<PAGE>
As filed with the Securities and Exchange Commission on June 31, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ending February 28, 1998 Commission file number 333-40621
Southern Ventures, Inc.
(Exact name of registrant as specified in charter)
Nevada 87-0188822
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2036 Maron Spillway
Elmore, Alabama 36025 (702) 341-7211
------------------------ --------------
(Address of principal executive offices) (Registrant's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State Issuer's revenues for its most recent fiscal year $18,300
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1997 was not determinable since the Common Stock was
not traded.
The number of shares outstanding of the issuer's classes of Common Stock as of
March 31, 1997:
Common Stock, $.001 Par Value - 18,937,400 shares
Preferred Stock, $.001 Par Value - 10,000,000 shares
Documents Incorporated by Reference: None
Transitional small business disclosure format (check one): Yes [ ] No [X]
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Southern Ventures, Inc. (USA) ("the Company") started operation on January 1,
1997. On January 1, 1997 the Company acquired from Mr. Bobby Harvey and Mr.
Gordon Tucker certain assets in the amount of $439,860.37 with an unsecured at
an interest rate of 8%. These assets are comprised of equipment, royalty
contracts and rights to the continued development of the charcoal briquette and
starch and gluten projects.
The Company was incorporated in the state of Nevada on February 7, 1997.
On October 22, 1997 the Company acquired from Mr. Bobby Harvey 100% ownership of
Elmore Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. (collectively
"Elmore") in exchange for ten million (10,000,000) shares of the Company's
voting preferred stock. As a result of this transaction, Mr. Bobby Harvey was
elected Chairman of the Board of Directors and CEO of the Company.
Prior to the incorporation of the Company, Southern Ventures, Inc. (Canada) was
incorporated in Alberta, Canada on September 9, 1996 for the purpose of
negotiating with ADM Agri-Industries, Ltd.,("ADM") regarding the purchase of the
wheat starch and gluten plant in Thunder Bay, Ontario.
Executive Summary for the Company.
The Company's principal objective is to establish a highly profitable
manufacturing base in North America by modernizing specific business facilities
in declining industries and controlling raw material supplies. New technologies
will replace obsolete manufacturing techniques and substantially reduce
production costs. Control over raw material supplies will ensure the Company's
corporate stability, production efficiency and long term growth potential.
The Company is organized to focus on rebuilding the charcoal briquette industry
and improving operations in the grain processing and mineral mining industries.
Figure 1 shows the current organizational structure of the Company.
Southern Ventures, Inc. (USA)
"The Company"
V V
V V
Elmore Sand & Gravel, Inc. and V
Tuskegee Sand & Gravel, Inc. V
"Elmore" V
Southern Ventures, Inc. (Canada)
V V
V V
Riverside Grain Products, Inc. Riverside Carbon Products, Inc.
"Riverside Grain" "Riverside Carbon"
Figure 1
The Subsidiary Structure of the Company
Elmore is the foundation supporting the Company's ambitious plan to establish a
strong manufacturing presence in North America. Elmore operates a silica sand
and gravel mine in Elmore County, Alabama and is currently the only Company
subsidiary generating revenues. The Company recently expanded Elmore's
operations by installing a state-of-the-art silica processing plant. The new
plant uses Company designed improvements for material handling to generate 2.5
times more silica sand and gravel than the old plant without significantly
increasing labor or power costs. See "Business of the Company - Elmore Sand &
Gravel, Inc."
Southern Ventures, Inc. (Canada), a wholly owned subsidiary of the Company, is
the central holding company for all Canadian operations. As such, it is the
parent company of Riverside Grain Products, Inc. and Riverside Carbon Products,
Inc.
2
<PAGE>
Riverside Grain Products, Inc. ("Riverside Grain") was established to directly
control the production of starch, a key raw material for the charcoal briquette
project. Riverside Grain recently purchased the wheat starch and gluten plant
in Thunder Bay, Ontario (the "Starch and Gluten Plant") from ADM Agri-
Industries, Ltd. The Starch and Gluten Plant became available for purchase
because ADM had decided to internally consolidate its operations and close the
plant in August 1996. Once reopened by the Company, the Starch and Gluten Plant
will provide substantial earnings by processing wheat flour into gluten for the
food industry, high-value starch for the paper industry, modified starch for the
gypsum wallboard industry and binder starch for the manufacture of charcoal
briquettes. See "Business of the Company - Riverside Grain Products, Inc." The
Company will install new equipment at the Starch and Gluten Plant before
reopening the plant. See "Business of the Company - Capital Requirements."
Riverside Grain is presently negotiating the purchase of a flourmill that may
provide wheat flour for the Starch and Gluten plant in addition to semolina for
the pasta industry. See "Business of the Company - Other Projects under
Development."
Riverside Carbon Products, Inc. ("Riverside Carbon") was established to directly
control the production of wood char, another key raw material for the charcoal
briquette project. Riverside Carbon will use technology designed and tested by
the Company that simplifies the construction and operation of furnaces which
produce char from wood waste at low cost and with improved flexibility of
product output. The new furnaces operate more efficiently and generate less
pollution than the outdated equipment currently used in the charring industry.
Residues from the wood processing industry will be used as raw material for
charcoal briquette manufacturing. The Company believes it can obtain long-term
commitments from major sawmills to receive this material at no cost and has
completed the acquisition of environmental permits required to construct and
operate charring plants in British Columbia, Canada. The Company intends to
install new plants sufficient to dominate the charcoal briquette market in North
America.
The Company will modernize the charcoal briquette industry and generate greatly
improved profits by installing new technology and controlling all raw materials
used in the manufacture of products. The planned vertical integration of the
charcoal briquette project is shown below in Figure 2. Developing the projects
indicated will give the Company control over wood char and starch, the raw
materials vital to manufacturing charcoal briquettes.
Timber Wheat
V V
V V
Lumber <---- Sawmill Operation Flourmill ---> Semolina
(Riverside Carbon Products) (Riverside Grain Products)
V V
V Wood Waste Flour V
V V
Power <---- Charring Plants Starch Gluten Plant--> Gluten
V V "A" Starch
V Char "B" Starch V
V ---------------><--------------- V
V
Briquette Plant
(Riverside Carbon Products)
V
V
Charcoal Briquettes
Figure 2
The Vertical Integration of Charcoal Briquette Manufacture
Company management has the skills and vision required to achieve the principal
objective of establishing a strong manufacturing base in North America. By
applying new technology and vertical integration, the Company will maximize
profitability in the starch and gluten and charcoal briquette industries.
Product market dominance will be attained through competitive pricing and
aggressive marketing.
3
<PAGE>
Capital Requirements
In addition to the proceeds of this Offering, the Company plans to raise
$23,000,000 over the next two years through financing received from private
lending institutions. Riverside Carbon will require approximately $14,000,000
for the installation of a charring and briquetting plant and working capital.
Riverside Grain will require approximately $1,500,000 for the installation of
new equipment at the Starch and Gluten plant and approximately $7,500,000 to
move the Starch and Gluten plant to a new facility in 1999. See "Business of
the Company - Riverside Grain Products Inc."
Elmore Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. ("Elmore")
Status: Elmore is the Company's mining subsidiary that produces high-grade
silica gravel and sand from ancient alluvial deposits in Elmore
County, Alabama. In October 1997, the Company completed
construction of a new processing plant. The new plant is fully
operational and the old plant being retired.
Production: Current production capacity is 600 tons of silica sand and gravel
per hour.
Acquisition: The silica mining operation was acquired by the issuance of 10
million preferred shares of the Company's stock with a call
provision at $0.50 per share. All 10 million shares were issued
to Mr. Bobby Harvey on October 22, 1997. These shares entitle Mr.
Harvey 80% of the new income earned by Elmore. By retiring the
preferred shares through the Company's current IPO, will generate
additional pretax profit to the holders of Common Shares.
Tuskegee Sand & Gravel, Inc. was incorporated in the state of Alabama in 1974.
Prior to acquisition by the Company, Tuskegee Sand & Gravel, Inc. was solely
owned by Mr. Bobby Harvey. In 1992, Mr. Harvey acquired Elmore Sand & Gravel,
Inc. from Alabama bankruptcy court and incorporated it in the state of Alabama.
From 1992 to 1994, production at the Tuskegee Sand & Gravel, Inc. facility was
gradually phased out and replaced by the Elmore Sand & Gravel, Inc. facility.
By the beginning of 1994, Tuskegee Sand & Gravel, Inc. had ceased mining
operations and the Elmore site was running at full production capacity.
Elmore is located in a region that has consistently produced high purity silica
sand and gravel. Elmore actively leases more than two thousand acres of private
and state lands that can provide high quality materials for at least another
twenty years at maximum production levels. An independent engineering study
conducted in October 1997 estimates reserves under the Company's current lease
to be approximately 38.55 million tons with a current average value of $6.50 per
ton.
The primary markets for Elmore's gravel are the ferrosilicon, decorative
landscaping and construction markets. Elmore produces over 110,000 tons
of silica for the ferrosilicon industry per year. Ferrosilicon is used in the
manufacture of steel.
Currently, Elmore sand is sold to the construction industry. Glass and ceramic
markets for high purity silica sand command better prices but involve higher
transportation costs. The Company is actively investigating these markets and
examining offers by potential purchasers.
To accommodate increased demand for silica gravel, the Company completed
Construction of a new plant designed to process 600 tons of gravel and sand per
hour. The Company has identified customers for all of the gravel output. To
facilitate the sale of additional sand production, the new plant features
classification methods that allow Elmore to sell sand into markets not currently
served. New screening systems produce sand sized in several categories
according to customer specifications.
By retiring the old plant, the Company realized some immediate advantages.
Overall production increased by decreasing maintenance downtime. In addition to
cost savings each year associated with maintenance, the new plant saves $150,000
per year in royalties paid to private landowners by being located on lands
leased from the State of Alabama.
Property under Lease
Elmore has long-term leases in place to generate products and provide itself a
financially secure future. The leased properties are located northwest of
Elmore on the west side of Highway 143 in the area surrounding and including
Speigner Lake in southern Alabama.
Twenty-five percent of the designated land is being leased from private
landowners. The Company will hold these leases until all silica sand and gravel
deposits have been removed and processed.
4
<PAGE>
The remaining fifteen hundred acres are under lease from the State of Alabama.
This state lease is for a twenty year period starting in 1985 and has five year
options for extensions that can be taken as needed.
Elmore has always exercised an excellent reclamation policy of restoring the
land to its original state by returning overburden and filling holes after
mining. Owners of adjacent properties containing significant deposits are
favorably inclined to lease their lands should the Company require additional
reserves in the long term.
Sand and Gravel Prices
The Company is researching the feasibility of significantly increasing overall
profits by selling sand into one of the markets listed in Table 1 instead of the
concrete industry at a rate of $2.50 per ton. Table 1 shows the quantity and
value of industrial sand and gravel sold or used by United States producers in
1995. The average value of all industrial sand sold in the South was $19.39 per
ton.
South US Total
Major Use Quantity1 Value2 Value per Quantity1 Value2 Value per
ton ton
Sand:
Glass 4,115 70,290 $17.08 10,690 174,200 $16.29
Foundry 1,050 13,000 $12.45 6,760 87,500 $12.94
Ground Silica 2,132 58,860 $27.61 4,212 115,200 $27.35
Filtration 162 2,840 $17.53 400 10,490 $26.23
Hydraulic Fracturing NA NA $30.84 1,580 53,000 $33.67
South US Total
Major Use Quantity1 Value2 Value per Quantity1 Value2 Value per
ton ton
Gravel:
Silicon, ferrosilicon NA NA $13.09 532 7,160 $13.45
Filtration NA NA $16.70 150 2,400 $16.01
Non metallurgical flux NA NA $18.77 590 8,450 $14.31
Other uses, specified 76 787 $10.36 607 3,910 $6.44
NA - Not available.
1 - Thousands of metric tons.
2 - Thousands of US dollars.
Source: US Geological Survey. Gordon P. Eaton, Director.
Table 1
Industrial Sand & Gravel Marketed in the United States in 1995, by Major End Use
Specifications
Silica sand that is mined and processed for industrial applications must conform
to the chemical and physical specifications set by customers. Table 2
summarizes the average minimum quantity of pure silica (SiO2) and maximum
allowable impurities (Al2O3, Fe2O3, TiO2) expressed in weight percent for each
silica market that Elmore may service.
Application SiO2 Al2O3 Fe2O3 TiO2 Sieve Size
Glass (Flat) 99.5% 0.30% 0.04% 0.10% 200 - 30 mesh
Glass (Container) 98.5% 0.50% 0.035% 0.03% 100 - 30 mesh
Foundry Sand 98.0% NA NA NA 100 - 30 mesh
Ground Silica 97.5% 0.38% 0.10% NA < 200 mesh
Filtration Sand 99.4% 0.19% 0.24% 0.12% 50 - 12 mesh
Ferrosilicon 98.0% 0.40% 0.20% NA 3/4" - 5"
Silicon Carbide 99.5% 0.30% 0.10% 0.01% 3/4" - 5"
Fluxes 90.0% 1.50% 1.50% NA 1/4" - 1"
Elmore Sand & Gravel 99.6% 0.06% 0.05% 0.01% 200 mesh - 5"
Table 2
Industrial Sand & Gravel Specifications, by Application
Sales Strategy
Elmore has a diverse customer base for its gravel products and has served these
markets for more than 10 years. Ferrosilicon markets have returned strong
profit margins and have been the backbone of Elmore's operations. Management
will continue providing excellent service and quality products to its customers.
5
<PAGE>
Improvements will be made in choosing markets for Elmore's sand products.
Currently, these products are marketed to the concrete and mortar industries and
net an average sales price of about $2.50 per ton, well below the national
average price for industrial sand.
Transportation cost is an important factor that must be taken into consideration
due to relatively low unit prices of various silica markets, except for a few
end uses that require a high degree of processing. Before contacting potential
customers for industrial sand products, management will evaluate transportation
costs as to their impact upon the bottom-line profitability of that particular
market.
Once favorable transportation situations are identified, potential customers
will be sent product samples for testing. Discounts on current market prices
will be offered to effectively penetrate selected target markets for industrial
sand.
In order to satisfy some industries, further processing of industrial sand may
be necessary. In these cases, management will factor the additional equipment
costs required for such processing to determine which markets are the most
lucrative.
Riverside Grain Products, Inc. ("Riverside Grain")
Status: Riverside Grain was formed by the Company to manage and operate the
wheat starch and gluten plant in Thunder Bay, Ontario (the "Starch
and Gluten plant"). The Company signed a Purchase Agreement with
the ADM Agri-Industries, Ltd., ("ADM") on November 11, 1997 to
purchase the Starch and Gluten plant for $5.0 million. Management
is currently making improvement to the Starch and Gluten Plant and
expects it to be fully operational by Fall of 1998.
Production: A target of 51,000 tons of wheat flour each year will be processed
to produce starch and gluten products. The Company plans to
install waste recovery systems to achieve high utilization of raw
materials.
Capital: Total capital required, including plant purchase, interim operation
capital and construction financing, is approximately $6.5 million.
ADM may accept an equity position of $2.0 million in the Company as
partial remuneration for the purchase of the Starch and Gluten
plant. ADM has agreed to finance the remaining $3.0 million owed
over a two year period.
Markets: The Company is primarily pursuing various markets for starch and
gluten products in North America. A sales agreement has been
signed with Heartland Wheat Growers, L.P. to purchase unmodified
starch for the manufacture of dextrinized and oxidized starch. A
distribution agreement has been offered to Raisio Chemicals to
market Riverside Grain's cationic starch output.
ADM Agri-Industries, Ltd., (ADM) signed a Purchase Agreement on November 11,
1997 to sell a starch and gluten plant to the Company for $5.0 million.
Included is a 5-year contract for the right to purchase straight-run flour at
market price from ADM on payment terms of net 90 days. As a condition in the
Definitive Agreement, ADM was obligated to repair equipment and buildings and
restore the plant to operational capacity. All electrical and mechanical
systems have been thoroughly inspected and tested by ADM.
The Starch and Gluten plant has been closed since August 15, 1996. Before
shutting down, the Starch and Gluten plant had been operating for 84 years.
During the last ten years of operation, the plant experienced low profitability
manufacturing a large number of commodity products to satisfy a variety of
customer needs. The manpower and packaging costs dedicated to the production of
many low-priced products resulted in poor overall operating efficiency and high
operating costs per unit of raw material processed.
Management will significantly increase profitability of the Starch and Gluten
plant by focusing on fewer product lines and recovering the 19% of raw materials
previously wasted by discharge in the effluent stream.
6
<PAGE>
The Starch and Gluten plant will produce the following primary product lines:
* Wheat gluten for the food industry
* Cationic starch for the paper industry
* Dextrinized starch for the mining and wallboard industries
* Large granule starch for the carbonless paper industry
* B-grade starch for the gypsum wallboard industry
Producing cationic starch will increase profit margins. Cationic starch offers
much higher revenues than the commodity starches previously manufactured. Prior
to August 1996, the Starch and Gluten plant averaged $413.50 and 4.0 man-hours
per ton of product sold. In 1998, the plant is expected to average $530.00 and
1.5 man-hours per ton upon implementing management's strategy of streamlining
operations and manufacturing products with higher market values.
Recovering plant effluents will increase efficiency. Approximately 19% of the
raw materials processed in the past were discarded as waste. This loss of raw
material adversely effected the previous owner's ability to maintain a profit.
Riverside Grain will install ultrafiltration and reverse osmosis systems to
recover these materials which can then be added to the B-grade starch products.
These systems will not only recover additional product but also will greatly
reduce waste disposal and water utility fees.
Product quality is influenced by raw material quality. Current management has
negotiating contracts with ADM for delivery of high quality flour on a "by
request" basis with 90 day terms. Riverside Grain is not bound to one supplier
for its flour.
The method by which gluten is dried greatly affects its market value.
Management believes that by installing gluten spray dryers, Riverside Grain will
compete in global markets that would otherwise not be accessible. Management
has received several inquires from potential customers willing to pay premium
prices for spray dried gluten.
Once the installation of new equipment is complete, the Starch and Gluten plant
will process approximately 51,000 tons of Canadian wheat flour each year. The
plant will produce 6,100 tons of gluten, 16,100 tons of cationic starch, 7,400
tons of dextrinized starch, 4,600 tons of large granule starch, and 14,100 tons
of B-grade starch.
Management is negotiating contracts to purchase approximately 100 truckloads of
unmodified A-grade starch. This starch will be processed in addition to the
starch derived from wheat flour. Management anticipates converting the
unmodified starch to high-value starch will generate excellent profit margins.
Production will be marketed primarily in Canada and the United States. The
Starch and Gluten plant is situated at the head of Lake Superior, facilitating
shipment of products. It is also linked to Canada's rail network and connects
directly to many rail lines in the United States.
Management intends to operate the existing equipment at full capacity as soon as
possible, doubling previous output. This will be accomplished by moving
existing equipment and operations into a new modern facility to be built in
Thunder Bay. Management believes that sufficient cash will be available in 2000
to construct the new facility. The current plant will operate until such time
the new plant is complete.
Riverside Grain has negotiated with ADM to purchase straight-run flour under
contract for 5 years. The flour will contain a minimum of 11.5% protein. Price
will fluctuate proportionately with the wheat market. Provisions in the
contract will allow Riverside Grain 90 days after flour delivery to complete
payment.
The Starch and Gluten plant will employ approximately 40 people in Thunder Bay.
Wheat Gluten Competition
Archer Daniels Midland Company ("ADM") is one of the world's leading gluten
producers. ADM has been in the gluten industry for many years, including
previous ownership of Ogilvie Mills and General Mills. During this time they
established a loyal customer base and integrated internal markets by acquiring
companies such as bakeries that use gluten as raw material.
Midwest Grain Company ("Midwest Grain") is a major manufacturer of gluten in the
United States. Midwest Grain has retained a loyal customer base for many years
selling most of its output through distributors.
Manildra Milling ("Manildra"), an Australian owned company, has been in the
North American market for many years. Manildra is one of the leading suppliers
in the United States, and is the largest Australian importer of gluten to the
United States.
7
<PAGE>
The remainder of the gluten consumed in North America is imported from Europe
and Australia. Approximately 22,000 tons comes from Europe and 25,000 tons from
Australia.
Sales Strategy for Wheat Gluten
Riverside Grain plans to produce approximately 6,100 tons of gluten per year.
Riverside Grain will price gluten slightly below current market levels to
effectively penetrate selected target markets. These markets include the bread,
pet food, cereal, pasta and other food industries.
Riverside Grain will use a direct sales approach to aggressively capture market
share in these industries. Three experienced salespeople will work strategic
North American locations, mainly in the eastern and mid western United States,
to focus efforts on leading purchasers of gluten.
Potential customers include Weston, Corporate Foods, McGavin and Kellogg in
Canada and Interstate, Earthgrains, Flowers and Heinz in the United States.
These companies purchase gluten in large quantities as commodity raw materials.
Since their decisions to buy are based on quality and price, management believes
Riverside Grain will quickly sell all initial production of gluten by offering a
high quality product at a 2% discount on current market prices.
Sales efforts will be concentrated in Canada and the United States to minimize
freight costs and maximize advantages created by restrictions these countries
have placed on gluten imports. Canadian restrictions keep overseas gluten
prices between 7 and 10% higher than domestic gluten.
Management believes gluten prices in the United States will steadily climb
throughout 1998 as gluten supplies tighten. This will present many
opportunities for export since, under NAFTA, Riverside Grain will enjoy full
access to United States markets without restriction.
All gluten output not sold through direct sales will be marketed through
commodity brokers and distributors. These brokers and distributors may find
channels leading to smaller niche markets than those targeted by Riverside
Grain's sales force. Niche markets usually offer higher prices for gluten than
large commodity markets.
The baking industry consumes approximately 70% of the gluten in North America.
Riverside Grain will announce its re-entry into the marketplace by advertising
in periodicals that reach a majority of baking companies, including Milling and
Baking News. Riverside Grain also intends to establish memberships with the
Institute of Food Technology, the Association of Bakery Engineers and the
International Wheat Gluten Association. Such memberships provide access to
current industry trends and statistical product information, as well as promote
a high profile and stable presence in the gluten industry.
While quantities of gluten purchased by large consumers remain fairly consistent
throughout a given year, prices for gluten fluctuate frequently. Consumers
generally elect signing 3 to 12 month contracts that fix both quantity and
price. Most would prefer gluten prices to change in relation to wheat prices
within a given contractual period. This would assure customers that gluten
prices are based on fair market value.
Management believes that by establishing a floating price structure based on the
price of wheat, Riverside Grain will successfully procure long term contracts
that require little renegotiation and inspire strong customer loyalty.
Furthermore, a floating price structure will allow Riverside Grain to maintain
steady profit margins and accurately prepare for future expansions that may be
initiated.
Future Outlook for Wheat Gluten Products
Pacific Rim markets for gluten continue to grow at a rapid pace. These markets
place greater emphasis on high quality and pay premium prices for gluten with
particular specifications. Gluten made from Canadian spring wheat imparts
higher protein content and better functionality than gluten made in other parts
of the world and is preferred by Japanese markets. Riverside Grain intends to
approach Sumitomo and Yuasa as well as other distributors to market its spray-
dried gluten in Japan and nearby countries.
Mexico, Central America and South America also present excellent opportunities
for future growth. Improvements in bread-making technologies have resulted in
stronger demand for gluten in these countries. For example, Bimbo Foods in
Mexico uses approximately 3,000 tons of gluten per year in the manufacture of
its bakery products. Riverside Grain will continue researching such markets to
monitor profitable opportunities as they arise.
8
<PAGE>
Riverside Grain will employ an experienced technical staff to enhance customer
service and explore niche markets for modified gluten. The pasta, aquaculture,
dairy products and meat analogue industries will be evaluated to determine
whether such value-added products may be manufactured to obtain even higher
returns than are currently projected.
Wheat Starch Competition
The primary competitors in the wheat starch industry are ADM, Manildra and
Midwest Grain. Several cornstarch manufacturers including Casco, National,
Staley and Minnesota Corn are potential competitors for starch supply to paper
mills. Riverside Grain will pursue competitive advantages over these companies
by providing expert technical and customer service.
Sales Strategy for Wheat Starch
Riverside Grain will produce approximately 28,100 tons of wheat starch per year.
Cationic starch will comprise 57% of starch production. Raisio Chemicals Inc.
has agreed to market all output of cationic starch to the coated paper industry.
Riverside Grain will sell dextrinized starch to the mining industry and to the
wallboard industry for special applications. Large granule starch will be sold
to the carbonless paper industry. The primary target market for B-grade starch
will be the gypsum wallboard industry.
Riverside Grain will use a direct sales approach to aggressively capture market
share in targeted industries. Three experienced salespeople will work strategic
North American locations, mainly in the eastern and mid western United States,
to focus efforts on leading purchasers of wheat starch.
Potential customers for industrial applications include Avenor Paper, Provincial
Paper, Domtar Corrugating and Sunoco Paper. Potential customers for food
applications include Weston, Kellogg, General Mills and Pillsbury. These
companies purchase starch in large quantities as commodity raw materials. Since
their decisions to buy are based on quality and price, management believes
Riverside Grain will quickly sell all initial production of starch by offering
high quality products at 2% discounts on current market prices.
Sales efforts will be concentrated in Canada and the United States to keep
freight costs as low as possible. Canadian markets are preferred due to higher
market pricing than the United States.
Advertising for starch products will be minimal. Riverside Grain will become a
member of the Technical Association of the Pulp and Paper Industries, the
Institute of Food Technology and the Association of Bakery Engineers to promote
a high profile and stable presence in the starch industry.
Riverside Grain will offer top-notch customer service. A technical department
will be devoted to assisting customers and coordinating sales activities with
production. Research and development will be ongoing to establish Riverside
Grain as the leading company of high quality wheat starch.
Future Outlook for Wheat Starch Products
Markets for modified starch represent the best opportunities for Riverside
Grain to maximize long-term profits. Specialty starches for the food industry
offer premium prices and will be the first modified starch markets explored.
Japanese markets for value-added starch will be evaluated with the assistance of
Yuasa Trading, a commodity broker and distribution company. Value-added starch
prices are sufficiently high in Japan to cover freight costs and earn enhanced
profits.
Starch markets in Latin and South America are expanding rapidly due to
technological improvements developed in the paper and corrugating industries.
Numerous exporting opportunities are anticipated to be available by the end of
1998.
9
<PAGE>
Riverside Carbon Products, Inc. ("Riverside Carbon")
Status: Riverside Carbon intends to construct the first charring plant in
Houston, British Columbia and the first briquetting plant in
Thunder Bay, Ontario. Wood waste from nearby sawmills will be
charred at the Houston plant and railed to a briquetting plant in
Thunder Bay. Environmental permits allowing the first charring
plant to be built have been obtained and management is confident
that long-term supplies of raw materials can be obtained from area
sawmills. Management anticipates that additional contracts for
wood waste will be available over the next three years, providing
enough raw material to build at least four more charring plants.
Production: A target of 55,000 tons of char to be produced each year from
220,000 bone-dry tons of wood waste residues. The Company plans
to produce 80,000 tons of charcoal briquettes from this char.
Capital: The total capital required, including interim operation capital
and construction financing, is approximately $14.0 million for the
first charring and briquetting plants.
Markets: The Company is primarily pursuing various markets for char and
charcoal briquettes in the United States and Canada; at this time
no sales or distribution contracts have been signed.
Riverside Carbon was formed by the Company to utilize wood fiber residuals
("hogfuel") generated at Canadian sawmill operations and by-product starch from
Riverside Grain Products, Inc. in the manufacture of charcoal briquettes.
For many sawmills, disposal of hogfuel poses severe environmental concerns. Air
pollution from wood burning in "beehive" burners and leachate contamination from
wood storage in landfills has been under heavy scrutiny in Canada over the last
decade. Stringent government regulations have been enacted, resulting in the
demand to cease such practices and find alternate uses for waste wood.
Riverside Carbon has obtained the environmental permits necessary to construct
and operate a charring plant in Houston, British Columbia and Carnaby, British
Columbia. Each will be capable of processing up to 220,000 bone-dry tons of
hogfuel per year. Fiber supply agreements can be arranged with two sawmills to
support the first charcoal plant. Agreements with sawmills to support the second
plant are being investigated and negotiations for an additional 500,000 bone-dry
tons per year are also being pursued.
The initial charring and briquetting plants require a total investment of $14.0
million. The briquetting plant will package 80,000 tons of charcoal briquettes
per year for sale in the United States and Canada. These figures are only
estimates of potential operations and are not based on any actual sales.
Potential partnerships with major producers of briquettes are being discussed as
a way to facilitate construction and financing of the new plants.
Raw Materials
Negotiations continue with forest products companies regarding long-term
commitments to provide wood residue to Riverside Carbon for the purpose of
making charcoal. Current plans include construction of charring plants at
Houston and Carnaby in northwestern British Columbia. Each plant will produce
approximately 55,000 tons of charcoal per year from 220,000 bone-dry tons of
hogfuel. Environmental permits were issued in January 1997 allowing
construction of this plant and a second plant of similar size in Carnaby,
British Columbia. These figures are estimates and do not reflect any actual
production.
Charcoal Briquette Market Information
The barbecue industry is the only significant market for charcoal briquettes.
According to the Barbecue Industry Association, Americans consumed approximately
869 thousand tons of briquettes during barbecue events in 1996, representing
more than $525 million in sales. This yielded an average retail sales price of
approximately $605 per ton.
10
<PAGE>
The total tonnage of charcoal briquettes sold over the last 5 years has
increased by about 3 percent per year. Charcoal briquette production quantities
in the United States are graphically represented in Figure 3 below.
(Figure 3 shows the annual production of charcoal briquettes in the United
States from 1967 to 1996. The production varies from 350,000 tons per year in
1967 to 870,000 tons per year in 1997. A curve is drawn though the data
points to illustrate the market trends over the period shown.)
Figure 3
Production of Charcoal Briquettes in the United States from 1967 to 1996.
Current Manufacturers of Charcoal Briquettes
Three companies manufacture approximately 90% of all charcoal briquettes
consumed in the United States. Kingsford Products Company is the dominant
producer, controlling 50% of the total United States market.
Many companies sell charcoal briquettes under private labels. Royal Oak
produces the briquettes distributed by approximately 90% of the private label
companies.
(This pie chart shows the major U.S. briquette producers as of 1993. The chart
shows the various companies' percentages of the market: Kingsford = 50%,
Safeway = 20%, Imperial = 20% and Royal Oak = 10%)
Figure 4
Major Charcoal Briquette Manufacturers in the United States.
Sales Strategy for Charcoal Briquettes
All Riverside Carbon charcoal briquette products will be sold to independent
marketing companies under long-term contracts. The Company is pursuing various
markets for both char and charcoal briquettes, at this time no sales or
distribution contracts have been signed.
11
<PAGE>
Future Developments
Company engineers are researching a binder that will give charcoal briquettes a
plastic-like coating. The briquettes will be easy to light, easy to handle and
very clean.
Property in British Columbia
Every effort is being made to locate the charcoal plants as close to the source
of wood residue as possible, to minimize the cost of transporting heavy, wet
wood residue.
Roughly seven acres of land are required at each site to provide adequate space
for project buildings, road and rail transport, fiber storage facilities and
effluent disposal fields.
Other Projects Under Development
The following projects are being developed by management as potential projects
only and can not be determined as probable.
Flourmill
The Company is negotiating the purchase of a flourmill in the northern United
States. Present negotiations involve the seller acquiring an equity position in
the Company. The purchase price for the mill is approximately $8.0 million.
The seller has indicated willingness to discuss terms which involve half of the
final purchase price being payable in common shares of the Company. Management
does not expect the negotiations to be finalized until after the Offering is
completed. Finalizing the purchase of the flourmill would be contingent upon
the Company securing proper financing from lending institutions. The flourmill
is currently operating and earning strong profits.
Grain Terminal
The Company is evaluating the acquisition of an industrial grain terminal. An
independent subsidiary operating under the direction of Southern Ventures, Inc.
(Canada) would be established to run the terminal. Grain cleaning and drying
equipment would allow the Company to procure contract grown wheat, thereby
providing a secure raw material supply for the flourmill and controlled
profitability through vertical integration of operations.
Recreational Park
Southern Ventures Inc. (Canada) has submitted a bid to the Ontario Ministry of
Citizenship, Culture and Recreation for the acquisition of the Big Thunder
Sports Park in Thunder Bay, Ontario. The bid was submitted in October 1997. An
equity position in the Company was not proposed. Finalizing the purchase of the
sports park would be contingent upon the Company securing proper financing from
lending institutions. Owning Big Thunder Sports Park would provide the Company
with excellent marketing and advertising opportunities. International skiing
competitions draw global attention. Big Thunder Sports Park hosted the Nordic
World Ski Championships in 1995. Events were televised around the world and
thousands of spectators and tourists visited the park. Management would develop
the existing facilities to establish Big Thunder Sports Park as a high
performance center and a four seasons resort. Each phase of development would
be financed with cash flows generated from the park.
ITEM 2. DESCRIPTION OF PROPERTY
Gluten / Starch Mill -- Thunder Bay, Ontario Canada
Industry Segment: Food Processing
The property, located on the banks of the Kaministiquia River at 675 Vickers
Street, Thunder Bay, Ontario, consists of approximately 8 acres.
12
<PAGE>
The property consists of the original gluten/starch plant as well as the former
Saskatchewan Wheat pool (SWP)-8 site and includes the following buildings:
2-story main office building
Grain elevator structures formerly operated by Saskatchewan Wheat Pool and by
ADM.
Feed mill
Boiler house
5 story smutts and plant proper with attached offices and dryers.
4 story warehouse
Anamet waste treatment facility
4 silos for bulk flour receipt
Associated trackage
Dock which runs along the warehouse, plant and feed mill
The processing building and warehouse are situated on the edge of the
Kaministiquia River which is dredged to a depth of 27 feet. A new steel dock
with tiebacks was installed in the late 1960's. The dock should be in good
condition since this type of dock has an average 70 to 80 year life span. The
dock is part of the former SWP-8 holdings. There are rail lines on the property
that are served by the major U.S. and Canadian rail companies. Products
manufactured at the facility were A-starch, B-Starch and wheat gluten. This
property is owned by Riverside Grain Products. There are no limitations of
ownership, however the property is used as collateral for debts outstanding to
ADM.
Southern Ventures, Inc. -- Cottondale, Alabama.
Industry Segment: None (Used as main administrative office for the Company.)
The property located at 15000 Highway 11 North, Cottondale, Alabama is
approximately 4.2 acres and has three buildings erected on the site. The
initial living room of the main building has been expanded to 3000 square feet
of office space. The main shop space connected to the office building measures
3000 square feet and is used as a product demonstration facility. This property
is rented on a month to month basis at a rate of $1600 per month including
property taxes, insurance and maintenance. The Company has an option to
purchase the property, and plans to do so in 1998.
Elmore Sand & Gravel, Inc. Elmore, Alabama
Industry Segment: Surface Mining
The Company's silica mining plant is located at 2036 Maron Spillway Elmore,
Alabama USA. The Company has long-term leases in place to generate products and
provide itself a financially secure future. A new 2.3 million-dollar processing
plant was built in 1997 to accommodate future growth. The leased properties are
located northwest of Elmore on the west side of Highway 143 in the area
surrounding and including Speigner Lake in southern Alabama.
Twenty-five percent of the designated land is being leased from private
landowners. The Company will hold these leases until all silica sand and gravel
deposits have been removed and processed. The remaining fifteen hundred acres
are under lease from the State of Alabama. This state lease is for a twenty
year period starting in 1985 and has five year options for extensions that can
be taken as needed.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Registrant's fourth fiscal quarter ended December 31, 1997, no
matters were submitted to a vote of security holders of the Registrant.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has not traded.
SHAREHOLDERS
As of June 30, 1998, there were approximately 35 stockholders of record.
DIVIDENDS
The Company has never paid a cash dividend on its common stock and does
not expect to pay one in the foreseeable future. Payment of dividends in the
future will depend on the Company's earnings and its cash requirements at that
time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Company Background
On September 1, 1996, Southern Ventures, Inc. (Canada) was incorporated in
Alberta. Southern Ventures, Inc. (USA) "the Company" was incorporated in the
State of Nevada on February 7, 1997 and became the parent of Southern Ventures,
Inc. (Canada) (see "Description of Business"). The Company's formation incurred
expenses in connection with the initial offering and development of various
projects. On January 1, 1997 the Company acquired from Mr. Gordon Tucker and
Mr. Bobby Harvey certain assets in the amount of $439,860; an unsecured note was
made payable jointly to Mr. Tucker and Mr. Harvey at a rate of interest of 8%
per annum, on demand no sooner than December 31, 1998. The Company has agreed
to make payment on this outstanding note by satisfying certain recurring debts
estimated to be $30,000 per year to the benefit of Mr. Tucker and Mr. Harvey.
Although there is no legal agreement to pay any recurring debt to the benefit of
Messrs. Tucker and Harvey, the Company has in the past and plans to in the
future to make such payments to satisfy the outstanding note payable to Messrs.
Tucker and Harvey. The annual payments to the outstanding note of Messrs.
Tucker and Harvey have been reflected in the financials as a current liability.
As of December 31, 1997 this note has a total outstanding balance of $402,625.
On October 22, 1997 the Company acquired 100% of the outstanding shares of
Elmore Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. common stock from
Mr. Harvey in exchange for ten million (10,000,000) preferred shares of the
Company. The Preferred Shares have full voting rights with dividends equal to
80% of the net earnings from the acquired mining operations or 9%, whichever is
greater. All dividends are cumulative and non-participating. The Company may
call all of the Preferred Shares for the sum of $5,000,000 or $0.50 per share.
The Company intents to use the proceeds of its Initial Public Offering (see "Use
of Proceeds") to call the Preferred Shares. The purchase price of $5,000,000
was determined based upon the estimated fair market value of the assets
purchased and the liabilities assumed at the date of acquisition. It was
mutually agreed that the effective date for accounting and dividend recognition
is November 1, 1997. In accordance to APB 16 "Accounting for Business
Combinations", this transaction qualifies as a reverse acquisition. Therefore,
the Company's historical financial statements are those of Tuskegee Sand &
Gravel, Inc. and Elmore Sand & Gravel, Inc.
On November 11, 1997, the Company's wholly owned subsidiary, Riverside Grain
Products, Inc., purchased from ADM Agri-Industries, Ltd., ("ADM") land,
improvements and equipment in Thunder Bay, Ontario for the production of starch
and gluten. The Company paid a total consideration of $5,000,000 by issuing a
$3 million dollar installment note and a $2,000,000 demand note fully secured by
the assets acquired. As a condition of the purchase, ADM was obligated to make
repairs to any equipment that was not operational. All electrical and
mechanical systems have been thoroughly inspected and tested by ADM. However,
the Company plans to make improvements to the building, heating and processing
systems before the plant is placed into production. The $2,000,000 demand note
may be satisfied through the issuance of 9% of the total Common Shares on a
fully diluted basis or 1,960,000 shares upon completion of the Offering. No
additional payments are due on both the installment note and the demand note
until December 1, 1998.
14
<PAGE>
The Company entered into a royalty agreement with National Synfuels, Inc.
whereby the Company has the sole and exclusive right to technology that allows
wood waste to be used as raw material in the manufacture of valuable products.
The royalty is two dollars ($2.00) per dry ton of wood processed into charcoal
or fuels. The Company issued a sublicense to Carbon Products Industries, Inc.
allowing the use of certain technology to convert wood waste into activated
carbon. Carbon Products Industries, Inc. will pay the Company a royalty of four
dollars ($4.00) per dry ton (of which the Company will pay National Synfuels
$2.00 per dry ton) of material processed using the Company's technology.
Various loans totaling $200,314 as of September 30, 1997 have been made to
Carbon Products Industries, Inc. The notes are payable on demand at an interest
rate of 8% per annum. The Company has not received any monies towards these
outstanding notes and has recognized an offsetting loss of $100,167.
Riverside Carbon Products, Inc., a wholly owned subsidiary, was formed by the
Company to utilize wood fiber residuals ("hogfuel") generated at Canadian
sawmill operations and by-product starch in the manufacture of charcoal
briquettes. The Company has obtained the environmental permits necessary to
construct and operate two charring plants in northwestern British Columbia, each
capable of processing up to 220,000 bone-dry tons of hogfuel per year. Fiber
supply agreements can be arranged with two sawmills to support the first
charcoal plant. The Company is actively pursuing financing for the construction
and start-up for it's first charring plant.
Results of Operations
The revenue of the Company consists exclusively of amounts earned by Elmore Sand
& Gravel, Inc. and Tuskegee Sand & Gravel, Inc. Tuskegee Sand & Gravel's
present business is to lease equipment operations to Elmore Sand & Gravel.
Production at the Elmore site has steadily increased by expanding the number of
work shifts and by decreasing plant downtime. Elmore Sand & Gravel generated an
average net income of $118,969 per month before taxes based on 1997 earnings. A
new 2.3 million-dollar silica mining plant was placed in production in October
1997. Management expects the new processing plant to increase net income.
Excellent margins assure sufficient earnings to sustain the ambitious growth
program planned by the Company.
Profit & Loss by Activity
Year Ended December 31, 1997
Mining Non-Mining
Activities Activities
Revenues................... $4,015,837 -
Cost of Sales.............. 1,833,586 -
---------- ---------
Gross Profit............ 2,182,252 -
Selling, General and
Administrative Expenses... 503,482 1,277,209
Interest Expense.......... 251,143 32,094
Investment Loss........... - 100,024
---------- ---------
Net Income................. 1,427,626 (1,409,327)
========== =========
The Company incurred 1.4 million in non-mining activities. These costs include
the research and development of the starch and gluten plant purchase, the
charcoal briquette project, the Company's public registration, legal fees,
startup costs, travel expenses, accounting fees and general management. The
Company's officers and directors have agreed to let the Company accrue a portion
of their salaries and of the 1.3 million in developmental cost, $503,607 is
accrued salaries. The salaries will be paid once the starch and gluten plant is
operational and generating a positive cash flows.
The Company believes that future cash flow from operations and the portion of
net proceeds from this Offering used for general corporate purposes will be
adequate to fund its operations for at least the next twelve months.
15
<PAGE>
Results of Operations - Mining Subsidiaries
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:
Year Ended December 31
1997 1996 1995
Revenues................... 100.0% 100.0% 100.0%
Cost of Sales.............. 45.7% 50.4% 59.3%
Gross Profit............ 54.3% 49.6% 40.7%
Selling, General and
Administrative Expenses... 12.5% 16.0% 15.1%
Interest Expense.......... 6.3% 3.3% 3.8%
Net Income................. 35.5% 30.2% 21.8%
The mining subsidiaries have experienced in the past and will experience in the
future quarterly variations in net sales and net income. Thus, operating
results for any particular quarter are not necessarily indicative of results for
any future period. Factors that have affected quarterly operating results
include customer relationships and labor costs, product mix, the level of
operating expenses, the condition of the mining industry, the economy in general
and competitive considerations.
Most of the revenue in each quarter results from orders received in that
quarter. In addition, the timing of individual orders and shipments, customer
buying patterns, including potential seasonal considerations affect quarterly
results. Although the sales are generally not seasonal, extreme weather
conditions can affect the mining, shipment and demands for products. Because
the expenses are relatively fixed in the short term, variations in the timing of
sales could cause significant fluctuations in operating results from quarter to
quarter and may result in lower earnings or cash flows for a given quarter than
expected.
Revenues - Mining Subsidiaries
Revenues from the Mining Subsidiaries consist of gross sales of products less
discounts, refunds and returns. Revenues increased 16% to $4 million during the
1997 from $3.5 million when compared to 1996. The on-going process of replacing
aging equipment and the increase in product market price led to improved
revenues. The 1997 purchase of four new tandem trucks further increased
production and reduced maintenance expenses. Revenues increased 50.2% to $3.4
million in fiscal 1996 from $2.3 million in fiscal 1995. This increase was
attributable to the continued effort to reach a broader customer base.
Additionally, increased production and decreased equipment maintenance favorably
impacted revenues. The total amount of rock and sand sold was 417,249 tons,
646,219 tons and 625,317 in 1995, 1996 and 1997 respectively. In 1996 the total
tons sold represented a 64% increase in production from 1995.
Gross Profit Margin - Mining Subsidiaries
Cost of sales consists of mining labor cost plus equipment operation costs and
overhead related to the mining operations. The gross profit margin (gross
profit as a percentage of net sales) decreased to 45.7% 1997 from 50.4% when
compared to 1996. The percentage difference between the gross profit margin in
1997 and 1996 was due to an increase in product price and a decrease in
maintenance costs due to the company's continuing effort the improve efficiency
by upgrading equipment and the recent start-up of a new processing plant in
October 1997. In fiscal 1996 gross profit margin increased to 49.6% from 40.7%
in fiscal 1995. This increase was due to the reduced maintenance costs and
earlier investments in equipment that improved overall efficiency.
Selling, General and Administrative Expenses - Mining Subsidiaries
Increases in pricing 1997 contributed to reducing selling, general and
administrative expenses as a percentage of net sales to 12.5% from 16.0%
compared to 1996. Also contributing to this was the discontinued use of a
commission sales company reducing sales cost by $85,000 and the reduction of
administrative staff. Selling, general and administrative expenses as a
percentage of net sales were 16% in fiscal 1996 and 15.1% in fiscal 1995. The
lower percentage was primarily the result of the increase in customer-related
services, management fees, and professional fees
16
<PAGE>
Interest Expense - Mining Subsidiaries
During 1997 interest expense increased to 6.3% as a percentage of net sales from
3.3% in 1996. The Company increased its indebtedness to complete the
construction of the new plant in 1997 and purchase additional related equipment
resulting in an increased interest expense. Interest expense as a percentage of
net sales decreased to 3.3% in fiscal 1996 from 3.8% in fiscal 1995. This lower
percentage was primarily the result of net sales for fiscal 1996 increasing 50%
from fiscal 1995. The interest expense decrease was partially offset by the
increase in future investment in plant and equipment, including the continuing
construction of a new plant, which began in the third quarter of 1996.
Liquidity and Capital Resources - Mining Subsidiaries
The mining subsidiaries have financed cash requirements through cash flows from
operations along with both short and long-term borrowings. The Company has
outstanding loans with interest rates at various spreads above the bank's cost
of funds for financing equipment. These credit facilities are secured by
various pieces of machinery. In September 1996, the Company obtained a
$1,800,000 secured line of credit with a local bank at an interest rate of
9.75%. This line of credit was obtained to enable the mining subsidiaries to
construct the new processing plant. In September 1997 the outstanding credit
line was converted to a fixed rate installment note at 8.5% interest payable in
equal payments of $33,707 over a 60-month term. As of December 31, 1997 this
note has an outstanding balance of $1,576,254. The Company has various
operating capital loans payable to Mr. Harvey at an interest rate of 8% per
annum, due on demand. On July 31, 1997, Mr. Harvey converted $239,500 to common
stock at a rate of $1 per share. As of December 31, 1997 these operating
capital loans had an outstanding balance of $254,569.
The primary sources of financing have been cash from operations, bank borrowings
and issuance of common stock. The capital needs have been to (i) fund working
capital requirements, (ii) repay indebtedness, (iii) purchase property and
equipment for expansion and (iv) fund research and development costs.
Cash flows from operations were approximately $2,752,580, $1,595,416, and
$553,222 in fiscal 1997, 1996 and 1995 respectively. Cash flows in fiscal 1996
were primarily provided by operating income, increases in accounts payable and
an increase in prepaid interest. For fiscal 1995, cash flows from operations
were primarily provided by operating income and decreases in accounts
receivable. For 1997, cash flows from operations were primarily provided by
operating income, decrease in prepaid interest and accrued payroll.
Net cash was primarily used in investing activities for expenditures related to
facilities and equipment and was $7,126,110, $1,781,166, and $551,919 in fiscal
1997, 1996, and 1995 respectively. In 1997 the Company made a $5,000,000
purchase for a starch and gluten facility. Also, $1,040,230 was related to the
recent plant expansion at the Company's mining subsidiary. In fiscal 1998 the
Company expects to make additional investments in plant expansion. Net cash
provided (used) in financing activities was $4,387,957, $323,796, and ($229,415)
in fiscal 1997, 1996 and 1995 respectively. The net cash used in financing
activities in fiscal 1996 consisted of payments to outstanding debts and
distributions to shareholders. Cash provided by financing activities in fiscal
1997 consisted primary of additions to long-term debt used in the acquisition of
the starch and gluten facility. Also, the cash provided by financing activities
in 1996 and 1997 includes additional long-term debt for the mining plant
expansion.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements starting with page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names of the executive officers and directors of the Company, their
respective ages and positions with the Company are as follows:
beneficial
Name Age Position with the Company
Bobby H. Harvey 61 Chairman of the Board & CEO
Chester I. Wright III 38 Treasurer and Director
W. Benjamin Wood 32 Secretary and Director
David Parsons 51 Vice President and Director
Ross G. Tucker 35 Vice President and Director
Dennis Saunders 51 Vice President
Rich Nutter 47 Vice President
All directors hold office until the next annual shareholders meeting of the
Company or until their successors have been elected and qualified. Executive
officers serve at the discretion of the board of directors. No director
receives any compensation other than his or her salary as an employee of the
Company.
Mr. Bobby Harvey Chairman, CEO and President
Mr. Harvey currently serves as Chairman, CEO and President of Southern Ventures,
Inc. Mr. Harvey also serves as the CEO and President of Elmore Sand & Gravel,
Inc. and has served in this capacity from 1992 to date. Mr. Harvey has over 25
years of experience in the silica mining and trucking industries. Prior to
acquiring Elmore Sand & Gravel, Inc., Mr. Harvey owned and operated Tuskegee
Sand & Gravel, Inc. and was a major partner in Walt's Sand & Gravel, Inc. From
1972 to 1984, Mr. Harvey owned and operated Harvey Trucking, Inc. Mr. Harvey
continues to provides consulting to other mining operations and is highly
regarded in the silica mining industry for his expertise. Mr. Harvey also
serves as the CEO/President and Director of Elmore Sand & Gravel, Inc. and
Tuskegee Sand & Gravel, Inc.
Mr. Chester I. Wright III Treasurer and Director
Before joining the Company in 1997, Mr. Wright took on the responsibility of
overseeing all operational and financial management of a real-estate office as a
comptroller for ERA American Brokers, Inc. In this position he supervised over
40 people from 1989 to 1996. Mr. Wright's implementation of innovative programs
and financial management after accepting the position of comptroller of the ERA
office resulted in an increase in annual revenues from $35 million to over $50
million in just two years. Prior to his employment at ERA, Mr. Wright was a
partner in Wright Services, Inc. where he implemented a program that tripled
profits over a four year period. Mr. Wright has been an invited speaker at
regional ERA conventions and has been published in the fields of real-estate
transactions and tax accounting.
Mr. W. Benjamin Wood Secretary and Director
Mr. Wood joined the Company from International Media Promotions, Inc. in 1996
where he was employed since 1994. Mr. Wood's previous experience at Home Box
Office, Inc. and Manning, Selvage and Lee Public Relations required the
organization of national marketing campaigns with multi-million dollar budgets.
He successfully administered the proper execution and distribution of marketing
funds, and was responsible for analyzing the campaign results to determine the
effectiveness of both the funds spent and the tactics used in the various
markets. Mr. Wood has already developed a corporate public relations and
communications plan to introduce the Company to financial markets. Mr. Wood's
education is in advertising and public relations with a B.A. in Public Relations
granted by the University of Alabama. Mr. Wood also serves as CEO and Director
of Southern Ventures, Inc. (Canada).
18
<PAGE>
Mr. David Parsons Vice President of Project Development and Director
As Manager of the Environmental Assessment Branch of the B.C. Ministry of
Environment, Lands and Parks from 1981 to 1996, Mr. Parsons was responsible for
supervising several senior staff members in the environmental assessment of
major industrial, mining and energy projects. Mr. Parsons has 18 years of
experience working for the Ministry of Environment and has participated in
writing environmental legislation such as the Environmental Assessment Act.
Throughout his career, Mr. Parsons has been responsible for coordinating
hundreds of environmental impact assessments. Mr. Parsons received a M.Sc. in
Soil Science and Land Use Planning from the University of British Columbia as
well as a Diploma in Elementary Education and a B.Sc. in Agriculture. Mr.
Parsons also serves as President and Director of Riverside Carbon Products, Inc.
Mr. Ross Tucker Vice President and Director
Mr. Tucker's previous experience as President of Chesapeake Capital Corp. from
1993 to 1996 has given him a great deal of experience in providing management
for corporate operations. As Production Manager and Supervisor for companies
such as Exact, Inc. and Bill Rivers Corp., Mr. Tucker was responsible for the
supervision of 30 shop and design personnel, and developed and implemented a
production line for the manufacturer of freezer storage units for Winn Dixie
Food Products Co. Over the last 16 years, Mr. Tucker has been involved in
almost every aspect of the fabrication industry from heavy I-beam construction
and high pressure thermal processing equipment fabrication to precision sheet
metal work and the fabrication of special alloy parts for the stealth fighter.
Mr. Tucker has received over 10 certifications including governmental welding
certifications, Statistical Processes Control and Instrumentation (SPCI), and
project management.
Mr. Dennis Saunders Vice President of Sales
Mr. Saunders previous position as general manager for Heartland Wheat Growers
(Farmland Industries) from 1994 to 1996 required the supervision of all
operational management of the company including sales, financial, operations,
warehousing, and distribution. Mr. Saunders was also responsible for managing
the construction of a $30 million wheat starch and gluten plant, and managed the
supervision of 55 employees. As a national sales manager for ADM from 1992 to
1994, Mr. Saunders was responsible for wheat and cornstarch product sales
throughout North America. Overall, Mr. Saunders has 30 years of experience in
the food products industry. Mr. Saunders is a member of several professional
associations and has been published in the TAPPI Journal. Mr. Saunders also
serves as President of Riverside Grain Products, Inc.
Mr. Rich Nutter Vice President of Manufacturing
Mr. Nutter has an extensive management background in wheat processing
operations, warehousing and distribution. From 1994 to 1998, Mr. Nutter served
as Plant Manager for Heartland Wheat Growers (Farmland Industries) where he
directly managed 55 employees. Prior to 1994, Mr. Nutter was responsible for
the quality control and production of wheat processing for 14 years for Ogilvie
Mills. Mr. Nutter received a Bachelor of Science, Food Science in 1972 from the
University of Missouri. Mr. Nutter is a member of the American Association of
Cereal Chemists.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file.
19
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation to be paid by the
Company for fiscal 1997 to the Company's executive officers whose total annual
salary and bonus for such year exceeds $100,000 (together, the "Named Executive
Officers").
Summary Compensation Table
Name Position with the Company Compensation
Salary Bonus
Bobby H. Harvey Chairman of the Board & CEO 260,000 --
The Company does not have any long-term incentive or defined benefit
pension plans.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below identifies the control positions of the directors and officers
of the Company and individuals (or organizations) that are known to hold more
than 5% of the common shares as of February 1, 1998, after giving effect to
sale of Common Shares offered hereby. All shares are owned directly. The
officers and directors as a group own 22,946,000 shares. Upon completion of the
Company's IPO Offering, the officers and directors as a group will beneficially
own 12,946,000 shares, representing a total of 59.1% of the total outstanding
shares of the Company.
Name and Address of Beneficial Amount of Class of percent of percent
of
Owner(1) Shares Shares Class prior Class after
Controlled to Offering Offering
Bobby Harvey(2) 10,000,000 Preferred 100.0 0.0
Bobby Harvey 9,841,000 Common 47.1 44.9
Chester I. Wright III 475,000 Common 2.3 2.2
David Tucker 725,000 Common 3.5 3.3
David Herr 475,000 Common 2.3 2.2
Elaine Knapp 475,000 Common 2.3 2.2
Ross Tucker 475,000 Common 2.3 2.2
Benjamin W. Wood 475,000 Common 2.3 2.2
David Parsons 380,000 Common 1.8 1.7
Dennis Saunders 100,000 Common 0.5 0.5
National Synfuels, Inc.(3) 4,750,000 Common 22.7 21.7
Archer Daniels Midland(4) 1,960,000 Common 9.4 9.0
Other Shareholders 766,400 Common 3.7 3.5
Previous Shareholders 20,897,400 Common 100.0 95.4
New Investors 1,000,000 Common 4.6
Total Voting Shares 21,897,400 100.0
(1) Address of beneficial owners is PO Box 33452, NV 89133.
(2) All of the preferred shares will be retired upon consummation of the
Offering.
(3) National Synfuels, Inc. is currently controlled by Mr. Gordon Tucker. See
"Interest of Management in Material Contracts."
(4) It should be noted that the Company has failed to achieve listing status
by January 16, 1998 as required by the purchase agreement entered into with
ADM, and the shares reserved to satisfy the $2,000,000 note by be canceled and
the note made due and payable at ADM's option. This would change both the
dilution listed above and the total debt of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 1, 1997 the Company acquired from Mr. Gordon Tucker and Mr. Bobby
Harvey certain assets in the amount of $439,860.37; an unsecured note was made
payable jointly to Mr. Tucker and Mr. Harvey at a rate of interest of 8%. Those
assets included: automobiles, computers, office equipment and supplies, shop
equipment and supplies, leasehold improvements, real property purchase option
and, interest in projects that were in the process of being developed.
The Company obtained cash and issued various notes payable to Mr. Harvey with
outstanding balances through December 1997 of $249,733. These notes are due
on demand and carry an 8% interest.
20
<PAGE>
On February 4, 1997 the shareholders of the Company entered into an agreement
with Mr. Bobby Harvey to participate in an IRS Code Section 368(a)(1)(B)
reorganization, in which Southern Ventures, Inc. obtained 100% ownership of the
Elmore in exchange for ten million (10,000,000) shares of voting preferred stock
of Southern Ventures, Inc. As a result of this transaction, Mr. Harvey has been
elected Chairman of the Board of Directors and CEO of the Company. On October
22, 1997 the transaction was consummated between Mr. Harvey and Southern
Ventures, Inc. The Preferred Shares earn a dividend of 80% of the net cash flow
of Elmore and have full voting rights with the Common Shares. See "Description
of Securities." There is a call provision on the shares for $0.50 per share.
However, there is no put provision on the Preferred Shares, and the Company has
no obligation to repurchase these shares.
On February 7, 1997 the Company entered into a royalty agreement with National
Synfuels, Inc. whereby the Company has the sole and exclusive right to use
technology which is patented under U.S. Patent # 4,385,905 (System and Method
for Gasification of Solid Carbonaceous Fuels) issued by the U.S. Patent Office
on May 31, 1983, in exchange for a royalty of two ($2.00) dollars per dry ton of
wood processed into charcoal or fuels. This agreement includes the right of the
Company to sublicense this technology. No royalties are owed or have been paid
to date.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.(i) (1) Articles of Incorporation
3.(ii) (1) Corporate Bylaws
5. (1) Opinion Regarding Legality
10.(i) (1) ADM Definitive Agreement - Purchase Agreement between ADM
AGRI-INDUSTRIES, LTD. and Riverside Grain Products, Inc.
Dated November 11, 1997
10.(i)(a) Amendment Between ADM AGRI-INDUSTRIES, LTD. and Riverside Grain
Products, Inc. Dated May 22, 1998
10.(ii) (1) License Agreement with Carbon Products Industries, Inc. Dated
January 2, 1997
10.(iii) (1) License Agreement with National SynFuels, Inc
10.(iv) (1) Northwood Woodwaste Agreement Dated May 2, 1997
10.(v) (1) HFP Woodwaste Agreement Dated May 2, 1997
10.(vi) (1) Property Leases
10.(vii) (1) Receipt of Exchange Dated October 22, 1997
10.(viii) Employment Agreement Between the Company and Richard Nutter,
Dated May 6, 1998.
21. (1) List of Subsidiary Companies
23. (1) Consent from Auditor
27.(i) (1) Financial Data Schedule as of September 31, 1997
27.(ii) Financial Data Schedule as of December 31, 1997
99.(i) (1) Permit PA14845
99.(ii) (1) Permit PA14846
99.3 (1) Permit PE14859
99.4 (1) Permit PE14860
99.5 (1) Letter from Heartland
99.6 (1) Mine Reserve Survey
99.7 (1) Subscription Agreement
99.8 (1) Letter from Auditor
99.9 (1) Notes payable
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
the fiscal year ended January 31, 1998.
(1) Filed as an Exhibit to the registrant's Registration Statement on Form
SB-2, filed on October 23, 1997 (File No. 333-40621).
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Statement of Financial Position F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Shareholder's Equity F-6
Notes to Financial Statements F-7
22
<PAGE>
SOUTHERN VENTURES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
----------------------------------------
- F-1 -
<PAGE>
Southern Ventures, Inc. and Subsidiaries
Report of Arthur J. Odle, CPA PC, Independent Auditors
To The Board of Directors
Southern Ventures, Inc.
Cottondale, Alabama
We have audited the accompanying consolidated balance sheets of Southern
Ventures, Inc. and subsidiaries as of December 31, 1997, 1996, and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Ventures, Inc. and
subsidiaries as of December 31, 1997, 1996, and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
"Arthur J. Odle"
Arthur J. Odle, CPA PC
Montgomery, Alabama
June 30, 1998
- F-2 -
<PAGE>
Southern Ventures, Inc. and Subsidiaries
Consolidated Statement of Financial Position
December 31,
1997 1996 1995
Assets
Current assets:
Cash and cash equivalents........ $ 181,685 $ 167,258 $ 29,212
Accounts receivable.............. 543,589 553,062 580,252
Inventory (Note 1)............... 465,018 405,837 416,087
Other assets..................... 55,097 227,246 92,007
--------- --------- ---------
Total current Assets........... 1,245,389 1,126,158 1,025,551
Intangible assets (Note 1, 2)....... 102,667 18,563 50,738
Notes receivable (Note 4, 7)........ 124,469 - -
Property, plant and equipment
(Note 3, 11)...................... 10,015,074 3,428,491 1,951,139
--------- --------- ---------
Total assets................... $11,487,598 $4,800,457 $3,119,435
========== ========= =========
Liabilities and Shareholders Equity
Current liabilities:
Accounts payable................. 151,847 410,677 93,309
Accrued compensation............. 503,608 - -
Payroll liabilities.............. 78,396 42,289 19,378
Current portion of
long-term debt................. 612,946 737,001 478,211
Dividend payable -
preferred stock................ 75,000 - -
Notes payable (Note 4, 11)....... 2,000,000 - 25,598
--------- --------- ---------
Total current liabilities....... 3,421,797 1,189,967 616,496
Long-term liabilities,
excluding current portion (Note 5). 6,178,922 1,502,387 670,035
--------- --------- ---------
Total liabilities.............. 9,600,718 2,692,354 1,286,531
Shareholder's equity:
Common stock, $.001 par value;
40,0000 shares authorized,
issued and outstanding
18,937,400 shares in 1997.
(Note 6,9)..................... 18,937 51,000 51,000
Preferred stock, $.001 par value;
10,000,000 shares authorized
issued and outstanding
10,000,000 shares in 1997.
(Note 6, 9).................... 10,000 - -
Additional paid-in capital....... 540,501 - -
Retained earnings................ 1,417,442 2,057,103 1,781,904
Shareholder's receivable......... (100,000) - -
--------- --------- ---------
Total shareholder's
equity......................... 1,886,879 2,108,103 1,832,904
--------- --------- ---------
Total liabilities and
shareholder's equity.......... $11,487,598 $4,800,457 $3,119,435
========= ========= =========
The accompanying notes to consolidated financial statement are an integral part
of this statement.
- F-3 -
<PAGE>
Southern Ventures, Inc. and Subsidiaries
Consolidated Statement of Operations
Year ended December 31
1997 1996 1995
Revenues................... $4,015,837 $3,453,797 $2,299,586
Cost of sales.............. 1,833,586 1,742,042 1,363,990
--------- --------- ---------
Gross profit............ 2,182,252 1,711,755 935,596
Selling, general and
admin. expenses............ 1,780,691 554,001 347,560
Interest expense........... 283,238 115,209 87,057
Other expense (Note 7)..... 100,024 - -
--------- --------- ---------
Net income (Note 8)..... $ 18,300 $1,042,545 $ 500,978
========= ========= =========
Net Income per
common share (Note 6).... $ 0.00 $ 0.020 $ 0.010
========= ========= =========
Common shares outstanding
(Note 6)................. 18,937,400 51,000,000 51,000,000
========== ========== ==========
The accompanying notes to consolidated financial statement are an integral part
of this statement.
- F-4 -
<PAGE>
Southern Ventures, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31
1997 1996 1995
Cash provided (used) by operations:
Net income...................... $ 18,300 $1,042,545 $ 500,978
Income charges (credit)
not affecting cash:
Depreciation & Depletion...... 429,527 303,815 271,354
Amortization.................. 25,896 32,175 27,225
Changes in certain
working capital components:
Decrease (increase)
in inventory................ (59,181) 10,250 10,250
Decrease (increase) in
accounts receivable......... 9,473 27,190 (158,789)
Decrease (increase) in
prepaid interest............ 216,513 (130,546) (50,977)
Decrease (increase) in
other current assets........ (168,832) (4,694) (2,877)
Increase (decrease) in
accrued payroll............. 503,608 - -
Increase (decrease) in
accounts payable,
notes payable and
accrued liabilities......... 1,777,277 314,681 43,942
--------- -------- --------
Cash provided by operations........ 2,752,580 1,595,416 553,222
Cash provided (used) by
investing activities:
Additions to
intangible assets............. (110,000) - -
Additions to property,
plant and equipment........... (7,024,424) (1,818,666) (601,540)
Disposals of property,
plant and equipment........... 8,314 37,500 49,621
--------- --------- --------
Cash used by
investing activities............... (7,126,110) (1,781,166) (551,919)
Cash provided by
financing activities:
Additions in
long-term debt................ 5,592,318 1,599,805 479,384
Reductions in
long-term debt................ (1,039,838) (503,663) (444,643)
Proceeds from
issuance of stock............. 418,438 - -
Distributions
to shareholders............... (582,961) (767,346) (264,156)
--------- --------- --------
Cash provided by
financing activities............... 4,387,957 323,796 (229,415)
Net increase (decrease)
in cash......................... 14,426 138,046 (228,111)
Cash at the beginning
of the period................... 167,258 29,212 257,324
--------- --------- --------
Cash at the end
of the period................... $ 181,685 $ 167,258 $ 29,212
========= ========= ========
The accompanying notes to consolidated financial statement are an integral part
of this statement.
- F-5 -
<PAGE>
Southern Ventures, Inc. and Subsidiaries
Consolidated Statement of Shareholder's Equity
Retained
Shares Amount Earnings Total
Balance at December 31, 1994...... 51,000,000 $51,000 $ 1,545,082 $ 1,596,082
Net Income..................... 500,978
Distributions to shareholders.. (264,156)
Balance at December 31, 1995...... 51,000,000 $51,000 $ 1,781,904 $ 1,832,904
Net Income..................... 1,042,545
Distributions to shareholders.. (767,346)
Balance at December 31, 1996...... 51,000,000 $51,000 $ 2,057,103 $ 2,108,103
Net Income..................... 18,300
Distributions to shareholders.. (582,961)
Preferred stock dividend....... (75,000)
Additional paid-in capital..... 540,501
Common stock................... 18,937,400 (32,063)
Preferred stock................ 10,000,000 10,000
Shareholder receivable......... (100,000)
Balance at December 31, 1997...... $469,438 $ 1,417,442 $ 1,886,880
The accompanying notes to consolidated financial statement are an integral part
of this statement.
- F-6 -
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant accounting policies
Organization and Description of Business:
These financial statements reflect the financial position and results of
operations of the Parent Company and its subsidiaries on a consolidated basis,
which reflects the Company's current organizational structure.
Entity Nature of Business
Parent Company:
Southern Ventures, Inc. Provides direct management, marketing, and
research and development for its
subsidiaries.
Wholly Owned Subsidiaries:
Southern Ventures, Inc. (Canada) Central holding company for Canadian
operations. Parent to Riverside Carbon
Products, Inc. and Riverside Grain Products,
Inc.
Riverside Carbon Products, Inc. Developing a Canadian charcoal briquette
project.
Riverside Grain Products, Inc. Developing a Canadian starch and gluten
manufacturing project. Recently acquired a
plant in Thunder Bay, Canada.
Elmore Sand & Gravel, Inc. Open pit mining of high-grade
silica rock and sand.
Tuskegee Sand & Gravel, Inc. Provides equipment and labor
for Elmore Sand & Gravel, Inc. mining
activities.
Fiscal Year:
The Company's fiscal year is a calendar year.
Basis of consolidation:
On October 22, 1997 the Company acquired all of the outstanding shares of common
stock of Elmore Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. in exchange
for 10,000,000 shares of the Company's preferred stock. In accordance to APB 16
"Accounting for Business Combinations", this transaction qualifies as a reverse
acquisition. The Registrant's historical financial statements will be those of
Tuskegee Sand & Gravel, Inc. and Elmore Sand & Gravel, Inc. and the accounts of
Southern Ventures, Inc. will be reflected in the consolidated financial
statements form the 10/22/97 date of the acquisition. The purchase price of
$5,000,000 was determined based upon the estimated fair market values at the
date of acquisition of the assets purchased and the liabilities assumed
The Company's financial statements have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The consolidated statements include Southern
Ventures, Inc. and its wholly owned subsidiaries. Inter-company transactions
have been removed for consolidation purposes.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. Depreciation for financial
reporting purposes is determined on a straight-line basis, based upon an
estimated useful life ranging from three to fifteen years.
Inventory:
Inventories are stated at the lower of cost or market, determined by using the
last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method were
used inventory amounts would be $403,909, $314,917, $318,076 and for the years
ending 1997, 1996 and 1995 respectively.
- F-7 -
<PAGE>
Intangible Assets:
Goodwill of $148,500 represents amounts relating to assets acquired in excess of
value when Elmore Sand and Gravel Inc. was acquired in 1992 and as of September
30, 1997 has been fully amortized.
The remaining intangible assets consist of various projects purchased by the
Company. These project development assets were purchased at historical cost
from Mr. Harvey and Mr. Tucker in January 1997. The amounts represent actual
project costs incurred by a third party. These projects were acquired by Mr.
Tucker and Mr. Harvey and sold to the Company at cost. Amortization for
financial reporting purposes is determined on a straight-line basis, based upon
an estimated useful life of fifteen years.
Income Taxes:
Income taxes are recorded in accordance with SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. This statement requires the recognition of deferred tax assets and
liabilities to reflect future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event future
consequences of differences between financial reporting basis and tax basis of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or the entire deferred tax asset will not be realized due to the uncertainty of
the Company's ability to realize the benefit of the deferred tax assets, a full
valuation allowance has been applied against the deferred tax assets at December
31, 1996.
Net Income per Common Share:
Net income per common share has been computed by dividing the net income by the
number of common shares outstanding during the period (See Note 6 - Stock).
Recognition of revenue:
Revenue recognized FOB Plant.
Lease and Royalty Commitments:
The leases obligate the Company to pay royalties, maintenance and reclamation
costs. There are approximately two thousand acres currently under long-term
leases.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosed contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Research and Development Costs:
Research and developments costs are charged to expenses as incurred.
Note 2. Intangible assets
Intangible assets includes the following:
Canadian Charcoal Briquette Project 90,000
Firebrick Project 5,000
Canadian Starch and Gluten Project 15,000
Accumulated Amortization (7,333)
--------
Total Intangible Assets $ 102,667
========
- F-8 -
<PAGE>
Note 3 - Property, Plant and equipment:
Property, plant and equipment includes the following:
December 31 1997 1996 1995
Leasehold.............. $ 79,722 $ 8,975 $ 5,725
Mining Equipment....... 676,642 646,642 603,340
New Plant.............. 2,329,087 933,406 110,066
Office Equipment....... 60,623 23,787 20,543
Railroad............... 143,500 143,500 143,500
Rolling Stock.......... 2,805,975 2,584,905 1,694,883
Service Vehicle........ 173,207 167,521 112,013
Shop Equipment......... 37,832 27,570 27,570
Starch Plant........... 5,056,494 -- --
Trailer................ 64,810 55,476 55,476
Land................... 436,390 256,390 293,890
---------- --------- ---------
11,864,283 4,848,173 3,067,007
Accumulated Depreciation
and Depletion 1,849,209 1,419,682 1,115,867
---------- --------- ---------
$10,015,074 $3,428,491 $1,951,139
========== ========= =========
Rolling stock is machinery and equipment that can move its self to and from
different locations as required. Rolling stock includes backhoes, bulldozers,
dump trucks and tandem trucks
Note 4. Related party transactions
Notes Payable - Shareholders
On January 1, 1997 the Company acquired from Mr. Gordon Tucker and Mr. Bobby
Harvey certain assets in the amount of $ 439,860.37; an unsecured note was made
payable jointly to Mr. Tucker and Mr. Harvey at a rate of interest of 8% per
annum, due on demand no sooner than December 31, 1998. The Company has agreed
to pay recurring debts estimated to be $ 30,000 per year to the benefit of Mr.
Tucker and Mr. Harvey. As of December 31, 1997 this note has an outstanding
balance of $402,625
The Company has various operating capital loans payable to Mr. Harvey at an
interest rate of 8% per annum, due on demand. On July 31, 1997, Mr. Harvey
converted $239,500 to common stock at a rate of $1 per share. As of December
31,1997 these operating capital loans had an outstanding balance of $254,569.
Notes Receivable - Shareholders
A note receivable from Mr. David Herr, president of Carbon Products Industries,
Inc., was acquired on January 1, 1997 from Mr. Tucker and Mr. Harvey. This note
was for the payment of licensing agreement given to Carbon Products Industries,
Inc. (see Note 7. - Commitments and Contingencies) and carries an interest rate
of 8% per annum. As of December 31,1997 this note has an outstanding balance of
$14,000.
The Company received a $100,000 promissory note with an interest rate of 6.8%
per annum from Vice President of Sales, Dennis Saunders, for 100,000 shares of
Company stock. The entire principal plus any accrued interest shall be repaid
on or before September 1, 2002.
Note 5 - Long Term Debt
The Company has outstanding loans at interest rates at various spreads above the
banks' cost of funds for financing equipment. These credit facilities are
secured by various pieces of the Company's machinery.
In September 1996, the Company obtained a $1,800,000 secured line of credit with
a local bank at a rate of interest of 9.75%. In October 1997 this line of
credit was converted to an 8.5% fixed rate loan. Through December 1997, this
loan consists of a total outstanding balance of $1,576,255.
- F-9 -
<PAGE>
The Company made a 25% down payment toward the purchase of land owned by
Northwood Pulp and Timber Limited with a remaining balance of $162,000 payable
on closing. In management's opinion this is a binding agreement on both parties
and new long-term financing will be obtained to secure this property. The
original closing date has lapsed and a new closing date has been set for on or
before February 13, 1998.
Note 6 - Stock
Common Stock
The Company is authorized to issue 40,000,000 Common Shares with a par value of
$0.001, of which 18,937,400are issued and outstanding. The number of
outstanding common shares for 1996 and 1995 has been adjusted on a pro forma
basis to reflect the same par value as the 1997 shares. For calculating the
earnings per share on the Consolidated Statement of Financial Position for the
years ended 1995 and 1996 an aggregated number of 51,000,000 shares with a par
value of $0.001 is used. This consists of Elmore Sand & Gravel, Inc.
outstanding stock of 1,000 shares at $1.00 par. value and Tuskegee Sand &
Gravel, Inc. outstanding stock of 500 shares at $100.00 par value (see Note 9 -
Acquisition of Subsidiaries).
Preferred Stock
Bobby Harvey is the sole owner of the Company's Preferred Stock $0.001 par value
per share. These shares have full voting rights and cumulative dividend of $.045
per share or 80% of the combined net income of Elmore Sand & Gravel, Inc. and
Tuskegee Sand & Gravel, Inc. whichever is greater. The shares may be redeemed by
the Company for $.50 per share.
The preferred stock has the following preferences:
- - The shares have full voting rights with the Common Shares of Southern
Ventures, Inc.
- - The dividends to be paid will be equal to 80% of the net earnings from the
mining operations owned by Southern Ventures, Inc. or 9% whichever is
greater.
- - All dividends will be cumulative and non-participating.
- - The shares may be redeemed by Southern Ventures, Inc. for the sum of
$5,000,000.
Note 7. - Commitments and Contingencies
The Company entered into a royalty agreement with National Synfuels, Inc.
whereby the Company has the sole and exclusive right to use technology patented
under U.S. Patent # 4,385,905 (System and Method for Gasification of Solid
Carbonaceous Fuels) and issued by the U.S. Patent Office on May 31, 1983. The
royalty is two dollars ($2.00) per dry ton of wood processed into charcoal or
fuels. This agreement includes the right of the Company to sublicense this
technology. As part of this agreement the Company obtained from Mr. Tucker and
Mr. Harvey a contract licensing this technology to Carbon Products Industries,
Inc. This contract was reissued as a sublicense allowing Carbon Products
Industries, Inc. to use certain technology to convert wood waste into activated
carbon. Carbon Products Industries, Inc. will pay the Company a royalty of four
dollars ($4.00) per dry ton (of which the Company will pay National Synfuels
$2.00 per dry ton) of material processed using the Company's technology.
Various loans totaling $200,314, as of December 31, 1997 have been made to
Carbon Products Industries, Inc. The notes are payable on demand at an interest
rate of 8% per annum. The notes are secured by a thermal process unit, which is
in the possession of the Company at its Alabama location. A non-operating
investment loss has been expensed to reflect management's opinion as to the
collectable value of these loans.
Note 8. Income Taxes
The consolidated statements include Southern Ventures, Inc. and its
subsidiaries. All inter-company transactions were eliminated for consolidation
purposes. Prior to November 1997 the company's subsidiaries Elmore Sand &
Gravel, Inc. and Tuskegee Sand & Gravel, Inc. had elected Chapter S of the
Internal Revenue Code for income tax reporting. Provisions made for Federal and
State income taxes are reflected on a pro forma basis as if the acquisition of
these subsidiaries had occurred at the beginning of the year. On a pro forma
basis no income tax liability would have been incurred.
Since the Company has incurred only losses prior to its acquisition of Elmore
Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. and due to the degree of
uncertainty related to the use of the loss, the Company has fully reserved this
benefit. At October 31, 1997 the Company had a tax net operating loss of
approximately $ 1,109,704 available to offset federal and state taxable income.
In accordance with Section 382 of the Internal Revenue Code, the use of the
above loss may be subject to annual limitations based upon ownership changes of
the Company's stock which have occurred.
Note 9 - Acquisition of Subsidiaries
On October 22, 1997 the Company acquired from Mr. Bobby Harvey 100% ownership of
Elmore Sand & Gravel, Inc. and Tuskegee Sand & Gravel, Inc. in exchange for ten
million (10,000,000) shares of the Company's voting preferred stock. It was
agreed by both parties that for the purpose of accounting and preferred dividend
recognition the effective date of the exchange would be November 1, 1997.
Note 10 - Other income / expense
Included in other expense for the year ended December 31, 1997 is an $100,167
investment loss for a bad debt allowance due to the degree of uncertainty
related to the note receivable due from Carbon Products Industries, Inc (see
Note 7. - Commitments and Contingencies). During fiscal year 1997 the Company
had a net exchange rate gain of $143.
Note 11 - Subsequent Activities
In April 1998, the purchase of land owned by Northwood Pulp and Timber Limited
(see Note 7. - Commitments and Contingencies) was terminated and the Company
received a full refund of its down payment.
The $2,000,000 current note payable and $3,000,000 long-term note payable to
Archer Daniels Midland, Inc. were renegotiated and no payments are due until
December 1997.
SIGNATURES
In accordance with the requirements of Sections 13 or 15(d) of the Exchange
Act of 1934, as amended, the Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
"Registrant"
Southern Ventures, Inc.
Dated June 30, 1998 By: /s/ Bobby H. Harvey
------------------------------------
Bobby H. Harvey, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Bobby H. Harvey Chief Executive Officer June 30, 1998
- - ------------------------ President and Director
Bobby H. Harvey
/s/ Chester I. Wright III Chief Financial Officer June 30, 1998
- - ------------------------- Treasurer and Director
Chester I. Wright III
/s/ William B. Wood Secretary, Vice President June 30, 1998
- - ------------------------ and Director
William B. Wood
Supplemental Information To Be Furnished With Reports Filed Pursuant to
Section 15(d) Of The Securities Exchange Act Of 1934, As Amended, By Non-
Reporting Issuers.
(c) No annual report or proxy material has been sent to security holders.
EXHIBIT 10.(ii)(a)
Exhibit 10.(ii)(a) Amendment Between ADM AGRI-INDUSTRIES, LTD. and Riverside
Grain Products, Inc. Dated May 22, 1998
ADDENDUM
THIS ADDENDUM is made this 22 day of May, 1998, by and among ADM Agri-
Industries, Ltd., a corporation incorporated under the laws of Ontario
("Vendor"), Riverside Grain Products, Inc., a corporation incorporated under the
laws of Ontario ("Purchaser"), and Southern Ventures, Inc., a corporation
incorporated under the laws of Alberta ("SVI).
WITNESSETH:
WHEREAS, the parties entered into that certain agreement made as of
November 11, 1997 relative to Vendor's starch and gluten manufacturing facility
and adjacent Saskatchewan Wheat Pool #8 facility located in Thunder Bay, Ontario
(the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement.
NOW, THEREFORE, in consideration of the remises, the mutual covenants as
set forth in this Addendum, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Capitalized terms not otherwise defined in this Addendum shall have
the meaning described to them in the Agreement.
2. Section 2,3 of the Agreement is hereby deleted in the entirety and
replaced with the following provision:
The amounts referred to in Section 2.2 shall be paid in
installments by wire transfer of funds on the dates and in the amounts set out
in Schedule "F" to Vendor's account at the Bank of Montreal in Toronto, Ontario,
account number ###-###-### or such other accounts as Vendor may from time to
time designate in writing. Notwithstanding the foregoing, SVI represents that
it is using its best efforts to obtain refinancing, including the relating to
Purchaser, and if the such refinancing is obtained, Purchaser shall pay Vendor
the balance of the purchase price, plus accrued interest, within thirty (30)
days of finalizing such refinancing.
3. Exhibit "F" to the Agreement is hereby deleted in its entirety and
replaced with Schedule "F" as attached to this Addendum.
4. The following provision shall be added as Section 9.8 of the
Agreement:
Vendor's Repairs. Within a reasonable time following receipt of
notice from Purchaser that operations at the Facilities have been commenced and
Purchaser desires the repairs be made, Vendor, at its expense, shall make the
following repairs and/or replacements:
1
<PAGE>
(i) dextrinizer repair;
(ii) replace fire escape stairs (and other security measures);
(iii) replace P&S dryer steam coils;
(iv) replace emergency lighting system; and
(v) repair P5000
Purchaser and SVI acknowledge that, subject to making the above-stated repairs
and/or replacements, Vendor's representations and warranties as set forth in the
Agreement shall be deemed true and correct in all material respects and shall
expire effective as of the date of this Addendum.
5. In the event of a conflict between the terms of this Addendum and
the terms of the Agreement, the terms of this Addendum shall control.
6. Except as modified by this Addendum, the terms of the Agreement
remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Addendum, this 22 day of
May, 1998.
ADM AGRI-INDUSTRIES, LTD.
BY: David Smith
ITS:
RIVERSIDE GRAIN PRODUCTS, INC.
BY: Dennis Saunders
ITS: President
SOUTHERN VENTURES, INC.
BY: Bobby H. Harvey
ITS: CEO
2
<PAGE>
SCHEDULE F
DATES AND AMOUNTS OF INSTALLMENT PAYMENTS
ATTACHED TO AND FORMING PART OF THE AGREEMENT AMONG
ADM AGRI-INDUSTRIES, LTD., RIVERSIDE GRAIN PRODUCTS, INC. AND
SOUTHERN VENTURES, INC. DATED NOVEMBER 11, 1997
November 19, 1997 $47,206
December 19, 1997 $56,648
December 1, 1998 $62,942*
January 1, 1999 $562,942*
February 1, 1999 $62,942*
March 1, 1999 $62,942*
April 1, 1999 $62,942*
May 1, 1999 $62,942*
June 1, 1999 $62,942*
July 1, 1999 $62,942*
August 1, 1999 $62,942*
September 1, 1999 $62,942*
October 1, 1999 $62,942*
November 1, 1999 $65,460*
December 1, 1999 $65,460*
January 1, 2000 $65,460*
February 1, 2000 $565,460*
March 1, 2000 $65,460*
April 1, 2000 $65,460*
May 1, 2000 $65,460*
June 1, 2000 $62,942*
July 1, 2000 $62,942*
August 1, 2000 $62,942*
September 1, 2000 $62,942*
October 1, 2000 $546,666*
All amounts expressed in U.S. Dollars
*Plus interest at the "prime rate" as from time to time reflected in the Wall
Street Journal calculated from November 19, 1998.
3
<PAGE>
EXHIBIT 10.(viii)
Exhibit 10.(viii) Employment Agreement Between the Company and Rich Nutter
Dated May 6, 1998.
May 6, 1998
Rich Nutter
1213 N. Front Street
Russell, KS 67665
Dear Rich:
On behalf of Shareholders and Directors of Southern Ventures, Inc. (the
Company), I would like to offer you the position of Vice President of
Manufacturing. The compensation offered to you for these duties is an annual
salary of $55,000. This initial salary will be based on the project in Thunder
Bay (3 weeks on and on week off). We will revise the salary after the project
is completed as discussed. Also, since this position will require a great deal
of travel, a car allowance of $350 per month will be paid. The benefits for
this position will be implemented through Southern Ventures, Inc. U.S. and are
currently under consideration by corporate management
As Vice President of Manufacturing, it is expected that you will be involved in
the day-to-day operations of Southern Ventures manufacturing facilities. You
would provide leadership and support to all the facilities; participate as a
member of the management team of the "Company" in the development and
implementation of new projects and seek to maximize corporate profitability
through innovative efforts. You will be expected to contribute suggestions to
the Vice President of Southern Ventures, Inc. in providing corporate goals and
directives.
If everything in this offer is acceptable, please sign the bottom of this offer
and fax back to me at (807) 622-6847. If you have any questions, please call me
at (807) 622-6747.
Sincerely,
- - --------------------------
Dennis H. Saunders,
Vice President,
Southern Ventures, Inc.
Acceptance of Offer
- - --------------------------- --------------
Donald C. Swanson Date
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SOUTHERN VENTURED, INC. AND SUBSIDIARIES AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 181,685
<SECURITIES> 0
<RECEIVABLES> 543,589
<ALLOWANCES> 0
<INVENTORY> 465,018
<CURRENT-ASSETS> 1,245,389
<PP&E> 11,864,283
<DEPRECIATION> 1,849,209
<TOTAL-ASSETS> 11,487,598
<CURRENT-LIABILITIES> 3,421,797
<BONDS> 0
0
10,000
<COMMON> 18,937
<OTHER-SE> 1,857,942
<TOTAL-LIABILITY-AND-EQUITY> 11,487,598
<SALES> 4,015,837
<TOTAL-REVENUES> 4,015,837
<CGS> 1,833,586
<TOTAL-COSTS> 1,833,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100,024
<INTEREST-EXPENSE> 283,238
<INCOME-PRETAX> 18,300
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,300
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
