UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Commission file number 0-25909
Australian Forest Industries
(Exact name of small business issuer as specified in its charter)
Nevada 86-0931332
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4/95 Salmon Street, Port Melbourne, Victoria
Australia, 3207
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 011 61 3 8645 4340
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
The number of shares of the issuer's outstanding common stock, which is the only
class of its common equity, on November 17, 2006 was 500,423.
ITEM 1 FINANCIAL STATEMENTS
Page
No.
Description
FINANCIAL INFORMATION:
Financial Statements
Consolidated Balance Sheets at September 30, 2006 (Unaudited).................3
Consolidated Statement of Operations (Unaudited)..............................4
Consolidated Statements of Cash Flows (Unaudited) ............................5
Notes to Consolidated Financial Statements (Unaudited)........................6
Item 1. Condensed Financial Statements
AUSTRALIAN FOREST INDUSTRIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30 December 31,
2006 2005
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash $ 127,014
Accounts receivable $ 2,667,853 1,622,974
Inventory 2,340,943 1,778,340
Prepaid expenses and other 71,256 193,739
------------ ------------
Total Current Assets 5,080,052 3,722,067
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,794,801 and $2,402,939 in 2006 and 2005, respectively 16,482,095 13,040,126
OTHER ASSETS
Long-term timber supply contract, net of amortization of $107,400 and
$91,843 in 2006 and 2005, respectively 712,586 794,805
------------ ------------
$ 22,274,733 $ 17,556,998
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 2,106,989 $ 117,772
Accounts payable 4,681,752 2,690,957
Current portion of capitalized lease obligations 1,076,013 1,076,013
Due to Timberman shareholders 5,991,199 3,213,912
Related party payable 606,487 592,844
Accrued payroll, related taxes and benefits 898,739 599,389
------------ ------------
Total Current Liabilities 15,361,179 8,290,887
OTHER LIABILITIES
Capitalized lease obligations 4,067,491 3,512,882
Deferred capital gain 1,181,414 1,396,481
Due to National Australian Bank 4,928,880 4,818,000
------------ ------------
Total Liabilities 25,538,964 18,018,250
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001, 5,000,000 shares
authorized, none issued and outstanding
Common stock, par value $0.001, 300,000,000 shares
authorized, 500,473 and 257,400,680 issued and outstanding 257,600 257,400
at September 30, 2006 and December 31, 2005 respectively
Additional paid-in capital 4,573,217 4,503,417
Accumulated other comprehensive income 225,992 333,619
Accumulated deficit (8,321,040 (5,555,688)
------------ ------------
Total Stockholders' Equity (3,264,231) (461,252)
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,274,733 $ 17,556,998
============ ============
See accompanying notes to financial statements.
3
AUSTRALIAN FOREST INDUSTRIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30 September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Restated) (Restated)
REVENUE - SALES $ 4,008,572 $ 3,377,974 $ 11,350,633 $ 10,124,288
COSTS AND EXPENSES
Cost of goods sold 2,414,890 1,894,605 6,525,037 5,753,756
Selling, general and administrative 2,706,697 1,888,529 6,737,478 5,829,987
Provision for Doubtful Accounts 134,154 266,649
Interest expense 254,564 138,355 647,648 418,088
Depreciation and amortization 149,162 208,597 436,287 580,851
------------ ------------ ------------ ------------
Total Costs and Expenses 5,659,467 4,130,086 14,613,099 12,582,682
------------ ------------ ------------ ------------
OPERATING LOSS (1,650,895) (752,112) (3,262,466) (2,458,394)
NON-OPERATING INCOME
Other income 12,037 97,382 145,325 99,915
Interest income 83,555 247,586
Gain on disposal of assets 648 799,496 104,203 1,963,799
------------ ------------ ------------ ------------
Total Non-Operating Income 96,240 896,878 497,114 2,063,714
NET INCOME (LOSS) $ (1,554,655) $ 144,766 $ (2,765,352) $ (394,680)
============ ============ ============ ============
NET LOSS PER SHARE $ (3.11) $ 0.29 $ (5.53) $ (0.79)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 500,473 500,473 500,473 500,473
============ ============ ============ ============
See accompanying notes to financial statements.
4
AUSTRALIAN FOREST INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended
September 30,
--------------------------
2006 2005
----------- -----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,765,352) $ (394,680)
Adjustments to reconcile net income to cash flows used
in operating activities:
Depreciation 391,862 372,254
Stock based compensation 70,000
Amortization of Timber contract 15,557
Amortization of leaseback gain (252,150)
Changes in operating activities:
(Increase) decrease in prepaid expenses 53,046 132,860
(Increase) decrease in inventories (562,603) (241,717)
(Increase) decrease in receivables (1,044,880) (1,612,693)
(Increase) decrease in related party receivable (273,175)
(Increase) decrease in timber contract 66,662 10,506
Increase (decrease) in accounts payable and other liabilities 1,990,795 1,181,904
Increase (decrease) in bank overdraft 1,989,217 (421,097)
Increase (decrease) in related party payable 13,643 1,061,522
Increase (decrease) in accrued payroll 299,350 (11,795)
Increase (decrease) in taxes payable 69,437
----------- -----------
Net Cash (Used in) Provided by Operating Activities 334,584 (196,111)
CASH FLOWS FROM INVESTING ACTIVITIES
Net capital additions (3,833,830) (1,172,640)
----------- -----------
Net Cash Used in Investing Activities (3,833,830) (1,172,640)
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from shareholders 2,777,287 115,979
Capital leases 554,609 1,422,477
National Australian bank loan 110,880 (184,983)
Sale leaseback deferred credit 37,083
----------- -----------
Net Cash Provided by (Used In) Financing Activities 3,479,859 1,353,473
EFFECT OF EXCHANGE RATES ON CASH (107,627) (198,001)
----------- -----------
(DECREASE) INCREASE IN CASH (127,014) (213,279)
CASH AT BEGINNING OF PERIOD 127,014 225,189
----------- -----------
CASH AT END OF PERIOD $ 0 $ 11,910
=========== ===========
See accompanying notes to financial statements.
5
AUSTRALIAN FOREST INDUSTRIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the financial statements not
misleading have been included. Results for the nine months ended September
30, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. For further information,
refer to the financial statements and footnotes thereto included in
Australian Forest Industries' annual report on Form 10-KSB for the year
ended December 31, 2005.
NOTE 2 - LOAN FROM TIMBERMANS GROUP (RELATED PARTY)
During the nine months ended September 30, 2006, the company received an
additional $2,777,287 from Timberman investors.
NOTE 3 - CAPITALIZED LEASE OBLIGATIONS
During the nine months ended September 30, 2006, the Company purchased
$3,900,000 in new equipment of which $1,981,000 was financed under
capitalized leases over a five year period.
NOTE 4 - STOCKHOLDERS' EQUITY
During the quarter ended September 30, 2006, the company issued 200,000
shares of stock for consulting services received. The shares were valued
at $.35 per share.
On August 30, 2006, the Board of Directors declared a 515 to 1 reverse
stock split of its common stock. As a result of this reverse split,
500,473 shares are considered issued and outstanding. All per share
amounts have been adjusted to give effect to the reverse stock split.
NOTE 5 - CHANGE OF CONTROL
The Company has entered into a letter of intent dated August 25, 2006,
under which and subject to a definitive agreement and closing thereof, it
will acquire all the issued share capital of Simbajamba Mines Limited
("Simbajamba") a wholly owned subsidiary of Simba Mines Inc. ("Simba") for
$41,547,000 and all the issued share capital of Rockbury Properties
Limited ("Rockbury"), a wholly owned subsidiary of Bongani International
Group Limited ("BIG") for $38,453,000.
6
In settlement of the above purchases, The Company proposes to issue
5,193,375 new ordinary shares to Simba and 4,806,625 new common shares to
BIG. They will rank equal with the consolidated 500,473 common shares of
AUFI and have a book value of $8 per share.
Upon closing of the acquisitions, AUFI will control 80% of the Cachoeiras
de Binga and 70% respectively of the Benguela and Zenza copper licenses in
Angola. In addition, discussions are in progress with BIG for the
acquisition of a controlling interest in two significant copper/cobalt
concession areas in the DRC. At closing, AUFI will change its name to
Zebra Copper Inc ("Zebra").
AUFI has also entered into a letter of intent to sell its wholly owned
subsidiary Integrated Forest Products Pty Ltd ("IFP") to an Australian
unlisted company, Australian Forest Industries Limited ("AFIL"), which
will issue new ordinary shares ranking equal as consideration. It is
intended that following the closing of this proposed transaction, the AFIL
shares will be distributed as a dividend to the shareholders of AUFI
listed on its share register at August 30, 2006
NOTE 6 - RESTATEMENT
The financial statements for the nine months ended September 30,
2006 have been restated to include the financial information of Timbermans
Group which is considered a Variable Interest Entity under the Provisions
of FIN 46.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
It should be noted that this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain "forward-looking statements."
The terms "believe," "anticipate," "intend," "goal," "expect," and similar
expressions may identify forward-looking statements. These forward-looking
statements represent the Company's current expectations or beliefs concerning
future events. The matters covered by these statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statements, including the Company's
dependence on weather-related factors, introduction and customer acceptance of
new products, the impact of competition and price erosion, as well as supply and
manufacturing restraints and other risks and uncertainties. The foregoing list
should not be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements, or to reflect the occurrence of
anticipated or unanticipated events. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation that the strategy,
objectives or other plans of the Company will be achieved. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
RESULTS OF OPERATIONS
We are currently in the third year of operations and have generated significant
revenues to date. Our activities from inception to date were related to our
formation, preparation of our business model, arranging and planning financing
and the acquiring all rights, title and interest to our timber rights located in
the Canberra region in addition to the implementation and construction of our
first sawmill also in the Canberra region.
Operating costs for the nine-months ended September 30, 2006 aggregated
$14,613,099. This includes costs incurred in procuring our rights under the
Bombala Agreement and operating expenses for our Canberra sawmill. We incurred
an operating loss of $3,262,466 and a total net loss of $2,765,352 or $(5.53)
per share.
Operating costs for the three-month period ended September 30, 2006 aggregated
$5,659,467. This includes an increase in costs of goods sold of $2,030,417 which
were a result of general costs associated with the growth of our business. As a
result of the above we realized a loss of $1,554,655 for the three-month period
ended September 30, 2006 or $(3.11) per share.
During the nine months ended September 30, 2006, we purchased $3,900,000 in new
equipment of which $1,981,000 was financed under capitalized leases over a five
year period. Additionally, during this time period, we received an additional
$2,77,287 from Timbermann investors.
8
On August 25, 2006, we entered into a letter of intent under which and subject
to a definitive agreement and closing thereof, we will acquire all the issued
share capital of Simbajamba a wholly owned subsidiary of Simba for $41,547,000
and all the issued share capital of Rockbury, a wholly owned subsidiary of BIG
for $38,453,000.
In settlement of the above purchases, we propose to issue 5,193,375 new ordinary
shares to Simba and 4,806,625 new common shares to BIG. These issuances will
rank equal to our consolidated 500,473 common shares and will have a book value
of $8 per share.
Upon closing of the acquisitions, we will control 80% of the Cachoeiras de Binga
and 70% respectively of the Benguela and Zenza copper licenses in Angola. In
addition, discussions are in progress with BIG for the acquisition of a
controlling interest in two significant copper/cobalt concession areas in the
DRC. At closing, we will change our name to "Zebra Copper Inc."
We have also entered into a letter of intent to sell our wholly owned subsidiary
IFP to an Australian unlisted company, AFIL, which will issue new ordinary
shares ranking equal as consideration. It is intended that following the closing
of this proposed transaction, the AFIL shares will be distributed as a dividend
to our shareholders listed on the Company's share register on August 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2006 we had current assets of $5,080,052 and on December 31,
2005 we had current assets of $3,722,067.
Net cash used in operating activities for the period from inception to September
30, 2005 was ($196,111). Net cash used in operating activities for the period
from inception to September 30, 2006 was $334,584.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
9
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements Affecting The Company:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS 123R,
"Share-Based Payment." This statement replaces SFAS 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board's Opinion
No. 25 (ABP 25), "Accounting for Stock Issued to Employees." SFAS 123R will
require us to measure the cost our employee stock-based compensation awards
granted after the effective date based on the grant date fair value of those
awards and to record that cost as compensation expense over the period during
which the employee is required to perform services in exchange for the award
(generally over the vesting period of the award). SFAS 123R addresses all forms
of share-based payments awards, including shares issued under employee stock
purchase plans, stock option, restricted stock and stock appreciation rights. In
addition, we will be required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. SFAS 123R is effective for fiscal
periods beginning after September 15, 2005. Therefore, we are required to
implement the standard no later than our third fiscal quarter which begins on
July 1, 2005. SFAS 123R permits public companies to adopt its requirements using
the following methods: (1) a "modified prospective" method in which compensation
cost is recognized beginning with the effective date (a) based on the
requirements of SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS 123 for all awards
granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date; or (2) a "modified retrospective" method which
includes the requirements of the modified prospective method described above,
but also permits entities to restate their financial statements based on the
amounts previously recognized under SFAS 123 for purposes of pro forma
disclosures for either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
10
ITEM 3. CONTROLS AND PROCEDURES
(a) Our principal executive officer and principal financial officer have each
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days
prior to the filing date of this quarterly report and have each concluded that
our disclosure controls and procedures are adequate.
(b) There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
(c) Not applicable
11
PART II Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
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 and Reports on Form 8-K
a. Exhibit Index
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer
Exhibit 32.1 Certification of Chief Financial Officer
b. Reports on Form 8-K
On October 10, 2006, we filed a current report on Form 8-K disclosing that a
director, Mr. Norman Backman, resigned from our board to pursue other business
interests.
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.
AUSTRALIAN FOREST INDUSTRIES
/s/ Michael Timms
-------------------------------
Name: Michael Timms
Title: CEO, President and Chairman of the Board
Date: November 17, 2006
/s/ Colin Baird
--------------------------------
Name: Colin Baird
Title: Chief Financial Officer
Date: November 17, 2006