from issuance of common stock - 30
Proceeds from issuance of preferred stock 16,288 -
Proceeds from long-term borrowings - 799
Proceeds from related-party notes payable 910,202 5,059,500
Repayment of related-party notes payable (509,467) (798,000)
Repayment of capital lease obligation (41,050) (6,070)
--------------------- ---------------------
Net cash from financing activities 375,973 4,256,259
--------------------- ---------------------
See accompanying notes.
6
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
JULY 31,
----------------------------------------------
1999 1998
-------------------- ----------------------
Net (decrease) increase in cash (213,569) 215,097
CASH, beginning of period 215,097 -
--------------------- ---------------------
CASH, end of period 1,528 215,097
===================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid 133,496 321,030
===================== =====================
SCHEDULE OF NONCASH INVESTING AND
FINANCING TRANSACTIONS
Purchase of Clipper Cubed Corporation's assets for
1,183,432 shares of common stock - 4,061,434
--------------------- ---------------------
Conversion of related-party notes payable to
preferred stock 4,050,000 -
--------------------- ---------------------
Capital lease obligations incurred by ClipperNet to
finance the purchase of computer equipment 64,665 -
--------------------- ---------------------
Conversion of ClipperNet long-term debt and accrued
interest to common stock in ClipperNet 693,849 -
--------------------- ---------------------
Issuance of Company shares for consulting services
performed 60,000 -
--------------------- ---------------------
Issuance of Company shares to ClipperNet
employees 39,388 -
--------------------- ---------------------
Acquisition of Netbridge Internet Access Services
assets by ClipperNet:
Equipment 50,000
Goodwill 50,000
Intangible assets 50,000
---------------------
Assets acquired 150,000
Note payable (47,924)
Company stock issued (60,000)
---------------------
Cash paid for business acquisition 42,076
=====================
</TABLE>
See accompanying notes.
7
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Integrated Food Resources, Inc. (the Company) is a
Nevada corporation, headquartered in Tigard, Oregon. Its business has
involved food processing for private label companies in the food
service industry through its wholly-owned subsidiary, Seabourne
Ventures, Inc. (Seabourne), and providing wireless Internet access
services through its former wholly-owned subsidiary, ClipperNet
Corporation (ClipperNet) (see Note 5). During 1999, the Company
established an additional wholly-owned subsidiary, Integrated Food
Finance Corp. (IFFC), which is a special purpose entity organized to
assist in the financing of future operating activities of the Company
and its operating subsidiaries. As further described in Note 2,
subsequent to July 31, 1999, this wholly-owned subsidiary was involved
in negotiations for additional financing. All significant intercompany
accounts and transactions among the Company's subsidiaries have been
eliminated in the preparation of the consolidated financial statements.
In July 1997, Seabourne Ventures, Inc., a newly organized company,
completed a Share Exchange Agreement with Pixieland Corporation, a
Nevada corporation, pursuant to which Seabourne exchanged 10,523,620
shares of its common stock (representing 70.82% of then issued and
outstanding common stock) for an equal number of Pixieland common
shares. Shortly thereafter, Pixieland changed its name to Integrated
Food Resources, Inc., and completed a Share Exchange Agreement with
Seabourne which then became a wholly-owned subsidiary of the Company.
As further discussed in Note 9, Seabourne operations have primarily
involved tuna processing and packing activities through a plant located
in Ensenada, Mexico. During 1999, the Company determined that
continuing operations through the Mexican plant was no longer
economically feasible and suspended its operations. Therefore, as of
July 31, 1999, Seabourne is involved in no significant operating
activities.
On July 28, 1998, the Company issued stock in exchange for all of the
assets and assumed the liabilities of Clipper Cubed Corporation, a
provider of wireless Internet access services. In 1999, all operations
of the acquired business were provided through the Company's
wholly-owned subsidiary, ClipperNet. As further discussed in Note 5, on
July 31, 1999, ClipperNet issued 1,870,479 shares of common stock to
its former owners in exchange for 1,015,702 shares they held in the
Company's common stock and $693,849 in debt owed to them by ClipperNet.
These transactions resulted in
8
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
the Company owning approximately 2.6% of the outstanding common stock
of ClipperNet and ClipperNet owning approximately 6.3% of the Company
as of July 31, 1999. The accompanying consolidated financial
statements include the results of operations of ClipperNet through
July 31, 1999, when the exchange occurred. As of July 31, 1999, the
Company adopted the cost method of accounting for its investment in
ClipperNet which has been recorded at no value.
Sales and accounts receivable - As of July 31, 1999 and 1998, and for
the years then ended, one customer, International Trade Group, LLC
(ITG, a related-party as explained in Note 8), accounted for
substantially all sales and accounts receivable from Seabourne's tuna
processing activities. All products from sales to ITG are shipped to
retail food chains in the United States. Sales are recorded when
product is shipped to third-party buyers from ITG.
Substantially all sales and accounts receivable of ClipperNet have
been to independent third parties. Sales have been recognized when
services were provided.
Inventories - Inventories consist of frozen tuna, canned tuna, and
packaging materials. Inventories are valued at the lower of cost or
market by the first-in, first-out (FIFO) method.
Plant and equipment - Plant and equipment are stated at cost.
Depreciation of plant and equipment is computed by the straight-line
method over estimated useful lives ranging from five to seven years.
Expenditures for normal maintenance and repairs are charged to
operations as incurred.
Land held for future development net of adjustment for foreign land
grant - As further discussed in Note 10, in 1998 the Company received
a foreign land grant from the Republic of Guinea. The grant has been
recorded as land held for future development at its appraised value of
$74,498,400. The appraisal was performed by an independent
international firm with expertise in appraisal valuations. An
adjustment in the same amount as the appraisal value (adjustment
balance) has been recorded as an offset to the land value consistent
with International Accounting Standard No. 20. The adjustment balance
will be amortized in the consolidated financial statements as income
over future periods equal to depreciation expense recognized for
assets acquired or constructed for use in conjunction with the land
received by grant.
9
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
Goodwill - Goodwill is amortized by the straight-line method over a
15-year period. Management periodically reviews goodwill for impairment
and, if appropriate, adjusts the carrying value of goodwill based upon
this assessment. As of July 31, 1999, all previously recorded goodwill
has been charged to expenses.
Income taxes - The Company follows the asset and liability method of
accounting for income taxes whereby deferred tax assets and liabilities
are recognized for the future tax consequences of differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Earnings (loss) per share - Basic earnings (loss) per common share is
computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted earnings per common share assumes
that convertible preferred shares outstanding at the beginning of the
year are converted on that date and outstanding common shares are
adjusted accordingly. Because the outstanding preferred shares would be
antidultive to the calculation, they were not included in the 1999 and
1998 diluted earnings per share calculations.
Cash and cash equivalents - Cash and cash equivalents consist of
short-term, highly liquid investments with maturities of 90 days or
less.
Use of estimates - Preparation of the consolidated financial
statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that
effect the amounts reported in the consolidated financial statements
and accompanying notes. Significant estimates include the appraisal for
land granted by the Republic of Guinea (see Note 10) and the value of
goodwill recorded by the Company. Actual results could differ from
those estimates and require periodic re-evaluation for impairment.
Recently issued accounting standards - In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 136, "Transfers of Assets to a Not-for-Profit
Organization or Charitable Trust That Raises or Holds Contributions for
Others," and SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133." Both statements, when they become effective, are expected to
have no effect on the consolidated financial statements of the Company.
10
<PAGE>
NOTE 2 - LIQUIDITY AND FUTURE OPERATIONS
As of July 31, 1999, the Company had current liabilities in excess of
current assets in the amount of $154,882. For the years ended July 31,
1999 and 1998, the Company incurred net losses of $5,933,961 and
$2,451,838, respectively, which contributed to an accumulated deficit
of $8,439,693 as of July 31, 1999. In addition, as of July 31, 1999,
the Company had suspended its tuna packing operations, not begun
operations within the Republic of Guinea, and disposed of its wireless
Internet access services segment resulting in the Company having no
operating activities. Subsequent to July 31, 1999, the Company was in
the process of closing on $201,649,292 in senior secured notes to
finance fishing vessels for the Company's food processing operations
and other capital projects of the Company. In the opinion of
management, completion of this financing will provide the necessary
working capital to allow the Company to pursue its intended business.
NOTE 3 - INVENTORIES
Inventories consisted of the following at July 31, 1999:
1999 1998
----------------------------------------
Finished goods $ - $115,925
Raw material $ - $ 860
Packaging material $ - $107,098
----------------------------------------
$ - $223,883
========================================
NOTE 4 - LONG-TERM LIABILITIES
Long-term debt consisted of the following:
1999 1998
---------- ----------
Unsecured note payable to ITG Finance, $ 232,100 $2,487,500
LLC, a related-party, payable in full
including interest at 10.5%, on December
31, 1999
11
<PAGE>
NOTE 4 - LONG-TERM LIABILITIES - (continued)
1999 1998
---------- -----------
Unsecured note payable to International $ - $ 1,765,000
Trade Group, LLC, a related-party, payable
in full including interest of 10%, on
December 31, 1998
Note payable to Pacific Continental Bank, $ - $ 100,000
secured by inventory, chattel paper,
accounts, equipment, and general
intangibles, payable in full including
interest of 11% per annum on September 16,
1998
Unsecured note payable to Business Systems $ - $ 350,000
Group, payable in monthly installments of
$1,500, including interest at 8%
amortizing over 30 years, payable on July
28, 2008
Unsecured note payable to International $ - $ 9,000
Trade Group, LLC, a related-party, payable
in full including interest of 6% per
annum, on July 15, 1999
Other unsecured notes of which $13,800 is $ - $ 71,307
payable on October 7, 1998, including
interest at 8% and $57,707 is payable in
full on December 8, 2002, including
interest at 8%
-------------------------
$ 234,099 $ 4,782,807
Less current portion $ (232,100) $ 4,375,300
-------------------------
Long-term debt, net of current portion $ 407,507
=========================
12
<PAGE>
NOTE 4 - LONG-TERM LIABILITIES - (continued)
On October 31, 1998, ITG Finance, LLC and International Trade Group,
LLC converted their outstanding debt of $2,285,000 and $1,765,000,
respectively, into the Company's preferred stock. With an exchange
ratio of one preferred share issued for each dollar of debt, this
resulted in the recognition of 4,050,000 additional shares of preferred
stock for $4,050,000. The conversion rate of one preferred share for
each share of common stock was provided for in the Company's amended
Articles of Incorporation, dated July 9, 1999. The Company's preferred
shareholders are entitled to receive dividends on the same basis as
common shareholders; to vote as a single class on all matters with each
preferred share converted to one common stock share for the purpose of
voting; to unrestricted conversion privileges at one common share for
each preferred share; and, to distribution preferences in the event of
dissolution or liquidation of the Company.
NOTE 5 - ACQUISITION AND DIVESTITURE OF CLIPPER CUBED CORPORATION
On July 28, 1998, the Company purchased certain assets and assumed
liabilities from Clipper Cubed Corporation for $4 million. The purchase
price was 1,183,432 shares of the Company's common stock valued, based
upon then current trades from over-the-counter bulletin board
transactions, at $3.38 per share in exchange for the net liabilities
assumed from Clipper Cubed Corporation. The Company placed the acquired
assets and assumed liabilities into a newly formed subsidiary,
ClipperNet Corporation. The acquisition was accounted for as a purchase
and resulted in the
13
<PAGE>
NOTE 5 - ACQUISITION AND DIVESTITURE OF CLIPPER CUBED CORPORATION - (continued)
recognition of goodwill which was being amortized to expense over 15
years unless adjusted for impairment consistent with the Company's
accounting policies. The assets purchased and liabilities assumed were
as follows:
Accounts receivable $ 62,199
Equipment $ 108,703
Goodwill $ 350,000
Other assets $ 18,186
Accounts payable $ (38,595)
Accrued liabilities $ (20,893)
Notes payable (520,507)
Capital lease obligation $ (20,527)
-------------
Net liabilities assumed in excess of assets purchased $ 61,434
Purchase price $ 4,000,000
-------------
Goodwill $ 4,061,434
=============
The accompanying 1998 income statement does not include the results of
operations of ClipperNet for the three days from the date of
acquisition to July 31, 1998, were not significant. The pro forma
effects for the year ended July 31, 1998, had ClipperNet's operations
been combined with those of the Company would have been as follows:
Net loss
Integrated Food Resources, Inc. $(2,451,808)
ClipperNet $ (61,434)
-------------
Combined net loss $(2,513,242)
=============
In November 1998, ClipperNet acquired certain assets and assumed
liabilities of Netbridge Internet Access Services (Netbridge) in
exchange for 20,000 shares of the Company's common stock and cash
consideration of $42,076. The acquisition of this Internet service
provider, located along the Oregon coast, has been accounted for as a
purchase. The pro forma effects of the acquisition on consolidated
operations for the
14
<PAGE>
NOTE 5 - ACQUISITION AND DIVESTITURE OF CLIPPER CUBED CORPORATION - (continued)
year ended July 31, 1999, are not material as Netbridge's operations
were not significant prior to its acquisition. The assets acquired and
liabilities assumed by ClipperNet in its acquisition of Netbridge are
summarized as follows:
Equipment $50,000
Goodwill $50,000
Other intangible assets $50,000
Note payable $ (47,924)
Stock issued $ (60,000)
--------------
Cash paid for business acquisition $ 42,076
==============
For the year ended July 31, 1999, ClipperNet recorded a net loss from
operations of $739,941 and, as of July 31, 1999, had a deficit working
capital position of approximately $430,000. Due to poor operating
results and the need for significant additional capital to support
on-going operations, management chose to divest the Company of
substantially all of its ownership interest in ClipperNet effective
July 31, 1999. To accomplish the disposition of its subsidiary, the
Company first elected a 20-for-1 reverse split of ClipperNet's
outstanding common stock. This resulted in the Company receiving
50,000 shares of common stock for the 1,000,000 shares of ClipperNet
common stock it held prior to the split. ClipperNet then issued
1,870,479 shares of its common stock to former shareholders in
exchange for 1,015,702 shares the same former shareholders held in the
Company's common stock and $693,849 in debt owed to them by
ClipperNet. These transactions resulted in the Company owning
approximately 2.6% of the outstanding common stock of ClipperNet and
ClipperNet owning approximately 6.3%, of the Company as of July 31,
1999. With the reduction in its ownership interest in ClipperNet, the
Company has adopted the cost method of accounting for its investment
which has been recorded at no value as of July 31, 1999.
15
<PAGE>
NOTE 5 - ACQUISITION AND DIVESTITURE OF CLIPPER CUBED CORPORATION - (continued)
The following summarizes the Company's divestiture of its investment
in ClipperNet as of July 31, 1999:
Cash $ 5,894
Receivables $ 89,016
Prepaids $ 1,416
Other assets $ 48,819
Equipment, net $ 235,552
Goodwill, net $4,171,006
Accounts payable $ (119,873)
Accrued liabilities $ (162,761)
Long-term debt $ (964,868)
Capital lease obligations $ (44,142)
-------------
Loss on disposal of Internet access services segment $3,260,059
Net loss from operations $ 739,941
-------------
Loss on investment in ClipperNet $4,000,000
=============
NOTE 6 - INCOME TAXES
Deferred income taxes are recognized for all significant temporary
differences between tax and financial statement bases of assets and
liabilities. The classification of the resulting deferred tax assets
and liabilities is based upon the classification of the related balance
sheet asset or liability.
Deferred tax assets result principally from the Company's net operating
loss carryforward. The net operating loss carryforward of approximately
$1,490,000 for both federal and state income tax purposes will begin
expiring in 2013 unless utilized in earlier years. The Company's
ability to utilize these net operating losses could be severely limited
under Section 382 of the Internal Revenue Code of 1986 if significant
ownership changes occur in the future. In addition, this limitation
could result in the expiration of the net operating losses prior to
their utilization. A valuation allowance is provided at July 31, 1999,
since it is uncertain if the Company will be able to utilize loss
carryforwards and other deferred tax assets in future periods.
16
<PAGE>
NOTE 6 - INCOME TAXES - (continued)
As described in Note 1, the Company completed a Share Exchange
Agreement with Pixieland Corporation in July 1997. The share exchange
transaction resulted in the Company assuming all of the tax attributes
of Pixieland's assets and liabilities and all actual or contingent tax
liabilities previously incurred by Pixieland. Management believes the
tax effect of the share exchange transaction was not significant and
was immaterial to the consolidated financial statements. However, as
complete taxpayer records for Pixieland Corporation are not available,
it is uncertain if any liability to local, state, or federal taxing
authority exists.
Long-term deferred tax assets and liabilities as of July 31, 1999 and
1998, consisted of the following;
1999 1998
-------------- --------------
Deferred tax assets
Net operating loss carryforward $ 1,490,000 $ 830,000
Valuation allowance $ (1,490,000) $ (830,000)
-------------- --------------
Net long-term deferred tax asset $ - $ -
============== ==============
NOTE 7 - PREFERRED STOCK RIGHTS AND PRIVILEGES
All holders of the Company's preferred stock have voting and dividend
rights equal to those of all common stockholders. In addition,
preferred stockholders enjoy liquidation preferences superior to
existing common stockholders and have rights to convert their holdings
into common stock. Preferred shares may be voluntarily exchanged for
common stock at a current rate of $1 per share, which is subject to
adjustment for changes in the Company's capitalization. Mandatory
conversion of preferred shares to common stock will occur upon the
earlier of a 30-day written notice from the Company or immediately
prior to the closing of a public offering by the Company.
In July 1998, the Company converted 5,868 shares of preferred stock at
a 2-for-1 conversion rate for 11,736 common shares. Since the preferred
shares were not issued with "in the money" beneficial conversion
features, the conversion of preferred to common shares has been
recorded as transfer of existing preferred stockholder interests to
that of common stockholder interests based on the exchange ratio.
17
<PAGE>
NOTE 8 - RELATED-PARTY TRANSACTIONS
International Trade Group, LLC (ITG), a corporation controlled by the
Company's Chairman and Chief Executive, has purchased substantially
all of the Company's tuna production for resale to its alliance of
large United States food retailers and private label distributors. ITG
Finance, LLC, also controlled by the Company's Chairman and Chief
Executive, provides short-term financing for the Company's tuna
packing operations.
As of July 31, 1999 and 1998, and for the years then ended, the
Company had the following transactions with ITG and ITG Finance, LLC,
which are related parties:
1999 1998
-------------- --------------
Net sales to International Trade $ 108,426 $ 5,378,691
Group, LLC
Administrative expenses paid to $ - $ 295,895
International Trade Group, LLC
Accounts receivable due from $ 33,852 $ 520,324
International Trade Group, LLC and
other related parties
Notes payable (see Note 4) $ 232,100 $ 4,261,500
At July 31, 1998, notes payable of $4,261,500 include two obligations
due to ITG in the original amount of $2,500,000 and $1,765,000. The
$2,500,000 note supported the working capital requirements of the
Company. The $1,765,000 note payable resulted from an Asset Acquisition
Agreement between the Company and ITG through which the Company
acquired all tangible and intangible assets and assumed certain lease
obligations that arose from ITG's investment in tuna packing operations
in Ensenada, Mexico (see note 9). The effect of the transaction was the
transfer of all tuna packing operations from ITG to the Company. Total
assets acquired at fair value are summarized as follows:
Cash $ 59,983
Accounts receivable $ 304,673
Inventory $ 429,519
Plant and equipment $ 927,383
Prepaid expenses $ 43,442
-----------------
$ 1,765,000
=================
18
<PAGE>
NOTE 8 - RELATED-PARTY TRANSACTIONS - (continued)
As further described in Note 9, tuna packing operations in Ensenada,
Mexico were terminated during 1999. At the time of termination, all
remaining assets were liquidated or abandoned and all liabilities paid.
This resulted in the recognition of a loss from disposal of $996,890.
NOTE 9 - MEXICAN SEAFOOD PROCESSING OPERATIONS
In 1998, the Company's subsidiary, Seabourne, entered into an agreement
that would have resulted in the purchase of the outstanding stock of
Agroindustrias Rowen S.A. (Rowen), a Company that operates a seafood
processing facility in Ensenada, Mexico. Management believed the
seafood processing facility, which is currently in bankruptcy, could
have been acquired in late 1998 or 1999 if conditions of bankruptcy and
terms of the purchase agreement were completed.
To complete the acquisition, which was dependent in part on settlement
of Rowen's outstanding debts of approximately $8.5 million, the Company
entered into a Consulting Agreement with Alvaro Romero Wendlandt
(Wendlandt), former owner in Rowen. Pursuant to the Consulting
Agreement, the Company engaged Wendlandt to negotiate full and complete
settlement of all of Rowen's bankruptcy debts for an amount not to
exceed $7 million. Of this amount, and subject to shareholder approval,
the Company would have paid Rowen's creditors up to $4 million in cash
and a fee to Wendlandt of up to $3 million in Company stock.
During the years ended July 31, 1999 and 1998, Rowen processed and
packed all of the Company's tuna production pursuant to a Toll Packing
Agreement and the Company invested $927,383 in plant equipment. The
Company's ability to acquire the Mexican seafood processing plant, was
dependent upon both settlement of existing creditor claims in
bankruptcy proceedings and its obtaining sufficient debt financing or
additional shareholder capital to meet settlement obligations. However,
during 1999 management recognized that the volume of tuna available for
processing through the Rowen plant was not sufficient to sustain
operations. Therefore, during 1999, the
19
<PAGE>
NOTE 9 - MEXICAN SEAFOOD PROCESSING OPERATIONS - (continued)
Company discontinued its seafood processing operations, liquidated or
wrote-off all Company assets remaining at the plant, and paid its
outstanding obligations when operations ceased. As a result of
terminating these operations and although management continues to
pursue further recoveries and liquidations, the Company wrote-off the
following assets and liabilities:
Accounts receivable $ 42,972
Inventory $ 98,361
Tuna packing plant, net of accumulated depreciation $ 895,956
Accounts payable $ (40,399)
-------------
Loss on disposal of tuna packing plant assets $ 996,890
=============
NOTE 10 - ACQUISITION OF LAND IN THE REPUBLIC OF GUINEA
On July 25, 1998, the Company and the Republic of Guinea (the Republic)
entered into an agreement whereby the Republic deeded to the Company
14,000 hectares (approx. 35,000 acres) of prime agricultural and
aquaculture land along its coastline. The parcels of land which
constitute the 14,000 hectares are spread throughout the coastal region
of the Republic and are not contiguous. The land is best suited for
shrimp farming, rice farming and/or tropical fruit production. In
addition, it is anticipated that a small portion of the land will be
used to construct a tuna processing facility. The land, with a value of
$74,498,400 based upon the independent appraisal of an international
firm with expertise in appraisals, is owned by the Company free of
encumbrances and obligations.
The Company intends to establish farming projects on the property and
anticipates it will fund these projects through the acquisition of debt
financing or the issuance of additional shareholder capital. The value
of the foreign land deeded to the Company has been recorded at fair
market value as land held for future development and is offset by an
adjustment in the same amount (see Note 1).
With the acquisition of additional shareholder capital and/or debt
financing, the Company expects to create viable commercial farming
operations that will maximize land use in phased-in farming projects.
However, the Company's ability to develop the property for its intended
use and to create viable commercial operations is dependent upon the
successful acquisition of additional shareholder capital and/or debt
financing. Further, although the Republic has no right to repatriate
the land if the Company is unable to complete its development plans,
this potential risk and uncertainty may only be mitigated by the
Company acquiring country risk insurance through the OPIC (a division
of ExIm Bank), which the Company has not obtained as of July 31, 1999.
20
<PAGE>
NOTE 11 - BUSINESS SEGMENTS
The Company has operated in two business segments: food processing and Internet
access services. The food processing segment harvests, processes, and
distributes food products to private label customers nationwide. The Internet
access services segment, until divested by the Company in 1999, provided
wireless Internet access services to customers domestically. The following table
discloses these business segments for 1999 and 1998.
INTERNET
SEAFOOD ACCESS
PROCESSING SERVICES CONSOLIDATED
--------------- ------------- ------------
1999
--------------------------
Revenues $ 108,426 $ 809,413 $ 917,839
Operating loss $(1,933,961) $ (739,941) $(2,673,902)
Identifiable assets $ 148,626 $ - $ 148,626
Capital expenditures $ 10,252 $ 70,763 $ 81,015
Interest expense $ 115,292 $ 69,254 $ 184,546
Depreciation and
amortization expense $ 173,845 $ 368,355 $ 542,200
1998
--------------------------
Revenues $ 5,378,691 $ - $ 5,378,691
Operating loss $(2,451,838) $ - $(2,451,838)
Identifiable assets $ 2,049,284 $ 189,088 $ 2,238,372
Capital expenditures $ 997,262 $ 108,703 $ 1,105,965
Interest expense $ 321,030 $ - $ 321,030
Depreciation and
amortization expense $ 36,757 $ - $ 36,757
21
<PAGE>
<TABLE>
INDEX TO EXHIBITS
Incorporated by
Filed Referenced from
No. Exhibit Description Here Form Date Exhibit
<S> <C> <C> <C> <C> <C>
2.0 Documents Comprising
the Reorganization of
ClipperNet Corporation Yes
3.1 Restated Articles of Incorporation
of Integrated Food Resources, Inc. Yes
3.2 Articles of Incorporation
of Seabourne Ventures, Inc. No 10-SB 11/25/98 3.2
3.3 Articles of Incorporation
of ClipperNet Corporation No 10-SB 11/25/98 3.3
3.4 Bylaws of Integrated Food
Resources, Inc. No 10-SB 11/25/98 3.4
3.5 Bylaws of Seabourne
Ventures, Inc. No 10-SB 11/25/98 3.5
3.6 Bylaws of ClipperNet
Corporation No 10-SB 11/25/98 3.6
3.7 Articles of Incorporation of
Morningstar Finance, Inc. Yes
3.8 Restated Articles of Incorporation
of Morningstar Finance, Inc. Yes
3.9 Bylaws of Morningstar
Finance, Inc. Yes
4.1 Certificate of Amendment to
the Articles of Incorporation Yes
4.2 Certificate of Amendment to
the Articles of Incorporation Yes
10.1 Technology and Trademark License
Agreement dated January 25, 1999
between Alain de la Motte and
Integrated Food Resources, Inc. No 10-SB 4/30/99 10.8
11 Statement of per share earnings
computation not filed as is readily
apparent from the consolidated
financial statements No
21 Subsidiaries of Integrated Food
Resources, Inc. No 10-SB 11/25/98 21
27 Financial Data Schedule Yes
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INDEPENDENT AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED JULY 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,528
<SECURITIES> 0
<RECEIVABLES> 33,852
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,351
<DEPRECIATION> (6,422)
<TOTAL-ASSETS> 148,626
<CURRENT-LIABILITIES> 292,479
<BONDS> 0
0
4,067
<COMMON> 16,199
<OTHER-SE> (164,119)
<TOTAL-LIABILITY-AND-EQUITY> 148,626
<SALES> 108,426
<TOTAL-REVENUES> 917,839
<CGS> 135,734
<TOTAL-COSTS> 521,178
<OTHER-EXPENSES> 1,270,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,292
<INCOME-PRETAX> (1,933,961)
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