SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT NO. 4
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTIONS 12(b)
OR 12(g) OF THE SECURITIES EXCHANGES ACT OF 1934
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
Securities of be registered pursuant t Section 12(g) of the
Act:
Class A Voting Common Stock
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(Title of class)
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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. Under the Company's management at that time, of which our
current management was not a part, the Company's original business was the
development of a family-oriented recreational theme park on the Oregon coast. In
May 1968, the Company's name was changed to Pixieland Corporation and the
development of the theme park continued under the new name. 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. The various name changes were a result of several efforts to either
acquire or merge with existing businesses, none of which developed. 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 we purchased all of the assets of Clipper Cubed in
exchange for our common stock. As part of our agreement with Clipper Cubed, we
formed ClipperNet Corporation ("ClipperNet"), an Oregon corporation, and the
assets purchased from Clipper Cubed were transferred to ClipperNet. ClipperNet
is now a wholly-owned subsidiary of the Company and Clipper Cubed has 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. The acquisition of ClipperNet is a
demonstration of the Company's strategic belief that technology will play an
increasingly important role in the global sourcing, procurement and distribution
of food products.
As used in this Registration Statement, whenever reference is made to
the Company, it shall include Seabourne and ClipperNet, 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 food retail
chains in the United States and Canada. We obtain our products from affiliated
and non-affiliated sources located throughout
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the world. We in turn supply these food products to our retail food chain
clients under a relationship with International Trade Group, LLC ("ITG"), an
affiliated company.
ITG is an Oregon limited liability company of which Alain de la Motte,
the President, Chief Executive Officer and director of the Company, owns an 90%
controlling interest. ITG is a privately-held company that serves as the central
buying agent for several of the nation's largest food retailers, such as The
Kroger Company, Western Family Foods and Safeway. It coordinates and manages the
international procurement needs of these customers supplying them with high
quality, competitively priced private-label food products. ITG has developed the
expertise to facilitate the import and export of food products, and food
retailers find it more economical and efficient to entrust their private-label
food procurement activities to ITG who can, as the overseas representative of
the collective retailer group, negotiate advantageous supplier contracts
throughout the world. ITG qualifies the foreign supplier's production
capabilities, and it negotiates contracts specifying pricing levels, volume
commitments, quality control standards, product specifications and delivery
schedules. ITG also engages in the important functions of international banking
and financing administration, plant inspections, logistics management, U.S.
Customs clearance and U.S. Food and Drug Administration release. The Company
will be one of the suppliers from whom ITG will procure foreign produced
private-label food products. ITG's purchases of canned tuna and other products
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. The
harvesting and processing system to be used will allow Seabourne to offer canned
tuna fish and tuna-related products that are superior in quality and 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, among other things, acquired certain tuna
processing equipment and other related assets.
In April 1998, the Company and the Republic of Guinea ("Guinea"), a
French-speaking, West African nation, entered into three separate Project
Development 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. On July 25, 1998, the government of Guinea transferred to the
Company approximately 35,000 acres of prime coastal agricultural and
aquacultural land for the purpose of implementing the previously described
Project Development 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 Project Development 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. The Company may begin development of the property in
1999 and will fund these activities through additional debt or equity financing.
With such financing, we expect to create viable commercial operations to
maximize the land use in these agricultural and aquacultural farming projects.
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The Company has planned a staged development of the property in Guinea.
The initial emphasis will be on establishing the infrastructure to support
Company projects. The funding requirement for this purpose is anticipated to be
approximately $10 million over the first two years of operation. The initial
development project will concentrate on shrimp farming and processing.
Construction of the tuna processing cannery and development of the tropical
fruit plantations fall in the stage of future projects. Their start-up dates are
still being planned. The anticipated funding requirements for these several
projects remain unchanged from the projections discussed in the Project
Development Agreements which are included in this Registration Statement as
Exhibit 10.4.
The Company has developed a form of structured financing as a means of
raising the capital required to finance its operations. The Company will
negotiate with major U.S. and international food retailers, wholesalers and
distributors to secure contracts for future delivery commitments of food
products from its global production operations. With regard to the shrimp and
tuna projects, the Company is confident its global experience and past business
relationships will be instrumental in the successful negotiation of forward
contracts for frozen shrimp, fresh-frozen tuna filets and steaks and canned
tuna.
The food retailers will issue clean irrevocable Standby Letters of
Credit ("SLOC") to support their forward purchase contracts. This bank
instrument of guarantee provides several benefits to the customer. The SLOC
guarantees the food retailer access to an on-going supply of
competitively-priced, private-label food products without the financial drain of
a large, up-front cash outlay. Subsequently, the Company may issue debt and/or
equity securities backed by the SLOC pursuant to a structured financing
negotiated on a case-by-case basis.
Food products are traded as a commodity item which limits the margins a
wholesaler can command in the U.S. marketplace. Competitive price pressures also
arise when a limited availability of raw materials, which are procured from
agricultural and aquacultural environments and therefore beyond control of the
producer, leads to a diminished supply of finished goods.
The diversity of food products traded in the global marketplace
fragments the market to such an extent that it is difficult to provide overall
ranking data for the several categories in which the Company intends to
participate. One category, however, that lends itself to ranking is canned tuna
fish. This category is dominated by the business activities of Starkist, Bumble
Bee and Chicken of the Sea. Based on available data, these nationally branded
products account for approximately 76% of U.S. retail sales. Private-label sales
account for the remaining 24% of market share. It is within this narrow market
segment that the Company is engaged.
The Company believes very strongly that information technology and
business to business electronic commerce will play an increasingly important
role in the global sourcing, procurement and distribution of food products. The
acquisition of ClipperNet is considered critical to our long-term objective, as
it will facilitate our growth and development in these areas with regard to the
trading of food products. ClipperNet has technically skilled employees whose
development of Internet-based systems will serve as communications resources not
only between us and our customers but also between our various global locations,
especially in those foreign locations with underdeveloped infrastructure.
ClipperNet provides high-speed wireless Internet access services to
business and residential customers in Oregon's Willamette Valley and Central
Coast regions. The service is suited for video conferencing, Web hosting, Web
browsing, e-mail and Internet faxing.
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ClipperNet's service uses point-to-point microwave technology as an alternative
to traditional Internet access. ClipperNet's microwave network technology can be
installed quickly and efficiently in the service area. A small antenna installed
on the roof of an office building or a home communicates with a small microwave
transceiver which is connected to a router which distributes incoming and
outgoing data to and from individual workstations.
In November 1998, ClipperNet purchased all of the assets of Netbridge
Internet Access Services ("Netbridge"), an Internet service provider serving the
Oregon coastal cities of Newport and Lincoln City. The Company has guaranteed
ClipperNet's obligations to the previous owners of Netbridge under the terms of
the Asset Purchase Agreement which is included in this Registration Statement as
Exhibit 10.6. Similar acquisitions involving other Internet service providers
are anticipated for 1999. However, there are no agreements, arrangements or
understandings at this time in connection with any business combination or
acquisition.
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.
ClipperNet is well situated to compete against these delivery
technologies. While the competition is hampered by the need to invest time and
money to expand its broadband cable networks, ClipperNet is poised to rapidly
react to the market opportunity. The deployment of its proprietary high-speed
microwave technology can be accomplished more quickly and with less expense.
The Company is committed to developing and marketing products that
improve upon the ways in which business is traditionally conducted. Project
Harvest(R) is an example of how the Company is marshalling its resources,
especially ClipperNet's ability to deliver a high-speed communication system to
the remotest parts of the world, to this goal.
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The traditional model for global sourcing and distribution of food
products encompasses two approaches. In "cold calling", a company in one country
initiates an unsolicited offer to sell or buy a product to a company in another
country. The "brokered relationship" involves a buyer in one country, a seller
in another country and one or more intermediaries between the principals. Both
approaches necessarily bring inefficiencies to the marketplace. The former
requires a repetitive exchange of verbal and written communications to qualify
the performance capabilities of the separate parties and to verity the quality
and validity of the unsolicited offer. Occasionally, this approach leads to a
profitable transaction, but it typically becomes a draining investment of time
and effort that produces no lasting business relationship. In the latter,
product quality can become a secondary consideration to the spread created
between seller and buyer prices, and the intermediaries guardedly protect their
interests by withholding the identity of the principals.
Project Harvest(R) eliminates these inefficiencies. It is a system that
combines Internet technology with industry experience to simplify the process of
negotiating and consummating the global transaction. Its engine is a
proprietary, patents-pending software program the rights to which have been
obtained by the Company through a Technology and Trademark License Agreement
with Alain de la Motte dated January 25, 1999 which is included in this
Registration Statement as Exhibit 10.8.
Buyers and suppliers from throughout the world will be invited to
participate in Project Harvest(R), and each one will be required to submit
specified information about itself to become registered in the system.
Pre-qualifying the buyers and sellers will ensure they are genuine in their
interest and capable of meeting their commitments. Registered buyers and sellers
can feel great confidence in the available pool of qualified potential partners.
A buyer can use the supplier database to identify viable suppliers. The
available information will reveal a supplier's product specifications, product
ingredients, quality control procedures, labelling options, seasonal
availability, supplier contacts, 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.
Project Harvest(R) facilitates open communication between the global
partners. Modules within the program 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. Because it was generated by
Project Harvest(R), the supplier knows the RFQ has come from a genuinely
interested, well-qualified buyer. The quote goes directly back to the buyer, and
the transaction can be completed with fewer obstacles and in less time than
under the traditional approaches.
Language represents a frequent barrier in international commerce, and
Project Harvest(R) eliminates this concern. The software includes a translator
program that allows the users to communicate in one of several languages in
common commercial use. 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.
Should the parties choose not to consummate the transaction, the RFQ
and the quote are posted on the Project Harvest(R) trading floor. Here other
registered buyers and sellers can review the RFQ and the quote to determine
their interest in participating in the transaction.
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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.
One of Project Harvest(R)'s most distinguishing features is the
assignment of factory ratings. Despite their similar appearances on the shelf,
it is very unlikely that the same food product from different suppliers was
produced under the same manufacturing conditions. These variances make it
necessary for a buyer's quality assurance authority to visit each potential
supplier and review critical sourcing criteria such as 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 factory
rating standard. Each criterion is defined to exceed the standard set by any
single buyer. The Company is working with recognized authorities with experience
in global food processing and regulatory compliance who will use this rating
system to conduct on-site evaluations around the world. Once a rating has been
assigned to a facility, the buyers will be able to discern with confidence a
supplier's commitment to quality assurance, process control and manufacturing
procedures. Should a supplier choose not to become rated, Project Harvest(R)
will alert registered buyers to the facility's unrated status.
Project Harvest(R) is an Internet based system, and any buyer or seller
with the ability to connect to the Internet can engage in global business to
business E-commerce transactions. The Company is confident that the synergy of
Project Harvest(R) and the ClipperNet technology will give it a clear
competitive advantage in the marketplace.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Review of Financial Condition
Prior to and as of July 31, 1997, the Company had no significant
operating activities.
For the year ended July 31, 1998, the Company experienced a net loss of
$2,451,838 or $.15 per common share on sales of $5,378,691. Approximately 97% of
all sales revenues during 1998 were to ITG who resold the Company's tuna
products to large retail food chains throughout the United States. The cost of
sales exceeded net sales for the year ended July 31, 1998 by $559,541 largely
due to the impact of the "El Nino" effect on the tuna fishing industry and the
relatively high production costs incurred by the Company pursuant to its Toll
Packing Agreement with Rowen. Selling, general and administrative expenses of
$2,094,051 and other expenses of $357,787 contributed to a net loss for the year
ended July 31, 1998 of $2,451,838. The Company's operating expenses of
$2,094,051 included significant expenditures to develop corporate agriculture
and aquaculture capabilities in Mexico and in Guinea, to complete the
acquisition of Clipper Cubed and to pursue the Company's long-term financing and
growth strategies. Other expenses were primarily comprised of interest expenses
paid to a related company that provided working capital financing during the
year ended July 31, 1998.
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As of July 31, 1998, the Company had total assets of $6,649,806
comprised of current assets of $1,040,965, goodwill of $4,411,434 and other
assets of $19,496. Current assets consisted primarily of cash and receivables
and inventories relating to tuna processing operations. Goodwill, which is being
amortized to expense over a 15 year period, was comprised of the excess of the
purchase price over assets acquired and liabilities assumed in the Company's
acquisition of Clipper Cubed and its Mexican fishing operations from ITG.
Included among the Company's assets as of July 31, 1998 was land held
for future development of $74,498,400 offset by an equal amount recorded as an
adjustment for foreign land grant. The land was acquired as a land grant from
Guinea, and it 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 from 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 their potential operating value.
Accordingly, the Company continues to pursue and evaluate viable sources of
long-term financing for future agricultural and aquacultural operations in
Guinea. There is, however, no assurance that such financing is or will become
available to the Company in the foreseeable future.
As of July 31, 1998, current assets were not sufficient to offset
current liabilities of $4,669,835 that resulted in a deficit working capital
position of $3,628,870. This deficit working capital position was supported by
unsecured related-party financing of $4,261,500 due in full December 31, 1998.
The Company remained confident that the related-party creditors, ITG and ITG
Finance, would continue to provide necessary operating support and, as of July
31, 1998, was in the process of negotiating conversion of the debt instruments
into equity at their maturity. As of July 31, 1998, the Company's leverage
ratio, calculated as the ratio of total debt to total equity, was 3.25-to-1. In
the opinion of the Company, this ratio represented an appropriate and manageable
level of internal and external financing of operations as of the fiscal year
then ended. Although related-party financing was necessary to augment its
operations through the period ended July 31, 1998, the Company continues to
pursue strategies that will provide an adequate, balanced and stable source of
financing for continuing operations.
For the three months ended October 31, 1998, the Company experienced a
net loss of $390,480 or $.02 per common share on sales of $167,089. This
compares to losses for the same period in the prior year of $397,938 on sales of
$1,021,892. The decline in sales is attributable entirely to the Company's
temporary discontinuance of its tuna processing business. An unfavorable market
for raw materials has made it unprofitable to continue processing tuna under
these prevailing conditions. During the first quarter of fiscal 1999, the focus
of the Company's tuna processing business has been on asserting firmer control
of raw material supply channels. During this time, the Company has also been
focused on building those portions of its business related to wireless Internet
access services. Essentially all sales and related expenses for the first
quarter of 1999 were comprised of activities in this segment of the Company's
operations.
As of October 31, 1998, the Company had consolidated total assets of
$6,081,387. Intangible assets, comprised of unamortized goodwill, represented
$4,433,153 or 72.8% of total assets with the remainder comprised of plant and
equipment of $1,171,866 and current assets of $476,368. As of October 31, 1998,
current assets exceeded current liabilities of
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$388,428 by $87,940. This positive working capital position resulted from the
conversion of related-party notes payable to convertible preferred stock during
the first quarter of fiscal 1999. As a result of converting these related-party
notes, total shareholders' equity as of October 31, 1998 increased to $5,323,953
and the Company's leverage ratio declined significantly to .14-to-1.
Review of Operating Results
Seabourne Ventures, Inc.
Seabourne began its business operation in July 1997, so there were no
operating results prior to the Company's fiscal year ended July 31, 1997. The
Company's revenue for fiscal year 1997-1998 was derived mainly from Seabourne's
tuna processing and marketing operations. ITG entered into a Toll Packing
Agreement for Canned Tuna ("Toll Packing Agreement") on September 5, 1996 with
Agroindustrias Rowen, S.A. de C.V. ("Rowen") of Ensenada, Mexico to process and
can tuna fish for the U.S. marketplace. The rights of ITG under the Toll Packing
Agreement was one of the assets acquired by Seabourne under the Asset
Acquisition Agreement included in this Registration Statement as Exhibit 10.1.
Essentially all of the production from the Rowen facility was sold to
ITG and eventually to ITG's previously mentioned customer network of major U.S.
food retailers. These sales produced $5,378,691 in gross revenue. Due to a
limited supply of dolphin-safe raw material in Mexico and difficult El Nino
conditions, Seabourne was able to fulfill less than 10% of the total demand for
canned tuna from the ITG members and other direct customers.
Under the Toll Packing Agreement, Seabourne contracted with Rowen to
pack canned tuna fish for Seabourne's U.S. customers. Seabourne has no current
direct or indirect ownership interest in the processing plant Rowen receives a
fixed cost per case to supply the means of production and the labor. To control
the costs, Seabourne has provided the fresh frozen whole tuna through contracts
with Mexican and U.S. tuna boat owners, and it supplied all direct manufacturing
materials (cartons, cans, lids, labels, hydrolyzed protein, pallets, etc.).
Seabourne hired a cadre of technical professionals to monitor the production
operation and to ensure compliance with quality specifications. None of the
individuals placed at the plant by Seabourne directly managed the operations of
the plant. This management function was performed by Rowen's employees.
Seabourne's staff was on site to perform the functions of fish acquisition,
quality control of finished product and process control engineering.
Improvements to the physical plant were required to ensure compliance with U.S.
Food and Drug Administration requirements, and when it became apparent Rowen
could not provide the necessary financing, Seabourne made the investments in new
equipment and plant upgrades. These investments totaled $918,617.
Seabourne has a three year option to acquire 100% of the outstanding
shares of Rowen's stock. Rowen is a Mexican company owned by Sr. Alvaro
Wendlandt Romero that is currently operating under the Mexican bankruptcy
protection laws which are equivalent to Chapter 11 of the U.S. Bankruptcy Code.
It is estimated that Seabourne may be able to settle with Rowen's creditors for
a fraction of the outstanding debt, said settlement being made in cash or a
combination of cash and stock. Rowen was recently appraised by a qualified
independent appraiser at US $7 million.
During the 1st quarter of fiscal year 1999, the Company decided to
refocus its strategy for packing tuna in Mexico. Prices for high-quality,
dolphin-safe frozen tuna reached record
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high levels which pushed fully compensatory pricing for finished goods beyond
what the market would bear. Rather than continuing to operate at a negative
gross margin, the Company decided the interests of its shareholders would be
best served if the operations in Mexico under the Toll Packing Agreement were
suspended. The Company has further decided to hold in abeyance its option to
acquire the Rowen cannery until such time as it can provide a dependable supply
of competitively priced, dolphin-safe raw material through its own fishing
operations.
The Company's plans to build and operate its own fleet of fishing and
processing vessels has been accelerated. The design of super-efficient fishing
vessels has been completed and negotiations are underway to complete the
financing and ship building contracts. 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 in compensation for processing vessel
design services. This is included in the Company's financial statements under
the category of prepaid expenses. It is still the Company's intentions to
construct and operate a fleet of harvesting and processing vessels. At this
time, there are no ship-building contracts, and the construction financing
arrangement have not been finalized.
The Company is subject to certain risks from its foreign operations.
These risks include potential losses on foreign exchange transactions and
possible repatriation of land and facilities located in foreign countries. To
mitigate foreign exchange risks, the Company currently purchases products and
services and makes sales exclusively to U.S. customers in U.S. dollars. The
Company maintains no operating funds in foreign financial institutions. To
mitigate expatriation risk, the Company will consider acquiring country risk
insurance through OPIC, a division of the Export-Import Bank when management
believes the cost of coverage is justified by the insurable risk.
ClipperNet Corporation
In July 1998, the assets and liabilities of Clipper Cubed were acquired
and transferred to ClipperNet. For our fiscal quarter ended October 31, 1998,
ClipperNet had net revenues of $163,021 and a loss of $41,415. A significant
portion of the loss is attributed to additional staffing to meet requirements
for the Portland, Newport and Albany, Oregon business sites. Sales are expected
to grow at a very rapid pace during the next year through domestic and global
expansion of ClipperNet's existing network, licensing agreements, acquisition of
other Internet access companies and new product introductions.
In November 1998, the assets of Netbridge were purchased for $150,000.
It was agreed that $60,000 of that purchase price would be satisfied by the
issuance of 20,000 shares of the Company's common stock. ITG Finance, LLC ("ITG
Finance"), an affiliate of the Company, loaned ClipperNet $20,766 to complete
this acquisition. This acquisition will be accounted for as a purchase.
Accordingly, the acquired assets including accounts receivable, customer
deposits, prepaid expenses, furniture, fixtures, leasehold improvements and
intangible assets will be recorded at their fair market value as of the date of
acquisition. For the year ended December 31, 1997, Netbridge reported net income
of approximately $42,000. As of the date of acquisition, the fair value of the
acquired assets was approximately $50,000, which resulted in the recognition of
$100,000 in intangible assets. The Company believes the acquisition of Netbridge
expands its Internet expertise, allows further access to Oregon markets and will
provide a positive impact on operations, liquidity and cash flow once all
Internet access operations are fully integrated.
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The Company believes that Internet usage will continue to grow for both
business and personal use, and users will introduce an ever increasing volume of
information into the same connection pipeline. While there may be sufficient
carrying capacity in the main trunks of the network's infrastructure, "curb to
door" bandwidth is limited. ClipperNet's proprietary high-speed wireless
microwave technology delivers curb to door broadband service to any home or
business without the expense of in-ground utility construction or telephone
carrier interconnect fees. ClipperNet's wireless services has been deployed in
Eugene, Oregon and other parts of the service region for twenty months, over
which time it has captured 25% of the local market share. We believe the success
of this model can be replicated nationwide in bringing new high-speed service on
line quickly, at lower installation costs and with lower subscription rates.
ClipperNet projects gross sales in fiscal year 1999 in excess of $2.5 million.
Capital Needs and Future Requirements
Capital-Intensive Projects
It was the Company's intent to initiate the major long-term capital
development projects described below during fiscal year 1999. 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 timetable for these
projects has now been moved into calendar years 2000 and 2001. The Company is
pursuing the financing for these projects through a combination of equity
financing, long-term asset backed loans and senior secured notes.
o Two modernized tuna processing facilities (Mexico, Indonesia
and/or Thailand). Total projected investment will approximate $30
million. Plant acquisition is expected to be in the form of cash
and stock. Equipment will be financed through leases, equipment
loans and outright purchase. The Company's interest in acquiring
processing facilities in Indonesia and/or Thailand is still in the
feasibility stage. No due diligence has been completed for these
facilities at this time.
The Company's active participation in the global marketplace for canned
tuna fish has enabled it to become very familiar with the
operating environments of the several foreign countries that serve
as the principal production sources for this product line. It is
on this experience that the Company has based its estimate of $30
million as a reasonable expense to acquire and operate two
foreign-based tuna processing facilities. Mexico is the foreign
operating environment with which the Company has the most
familiarity and knowledge, and although the Toll Packing Agreement
with Rowen has been terminated, it could choose to avail itself of
this experience by initiating a relationship with another cannery
in Mexico.
o Six new combination fishing/factory ships with an approximate cost
of $180 million. Construction deposits and related expenses will
amount to approximately $40 million. The contract for construction
of up to six 79-meter fishing vessels is being finalized between
the Company and a European shipyard. Construction financing for up
to 90% of the total contract will be provided primarily by the
shipyard with the Company providing the remainder either through a
combination of government grants and/or proceeds from equity or
debt financing. The shipyard will provide a performance bond to
guarantee that the vessels are delivered on time and constructed
in accordance with Company specifications. The completed ships
will be financed primarily through insured export-credit
guaranteed loans, straight asset-backed loans, grants and local
government subsidies. The
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Company expects to finance nearly 100% of the cost of the finished
vessels with the ships representing the sole collateral on the
loan.
The Company views the construction and operation of its own fleet of
harvesting and production vessels to be an integral part of its
operating strategy. The task of raising the capital to realize
this goal has been made difficult by the need to develop a complex
financing structure. The Company has experienced delays in
obtaining the financing due to structural changes required by
prospective lenders, shipyards and government authorities. For
this reason, the details of the final structure will remain
subject to change and revision until the negotiations are
concluded. Any specific disclosures on these matters at this time
would be speculative.
o Twelve new bait boats for an estimated cost of $24 million.
Construction deposits and related expenses will amount to a
maximum of $10 million. The balance will be due when the ships are
delivered. We expect to finance 70% of this asset through
asset-backed loans. The balance will be financed through cash and
clean irrevocable bank instruments of guarantee.
o Tuna harvesting, processing and cold storage operations in Guinea
at an estimated cost of $118 million. Specific projects include
the construction of two tuna seiners, two factory trawlers and a
tuna cannery . Asset-backed loans are available to finance a
significant percentage of the capital cost related to these
projects.
o Shrimp processing operations in Guinea at an estimated cost of
$107 million plus $10 million for land development. The property
on which the Company intends to develop the shrimp operation is
located in the geographical region of Guinea known as Sakoba.
Adjacent to our property is a fully operational shrimp farm and
processing facility called the Sakoba Shrimp Company. SEPIA, a
private French company, built this facility in partnership with
the government of Guinea. The Sakoba Shrimp Company has recently
ceased operations. Specific projects include development of ten
small prawn farms and a processing facility for the Company shrimp
operation in the region of Sakoba as well as the possible purchase
of the Sakoba Shrimp Company. F.E.S. Inc., a Los Angeles-based
company, has expressed an interest in partnering with the Company
to assume control of the Sakoba Shrimp Company. Nothing
definitive, however, has been concluded with F.E.S. Inc. in this
matter. Asset-backed loans are available to finance a significant
percentage of the capital cost related to these projects.
o Tropical fruit canning operations in Guinea at an estimated cost
of $60 million. Specific projects include a processing cannery,
pineapple plantation and other fruit plantations. Asset-backed
loans are available to finance a significant percentage of the
capital cost related to these projects
The plants and processing facilities in Guinea will be financed
primarily through asset-backed export-credit guaranteed loans and government to
government grants and subsidies. Note that the French Government has privileged
relationships with Guinea, a former French colony. COFACE, the export credit
insurance agency of the French Government, provides low interest asset-backed
loans for equipment exported from France and for projects that benefit a third
world country in terms of job creation and expanded exports. The land in Guinea
will be pledged as collateral to secure local working capital for the
contemplated projects. The
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Company expects to be able to borrow up to 40% of the land value in U.S.
dollar-denominated working capital loans.
The tuna-processing portion of the seafood-related projects are
projected to produce the following net after-tax earnings on net sales for the
first full year of production:
<TABLE>
<S> <C> <C>
Full Year Of Production Net After-Tax Earnings (mill) Net Sales (mill)
first $10.0 $57.5
</TABLE>
That these projections compare favorably with the Company's past
performance in this market is attributable to a strategic change in operating
environment. When the Company first became a supplier of canned tuna fish, it
contracted with an independent, non-related processing facility 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. This was due primarily to the
prevailing El Nino conditions in the Eastern Pacific Ocean which resulted an
unpredictable disruption in the supply chain for tuna fish. Despite the
unfavorable combination of increasing costs and declining revenues, the Company
felt an obligation to fulfill its customer commitments which ultimately explains
the negative performance reported by the Company in this segment of its
business. This model's reliance on outside sources for supply and production
also provide an insight into the Company's decision to terminate its
relationship with Rowen.
The experience gained while operating under this model provided the
Company with an opportunity to become well versed in the economics of the
marketplace, and it has demonstrated in no uncertain terms that the Company must
take strong and assertive control of its operating environment to succeed in
this product line. It is precisely this understanding of the need for vertical
integration of the supply chain that drives the Company's plans to construct and
operate its own fleet of harvesting and processing ships and its own cannery
facilities. While these plans will require the investment of financial
resources, the Company believes it is realistic and practical to offset these
costs through increased production volume, improved product quality, better cost
management, broader market penetration and growing revenue streams. Drawing on
its marketplace experience and knowledge, the Company has factored these
economic variables into the sales and earnings projections for its future
tuna-processing operations.
The Company has surrounded itself with a group of experts in the areas
of fishing, harvesting, processing and distribution. All assumptions used in
developing the financial model were derived after extensive consultation with
these experts and project consultants who advise Seabourne Ventures, Inc.
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.
The Company is continuing its efforts to finalize an initial $15
million debt financing. It was anticipated this financing would be completed in
the 2nd calendar quarter of 1999. The
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Company's expectation for this timing was based on the progress of its
negotiations with a prospective lender. These negotiations have been terminated,
and no funding was secured. The Company continues to seek funding from other
sources none of which are identified at this time.
The Company agreed with the L'Agence Autonome d'Assistance Integree aux
Entreprises (AAAIE), an agency of Guinean government operating directly under
the Ministry of Private Sector, Commerce & Industry, that the Company would
attempt to raise up to $400 million through the sale of letter-of-credit backed
commercial paper. The Company informed AAAIE that it would be difficult for the
Company's customers to bear the full risk of issuing SLOC's to fund projects in
a third-world country and that the government might be called upon to provide
the following credit enhancement facilities in addition to the land grant:
(1) A sovereign guarantee of the Government of the Republic of Guinea
issued by the Ministry of Finance for the portion of the funding
involving capital assets and infrastructure development in Guinea.
(2) Facilitation of the hypothecation of the land owned by the Company
so as to enhance the credit support structure.
The Company has approached the Ministry of Finance to obtain these
credit enhancements. AAAIE asked to be indemnified from any and all claims that
might result from a default on any debt. The Company agreed to AAAIE's request
and issued the indemnification.
The $400 million financing requires a substantial cash expenditure for
closing costs, attorneys fees, escrow fees and other related expenses. The
Company's intent was to allocate a portion of the $15 million financing for
these expenses. The termination of the negotiations on the $15 million financing
prevented the Company from closing on the $400 million financing. Given the
ensuing changes in strategic priorities and the likely availability of less
costly financing options, it is not likely that the Company will close on the
$400 million financing within the next 12 months. If the financing is obtained,
the Company will confer with the government of the Republic of Guinea and review
the previous discussions of mutual interests as represented by the Project
Development Agreements and the Indemnity Agreement.
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 third fiscal quarter, 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.
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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
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 3. DESCRIPTION OF PROPERTY
The Company's offices are located in the Western Family Foods Building
at 6700 S. W. Sandburg Street., Tigard, Oregon 97223. Our space within this
36,000 square foot corporate environment is secured on a month-to-month lease at
a rate of $1,000 per month, and we have full access to all on-site facilities.
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 office space is suitable for its intended
purpose. The Company's offices are adequately covered by insurance.
We also own approximately 35,000 acres of coastal land in the Guinea
which is located on the west coast of Africa. We intend to use that land and its
buildings and other improvements to develop and operate a tuna processing plant,
a shrimp farm and tropical fruit plantations.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table describes the current ownership of the Company's outstanding
Common Stock as of July 31, 1998 by (a) each of our officers and directors, (b)
each person who is known by us to own more than 5% of the Company's outstanding
Common Stock and (c) all of our officers and directors as a group:
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Common Stock Alain de la Motte 2,642,708 18.0%
6700 SW Sandburg St.
Tigard, OR 97223
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Common Stock Brian Bittke (i) 583,020 3.6%
6700 SW Sandburg St.
Tigard, OR 97223
Common Stock James McKenzie 595,000 3.6%
9615 SW Allen Blvd.
Portland, OR 97005
Common Stock Hugh Latif 38,000 *
135 Park Ave.
Toronto, Ontario, Canada
Common Stock Alan Resnik 75,000 *
1016 SW Davenport St.
Portland, OR 97201
Common Stock Harald Kvalo 1,623,200 10.0%
2334 West Plymouth St.
Seattle, WA 98119
Common Stock International Trade Group, LLC (ii) 1,987,368 12.0%
6700 SW Sandburg St.
Tigard, OR 97223
Common Stock ITG Finance, LLC (iii) 2,000,000 12.0%
6700 SW Sandburg St.
Tigard, OR 97223
All officers and Directors as a group (5 persons) 3,933,728 24.5%
- ------------------------------------
* refers to less than one percent
(i) Brian Bittke resigned as a director in April 1999. Ransom
Southerland, the President of ClipperNet, became a director of the Company in
October 1998. Mr. Southerland owns 317,550 shares (2.0%) of the Company's common
stock.
(ii) International Trade Group, LLC is an Oregon limited liability
company organized in March 1994. Alain de la Motte is a member of this limited
liability company and directly and indirectly owns an 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, of which Mr. Alain de la Motte is a managing member.
International Trade Group, LLC owns an 80% interest in ITG Finance, LLC.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This table describes our directors and executive officers, as of July
31, 1998:
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Name Age Title
Alain de la Motte 49 President, Chief Executive Officer and Chairman
Brian Bittke 60 Executive Vice President and Director
James McKenzie 55 Secretary and Director
Hugh Latif 46 Director
Alan J. Resnik 53 Director
Alain 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.
Brian E. Bittke has been Executive Vice President and a Director of the
Company from its inception. Since December 1993, Mr. Bittke has been Executive
Vice President of Sales and Marketing for ITG. Before joining ITG, Mr. Bittke
was President and Chief Operating Officer for Continental Companies, a
private-label frozen food procurement company. He was also Executive Vice
President of Western Family Foods and President of Shurfine Central Corporation.
Mr. Bittke was educated at the University of Southern California in marketing.
James 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.
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,
and 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 to1996, 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.
Directors serve in their positions until the next annual meeting of
stockholders or until the directors' successors have been elected and qualified.
Our executive officers are appointed by our Board of Directors and serve at the
discretion of the Board.
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ITEM 6. EXECUTIVE COMPENSATION
The Company has not paid any compensation to its 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
compensation when it determines that its financial condition is such that it can
pay such salaries and compensation.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 1997, our wholly-owned subsidiary, Seabourne purchased
certain assets from ITG for $1,765,000. These assets consisted of certain office
equipment, accounts receivable and cash. Seabourne also assumed the obligation
on two leases for solid pack tuna canning machines which ITG was leasing from an
unrelated party. Seabourne gave ITG a subordinated unsecured convertible
promissory note for $1,765,000 as payment for the assets. The note was payable
on December 31, 1998. The entire outstanding balance of the note was converted
into Series A Convertible Preferred Stock of the Company during the 1st quarter
of fiscal 1999.
On July 1, 1997, ITG Finance, a subsidiary of ITG, loaned $ 2,500,000
to Seabourne for working capital purposes. Seabourne gave ITG Finance a
subordinated unsecured convertible promissory note for the amount of the loan.
The note is payable on December 31, 1998. A portion of the outstanding balance
of the note has been converted into Series A Convertible Preferred Stock during
the 1st quarter of fiscal 1999.
On July 15, 1998, ITG loaned $9,000 to Clipper Cubed. The obligation
was assumed by the Company as part of the Asset Acquisition Agreement and Plan
of Reorganization with Clipper Cubed. The obligation was subsequently assumed by
ClipperNet as part of its capitalization. This obligation is payable on July 15,
1999.
During our fiscal year ending July 31, 1998, Seabourne sold processed
tuna and tuna-related products to ITG in the amount of $ 5,378,691.
During our fiscal year ended July 31, 1998, total executive
compensation of $261,470 was paid by ITG on behalf of the Company and recorded
as expense at fair market value. This compensation has been recognized in the
Company's financial statements as administrative and consulting fees paid to
ITG. All expenses related to other services provided by ITG have been recorded
at fair value in the Company's financial statements.
On January 25, 1999, the Company entered into a Technology and
Trademark License Agreement with Alain de la Motte regarding the Project
Harvest(R) software technology and associated trademarks. The Company obtained a
20 year exclusive, world-wide license to make and use the software for the food
products industry. Under the Agreement, the Company has agreed to pay Mr. de la
Motte a one-time lump sum license fee of $200,000 upon the occurrence of certain
funding events and a royalty payment of 7.5% of the gross profit margin that the
Company realizes from the commercial use of the software technology.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
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We are 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, 1998, we have
16,084,643 shares of Class A Common Stock issued and outstanding. There are no
shares of Class B Common Stock 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 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. Our stockholders
have no preemptive rights to acquire additional shares of Common Stock or any
other securities. Our Common Stock is not subject to redemption and carries no
rights to purchase other securities of the Company. Our Common Stock is
non-assessable.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been thinly traded in the over-the-counter market
and prices for the Common Stock are published on the OTC Bulletin Board under
the symbol "IFGR". This market is extremely limited and the prices for our
Common Stock quoted by brokers is not a reliable indication of the value of the
Common Stock. The following is the range of high and low bid prices for our
Common Stock since trading began in January 1998.
Quarter Ending High Low
April 30, 1998 $ 2.00 $ 2.00
July 31, 1998 $ 3.00 $ 1.125
These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual purchases and sales by
investors.
We have never paid cash dividends on our Common Stock; however, we may
pay dividends in the future if our earnings justify it.
There are approximately 4,100 shareholders of the Company's common
stock.
ITEM 2. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company's original auditor was J. Paul Kenote, PC, Portland,
Oregon. It was decided by the Directors that the Company's changing business
operations and growth expectations would best be supported if the Company were
to engage an auditor with the experience and global representation to consult on
a broad range of financial matters. At its meeting on December 12, 1997, the
Board of Directors approved a resolution dismissing J.
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<PAGE>
Paul Kenote PC and engaging Moss Adams, LLP, Portland, Oregon as the Company's
new auditor.
Neither of J. Paul Kenote PC's reports on the financial statements from
the previous two fiscal years contained an adverse opinion or disclaimer of
opinion or was modified as to uncertainty, audit scope or accounting principles.
Moreover, there were no disagreements between Kenote and the Company during this
period on any matter of accounting principle or practice, financial statement
disclosure or auditing scope or procedure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In January 1999, ITG and ITG Finance converted their promissory notes
from the Company in the principal amounts of $1,765,000 and $2,285,000
respectively into 4,050,000 shares of the Company's Series A Convertible
Preferred Stock. ITG will be issued 1,765,000 shares of Series A Convertible
Preferred Stock, and ITG Finance will be issued 2,285,000. This transaction was
exempt from registration under the Securities Act of 1933 by virtue of Section
4(2) thereof. ITG and ITG Finance are sophisticated investors. The nature of
access to corporate information was based on the existence of common controlling
interests.
In November 1998, we issued 20,000 shares of our Class A Common Stock
to the sellers of Netbridge in connection with the acquisition of that company.
We relied on the exemption from registration at Section 4(2) of the Securities
Act of 1933. The sellers of Netbridge are considered sophisticated investors as
a result of their representation by legal counsel in connection with this
transaction. The nature of access to corporate information was based on the
seller's due diligence examination of the business and financial condition of
the Company.
On July 31, 1998, we issued 1,183,432 shares of our Class A Common
Stock to Clipper Cubed under the terms of the Asset Acquisition Agreement and
Plan of Reorganization. We relied on the exemption from registration at Section
4(2) of the Securities Act of 1933 for non-public offerings. The selling
shareholders of Clipper Cubed were deemed to be sophisticated by virtue of their
representation by legal counsel through the negotiation of the acquisition. The
nature of access to corporate information was based on the selling shareholders'
due diligence examination of the business and financial condition of the
Company.
Effective June 3, 1998, we issued 11,736 shares of our Class A Common
Stock to two preferred shareholders upon the conversion of 5,868 shares of
Series A Convertible Preferred Stock.
In January 1998, we issued 30,000 shares of our Class A Common Stock to
Grady & Hatch and Company, Inc. as compensation for services rendered under a
Consulting Agreement dated August 4, 1997 under which Grady & Hatch and Company,
Inc. facilitated introductions between the Company and potential lenders. We
relied upon the exemption from registration at Section 4(2) of the Securities
Act of 1933. Grady & Hatch and Company, Inc. are considered accredited investors
by virtue of their status as a broker-dealer registered under the Securities
Exchange Act of 1934.
Effective September 29, 1997, we issued 10,523,620 shares of our Class
A Common Stock to the shareholders of Seabourne under the terms of the Share
Exchange Agreement. We relied on the exemption from registration at Section 4(2)
of the Securities Act of 1933 for
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<PAGE>
non-public offerings. The shareholders of Seabourne were considered
sophisticated by virtue of their position as either employees of the Company or
directors and officers of the Company. Access to corporate information was based
on their affiliation with the Company.
On September 15, 1996, under our previous name of Cyberwin, Inc., we
sold 4,000,000 shares of our Class A common stock to five purchasers for
$50,000. The offering was conducted under Regulation D Rule 504 of the
Securities Act of 1933.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company is permitted under the Nevada Revised Statutes to indemnify
any person named as a party to a legal proceeding because they are, or were, a
director, officer, employee or agent of the Company. The indemnification covers
expenses, judgments, fines and amounts paid by the director, officer, employee
or agent in any settlement of the legal proceeding if they acted in good faith
and in a manner which they reasonably believed to be in the best interest of the
Company and they had no reason to believe their conduct was unlawful.
The Company is required to indemnify a director, officer, employee or
agent of the Company who is successful in the defense of any legal proceeding in
which they are named as a party because they are, or were a director, officer,
employee or agent of the Company. The indemnification covers expenses incurred
by them in connection with the defense.
The Company's Articles of Incorporation eliminate the personal
liability of our directors, officers and stockholders for damages for breach of
fiduciary duty. However, the liability of a director or officer is not
eliminated for (a) actions or inactions which involve intentional misconduct,
fraud or a knowing violation of law, or for (b) the payment of distributions to
stockholders in violation of the applicable Nevada law.
The Company may make arrangements to pay the expenses of officers and
directors which are incurred in defending a civil or criminal proceeding, either
as the expenses are incurred and in advance of the final outcome of the legal
proceeding. If the Company pays these expenses, the director or officer must
agree to repay the amount if it is determined by the court that they are not
entitled to be indemnified by the Company.
Nevada law also permits the Company to buy and maintain liability
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of the Company to cover any liability
asserted against them and liability and expenses incurred by them in their
capacity as a director, officer, employee or agent, whether or not the Company
has the authority to indemnify them against such liability and expenses.
PART F/S
Attached hereto are the following financial statements:
(1) Revised Independent Auditor's Report of Moss Adams LLP.*
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(2) Balance Sheet, Statement of Operations and Accumulated Deficit
Statement of Changes in Shareholders' Equity, Statement of Cash Flows, and Notes
to Consolidated Financial Statements for Integrated Food Resources, Inc. for the
year ended July 31, 1998.*
(3) Unaudited Consolidated Balance Sheet and Consolidated Income
Statement for the Three Months ended October 31, 1998.**
(4) Unaudited Statement of Cash Flows for the Nine Months ended April
30, 1999.*
* Filed with this Amendment No. 4
** Previously filed with the Securities and Exchange Commission
PART III
ITEM 1 Index to Exhibits
Exhibit
Number Description
3.1 Articles of Incorporation of Integrated Food Resources, Inc. and
Amendments thereto.**
3.2 Articles of Incorporation of Seabourne Ventures, Inc.**
3.3 Articles of Incorporation of ClipperNet Corporation.**
3.4 Bylaws of Integrated Food Resources, Inc.**
3.5 Bylaws of Seabourne Ventures, Inc.**
3.6 Bylaws of ClipperNet Corporation.**
4.0 Specimen Stock Certificate of Integrated Food Resources, Inc.**
10.1 Toll Packing Agreement dated September 5, 1996 between
Agroindustrias Rowen S.A. de C.V. and International Trade Group,
LLC.**
10.2 Asset Acquisition Agreement dated July 1,1997 between International
Trade Group, LLC and Seabourne Ventures, Inc.**
10.3 Share Exchange Agreement dated September 29, 1997 between Pixieland
Corporation and Seabourne Ventures, Inc.**
10.4 Project Development Agreements each dated April 15, 1998 between
Integrated Food Resources, Inc. and L'Agence Autonome
d'Assistance Integree aux Enterprises, an official agency of the
Republic of Guinea.**
10.5 Certificate of Ownership dated July 25, 1998 from the Republic of
Guinea, Department of Promotion of the Private Sector and of
Commerce and Industry.**
10.6 Asset Acquisition Agreement and Plan of Reorganization dated July
31, 1998 between Integrated Food Resources, Inc. and Clipper
Cubed Corporation.**
21
<PAGE>
10.7 Asset Purchase Agreement and Security Agreement dated November 6,
1998 between ClipperNet Corporation and Netbridge Internet Access
Services.**
10.8 Technology and Trademark License Agreement dated January 25, 1999
between Alain de la Motte and Integrated Food Resources, Inc.**
16 Letter from J. Paul Kenote, CPA, P.C.**
21 Subsidiaries of Integrated Food Resources, Inc.**
27 Financial Data Schedule.**
* Filed with this Amendment No. 4
** Previously filed with the Securities and Exchange Commission
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Amendment No. 3 to be signed on its behalf by the
undersigned, thereunto duly authorized.
Integrated Food Resources, Inc.
Date: October 22, 1999 By /s/ Alain L. de la Motte
------------------------
Alain L. de la Motte
Chairman and Chief Executive Officer
22
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet 3
Statement of operations and accumulated deficit 4
Statement of changes in stockholders' equity 5
Statement of cash flows 6
Notes to consolidated financial statements 7 - 17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Integrated Food Resources, Inc.
We have audited the accompanying consolidated balance sheet of Integrated Food
Resources, Inc., as of July 31, 1998, and the related consolidated statements of
operations and accumulated deficit, changes in stockholders' equity, and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/MOSS ADAMS LLP
MOSS ADAMS LLP
Portland, Oregon
October 2, 1998
(except for Note 13 as to which
the date is January 18, 1999)
1
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 215,097
Receivables:
Trade 63,458
Related-party 520,324
Employees
8,421
Inventory 223,883
Prepaid expenses
9,782
------------
Total current assets 1,040,965
------------
PLANT AND EQUIPMENT
Tuna packing plant 918,617
Equipment 296,051
Accumulated depreciation (36,757
------------
1,177,911
------------
LAND HELD FOR FUTURE DEVELOPMENT 74,498,400
(74,498,400)
ADJUSTMENT FOR FOREIGN LAND GRANT ------------
Land held for future development, net of adjustment -
------------
GOODWILL 4,411,434
OTHER ASSETS 19,496
------------
$ 6,649,806
Total assets ============
2
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 254,657
Accrued liabilities 33,453
Related-party notes payable 4,261,500
Current portion of long-term debt 113,800
Current portion of capital lease obligation
6,425
------------
Total current liabilities 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 7 and 12)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 10,000,000 shares authorized,
799 issued and outstanding
1
Class A common stock, $.001 par value, 50,000,000 shares authorized,
16,084,643 issued and outstanding 16,079
Clas B common stock, $.001 par value, 50,000,000
shares authorized, none issued and outstanding
------------
Additional paid-in capital 4,054,084
Accumulated deficit (2,505,732)
------------
Total stockholders' equity 1,564,432
------------
Total liabilities and stockholders' equity $ 6,649,806
============
</TABLE>
See independent auditor's report and accompanying notes.
3
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
NET SALES $ 5,378,691
COST OF SALES 5,938,232
-----------
Gross loss (559,541)
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES
Administrative and consulting (1,118,832)
Other selling and general (415,678)
-----------
Operating loss (2,094,051)
-----------
OTHER EXPENSES
Depreciation and amortization (36,757)
Interest (321,030)
-----------
Total other expenses (357,787)
-----------
NET LOSS (2,451,838)
ACCUMULATED DEFICIT, beginning of year
(53,894)
-----------
ACCUMULATED DEFICIT, end of year $(2,505,732)
===========
Basic loss per share $ (0.15)
===========
Diluted loss per share $ (0.15)
===========
See independent auditor's report and accompanying notes.
4
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
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 6,667 $ 7 $ 65,791 $ (53,894) $ 16,240
Issuance of shares to
Seabourne Ventures, Inc.
10,523,620 10,524 -- -- (10,524 -- --
Issuance of common stock
for professional services
30,000 30 -- -- -- -- 30
Issuance of common stock
for acquisition of Clipper
Cubed Corporation
1,183,432 1,183 -- -- 39,988,817 -- 39,990,000
Conversion of preferred
stock to common stock
11,736 6 (5,868) (6) -- -- --
Net loss
-- -- -- -- -- (2,451,838) (2,451,838)
---------- ------- ------ ------ ------------ ------------ ------------
BALANCE, July 31, 1998 16,084,643 $16,079 799 $ 1 $ 40,044,084 $(2,505,732) $ 37,554,432
========== ======= ====== ====== ============ ============ ============
</TABLE>
See independent auditor's report and accompanying notes.
5
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
<S> <C>
Net loss $(2,451,838)
Adjustments to reconcile net loss to cash from operating activities:
Depreciation and amortization 36,757
Increase in:
Receivables (530,004)
Inventories (223,883)
Prepaid expenses (9,782)
Other assets 14,931
Accounts payable 216,062
Accrued liabilities 12,560
-----------
Net cash from operating activities (2,935,197)
-----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchase of equipment (187,348)
Tuna packing plant costs (918,617)
-----------
Net cash from investing activities (1,105,965)
-----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Issuance of common stock 30
Proceeds from long-term borrowings 799
Proceeds from related-party notes payable 5,059,500
Repayment of related-party notes payable (798,000)
Repayment of capital lease obligation (6,070)
-----------
Net cash from financing activities 4,256,259
-----------
NET INCREASE IN CASH 215,097
CASH, beginning of period -
-----------
CASH, end of period $ 215,097
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 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
===========
</TABLE>
See independent auditor's report and accompanying notes.
6
<PAGE>
INTEGRATED FOOD RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
JULY 31, 1998
- --------------------------------------------------------------------------------
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. It is engaged in
food processing for private label companies in the food service
industry through its wholly-owned subsidiary, Seabourne Ventures, Inc.
(Seabourne), and in providing wireless Internet access services through
its wholly-owned subsidiary, ClipperNet Corporation (ClipperNet).
Substantially all of Seabourne's operations for the year ended July 31,
1998, were derived from a tuna processing plant located in Ensenada,
Mexico (see Note 7). ClipperNet, based in Eugene, Oregon and acquired
by the Company in July 1998, has provided wireless Internet access
services since its inception in 1997 to customers located in Oregon's
Willamette Valley. All significant intercompany accounts and
transactions 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 and nonreporting public entity, 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.
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 (see Note 4). All
operations of the acquired business are currently provided through the
Company's wholly-owned subsidiary, ClipperNet Corporation.
Sales and accounts receivable - As of July 31, 1998, and for the year
then ended, one customer, International Trade Group, LLC (ITG, a
related-party as explained in Note 7), accounted for approximately 99%
of accounts receivable and 97% of sales. All products from sales to ITG
are shipped to retail food chains in the U.S. Sales are recorded when
product is shipped to third-party buyers from ITG.
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.
7
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
Plant and equipment - Plant and equipment are stated at cost.
Depreciation on 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 has been recorded
as an offset to the land value consistent with International Accounting
Standard No. 20. The adjustment balance will be recognized in the
consolidated financial statements as income over future periods in
proportion to depreciation expense recognized for assets acquired or
constructed for use in conjunction with the land received by grant.
Goodwill - Goodwill is amortized by the straight-line method over a
15-year period. Management periodically reviews goodwill for impairment
and, if appropriate, will adjust the carrying value of goodwill based
upon their assessment.
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 1998
diluted earnings per share calculation.
Cash and cash equivalents - Cash and cash equivalents consist of
short-term, highly liquid investments with maturities of 90 days or
less.
8
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
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 1998 and October 1998,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and Statement of Financial Accounting
Standards No. 134 "Accounting for Mortgaged-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," respectively. Both statements, when they become
effective, are expected to have no effect on the consolidated financial
statements of the Company.
NOTE 2 - INVENTORIES
Inventories consisted of the following at July 31, 1998:
Finished goods $ 115,925
Raw material 860
Packaging material 107,098
------------
$ 223,883
============
NOTE 3 - LONG-TERM LIABILITIES
Long-term debt consisted of the following at July 31, 1998:
<TABLE>
<S> <C>
Unsecured note payable to International Trade Group, LLC, a
related-party, payable in full including interest of 10%,
on December 31, 1998 $ 1,765,000
9
<PAGE>
NOTE 3 - LONG-TERM LIABILITIES - (continued)
Unsecured note payable to ITG Finance, LLC, a related-party,
payable in full including interest at 10.5%, on December
31, 1998 $ 2,487,500
Note payable to Pacific Continental Bank, secured by inventory,
chattle paper, accounts, equipment, and general
intangibles, payable in full including interest of 11% per
annum, on September 16, 1998 100,000
Unsecured note payable to Business Systems Group, payable in
monthly installments of $1,500, including interest at 8%
amortizing over 30 years, payable on July 28, 2008 350,000
Unsecurednote payable to International Trade Group, LLC, a
related-party, payable in full including interest of 6% per
annum, on July 15, 1999 9,000
Other unsecured notes of which $13,800 is payable on October 7,
1998, including interest at 8% and $57,707 is payable in
full on December 8, 2002, including interest at 8% 71,307
-----------
4,782,807
Less current portion $ 4,375,300
-----------
Long-term debt, net of current portion $ 407,507
===========
The aggregate maturities of long-term debt are as follows:
YEARS ENDING JULY 31,
1999 $ 4,375,300
2000 -
2001 -
2002 57,507
Thereafter 350,000
-----------
$ 4,782,807
===========
</TABLE>
10
<PAGE>
NOTE 4 - ACQUISITION 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 comprised of 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 recognition of goodwill which will be
amortized to expense over 15 years unless earlier adjusted for
impairment consistent with the Company's accounting policies (see Note
1). The assets purchased and liabilities assumed are 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 income statement does not include the results of
operations of ClipperNet as the results of its operations 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)
===========
11
<PAGE>
NOTE 5 - 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
$830,000 for both federal and state income tax purposes will expire 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, 1998, since it is uncertain
if the Company will be able to utilize loss carryforwards and other
deferred tax assets in future periods.
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, 1998,
consisted of the following;
Deferred tax assets
Net operating loss carryforward $ 830,000
Valuation allowance (830,000)
----------------
Net long-term deferred tax asset $ -
================
NOTE 6 - 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 shareholders enjoy liquidation preferences superior to
existing common shareholders and have rights to convert their holdings
into common stock. Preferred shares may be voluntarily exchanged for
common stock at a current rate of $2 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 shareholder interests to
that of common shareholder interests based on the exchange ratio.
NOTE 7 - RELATED-PARTY TRANSACTIONS
International Trade Group, LLC (ITG), a corporation controlled by the
Company's Chairman and Chief Executive, purchases substantially all of
the Company's tuna production for resale to its alliance of large U.S.
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, 1998, and for the year then ended, the Company had the
following transactions with ITG and ITG Finance, LLC, which are related
parties:
<TABLE>
<S> <C>
Net sales to International Trade Group, LLC $ 5,378,691
Administrative expenses paid to International Trade Group, LLC $ 295,895
Accounts receivable due from International Trade Group, LLC $ 520,324
Notes payable (see Note 3) $ 4,261,500
</TABLE>
12
<PAGE>
NOTE 7 - RELATED-PARTY TRANSACTIONS - (continued)
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
supports 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 an 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 equpment 927,383
Prepaid expenses
43,442
----------
$1,765,000
==========
NOTE 8 - LEASE AND LEASE COMMITMENTS
The Company rents certain office facilities and vehicles under
operating leases. The Company also assumed a capital lease for
equipment with the acquisition of ClipperNet Cubed Corporation. Minimum
lease payments for all noncancellable operating leases and the capital
lease for the following five years, are as follows:
13
<PAGE>
NOTE 8 - LEASE AND LEASE COMMITMENTS - (continued)
<TABLE>
CAPITAL OPERATING
YEARS ENDING JULY 31, LEASE LEASES
---------- ----------
<S> <C> <C> <C>
1999 $ 9,123 $ 95,411
2000
9,123 95,411
2001
2,281 81,736
2002
- 17,299
---------- ---------
Total minimum lease payments 20,527 $ 289,857
=========
Less amount representing interest 6,070
----------
Present value of minimum lease payments 14,457
Less current obligation
6,425
----------
Long-term obligation $ 8,032
==========
</TABLE>
Total rental expense incurred on all operating leases for the year
ended July 31, 1998, was $33,637.
NOTE 9 - PURCHASE OF MEXICAN TUNA PACKING PLANT
The Company's subsidiary, Seabourne, has entered into an agreement
that, if fulfilled, will result in the purchase of the outstanding
stock of Agroindustrias Rowen S.A. (Rowen), a Company that operates a
tuna processing facility in Ensenada, Mexico. Management believes the
tuna processing facility, which is currently in bankruptcy, may be
acquired in late 1998 or 1999 if conditions of bankruptcy and terms of
the purchase agreement are completed.
To complete the acquisition, which is dependent in part on settlement
of Rowen's outstanding debts of approximately $8.5 million, the Company
has entered into a Consulting Agreement with Alvaro Romero Wendlandt
(Wendlandt), former owner and shareholder in Rowen. Pursuant to the
Consulting Agreement, the Company has 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 will pay Rowen's creditors up to $4
million in cash and a fee to Wendlandt of up to $3 million in Company
stock. In the event Wendlandt negotiates settlement with Rowen
creditors for less than $4 million, his fee
14
<PAGE>
NOTE 9 - PURCHASE OF MEXICAN TUNA PACKING PLANT - (continued)
will be increased by the amount of the difference. Conversely, in the
event Wendlandt negotiates settlement for an amount greater than $4
million, but less than $7 million, his fee in Company stock will be
reduced by the difference. The Company will fund the tuna facility
acquisition, if completed, through the issuance of additional debt or
sale of its stock.
During the year ended July 31, 1998, Rowen processed and packed all of
the Company's tuna production pursuant to a Toll Packing Agreement and
the Company invested $918,617 in plant equipment. The Company's ability
to acquire the Mexican tuna packing plant currently in bankruptcy is
dependent upon both settlement of existing creditor claims and its
obtaining sufficient debt financing or additional shareholder capital
to meet settlement obligations. Should the Company or its agent be
unsuccessful in either of these endeavors, the Company's ability to
continue to process and pack tuna production through the existing
Mexican facility as well as to realize the benefits of currently
capitalized assets is uncertain.
Management believes that if the acquisition of the Rowen plant is
completed, no significant additional costs will be required for plant
improvements, equipment purchases, or other items to continue
operations. The Company's only substantive commitments to the Republic
in exchange for the land grant are to (1) use the land for agricultural
or aquacultural and (2) use its best efforts to create jobs and market
the products using the Company's distribution network.
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.
15
<PAGE>
NOTE 10 - ACQUISITION OF LAND IN THE REPUBLIC OF GUINEA - (continued)
The Company intends to establish farming projects on the property
during 1999 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 fulfill its development
commitments, 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, 1998.
NOTE 11- BUSINESS SEGMENTS
The Company operates 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 provides wireless
Internet access services to customers domestically. The following table
discloses these business segments.
INTERNET
SEAFOOD ACCESS
PROCESSING SERVICES CONSOLIDATED
-------------- ------------ --------------
Operating income $ (2,451,808) $ - $ (2,451,808)
Identifiable assets $ 80,609,118 $ 539,088 $ 81,148,206
Capital expenditures $ 997,262 $ 108,703 $ 1,105,965
Depreciation $ 36,757 $ - $ 36,757
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NOTE 12 - LIQUIDITY AND FUTURE OPERATIONS
As of July 31, 1998, the Company had current liabilities in excess of
current assets in the amount of $3,628,870, primarily as the result of
operating losses incurred during the year ended July 31, 1998, and
requirement to fund long-term capital expenditures. However, the
Company has reached agreements with its primary related-party creditors
(see Notes 3 and 7) to defer, if necessary, demand for repayment until
at least August 1999, while the Company seeks other financing sources.
At July 31, 1998, the Company did not have any commitments from third
parties to provide significant short-term or long-term funding.
Management believes the fiscal 1998 operating loss was primarily
attributable to the start-up of operations and unusual weather patterns
which affected the worldwide volume of tuna processed and created
adverse price conditions.
Management believes most conditions that required the use of cash in
fiscal 1998 have been modified for 1999 and that completion of the
acquisition of the plant in Mexico and commencement of operations in
the Republic of Guinea have the ability to create positive cash flow in
future periods and to assist in the Company obtaining the necessary
short-term and long-term funding for future operations. However, a
detailed operating plan has not yet been developed for the Republic of
Guinea operations; there remain uncertainties regarding the acquisition
of the Mexico plant; and, there is no assurance that the Company will
obtain necessary short-term or long-term financing, although subsequent
to July 31, 1998, financing alternatives were under review by several
financial institutions.
NOTE 13 - SUBSEQUENT EVENT: CONVERSION OF RELATED-PARTY NOTES
PAYABLE TO PREFERRED STOCK
Subsequent to July 3, 1998, the Company converted $4,050,000 of
related-party notes payable to International Trade Group LLC and ITG
Finance, LLC into 4,050,000 shares of the Company's Series A
convertible preferred stock. The Company's Series A 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 shares for the purpose of
voting; to conversion privileges at one common shares for each
preferred share, and to distribution preferences in the event of
dissolution or liquidation of the Company.
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CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
FOR THE 9 MONTH PERIOD ENDING APRIL 30, 1999
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net Loss $(1,161,302)
Adjustments to reconcile net loss to cash from operating activities
Depreciation and Amortization $ 374,568
Increase/Decrease in:
Receivables $ 437,980
Note Receivable $ (7,500)
Inventories $ 84,548
Prepaid Expenses $ (114,215)
Accounts Payable $ 45,489
Accrued Liabilities $ (33,453)
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Net Cash from Operating Activities $ 787,417
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchase of Equipment $ (157,813)
Tuna Packing Plant Costs $ (118)
Other Assets $ 3,255
Goodwill $ (179,601)
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Net Cash from Investing Activities $ (334,277)
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Repayment of Related Party Notes Payable $(3,840,706)
Repayment of Third Party Notes Payable $ (110,203)
Proceeds from Long Term Capital Lease $ 10,974
Proceeds from Long Term Notes Payable - Third Party $ 220,723
Proceeds from Long Term Notes Payable - Stockholder $ 98,240
Issuance of Preferred Stock $ 4,050
Issuance of Common Stock $ 100
Additional Paid in Capital-Preferred $ 4,137,382
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Net Cash from Financing Activities $ 520,560
Net Increase (Decrease) in Cash $ (187,602)
CASH, BEGINNING OF PERIOD $ 215,097
CASH, END OF PERIOD $ 27,495
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