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Introduction

MMG FORESTRY LIMITED (Associated Member of ROSH Group companies) was registered and incorporated in Dublin, Ireland. The Company is primarily involved in forestry, which includes: woodland care, the planting of trees, the growing and harvesting of trees.

In 1995 - 1997 MMG FORESTRY LIMITED was involved in the implementation of the Ladva-Timber project (timber production on the territory of Russian Federation). The company owned 75% of Ladva-Timber Joint-Stock Company, which was incorporated in Russia and engaged in the forestation of one of the largest contiguous timber production areas in the Republic of Karelia totaling 399,000 acres. Ladva-Timber held the lease to harvest timber on this territory for a period of 50 years with the right to renew the lease at expiration.

Ladva-Timber leased timber production equipment (forwarders, tractors, carriers, loaders, saw frames, bulldozers, cranes, lines for cutting round timber and so forth) from MMG FORESTRY LIMITED.

Overview of Russian Timber Industry

The timber industry is a vast industry in Russia with working forests in Karelia, Komi. Kostromskaya Oblast, Vologodskaya Oblast and Siberia. Major importers of Russian timber are Japan, China, Finland, Switzerland, England, Germany, France and Italy. These imports are usually round logs that are milled in their respective countries. In addition the United States have been importing finished wood products such as plywood and saw timber. The largest forestry companies are Kursky Forestry, Sakhalin Forestry and Karelian Forestry.

In the early nineties investment in Russian timber industry was very profitable because this market was growing rapidly due to the limited production in North American forests, environmental issues and the increasing demand for wood products.

Description of Business Activities

Ladva-Timber was engaged in the harvesting of trees, planting of trees and general forestry management. In addition to forestry activities Ladva-Timber had been processing a portion of its round logs into railroad ties, building materials, saw logs and carpenter goods for furniture. Also the non-wooded areas were utilized to raise cattle grow berries, mushrooms, and other agricultural products.

The results of the pilot project indicated that forestry production could increase by 23,000 cubic meters for each new forwarder added to forest production. This pilot project provided the employees and management with an opportunity to learn the new forestry techniques and operation of the new equipment at a pace conducive to complete testing and learning. After the pilot project was successfully completed MMG FORESTRY LIMITED provided Ladva-Timber with the rest of equipment.

MMG FORESTRY LIMITED was directly involved in the management of Ladva-Timber as they actively held the offices of Director of Marketing and Consultant to the General Director. Officers of MMG FORESTRY LIMITED had business relationships with Ladva-Timber and were fully versed on the daily operations of Ladva-Timber.

Ladva-Timber had been constantly improving its forest by selective cutting of timber, road improvements and the building of new roads, building fire barriers, and the planting of conifers which are in demand on the export market. These capital improvements placed Ladva-Timber in a position to enjoy high long-term timber yields.

Analysis of Financial Results (1994)

Sales were primarily made to domestic customers such as lumber mills, railroads, paper factories and furniture manufacturers. The balance of sales, approximately 30%, was exported as saw timber, round logs and lumbers, such as birch and red wood, to the Finnish market. Production output varied significantly during the year due to uncertainties related to export duties, corporate taxes, and taxes related to the cutting of timber. These uncertainties made it very difficult to commit to pricing over the long term and thus had a negative impact on sales during 1994.

Cost of production remained constant throughout the year at 29% of sales. General production expenses were the largest portion of total operating expenses at 27%. Costs included in this category were expenses for employees' transportation, office expense, and salary for office employees. The second largest expense category was transportation expenses for timber, which equaled 5% of total sales or 18% of operating expenses. Salary for forestry workers was 17% of production costs and remained constant throughout the period. Non-production expenses were comprised of cost of delivery and were 5% of sales for the year. Taxes on income remained at the statutory 38% during the year and totaled 837,000 dollars.

As of December 31, 1996 ROSH invested over $8,000,000 in this project through MMG Forestry. On the average (in 1994-1996), the annual revenue generated by the project constituted $3,500,000.

 

 
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