<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>body.txt
<DESCRIPTION>VICTORIA INDUSTRIES 10QSB 3-31-2005
<TEXT>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED
MARCH 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-27189
VICTORIA INDUSTRIES , INC.
(Name of Registrant as specified in its charter)
NEVADA 98-0230423
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
551 Fifth Avenue, Suite 601
New York, New York 10017
(Address of principal executive office) (Zip Code)
(Former name or address, if changed since last report)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 973-0063
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 month (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_
Indicate the number of shares outstanding of each of the issuer`s classes of
common stock , as of the latest practicable date:
Common Stock, $0.001 par value 10,965,090
(Class) (Outstanding as of August 5, 2005)
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VICTORIA INDUSTRIES, INC.FORM
10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets - March 31, 2005 and December 31, 2004 . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Loss - for the three months ended
March 31, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholder's Equity (Capital Deficit)and
- March 31, 2005 December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows - for the three months ended
March 31, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . .
Item 2. Management's Discussion and Analysis of Principal Condition and Operations . . . . . . . . . .
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . .
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. . . . . . . . . . . . . . . . . .
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . .
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES
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<TABLE>
<CAPTION>
VICTORIA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
UNAUDITED
----------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2005 2004
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 5) $ 45,796 $ 14,752
Accounts receivable (Note 6) 375,338 120,453
Related party receivable - current portion (Note 7) 201,993 134,137
VAT receivable and other taxes prepaid 114,556 54,248
Inventories (Note 8) 85,721 36,321
Prepayments and other current assets (Note 9) 136,207 226,949
Deferred tax asset (Note 10) 41 -
-------------- --------------
Total current assets 959,652 586,860
Property, plant and equipment, net (Note 11) 659 739
Related party receivable (Note 7) 326,341 390,098
-------------- --------------
TOTAL ASSETS $ 1,286,652 $ 977,697
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings from related parties (Note 12) $ 77,925 $ 77,925
Accounts payable (Note 13) 400,770 93,399
Taxes payable 6,261 275
Deferred tax liability (Note 10) - 11,195
Other current liabilities (Note 14) 3,041 2,618
-------------- --------------
Total current liabilities 487,997 185,412
Commitments and Contingencies (Note 20)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 10,965,090 shares issued and outstanding
(Note 15) 10,965 10,965
Additional paid-in capital 1,769,267 1,749,878
Accumulated deficit (992,151) (980,279)
Accumulated other comprehensive loss - foreign currency 10,574 11,721
-------------- --------------
Total stockholders' equity 798,655 792,285
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,286,652 $ 977,697
============== ==============
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<TABLE>
<CAPTION>
VICTORIA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(EXPRESSED IN US DOLLARS, EXCEPT SHARE AMOUNTS)
UNAUDITED
---------------------------------------------------------------------------
FOR THE PERIODS ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ------------
<S> <C> <C>
REVENUES $ 594,204 $ 721,186
COST OF SALES (406,546) (631,188)
------------ ------------
187,658 89,998
OPERATING EXPENSES
Sales, general and administrative (Note 16) (184,657) (62,247)
Compensation (Note 17) (19,389) (27,124)
Professional fees (Note 18) - (15,000)
Depreciation and amortization (77) (186)
------------ ------------
(204,123) (104,557)
OPERATING LOSS (16,465) (14,559)
OTHER INCOME (EXPENSE)
Interest income (expense), net 3,784 -
Other expense, net (3,811) (6,307)
------------ ------------
LOSS BEFORE TAX AND MINORITY INTEREST (16,492) (20,866)
FOREIGN INCOME TAX (Note 10) 4,620 (6,527)
MINORITY INTEREST - 5,632
------------ ------------
NET LOSS (11,872) (21,761)
------------ ------------
Other comprehensive loss
Foreign currency translation gain (loss) (1,147) 39,397
------------ ------------
COMPREHENSIVE LOSS $ (13,019) $ 17,636
============ ============
BASIC DILLUTED (LOSS) PER SHARE $ 0.001 $ 0.002
From Continuing operations
WEIGHTED AVERAGE COMMON SHARES 10,965,090 10,965,090
OUTSTANDING
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<CAPTION>
VICTORIA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
UNAUDITED
(EXPRESSED IN US DOLLARS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL ACCUMULATED ACCUMULATED TOTAL
PAID-IN OTHER (DEFICIT) STOCKHOLDERS'
CAPITAL COMPREHENSIVE EQUITY
SHARES AMOUNT (LOSS) (CAPITAL DEFICIT)
---------- ------- ----------- --------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 2003 10,965,090 $10,965 $ 1,650,022 $ (33,924) $ (887,958) $ 739,105
Contributed services - - 99,856 - - 99,856
Comprehensive (loss) for the year - - - 45,645 - 45,645
Net loss for the year - - - - (92,321) (92,321)
---------- ------- ----------- --------------- ------------- ------------------
DECEMBER 31, 2004 10,965,090 10,965 1,749,878 11,721 (980,279) 792,285
Contributed services (Note 17) - - 19,389 - - 19,389
Comprehensive gain (loss) for the period - - - (1,147) - (1,147)
Net loss for the period - - - - (11,872) (11,872)
---------- ------- ----------- --------------- ------------- ------------------
MARCH 31, 2005 10,965,090 $10,965 $ 1,769,267 $ 10,574 $ (992,151) $ 798,655
========== ======= =========== =============== ============= ==================
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<TABLE>
<CAPTION>
VICTORIA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
UNAUDITED
-------------------------------------------------------------------------------------------
FOR THE PERIODS ENDED
MARCH 31, MARCH 31,
2005 2004
----------- -----------
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net loss from continuing operations for the period $ (11,872) $ (21,761)
Adjustments to reconcile net loss from continuing
operations to net cash in operating activities:
Minority interest - 10,994
Contributed services by shareholders 19,389 27,124
Deferred tax expense (gain) (11,236) 5,619
Loss on disposal of fixed assets 3 56
Depreciation 77 186
Changes in current assets and liabilities:
Net accrued interest income (expense), net (4,099) -
(Increase) in accounts receivable (254,885) (43,008)
(Increase) decrease in prepaid expenses and other current assets 90,742 6,234
(Increase) in inventories (49,400) (240,192)
(Increase) in VAT receivable and other taxes prepaids (60,308) (55,974)
Increase (decrease) in accounts payable 279,175 (21,510)
Increase in taxes payable 5,986 507
Increase in other accounts payable 28,619 18,327
----------- -----------
NET CASH FLOW FROM OPERATING ACTIVITY 32,191 (313,398)
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds on loans from related parties - 32,954
----------- -----------
NET CASH FLOW FROM FINANCING ACTIVITY - 32,954
CASH USED IN INVESTING ACTIVITY:
Short term loans given - (3,283)
Promissory notes purchased - (28,767)
----------- -----------
NET CASH FLOW FROM INVESTING ACTIVITY - (32,050)
----------- -----------
Effect of exchange rate changes (1,147) 39,397
----------- -----------
INCREASE (DECREASE) IN CASH: 31,044 (273,097)
CASH, AT THE BEGINNING OF THE PERIOD 14,752 333,236
----------- -----------
CASH, AT THE END OF THE PERIOD $ 45,796 $ 60,139
=========== ===========
<FN>
(1) Income Tax paid in the amount of $6,616 and $908 for the three months ended
March 31, 2005 and 2004, respectively.
</TABLE>
<PAGE>
1. NATURE OF BUSINESS
Victoria Industries, Inc. was incorporated on January 25, 2000 under the
laws of the State of Nevada. Prior to 2003, Victoria Industries, Inc. was
regarded as a "development stage enterprise" and was involved in businesses
unrelated to the current operations. All interest in prior businesses has
been disposed of prior to the periods covered in the consolidated financial
statements. As 2003 was the first year in which material revenues were
recognized, the management believes that Victoria Industries, Inc. should
no longer be regarded as a "development stage company".
The current principal activities of Victoria Industries, Inc. and its'
subsidiaries (collectively referred to as the "Group") as of March 31, 2005
and December 31, 2004 were as follows:
<TABLE>
<CAPTION>
OPERATING ENTITY PRINCIPAL ACTIVITY COUNTRY OF MARCH 31, DECEMBER 31,
INCORPORATION 2005 2004
Control %
-------------------------------- ------------------------ ------------- ---------- ------------------
<S> <C> <C> <C> <C>
Victoria Industries, Inc. Holding company United States - -
of America
Victoria Resources, Inc. Marketing and United States 100% 100%
distribution of forestry of America
products
Victoria Lumber, LLC Marketing and Russian 100% 100%
distribution of forestry Federation
products
Victoria Siberian Wood, LLC Marketing and Russian - -
distribution of forestry Federation
products
Coptent Trading Limited Marketing and Cyprus 100% 100%
distribution of forestry
products
</TABLE>
The principal executive office of the Group is situated at the following
address: 551 Fifth Avenue, Suite 601, New York, NY 10017, USA. The
principal operating office of the Group is located at the following
address: 2-B Vitebskaya Street, Suite 1-A, 454080 Chelyabinsk, Russian
Federation.
The number of employees of the Group at March 31, 2005 and December 31,
2004 was 12 and 10, respectively.
The principal customers of the Group are based in Eastern Siberia and Far
East regions of Russia, and North provinces of China: Inner Mongolia and
Heyluntszyan.
GOING CONCERN - These consolidated financial statements have been prepared
on a going concern basis which assumes that adequate sources of financing
will be obtained as required and that our assets will be realized and
liabilities settled in the ordinary course of business. Accordingly, these
consolidated financial statements do not include any adjustments related to
the recoverability of assets and classification of assets and liabilities
that might be necessary should we be unable to continue as a going concern.
In order to continue as a going concern, the Group requires additional
financing. There can be no assurance that additional financing will be
available to us when needed or, if available, that it can be obtained on
commercially reasonable terms. If the Group is not able to continue as a
going concern, it would likely be unable to realize the carrying value of
the Group's assets reflected in the balances set out in the preparation of
consolidated financial
<PAGE>
statements. There is substantial doubt about Group's ability to continue as
a going concern as it has just commenced operations in Russia and has
incurred recurring operating losses.
Management plans to recover its' current losses through extensive marketing
policy and flexible shipment terms being offered to its new clients for
2005.
2. PRESENTATION OF FINANCIAL STATEMENTS
BASIS OF PRESENTATION - The consolidated financial statements have been
prepared in accordance with the requirements of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" (SFAS 52).
Russian subsidiaries of the Group maintain their accounting records in
Russian Rubles in accordance with the accounting and reporting regulations
of the Russian Federation. Russian statutory accounting principles and
procedures differ substantially from those generally accepted under US
GAAP. Accordingly, the consolidated financial statements, which have been
prepared from the Group's Russian statutory accounting records, reflect
adjustments necessary for such financial statements to be presented in
accordance with US GAAP.
The accompanying financial statements have been presented in accordance
with accounting principles generally accepted in the U.S. Russian
subsidiaries of the Group maintain their accounting records in Russian
Rubles in accordance with the accounting and reporting regulations of the
Russian Federation. However, the subsidiaries' financial statements have
been converted to U.S. GAAP for inclusion in these financial statements.
USE OF ESTIMATES AND ASSUMPTIONS - The preparation of consolidated
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and the disclosure of contingent assets
and liabilities. Due to the inherent uncertainty in making those estimates,
actual results reported in future periods could differ from such estimates.
FUNCTIONAL AND REPORTING CURRENCY - The functional currency of the Group is
the U.S. dollar. Certain subsidiaries keep their financial records and
transact most of its transactions in Russian Rubles, their functional
currencies. Their financial statements have been translated into U.S.
dollars using year end foreign exchange rates for assets and liabilities,
average foreign exchange rates for income and expenses, and rates for
common stock issuance that were in effect on the dates of the transactions.
Translation differences from year to year resulting from varying exchange
rates are reflected in other comprehensive income. Remeasurement
differences from settlements of transactions in currencies other than the
functional currency are reflected in the statement of income.
The prevailing exchange rates at March 31, 2005 and December 31, 2004 were
approximately 1 U.S. dollar to 27.83 and 27.7487, Russian rubles,
respectively. For the periods ended March 31, 2005 and 2004, the average
exchange rate for 1U.S. dollar was 27.84, 28.6278, Russian rubles,
respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements incorporate
the financial statements of Victoria Industries, Inc. and other
enterprises, where the Group, directly or indirectly exercises control.
Control is achieved where the Group has the power to govern the financial
and operating policies of an investee enterprise so as to obtain benefits
from its activities.
<PAGE>
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those
used by other members of the Group. The interest of minority shareholders
is stated at the minority's proportion of the carrying values of the assets
and liabilities recognized.
All significant intercompany transactions, balances and unrealized gains
(losses) on transactions are eliminated on consolidation.
REVENUE RECOGNITION - For revenue from product sales, the Group recognizes
revenue in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" ("SAB 104"). SAB 104 requires that
four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured.
Criterion (1) is met as every delivery is covered by a separate contract
and the title passes to the customer only upon customer's acceptance at
point of destination, which is in compliance with criterion (2).
Determination of criteria (3) and (4) are based on management's judgments
regarding the fixed nature of the selling prices of the products delivered
and the collectibility of those amounts. Provisions for discounts and
rebates to customers, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for
which the product has not been delivered and accepted by its customers. In
accordance with the Company's standard contract terms, once delivered and
accepted the product cannot be returned and no claims can be presented to
the Company. The Company recognizes revenue on gross basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost.
Depreciation is computed under the straight-line method utilizing useful
lives of the assets, which are:
Office Equipment 4 - 6 years
Computer Equipment 3 years
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the carrying
amount of the asset and is recognized in the income statement.
LEASING - There were no assets held under capital leases. Operating lease
expenses are written of in the profit and loss account in the period in
which they are incurred.
INVENTORIES - Inventories are stated at the lower of cost or net realizable
value. Cost comprises direct cost of products purchased, customs duties,
transportation and handling costs. Cost is calculated using specific
identification method. Net realizable value represents the estimated
selling price less all estimated costs to completion and costs to be
incurred in marketing, selling and distribution.
ACCOUNTS RECEIVABLE - Accounts receivable are stated at their net
realizable value after deducting provisions for uncollectible amounts.
Provision is estimated based on credit history of particular customers.
CASH AND CASH EQUIVALENTS - Cash include petty cash and cash held on
current bank accounts. Cash equivalents include short-term investments with
a maturity of 3 months or less that are readily convertible to known amount
of cash and which are subject to insignificant risk of changes in value.
<PAGE>
LOANS AND OTHER NON-BANK BORROWINGS - All loans and borrowings are
initially recorded at the proceeds received, net of direct issue costs.
After initial recognition all loans and borrowings are subsequently
measured at amortized cost, which is calculated by taking into account any
discount or premium on settlement.
CONVERTIBLE NOTES AND OTHER DEBT SETTLED WITH GROUP'S COMMON STOCK - The
Company accounted for convertible notes and other debt settled with the
Group's in stock at the amount of the actual debt converted. The Company
believes the additional issuance of a large amount of stock would have
greatly effected the quoted market value of stock because of the small
amount of freely trading stock compared to the additional issuance, i.e.
the best measure of the actually fair market value of the stock issued is
the amount of the debt converted.
TRADE AND OTHER PAYABLES - Liabilities for trade and other amounts payable
are stated at their nominal value.
VALUE ADDED TAX ON PURCHASES AND SALES - Value added taxes (VAT) related to
sales is payable to tax authorities upon collection of receivables from
customers. Input VAT is reclaimable against sales VAT upon payment for
purchases. The tax authorities permit the settlement of VAT on a net basis.
VAT related to sales and purchases which have not been settled at the
balance sheet date (VAT deferred) is recognized in the balance sheet on a
gross basis and disclosed separately as a current asset and liability.
Where provision has been made against debtors deemed to be uncollectable
bad debt expense is recorded for the gross amount of the debtor, including
VAT. The related VAT deferred liability is maintained until the debtor is
settled or until the debtor is written off for statutory accounting
purposes.
INCOME TAXES - Income tax has been computed based on the results for the
year as adjusted for items that are non-assessable or non-tax deductible.
The Group has adopted Financial Accounting Standards No. 109 ("SFAS 109"),
under which the deferred tax is accounted for using the balance sheet
liability method in respect of temporary differences arising from
differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax basis used in the
computation of taxable profit. Deferred tax liabilities are generally
recognized for all taxable temporary differences and deferred tax assets
are recognized to the extent that it is probable that taxable profits will
be available against which deductible temporary differences can be
utilized. Deferred tax assets and liabilities are offset when they relate
to income taxes levied by the same taxation authority and the Group intends
to settle its tax assets and liabilities on a net basis.
Deferred tax is calculated at rates that are expected to apply to the
period when the asset is realized or the liability is settled. It is
charged or credited to the income statement, except when it relates to
items credited or charged directly to equity, in which case the deferred
tax is also dealt with in equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Group's financial instruments
consist of cash, accounts receivable, short term loans given, accounts
payable and accrued liabilities and amounts due to directors. Unless
otherwise noted, it is management's opinion that the Group is not exposed
to significant interest, currency or credit risks arising from these
financial instruments. The fair value of financial instruments approximate
their carrying values due to the immediate or short term maturity of these
financial instruments.
<PAGE>
STOCK BASED COMPENSATION - The Group applies Accounting Principles Board
("APB") opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for stock option grants to employees.
Under APB 25, compensation cost is recognized for stock options granted to
employees at prices below the market price of the underlying common stock
on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Group
to provide pro-forma information regarding net income as if compensation
cost for the Group's stock options had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. The value of stock
options granted to consultants is recognized in these consolidated
financial statements as compensation expense using the Black-Scholes option
pricing model. Compensation expense is remeasured on a quarterly basis
until fully vested for options not vested on the grant date.
LOSS PER SHARE - Loss per share is computed in accordance with SFAS No.
128, "Earnings Per Share". Basic loss per share is calculated by dividing
the net loss available to common stockholders by the weighted average
number of shares outstanding during the year. Diluted earnings per share
reflect the potential dilution of securities that could share in earnings
of an entity. In a loss year, dilutive common equivalent shares are
excluded from the loss per share calculation as the effect would be
anti-dilutive. Basic and diluted loss per share are the same for the years
presented.
COMPREHENSIVE INCOME - Statement of SFAS 130, "Reporting Comprehensive
Income," establishes standards for reporting and displaying of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
RETIREMENT BENEFIT COSTS - The operating entities of the Group situated in
the Russian Federation contribute to the state pension, medical and social
insurance and employment funds on behalf of all its current employees. Any
related expenses are recognized in the income statement as incurred. No
other retirement plans have been established.
SEGMENT REPORTING - The Group's business operations are located in the
Russian Federation and relate primarily to marketing and distribution of
forestry products. Therefore, business activities are subject to the same
risks and returns and addressed in the consolidated financial statements of
the Group as one reportable segment.
NEW ACCOUNTING PRONOUNCEMENTS - In December 2003, FASB issued a revision to
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" ("FIN 46R" or the "Interpretation"). FIN 46R
clarifies the application of ARB No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. FIN 46R requires the
consolidation of these entities, known as variable interest entities
("VIEs"), by the primary beneficiary of the entity. The primary beneficiary
is the entity, if any, that will absorb a majority of the entity's expected
losses, receive a majority of the entity's expected residual returns, or
both.
Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003,
(b) eased some implementation problems, and
<PAGE>
(c) added new scope exceptions. FIN 46R deferred the effective date of the
Interpretation for public companies, to the end of the first reporting
period ending after March 15, 2004, except that all public companies must
at a minimum apply the provisions of the Interpretation to entities that
were previously considered "special-purpose entities" under the FASB
literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003.
The Group is evaluating whether the adoption of FIN 46 will have a material
impact on its financial position, cash flows and results of operations. The
Group did not enter into any transactions under the scope of FIN 46R after
February 1, 2003.
In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the
codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The Group believes it is
following the guidance of SAB 104.
4. FOUNDATION AND DISPOSAL OF SUBSIDIARIES
VICTORIA RESOURCES, INC. - 100%
In September 2003, the Group contributed $1,000 into the establishment of a
wholly-owned subsidiary, Victoria Resources, Inc. in the State of New York
for the purpose of pursuing opportunities in the lumber resource sector.
VICTORIA LUMBER, LLC - 100%
In December 2003 the Group's subsidiary, Victoria Resources, Inc.,
contributed $300,000 into the establishment of new 100% owned subsidiary,
Victoria Lumber, LLC, based in Chelyabinsk, Ural region of the Russian
Federation.
Victoria Lumber LLC, was established in order to focus on marketing and
distribution of high-value added forestry products.
VICTORIA SIBERIAN WOOD, LLC - 51%
In December 2003 Victoria Resources, Inc., together with the third party,
Tomlespromivest LLC, Russian production enterprise, contributed $263,117
and $252,799, respectively, into the foundation of new entity, Victoria
Siberian Wood, LLC, which represented 51% and 49%, respectively. Victoria
Siberian Wood, LLC, was based in Novosibirsk, West Siberian region of the
Russian Federation and was established for the purpose of trading in
forestry products both in Russia and internationally.
In February 2004 the Group and minority shareholder, Tomlesprominvest LLC,
registered the increase in Victoria Sibwood, LLC share capital up to
$1,000,000 with no change in 51%:49% respective ownership structure. In the
first part of 2004 the Group contributed further $247,433 in order to
comply with new capital structure. As of June 30, 2004 the minority
shareholder did not contribute their share of the additional capital
increasing Group's actual shareholding up to 67%.
In August 2004 the Group decided to terminate its interest in Victoria
Siberian Wood, LLC, due to unresolved disputes with the minority
shareholder. As of December 31, 2004 the Group transferred its 51%
shareholding at the amount of total equity invested adjusted to the
valuation of the Russian
<PAGE>
Ruble, $551,377, in exchange for an interest free long term note with the
related party OOO TK Promtekhresurs (See Note 7). This transaction has been
valued at the discounted amount of future receivable.
Net assets of the Siberian Wood LLC as of June 30, 2004 were comprised as
follows:
<TABLE>
<CAPTION>
JUNE 30,
2004
----------
<S> <C>
Cash $ 36,144
Accounts receivable 581,131
Inventory 183,028
Property, plant and equipment 3,409
Other accounts receivable 2,489
Accounts payable and other liabilities (23,248)
----------
100% of Net Assets 782,953
67% of Net Assets 524,235
Less Related party receivable (Note 11)
At cost 551,377
Net of imputed interest at 3.165% (27,142)
----------
524,235
----------
NET GAIN ON DISPOSAL OF SIBERIAN WOOD $ -
==========
</TABLE>
The note is receivable in 8 equal quarterly installments, amounting to
$68,922 starting on September 30, 2005. The Company believes the net
current amount as of December 31, 2004 approximated the fair market value
the Company could have negotiated with a third party based on an
arms-length transaction.
COPTENT TRADING LTD - 100%
In April 2004 the Group's subsidiary, Victoria Resources Inc contributed
$10,095 into the establishment of new 100% owned subsidiary, Coptent
Trading Ltd., registered in Cyprus. The subsidiary was established in order
to provide better marketing and administration functions of lumber sales on
the Chinese market.
DISCONTINUED OPERATIONS
The operations of Victorian Siberian Wood have not been reported as
discontinued operations. Those activities were substantially the same as
the continuing business of the Company and the company considers the
disposal to be a sale of assets in the normal course of business. From the
perspective of the operations of the Company, it is no different than any
change in a vendor or representative.
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of March 31, 2005 and December 31, 2004
consisted of the following:
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Cash in banks, in USD $10,745 $10,745
------- -------
Cash in banks, in RUR 35,051 4,007
TOTAL $45,796 $14,752
======= =======
</TABLE>
<PAGE>
6. ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 2005 and December 31, 2004 consisted of
the following:
<TABLE>
<CAPTION>
2005 2004
-------- --------
<S> <C> <C>
Yon Chou $189,492 $ 9,546
Exintra 110,000 -
Dekra 58,761 58,933
Lesholding 10,691 22,163
DOK # 15 4,571 8,188
Chitalesholding 1,465 -
Arhipelag 358 1,802
Levita - 14,415
Baikallesexport - 5,406
-------- --------
TOTAL $375,338 $120,453
======== ========
</TABLE>
7. RELATED PARTY RECEIVABLE
In August 2004 the Group decided to dispose of its shareholding in Siberian
Wood LLC (See Note 4). As of December 31, 2004 the Group signed an
agreement with a related party TK Promtekhresurs to transfer its interest
in exchange for an interest free note, $551,377, repayable as follows:
<TABLE>
<CAPTION>
AT COST AT NET
PRESENT VALUE
MARCH 31,
2005
-------------- --------------
<S> <C> <C>
September 30, 2005 $ 68,922 $ 67,856
December 31, 2005 68,922 67,330
March 31, 2006 68,922 66,807
-------------- --------------
CURRENT PORTION 206,766 201,993
June 30, 2006 68,922 66,289
September 30, 2005 68,922 65,774
December 31, 2005 68,922 65,264
March 31, 2006 68,922 64,758
June 30, 2006 68,923 64,256
-------------- --------------
LONG TERM PORTION 344,611 326,341
-------------- --------------
TOTAL $ 551,377 $ 528,334
============== ==============
</TABLE>
The net recovered amount of the investment has been discounted
approximately at 3%, the estimated cost of capital as of March 31, 2005.
The net discounted amount of $528,334 is equal to the Company's share in
net assets of Siberian Wood LLC and approximates the Company's total
investment in the venture.
The Company believes this approximation equals to what that could be
negotiated with the third party based on arms-length transaction terms.
<PAGE>
8. INVENTORIES
Inventories as of March 31, 2005 and December 31, 2004 consisted of the
following:
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Hardwood lumber $85,721 $36,321
------- -------
TOTAL $85,721 $36,321
======= =======
</TABLE>
As of March 31, 2005 and December 31, 2004 hardwood lumber was valued at
the lower of specific identification cost or market.
9. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets as of March 31, 2005 and December 31,
2004 consisted of the following:
<TABLE>
<CAPTION>
2005 2004
-------- --------
<S> <C> <C>
Techkomservice - lumber prepayment $ 61,601 -
Lesholding - lumber prepayment 41,513 -
Levita- lumber prepayment 14,373 -
Baikallesexport- lumber prepayment 5,390 -
Chitalesholding - prepayment 2,827 $126,689
Yon Chou - lumber prepayment - 48,386
Exintra - lumber prepayment - 37,977
Deltatransservice - lumber prepayment - 914
Other 10,503 12,983
-------- --------
TOTAL $136,207 $226,949
======== ========
</TABLE>
10. INCOME TAX
The Group's provision for income tax for the periods ended March 31, 2005
and 2004 were as follows:
<TABLE>
<CAPTION>
2005 2004
--------- ---------
<S> <C> <C>
Current tax $ 6,616 $ 908
Deferred tax expense (gain) (11,236) 5,619
--------- ---------
TOTAL INCOME TAX CREDIT $ (4,620) $ 6,527
========= =========
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes.
The change for the period in the Group's deferred tax position is as
follows:
<TABLE>
<CAPTION>
2005 2004
--------- ---------
<S> <C> <C>
Net asset at the beginning of the period $(11,195) $ 1,298
Charged to (expense) income for the period 11,236 (12,493)
--------- ---------
NET (LIABILITY) ASSET AT THE END OF THE PERIOD
$ 41 $(11,195)
========= =========
</TABLE>
<PAGE>
The tax effect on the major temporary differences that give rise to the
deferred tax assets as at March 31, 2005 and December 31, 2004 is presented
below:
<TABLE>
<CAPTION>
2005 2004
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Deferred expenses written off $ 3 $ 1,552
Difference in depreciable value of
property, plant and equipment 38 38
--------- ---------
TOTAL 41 1,590
DEFERRED TAX LIABILITIES
Accounts receivable accruals - (12,785)
--------- ---------
NET DEFERRED TAX ASSET (LIABILITY) $ 41 $(11,195)
========= =========
</TABLE>
The taxation charge for the year is different from that which would be
obtained by applying the federal US statutory income tax rate to the net
loss before income tax. Below is a reconciliation of theoretical income tax
at 34% to the actual expense recorded in the Group's income statement:
<TABLE>
<CAPTION>
2005 2004
--------- ---------
<S> <C> <C>
(Loss) before income tax and)
minority interest $(20,591) $(20,866
Theoretical income tax (benefit)
at statutory rate (7,001) (7,094)
Adjustments due to:
Non deductible fair value 6,592 9,222
compensation adjustment
Other permanent differences (4,211) 4,399
--------- ---------
INCOME TAX EXPENSE $ (4,620) $ 6,527
========= =========
</TABLE>
At March 31, 2005 and December 31, 2004 the Group had a net operating loss
carry forward for purposes of US federal income tax of approximately
$48,500 and $50,000. No deferred tax asset has been recorded because of the
uncertainty of realization. The carry forwards expire in 2024 and 2023,
respectively.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2005 and December 31, 2004
consisted of the following:
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Computer equipment $1,230 $1,233
Accumulated Depreciation (571) (494)
------- -------
NET BOOK VALUE $ 659 $ 739
======= =======
</TABLE>
12. SHORT TERM BORROWINGS FROM RELATED PARTIES
Borrowings from related parties as of March 31, 2005 and December 31, 2004
consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Advances from the current shareholders $62,925 $62,925
Former directors 15,000 15,000
------- -------
TOTAL $77,925 $77,925
======= =======
</TABLE>
Advances from the shareholders as of March 31, 2005 and December 31, 2004
in amount of $62,925 represents non interest bearing borrowings repayable
on demand to finance administration of the New York office of the Company.
Borrowings from the former directors outstanding as of March 31, 2005 and
December 31, 2004 represented the outstanding balance of $15,000 of short
term loans obtained during the year ended December 31, 2002 and repayable
on demand.
13. ACCOUNTS PAYABLE
Accounts payable as of March 31, 2005 and December 31, 2004 consisted of
the following:
<TABLE>
<CAPTION>
2005 2004
-------- --------
<S> <C> <C>
Techkomservice - lumber payable $196,459 -
Exintra - commission payable 91,175 $ 42,693
BDO - Seidman - consulting fees 13,273 13,273
Lesholding- commission payable 24,106 -
Deltatranscenter - commission payable 9,615 -
Baikallesoexport - commission payable 6,607 -
BDO Dunwoody - audit fees - 15,383
Thomas Brown - legal fees 3,600 16,763
Other 55,935 5,287
-------- --------
TOTAL $400,770 $ 93,399
======== ========
</TABLE>
14. OTHER CURRENT LIABILITIES
Other payables as of March 31, 2005 and December 31, 2004 consisted of the
following:
<TABLE>
<CAPTION>
2005 2004
------ ------
<S> <C> <C>
Payroll 1,675 1,120
Payroll related taxes 354 523
Cenex Continental 975 975
Other 37 -
------ ------
TOTAL $3,041 $2,618
====== ======
</TABLE>
15. COMMON STOCK
At March 31, 2005 and December 31, 2004 the Company had 10,965,090 ordinary
shares, issued and fully paid with a par value of $0.001 US dollar.
The holders of ordinary shares have voting rights but no guarantee of
dividends. Distributable profits are determined on the basis of profits
reported in statutory financial statements of the Group entities. These
profits differ from profits recorded under US GAAP.
<PAGE>
No dividends were declared or paid during the periods ended March 31, 2005 and
December 31, 2004.
16. SALES, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the periods ended March
31, 2005 and 2004 consisted of the following:
<TABLE>
<CAPTION>
2005 2004
-------- -------
<S> <C> <C>
Transportation costs $158,612 $26,520
Commission 7,175 71
Payroll and payroll related taxes 4,952 10,865
Rent 3,659 23,054
Customs fees 3,648 547
Fines 975 -
Bank services 679 2
Taxes, other than income tax 628 455
Travel and promotion 521 -
Legal and professional services 216 -
Other 3,592 733
-------- -------
TOTAL $184,657 $62,247
======== =======
</TABLE>
Rent is payable for the office space leased from related parties in
Cheliabinsk and New York. Rent price is not materially different from that
which could have been negotiated with third party based on arms length
terms.
17. COMPENSATION
Compensation expenses for the periods ended March 31, 2005 and 2004
consisted of the following:
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Fair value adjustment - executive
compensation $19,389 $27,124
------- -------
TOTAL $19,389 $27,124
======= =======
</TABLE>
Fair value estimation of the Group's executive compensation expense for the
periods ended March 31, 2005 and 2004 was performed based on the available
market information on the comparable companies and subsequent employment
agreements.
Fair value adjustment on the executive compensation represents an excess of
estimated fair value for services contributed over contractual salary and
has been reflected as additional paid in capital.
<PAGE>
18. PROFESSIONAL FEES
Professional fees for the periods ended March 31, 2005 and 2004 consisted
of the following:
<TABLE>
<CAPTION>
2005 2004
------- -------
<S> <C> <C>
Filing, other professional fees - $15,000
------- -------
TOTAL - $15,000
======= =======
</TABLE>
19. RELATED PARTIES
Related parties include shareholders, affiliates and entities under common
ownership, over which the Group has the ability to exercise a significant
influence.
Transactions with related parties are performed on terms that may not
necessarily be available to unrelated parties.
For details of related party balances outstanding as of March 31, 2005 and
December 31, 2004 see Notes 4, 7 and 12.
20. COMMITMENTS AND ONTINGENCIES
LEASE COMMITMENTS - The Group's outstanding lease commitments as of March
31, 2005, are presented as follows:
<TABLE>
<CAPTION>
2004
------
<S> <C>
2005 $5,749
------
2006 -
2007 -
2008- 2009 -
------
TOTAL $5,749
======
</TABLE>
LITIGATION - The Group has been and continues to be the subject of legal
proceedings and adjudications from time to time, none of which has had,
individually or in the aggregate, a material adverse impact on the Group.
Management believes that the resolution of all business matters will not
have a material impact on the Group's financial position or operating
results.
RUSSIAN FEDERATION TAX AND REGULATORY ENVIRONMENT - The government of the
Russian Federation continues to reform the business and commercial
infrastructure in its transition to a market economy. As a result laws and
regulations affecting businesses continue to change rapidly. These changes
are characterized by poor drafting, different interpretations and arbitrary
application by the authorities. In particular taxes are subject to review
and investigation by a number of authorities enabled by law to impose fines
and penalties. While the Group believes it has provided adequately for all
tax liabilities based on its understanding of the tax legislation, the
above facts may create tax risks for the Group.
21. RISK MANAGEMENT POLICIES
Management of risk is an essential element of the Group's operations. The
main risks inherent to the Group's operations are those related to credit
risk exposures, market movements in foreign
<PAGE>
exchange rates and in interest rates. A description of the Group's risk
management policies in relation to those risks follows.
CREDIT RISK - The Group is exposed to credit risk which is the risk that
one party to a financial instrument will fail to discharge an obligation
and cause the other party to incur a financial loss.
The Group structures the levels of credit risk it undertakes by placing
limits on the amount of risk accepted in relation to one customer, or
groups of customers. Limits on the level of credit risk by customer are
approved by the Credit Committee.
CURRENCY RISK - Currency risk is defined as the risk that the value of a
financial instrument will fluctuate due to changes in foreign exchange
rates. The Credit Committee sets limits on the level of exposure by
currencies (primarily US Dollar), by entities and in total. Sales in excess
of 20% to any one customer for the periods ended March 31, 2005 and 2004
were as follows:
<TABLE>
<CAPTION>
2005 2004
-------- --------
<S> <C> <C>
Yon Chou $594,204 -
Snabresource LLC - $415,182
Other - 306,004
-------- --------
TOTAL $594,204 $721,186
======== ========
</TABLE>
Customers are Russian and Chinese operating companies involved in
construction and lumber trading.
INTEREST RATE RISK - Interest rate risk arises from the possibility that
changes in interest rates will affect the value of the financial
instruments. Currently, the Group management approach to the interest risk
limitation is borrowing at fixed rates.
22. CONCENTRATION OF BUSINESS RISK
The Group's business activities are within the Russian Federation. Laws and
regulations affecting businesses operating in the Russian Federation are
subject to rapid changes and the Group's assets and operations could be at
risk due to negative changes in the political and business environment.
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF PRINCIPAL CONDITION AND OPERATIONS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
----------------------------------------------
RESULTS OF OPERATIONS
Revenues recognized for the periods ended March 31, 2005 and 2004 amounted to
$594,204 and $721,186. Cost of sales for the respective periods, 2005 and 2004,
consisted mainly of purchased logs and transportation cost in amounts of
$406,546 and $631,188.
The significant increase in sales for the three months ended March 31, 2005, in
comparison with respective period 2004 was mostly due to the increased volumes
of pine, larch, birch and plywood in amounts of 2,951 (2004: 2,570) cubic
meters; 2,946 (2004: none) cubic meters, 994 (2004: none) and none (2004:
113,035) square meters, respectively, which translated into revenues of $219,845
(2004: $99,495), $195,241 (2004: $none), $179,118 (2004: none) and $none (2004:
$621,691), respectively.
Cost of sales as of March 31, 2005 (2004) consisted primarily of pine, larch,
birch and plywood purchase costs and transportation amounting to $154,294 (2004:
$82,185), $122,280 (2004: $none), $129,972 (2004: none) and $none (2004:
$549,003), respectively.
The relatively low gross margin has been caused by, on average, a 10-15%
discount to the prevailing market price that we provided to our customers in an
effort to aggressively enter the marketplace. We expect to gradually reduce this
discount as we establish our reputation on the market. No assurance can be given
as to when and if we become an established supplier and as to whether or not
this would allow us to sell at prevailing market prices. We also expect to
secure better terms from our suppliers, which may further improve our gross
margin in the future. There is no assurance as to when and if these will be
achieved.
In order to establish its reputation in the market, the Group had to provide
attractive credit terms to suppliers and customers resulting in substantial
prepayment and account receivable balances as of March 31, 2005 and December 31,
2004 in amounts of $136,207 and $226,949, respectively.
During the periods ended March 31, 2005 and 2004, we incurred total operating
expenses of $204,438 and $104,557, respectively, consisting mainly of
compensation ($19,389 and $27,124, respectively), professional fees ($none and
$15,000, respectively) and sales, general and administrative expenses of
($185,049 and $62,247, respectively).
Compensation expense for the periods ended March 31, 2005 and 2004 consists of
$19,389 and $27,124 of the imputed value of services provided by the Directors
for which no fees are due. These amounts have been recorded as additional
capital contributions.
Sales, general and administrative expenses for the periods ended March 31, 2005
and 2004 include primarily, transportation costs of $158,612 and $26,520,
storage and office rent expense of $3,659, $23,054, commission for logistics
services of $7,175 and $71, payroll and payroll related taxes of $4,952 and
$10,865, customs fees of $3,648 and $547, respectively. Transportation costs for
the three months ended March 31, 2005 increased substantially in comparison with
the respective period of 2004 mostly due to the export operations started at the
end of 2004.
Long term assets of the Group as of March 31, 2005 and December 31, 2004 were
represented by the long term related party receivable and property, plant and
equipment in amounts of $323,809 and $390,098 and $659 and $739, respectively.
<PAGE>
In August 2004 the Group decided to dispose of its 51% shareholding in Siberian
Wood LLC. As of December 31, 2004 the Group signed an agreement with a related
party TK Promtekhresurs to transfer its interest in exchange for an interest
free note in the principal amount of $551,377, repayable in eight equal
installments starting from September 30, 2005. The net recovered amount of the
investment has been discounted at 3.165%, the estimated cost of capital as of
March 31, 2004. The net discounted amount of $528,334 approximates what that
could be negotiated with a third party based in an arms-length transaction
terms.
Professional fees expenses for the periods ended March 31, 2005 and December 31,
2004, consists of filing and other professional fees of $none and $15,000,
respectively. Professional fees were required to maintain the Group's status as
a publicly traded company plus fees required to set-up the current
infrastructure including the New York subsidiary Victoria Resources, Inc, Cyprus
subsidiary Coptent Trading, Ltd and two Russian subsidiaries - Victoria Siberian
Wood and Victoria Lumber.
Depreciation and amortization expense for the periods ended March 31, 2005 and
2004 amounted to $77 and $186, respectively.
Current liabilities of the Group as of March 31, 2005 and December 31, 2004 were
mainly consisted of account payable in amount of $400,770 and $93,399, short
term borrowings from related parties of $77,925 and $77,925 and other current
liabilities of $3,041 and $2,618, respectively.
There were no long term liabilities as of March 31, 2005 and December 31, 2004.
All accounts receivable as at March 31, 2005 and December 31, 2004 represented
trade accounts receivables for the dispatched saw logs. Based on the contracts
terms with customers and on the Group's management estimates no provision for
the doubtful debt is required, all outstanding amounts are recoverable.
The continuation of the Group is dependent upon achieving a profitable level of
operations, expanding the Group's business, continuing financial support of
creditors and stockholders as well as obtaining long-term financing. Management
plans to raise equity capital to finance the current cash requirements of the
Group. Capital raised will be used to expand current operations, finance working
capital and acquire fixed assets. While the Group is expending its best efforts
to achieve the above plans, there is no assurance that any such activity will
generate funds that will be available for operations. If the Group is not
successful in raising financing the Group's expected business expansion may be
slowed down or may not materialize at all. Additionally, the Group may lose its
current business, which may lead to significant curtailment or suspension of
operations.
In December 2003 Victoria Resources, Inc., together with the third party,
Tomlespromivest LLC, Russian production enterprise, contributed $263,117 and
$252,799, respectively, into the foundation of new entity, Victoria Siberian
Wood, LLC, which represented 51% and 49%, respectively. Victoria Siberian Wood,
LLC, was based in Novosibirsk, West Siberian region of the Russian Federation
and was established for the purpose of trading in forestry products both in
Russia and internationally.
In February 2004 the Group and minority shareholder, Tomlesprominvest LLC,
registered the increase in Victoria Sibwood, LLC share capital up to $1,000,000
with no change in 51%:49% respective ownership structure. In the first part of
2004 the Group contributed an additional $247,433 in order to comply with new
capital structure. As of June 30, 2004 the minority shareholder did not
contribute their share of the additional capital increasing Group's actual
shareholding up to 67%.
In August 2004 the Group decided to terminate its' interest in Victoria Siberian
Wood, LLC, due to unresolved disputes with the minority shareholder. As of
December 31, 2004 the Group transferred its
<PAGE>
shareholding at the amount of total equity invested adjusted to the valuation of
the Russian Ruble, $551,377, in exchange for an interest free long term note
with the related party OOO TK Promtekhresurs. This transaction has been valued
at the discounted amount of future receivable. The related parties have also
pledged certain real estate in Chelyabinsk, Russia as additional collateral for
the note.
In April 2004 the Group's subsidiary, Victoria Resources Inc contributed $10,095
into the establishment of new 100% owned subsidiary, Coptent Trading Ltd.,
registered in Cyprus. The subsidiary was established in order to provide
marketing and administration functions for lumber sales on the Chinese market.
CAPITAL EXPENDITURES
As at March 31, 2005 and December 31, 2004 the Group did not have significant
fixed assets as in 2005 and 2004 it operated solely as a trader and not a
producer.
At certain stage during 2005 we may require to add certain fixed assets or
obtain timberland leases to maintain and further grow our business. The fixed
assets may be in the form of warehouse space, manufacturing facilities,
processing machinery, logging machinery, automotive vehicles and tractors,
chainsaws and other equipment used for logging and lumber processing. We may
also elect to form new partnerships, invest into and/or acquire other companies
operating in the same segment. In order to finance future capital expenditures,
we may need to raise substantial funds. There is no assurance that the required
financing will be raised. Further, there is no assurance that the Group will be
able to continue successfully in operating existence if the required capital
expenditures are not made.
COMPETITION
We compete in a highly competitive industry that is open to new entrants without
significant barriers to entry. We encounter competition in all of our
operations, including the acquisition of goods from suppliers and sale of these
goods to customers. Many of our competitors have financial and other resources
substantially greater than ours.
CASH REQUIREMENTS
The Group anticipates it will require around $2,500,000 to sustain operations
and develop its subsidiaries over the next twelve months. The Group believes it
will be able to raise these funds through equity and debt financing; however,
there is no guarantee that funds will be raised.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Group has financed its operations from private financing.
The Group began operations in 2003 and 2004 through its' subsidiary businesses,
Victoria Siberian Wood, Victoria Lumber and Coptent Trading Ltd. The Group
anticipates continuing losses in the near future while Victoria Lumber
establishes operations in Russia. As of March 31, 2005 and December 31, 2004 the
Group had total current assets of $959,652 and $586,860 and total current
liabilities of $487,997 and $185,412, respectively. As of March 31, 2005 and
December 31, 2004, the Group had cash balances of $45,796 and $14,752 and a
working capital surplus of $471,655 and $401,448 and, respectively.
<PAGE>
GOING CONCERN
These financial statements have been prepared on a going concern basis which
assumes that adequate sources of financing will be obtained as required and that
our assets will be realized and liabilities settled in the ordinary course of
business. Accordingly, these consolidated financial statements do not include
any adjustments related to the recoverability of assets and classification of
assets and liabilities that might be necessary should we be unable to continue
as a going concern. In order for us to continue as a going concern, we require
additional financing. There can be no assurance that additional financing will
be available to us when needed or, if available, that it can be obtained on
commercially reasonable terms. If we are not able to continue as a going
concern, we would likely be unable to realize the carrying value of our assets
reflected in the balances set out in the preparation of financial statements.
There is substantial doubt about our ability to continue as a going concern as
we are just commencing operations in Russia and have incurred recurring
operating losses since our inception. Accordingly, our independent auditors
included an explanatory paragraph in their report on the December 31, 2004 and
2003 financial statements regarding concerns about our ability to continue as a
going concern. Our financial statements contain additional note disclosures
describing the circumstances that lead to this disclosure by our independent
auditors.
CASHFLOW
Cash, provided by (used in) operating activities for the three months ended
March 31, 2005 and 2004 amounted to $32,191 and $(313,398), respectively. Cash
inflow for the three months ended March 31, 2005 was primarily caused by the
decrease in prepaid expenses and other current assets of $90,742 and increase in
accounts payable of $279,175. Cash outflow for the 3 month ended March 31, 2004
was primarily caused by the increase in inventories of $240,192, accounts
receivable of $43,008 and VAT receivable, other taxes prepaids of $55,974.
Factors contributing into the increase of cash provided by financing activity
during three months ended March 31, 2004 were increase in proceeds on loans from
related parties in the amount of $32,954.
For the three month ended March 31, 2004 the Group used $28,767 and $3,283 in
investing activities to purchase short-term investments and give short term
loans, respectively.
INCOME TAXES, NET OPERATING LOSSES AND TAX CREDITS
Currently, the Group is liable for the Russian income tax at the rate of 24% of
the pre-tax earnings as defined by the Russian income tax law. The taxation
system in Russia is evolving as the central government transforms itself from a
command to a market-oriented economy. Based on current tax law and the United
States-Russia income tax treaty, the income tax paid in Russia will be
creditable tax when determining the Company's US income taxes payable, if any.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
<PAGE>
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could materially differ from these estimates.
REVENUE RECOGNITION
For revenue from product sales, the Group recognizes revenue in accordance with
SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB 104"). SAB 104 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured.
Criterion (1) is met as every delivery is covered by a separate contract and the
title passes to the customer only upon customer's acceptance at point of
destination, which is in compliance with criterion (2). Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, and other
adjustments are provided for in the same period the related sales are recorded.
The Company defers any revenue for which the product has not been delivered and
accepted by its customers. In accordance with the Company's standard contract
terms, once delivered and accepted the product cannot be returned and no claims
can be presented to the Company. The Company recognizes revenue on gross basis.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Much of the information included in this quarterly report includes or is based
upon estimates, projections or other "forward looking statements". Such forward
looking statements include any projections or estimates made by us and our
management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other "forward
looking statements".
Our common shares are considered speculative during our search for a new
business opportunity. Prospective investors should consider carefully the risk
factors set out below.
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINLY OF FUTURE RESULTS
The Group has a limited operating history upon which an evaluation of its
prospects can be made. There can be no assurance that the Group will effectively
execute its business plan or manage any growth of the business, or that the
Group's future operating and financial forecast will be met. Future development
and operating results will depend on many factors, including access to adequate
capital, the demand for the Group's products, the level of product and price
competition, the Group's success in setting up and expanding distribution
channels, and whether the Group can control costs. Many of these factors are
beyond the control of the Group. In addition, the Group's future prospects must
be considered in light of the risks, expenses, and difficulties frequently
encountered in establishing a new business in the forest products industry,
which is characterized by intense competition, rapid technological change,
highly litigious competitors and significant regulation.
LIMITED PUBLIC MARKET
The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol VIIN. As of July 8, 2005 there were approximately
10,965,090 shares of Common Stock outstanding. There can be no assurance that a
trading market will be sustained in the future. Factors such as, but not limited
to, technological innovations, new products, acquisitions or strategic alliances
entered into by the Group or its competitors, failure to meet security analysts'
expectations, government regulatory action, proprietary rights developments, and
market conditions for lumber products in general could have a material effect on
the volatility of the Company's stock price.
POLITICAL RISKS
The market in Russia is monitored by the government, which could impose taxes or
restrictions at any time which would make operations unprofitable and infeasible
and cause a write-off of capital investment in Russian lumber opportunities.
A number of factors, beyond the Group's control and the effect of which cannot
be accurately predicted may affect the marketing of the Group's lumber
operations. These factors include political policy on foreign ownership,
political policy to open the doors to foreign investors, and political policy on
lumber exports.
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
In 2004 the Group started trading to China. However, the future success of the
Group will depend in part on its ability to generate sales on international
markets. There can be no assurance, however, that the Group will be successful
in generating these sales. In addition, these will be subject to a number of
risks, including: foreign currency risk; the risks that agreements may be
difficult or impossible to enforce and receivables difficult to collect through
a foreign country's legal system; foreign customers may have longer payment
cycles; or foreign countries could impose withholding taxes or otherwise tax the
Group's foreign income, impose tariffs, embargoes, or exchange controls, or
adopt other restrictions on foreign trade. In addition, the laws of certain
countries do not protect the Company's offerings to the same extent as the laws
of the United States. The Group has taken steps to mitigate these risks through
joint ventures with domestic Russian companies, but there can be no assurance in
the adequacy of these protection measures.
Although none of our present officers or directors are key to our continuing
operations, we rely upon the continued service and performance of these officers
and directors, and our future success depends on the retention of these people,
whose knowledge of our business and whose technical expertise would be difficult
to replace. At this time, none of our officers or directors are bound by
employment agreements, and as a result, any of them could leave with little or
no prior notice.
Competition for qualified individuals is likely to be intense, and we may not be
able to attract, assimilate, or retain additional highly qualified personnel in
the future. The failure to attract, integrate, motivate and retain these
employees could harm our business.
LACK OF DIVERSIFICATION
The Group is currently exclusively in the business of trading in forest
products. This lack of diversification into a number of areas may subject us to
economic fluctuations within the forest products industry, thereby increasing
the risks associated with our operations.
REGULATION
Although we will be subject to regulation under the Securities Exchange Act of
1934, management believes that we will not be subject to regulation under the
Investment Company Act of 1940, insofar as we will not be engaged in the
business of investing or trading in securities. In the event that we engage in
business combinations which result in us holding passive investment interests in
a number of entities, we could be subject to regulation under the Investment
Company Act of 1940, meaning that we would be required to register as an
investment company and could be expected to incur significant registration and
compliance costs. We have obtained no formal determination from the Securities
and Exchange Commission as to the status of our company under the Investment
Company Act of 1940 and, consequently, any violation of such act would subject
us to material adverse consequences.
EXPOSURE TO NATURAL DISASTERS
The forest products industry is subject to natural events such as forest fires,
adverse weather conditions, insect infestation, disease and other natural
disasters. The occurrence of any of these events could adversely affect our
ability to trade in forest products which would result in a material adverse
consequence to the Group.
<PAGE>
EXPOSURE TO FOREIGN EXCHANGE RATE FLUCTUATIONS
With the majority of our operations being located in the Russian Federation, the
majority of our expenses were denominated in Russian rubles, while most revenues
in 2004 were denominated in US dollars. We currently do not and do not plan in
the near future to engage in hedging our exposure to changing foreign exchange
rates. Any unfavorable changes in the relevant foreign exchange rates may have a
material effect on our financials and performance.
"PENNY STOCK" RULES MAY RESTRICT THE MARKET FOR THE COMPANY'S SHARES
Our common shares are subject to rules promulgated by the Securities and
Exchange Commission relating to "penny stocks," which apply to companies whose
shares are not traded on a national stock exchange or on the NASDAQ system,
trade at less than $5.00 per share, or who do not meet certain other financial
requirements specified by the Securities and Exchange Commission. These rules
require brokers who sell "penny stocks" to persons other than established
customers and "accredited investors" to complete certain documentation, make
suitability inquiries of investors, and provide investors with certain
information concerning the risks of trading in such penny stocks. These rules
may discourage or restrict the ability of brokers to sell our common shares and
may affect the secondary market for our common shares. These rules could also
hamper our ability to raise funds in the primary market for our common shares.
POSSIBLE VOLATILITY OF SHARE PRICES
Our common shares are currently publicly traded on the Over-the-Counter Bulletin
Board service of the National Association of Securities Dealers, Inc. The
trading price of our common shares has been subject to wide fluctuations.
Trading prices of our common shares may fluctuate in response to a number of
factors, many of which will be beyond our control. The stock market has
generally experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of companies with no
current business operation. There can be no assurance that trading prices and
price earnings ratios previously experienced by our common shares will be
matched or maintained. These broad market and industry factors may adversely
affect the market price of our common shares, regardless of our operating
performance.
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. Such
litigation, if instituted, could result in substantial costs for us and a
diversion of management's attention and resources.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Our by-laws contain provisions with respect to the indemnification of our
officers and directors against all expenses (including, without limitation,
attorneys' fees, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that the person is one of our officers or directors) incurred by an officer
or director in defending any such proceeding to the maximum extent permitted by
Nevada law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of our
company under Nevada law or otherwise, we have been advised the opinion of the
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
<PAGE>
FUTURE DILUTION
Our statutory documents authorize the issuance of 75,000,000 common shares, each
with a par value of $0.001. In the event that we are required to issue any
additional shares or enter into private placements to raise financing through
the sale of equity securities, investors' interests in our Group will be diluted
and investors may suffer dilution in their net book value per share depending on
the price at which such securities are sold. If we issue any such additional
shares, such issuances also will cause a reduction in the proportionate
ownership and voting power of all other shareholders. Further, any such issuance
may result in a change in our control.
ANTI-TAKEOVER PROVISIONS
We do not currently have a shareholder rights plan or any anti-takeover
provisions in our By-laws. Without any anti-takeover provisions, there is no
deterrent for a take-over of our Group, which may result in a change in our
management and directors.
REPORTS TO SECURITY HOLDERS
Under the securities laws of Nevada, we are not required to deliver an annual
report to our shareholders but we intend to send an annual report to our
shareholders.
ITEM 4. CONTROLS AND PROCEDURES
The registrant's Principal executive officers and principal financial officer,
based on their evaluation of the registrant's disclosure controls and procedures
(as defined in Rules 13a-14 ( c ) of the Securities Exchange Act of 1934) as of
March 31, 2005 have concluded that the registrants' disclosure controls and
procedures are adequate and effective to ensure that material information
relating to the registrants and their consolidated subsidiaries is recorded,
processed , summarized and reported within the time periods specified by the
SEC' s rules and forms, particularly during the period in which this quarterly
report has been prepared.
The registrants' principal executive officers and principal financial officer
have concluded that there were no significant changes in the registrants'
internal controls or in other factors that could significantly affect these
controls as of the end of the period covered by this report based on such
evaluation, and that there was no significant deficiencies or material
weaknesses in the registrant's internal controls.
<PAGE>
PART II.
ITEM 1. LEGAL PROCEEDINGS
We know of no material, active or pending legal proceedings against us, nor are
we involved as a plaintiff in any material proceedings or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholders are an adverse party or have a
material interest adverse to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
A current report on Form 8K Item 4.01: Changes in the Company's Certifying
Accountants was filed on April 26, 2005.
The following Consolidated Financial Statements pertaining to Victoria
Industries are filed as part of this quarterly report:
Review Report of Independent Registered Public Accounting Firm - John Braden and
Co., P.C. for the three months ended March 31, 2005.
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit) for
the periods ended March 31, 2005 and December 31, 2004
Consolidated Statements of Operations and Comprehensive Loss for the periods
ended March 31, 2005 and 2004
Consolidated Statements of Cash Flows for the periods ended March 31, 2005 and
2004
Notes to the Consolidated Financial Statements for the three month ended March
31, 2005 and 2004 and the year ended December 31, 2004
<PAGE>
EXIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
Articles of Incorporation and Corporate Charter of the Registrant* (incorporated
by reference from our Registration Statement on Form 10-SB filed on October 4,
2000)
By-laws of the Registrant* (incorporated by reference from our Registration
Statement on Form 10-SB filed on October 4, 2000)
Exhibit 31 - Section 302 Certification
Exhibit 32 - Section 906 Certification
* Previously filed as an exhibit to the Company's Form 10-KSB filed on August
15, 2003
MATERIAL CONTRACTS
The following is a description of contracts that we and/or our subsidiaries have
been a party to since January 1, 2004, and are or may be material to our
business:
2005
1. Commission Agreement # 21 between "Coptent Trading", LTD and
"Exintra", LLC, entered into July 23, 2004.
2. Commission Agreement # 35 between "Coptent Trading", LTD and
"Exintra", LLC, entered into October 27, 2004.
3. Commission Agreement #23 between "Coptent Trading", LTD and
"Chtaleskholding", JSC, entered into August 11, 2004.
4. Railroad Services Supplier #25 Agreement between "Coptent Trading",
LTD and "DeltaTransCentr", LLC, entered into July 27, 2004.
5. Customer Agreement #YCH-04/888 between "Coptent Trading", LTD and Yon
Chou, entered into July 26, 2004.
6. Customer Agreement #YCH-04/999 between "Coptent Trading", LTD and Yon
Chou, entered into November 1, 2004.
7. Commission Agreement #30 between "Victoria Lumber", LLC and Mrs. G.
Vasilieva, private proprietor, entered into July 27, 2004.
8. Commission Agreement #32 between "Victoria Lumber", LLC and "Exintra",
LLC, entered into July 27, 2004.
9. Commission Agreement #36 between "Victoria Lumber", LLC and
"Chitaleskholding", LLC, entered into August 10, 2004.
10. Commission Agreement #34 between "Victoria Lumber", LLC and
"Baikellesoexport", CJSC, entered into July 29, 2004.
11. Customer Agreement #12 between "Victoria Lumber", LLC and "DOK #15",
LLC, entered into March 30, 2004.
12. Customer Agreement #15/27 between "Victoria Lumber", LLC and "Notex",
LLC entered into July 30, 2004.
13. Customer Agreement #10 between "Victoria Lumber", LLC and
"Archipelago", LLC, entered into March 10, 2004.
14. Commission agreement #43 between "Victoria Lumber, LLC" and
"Lesholding", LLC, entered into September 9, 2004.
15. Purchase agreement #YCH-04/888(33) between "Coptent Trading", LTD and
"Lesholding", LLC, entered into September 9, 2004.
<PAGE>
2004 -
16. Commission Agreement # 21 between "Coptent Trading", LTD and
"Exintra", LLC, entered into July 23, 2004.
17. Commission Agreement # 35 between "Coptent Trading", LTD and
"Exintra", LLC, entered into October 27, 2004.
18. Commission Agreement #23 between "Coptent Trading", LTD and
"Chtaleskholding", JSC, entered into August 11, 2004.
19. Railroad Services Supplier #25 Agreement between "Coptent Trading",
LTD and "DeltaTransCentr", LLC, entered into July 27, 2004.
20. Customer Agreement #YCH-04/888 between "Coptent Trading", LTD and Yon
Chou, entered into July 26, 2004.
21. Customer Agreement #YCH-04/999 between "Coptent Trading", LTD and Yon
Chou, entered into November 1, 2004.
22. Commission Agreement #30 between "Victoria Lumber", LLC and Mrs. G.
Vasilieva, private proprietor, entered into July 27, 2004.
23. Commission Agreement #32 between "Victoria Lumber", LLC and "Exintra",
LLC, entered into July 27, 2004.
24. Commission Agreement #36 between "Victoria Lumber", LLC and
"Chitaleskholding", LLC, entered into August 10, 2004.
25. Commission Agreement #34 between "Victoria Lumber", LLC and
"Baikellesoexport", CJSC, entered into July 29, 2004.
26. Customer Agreement #12 between "Victoria Lumber", LLC and "DOK #15",
LLC, entered into March 30, 2004.
27. Customer Agreement #15/27 between "Victoria Lumber", LLC and "Notex",
LLC entered into July 30, 2004.
28. Customer Agreement #10 between "Victoria Lumber", LLC and
"Archipelago", LLC, entered into March 10, 2004.
* CERTAIN PARTS OF THIS DOCUMENT HAVE NOT BEEN DISCLOSED AND HAVE BEEN FILED
SEPARATELY WITH THE SECRETARY, SECURITIES AND EXCHANGE COMMISSION, AND IS
SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 24B-2 OF THE
SECURITIES ACT OF 1934.
SUBSIDIARIES:
2005
Victoria Resources, Inc
Victoria Lumber, LLC
Coptent Trading, Ltd
2004:
Victoria Resources Inc.
Victoria Lumber LLC
Victoria Siberian Wood, LLC
Coptent Trading, Ltd
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 5, 2005 Victoria Industries, Inc.
--------------------------------
Albert Abdoulline
President
</TEXT>
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