UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006 Commission File
Number 0-25909
AUSTRALIAN FOREST INDUSTRIES (f/k/a Multi-Tech International, Corp.)
(Name of small business issuer 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
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Check whether the issuer (1) 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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The aggregate market value of the voting common stock held by non-affiliates of
the registrant as of April 13, 2007 was approximately $180,204 based on 600,680
shares of common stock. The number of shares of Common Stock of the registrant
outstanding on April 13, 2007 was 257,600,680.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
Australian Forest Industries f/k/a Multi-Tech International, Corp., hereinafter
referred to as "the Company", "we' or "us", was originally organized by the
filing of Articles of Incorporation with the Secretary of State of the State of
Nevada on September 21, 1998 under the name Oleramma, Inc. The Articles of
Incorporation authorized the issuance of one hundred five million (105,000,000)
shares, consisting of one hundred million (100,000,000) shares of Common Stock
at par value of $0.001 per share and five million (5,000,000) shares of
Preferred Stock at par value of $0.001.
On April 28, 1999, the Company changed its name to BuckTV,Com, Inc. on the basis
that the Company would market consumer products through an InteractiveWeb site.
The Company again changed its name in November 2002 to Multi-Tech International,
Corp.
On September 1, 2004, we entered into a Share Exchange Agreement with Timbermans
Group Pty Ltd, an Australian corporation and its wholly-owned subsidiary at the
time Integrated Forest Products Pty Ltd, an Australian corporation as well
("Share Exchange Agreement" and "Share Exchange", respectively). Pursuant to
such Share Exchange Agreement, we:
o completed a 200-1 reverse stock split of our common stock
o increased our authorized number of shares from 100,000,000 to 300,000,000
o changed our name from Multi-Tech International, Inc. to Australian Forest
Industries
o appointed Messrs. Michael Timms, Norman Backman, Colin Baird, Antony
Esplin and Roger Timms to the board of directors
o issued 257,000,000 shares of our common stock as a result of the Share
Exchange Agreement
Thus, upon completion of the Share Exchange, Integrated Forest Products Pty Ltd
("IFP") became a wholly-owned subsidiary of the Company and the Company's symbol
on the OTC-BB was changed from "MLTI" to "AUFI".
GENERAL
The majority of the issued and outstanding ordinary shares in the capital of the
Company are held by Timbermans Group, a leading supplier of softwood timber
products in Australia. The shareholders of Timbermans Group are the same
individuals who comprise our board of directors.
The timber industry in Australia experienced a strong demand from internal
growth in residential and commercial construction along the Eastern coast of
Australia. Additionally, export demand from China and elsewhere in Asia for
lumber and other wood products continued to be very strong in recent years and
management expects that this trend will continue in the foreseeable future.
The facilities of the Company are located in Australia. The business of the
Company consists of a pine sawmilling and timber facility at Canberra, which has
a capacity to process 200,000 cubic meters of sawn timber. This sawmill
processed approx. 170,000 cubic meters of log in the Fiscal Year 2007. The
Company is currently in the process of arranging the financing for the
construction of a second sawmill. With this second sawmill, the Company intends
to exploit the log resource generated by our contract with Timbermans Group
which grants us the right to the Bombala Agreement described below.
In April 2003, Timbermans Group Pty Ltd entered into an agreement with the
government of New South Wales which granted Timbermans the 20 year wood supply
rights to timber from the Bombala forest, equal to approximately 300,000 cubic
meters of wood ("Bombala Agreement"). This Agreement was assigned to the Company
at that time with the full knowledge of New South Wales government. Management
believes that this is the last significant undeveloped pine forest in Eastern
Australia. The Bombala Agreement provides, inter alia, that the log purchase
price review mechanism is linked to the sawn timber actual price achieved for
the products produced at the new sawmill to be built at Bombala, the market
price for structural radiata pine timber, the ABS producer price index for
softwood in Sydney and input costs such as wages and fuel. This mechanism is
expected to adequately protect the Company from any decreasing market prices and
in part from increased costs during the term of the Bombala Agreement. With the
signing of the Bombala Agreement, the Company ensured its supply for at least 20
years and is renewable at the Company's option. With this asset the Company
believes it has secured a major asset.
2
The Company's core markets are Australia and Southern Asia. The Company's
revenues are generated solely in its core markets.
Recent events
The proposed new sawmill at Bombala is planned to begin construction in 2008
after the approvals of the government of New South Wales and local council have
been obtained.
The new mill operation will be situated on approximately 300 acres of land on
the Monaro Highway, just south of Bombala. Management believes that the new mill
will be a state of the art mill. It will be constructed by industry experts,
including Acora Reneco Group, and will utilize state of the art machinery and
technology.
The mill is expected to comprise sawing machines from the USA, Canada, Europe
and Australia, and to have proven production capabilities, as well as safety,
environmental and efficiency capabilities.
The total mill and ancillary investment are expected to be approximately $30
million (US). Most of the timber from the new mill will be transported in green
form to the Integrated Forest Products plant at Canberra, for drying and
dressing processing. The balance will be sold in green form.
The new mill is expected to initially process 300,000 cubic meters per year of
log, although designed to cut in excess of 400,000 cubic meters per year, under
the Bombala Agreement.
Furthermore, negotiations are at an advanced stage for the sale of all mill
residues of sawdust, bark and waste wood chips into a Co Generation Plant
located at the Canberra Sawmill site, which will then sell electricity to a
major Australian Electricity supplier.
The new sawmill at Bombala and the Co Generation Plant at Canberra is expected
to put the Company in a position to produce at a lower cost relative to its
current cost level, and in compliance with all applicable safety standards. In
addition, it is expected to provide access to the Company to a large and high
quality log supply, to Acora Reneco Group as leading Australian timber
technology, mill and equipment suppliers, low cost production from expanding
Integrated Forest Products and will allow the Company to concentrate on
structural timber. Finally, the new sawmill is expected to create competitive
economics of scale and to generate profits from the future integration of the
Company's operations in Canberra and Bombala.
In early 2005, the Company purchased a new timber treatment facility for its
operations in Canberra. With this new timber treatment facility, management has
been able to offer treated pine framing to the market since March 2005. With the
new facility, the Company has been able to meet an increased demand for treated
timber as a result of changing rules and regulations for the construction of new
homes that require the use of such timber for framing to be termite resistant.
Furthermore, Integrated Forest Products commissioned a new sawlog line in 2005
which has lifted the log intake rate of its facility in Canberra to over 170,000
cubic meters per year, thereby increasing its sawing capacity by over 40%,
providing a recovery increase, a higher sawing accuracy, greater operator safety
and a better timber finish.
On September 27, 2006, Norman Backman resigned as a member of the Board of
Directors of the Company. The Company has no plans to fill the vacancy on the
Board left by Mr. Backman.
3
On September 18, 2006, Australian Forest Industries (the "Company"), entered
into a stock purchase and recapitalization agreement (the "Stock Purchase
Agreement") with SIMBA Mines, Inc., a Nevada corporation ("SIMBA") pursuant to
which the Company proposed to purchase from SIMBA all of the issued and
outstanding shares of its wholly-owned subsidiary Simbajamba Mines Limited, a
company incorporated pursuant to the laws of Samoa. On March 24, 2007, all
parties agreed to terminate the Stock Purchase Agreement. As a result, the
Company continues to operate to operate its business as if the Stock Purchase
Agreement never occurred.
Strategy
The Company's strategy is to maximize shareholder value, inter alia, by
realizing economics of scale and profits, initially through the securing of
access to additional log supplies from private forests, the installation of a
new log sawing line at Integrated Forest Products to improve its efficiency, and
the continuation of the meeting of milestones laid down in the Bombala
Agreement. The medium term strategy of the Company is to combine its wood chip
production facilities, utilizing the Co Generation Plant, which will be
constructed at the Canberra Sawmill. The long term strategy of the Company is to
build a new green sawmill in Bombala, and to expand its drying and planing
facilities for the intake of green sawn timber from the facilities then operated
at Bombala.
Employees
At the end of December 2006, we employed 122 full time equivalents. In the
Company's vision, employees play a crucial role in the success of the Company.
We encourage our employees to take initiative to further enhance our efficiency
in timber production. In order to assist our employees, we constantly seek to
train and educate them, either on an individual basis (product knowledge and
quality control) or on a more collective basis (office automation and management
skills). We have never experienced a work stoppage resulting from labor
problems.
Our employees are members of the CFMEU which is one of the largest unions in
Australia. As a result, each non-executive employee is a party to a collective
bargaining agreement known as an Enterprise Bargaining Agreement which
determines the terms of employment of each non-executive employee. Management
believes that its relations with such union are impeccable and the risk of work
stoppages is extremely unlikely.
Competition
The Australian wood products market is a competitive market and could become
more competitive in the future. Our competitors are diverse and offer products
similar to our products. Some of our competitors have access to significantly
greater financial, marketing and other resources than us. Increased competition
may result in price reductions for our products, reduced revenues and gross
margins and loss of market share. We are committed to executing our strategy as
set out above, inter alia, by focusing on our ability to source capital
equipment at very competitive prices and effectively manage facilities as a
result of management's extensive consulting experience.
At the time many sawmills in Australia are facing limitations on log supply as
older forests are becoming less productive and a series of significant forest
fires over the past five years have diminished the availability of high quality
logs.
We believe that we have certain competitive advantages our (i) ability to
construct efficient low cost mills, as a result of our strategic alliance with
Acora Reneco Group, (ii) access to log resources through the Bombala Agreement,
(iii) excess drying and dressing capacity in the Canberra processing facilities,
(iv) low cost operating and management techniques, and (v) operations management
system, which we believe to be superior to the systems of our competitors.
Finally, unlike most of our competitors, we believe that we have the ability for
low cost incremental expansion of our Canberra and future Bombala facilities,
mainly because of our spare processing capacity, subject to the availability of
logs - the supply of which we believe to have secured through our Bombala
Agreement, our log merchandising facility at Bombala for greater fiber recovery
from whole log, and the availablity of in-house process control and selective
hi-tech equipment.
4
It is our belief that, when we get the new facility in operation in 2008, we can
record operating performance equal or better than that shown by the large
capital forestry companies including the high growth ones.
ITEM 2. DESCRIPTION OF PROPERTY
Our main facility is located in Australia which consists of pine sawmilling and
timber facility at Canberra, which has a capacity to process 200,000 cubic
meters of log. We are currently in the process of arranging the financing for
the construction of a second in the Bombala region to further exploit the log
resources generated by the Bombala Agreement.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings or government
actions, including any bankruptcy, receivership, or similar proceedings.
Management of the Company does not believe that there are any proceedings to
which any director, officer, or affiliate of the Company, any owner of record of
the beneficially or more than five percent of the common stock of the Company,
or any associate of any such director, officer, affiliate of the Company, or
security holder is a party adverse to the Company or has a material interest
adverse to the Company. See Item 6 for a discussion involving a lawsuit in which
Timbermans Group Pty. Ltd., our majority stockholders, was a named party.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded on the OTC-Bulletin Board under the
symbol AUFI. The following sets forth the range of the closing bid prices
for the Company's Common Stock for the period January 1, 2003 through
April 13, 2007. Such prices represent inter-dealer quotations, do not
represent actual transactions, and do not include retail mark-ups,
mark-downs or commissions. Such prices were determined from information
provided by a majority of the market makers for the Company's Common
Stock.
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High Close Low Close
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2005
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First Quarter 1.51 1.50
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Second Quarter 1.50 1.50
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Third Quarter 1.75 1.60
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Fourth Quarter 8.00 1.25
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2006
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First Quarter 4.35 0.75
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Second Quarter 0.94 0.75
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Third Quarter 0.30 0.12
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Fourth Quarter 0.42 0.31
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2007
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First Quarter 0.22 0.22
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Second Quarter 0.31 0.20
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(b) The approximate number of holders of the Common Stock of the Company as of
April 13, 2007 was 1,000.
(c) No cash dividends were declared by the Company during the fiscal year
ended December 31, 2006. While the payment of dividends rests within the
discretion of the Board of Directors, it is not anticipated that cash
dividends will be paid in the foreseeable future, as the Company intends
to retain earnings, if any, for use in the development of its business.
The payment of dividends is contingent upon the Company's future earnings,
if any, the Company's financial condition and its capital requirements,
general business conditions and other factors.
ITEM 6. 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.
6
On April 14, 2005, Timbermans Group Pty Ltd. ("Borrower") entered in to a loan
agreement with Oz Investmentcorp Pty Ltd. ("Lender") that articulates the terms
of two loans (collectively, "Loan Agreement"). The first loan in the amount of
$1,000,000 was made pursuant to a letter agreement dated August 9, 2005. The
second loan of $1,000,000 is to be paid to the Borrower upon 14 days written
notice from the Borrower.
In consideration for the Lender's loans, Borrower agreed to pay to Lender a
total principal of $2,000,000 ("Total Principal") together with interest.
Additionally, The Borrower granted to the Lender a conversion right entitling
the Lender in its sole discretion to convert all or part of the Total Principal
outstanding to issued ordinary shares in the Borrower ("Conversion Right").
Both principal and interest are payable to the Lender on or before August 9,
2007. Prior to that date, the Borrower may not repay all or part of the Total
Principal unless it gives the Lender 14 days notice articulating the amount it
desires to repay so long as the Lender has not exercised any conversion rights.
In early 2007, Lender filed a lawsuit in Australia alleging that the Borrower
defaulted under the Loan Agreement. Although management believes that adequate
protections are in place, there is no guarantee that the Borrower will
successfully defend itself in such lawsuit. As a result, if the Lender prevails
or a settlement is not reached, the Borrower may be forced to tender some or all
of its shares in AUFI or sell off certain assets of AUFI to satisfy such
liability.
During the fourth quarter, the Company experienced a severe liquidity problem
and was having difficulty obtaining logs to operate its businesses. Currently,
management has entered into a processing contract with Weyerhaeuser to process
their logs for which the Company is receiving a processing fee.
RESULTS OF OPERATIONS
We are currently in the fourth 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 re-construction of our
first sawmill also in the Canberra region.
Operating costs for the twelve-month period ended December 31, 2005 aggregated
$17,069,222. We incurred an operating loss of $(3,569,423) and a total net loss
of $(2,789,783) or $(0.01) per share.
Operating costs for the twelve-month period ended December 31, 2006 aggregated
$21,559,680. This includes an increase in costs of goods sold of $9,423,786
which were a result of general costs associated with the growth of our business
and costs associated with selling and general and administrative costs of
$10,460,611. As a result of the above we realized an operating loss of
$(6,232,589) for the twelve-month period ended December 31, 2006 or $(0.02) per
share.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2005 and 2006 we had current assets of $3,722,067 and
$2,271,872, respectively.
Net cash used in operating activities for the twelve-month period ended December
31, 2005 was $(4,148,578). Net cash used in operating activities for the
twelve-month period ended December 31, 2006 was $(1,003,662). The decrease in
net cash was a result of an increase in accounts payable and other liabilities
of $2,620,144 which was a consequence of our growing business.
7
In the twelve-month period ending December 31, 2006, the Company experienced an
increase in net proceeds from capital leases of $799,182 and during that same
period an increase in loans to related parties of $3,380,039 and an increase in
a bank overdraft of $1,781,466, thus resulting in net cash provided by financing
activities of $6,352,067.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48
defines the threshold for recognizing the benefits of tax return positions in
the financial statements as "more-likely-than-not" to be sustained by the taxing
authority. Recently issued literature also provides guidance on the
derecognition, measurement and classification of income tax uncertainties, along
with any related interest and penalties. FIN 48 also includes guidance
concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company expects to adopt the provisions of FIN 48 beginning in the
first quarter of 2007. The Company is currently in the process of determining
the impact, if any, of adopting the provisions of FIN 48 on its financial
position, results of operations and liquidity.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value under
other accounting pronouncements that permit or require fair value measurements,
changes the methods used to measure fair value and expands disclosures about
fair value measurements. In particular, disclosures are required to provide
information on the extent to which fair value is used to measure assets and
liabilities; the inputs used to develop measurements; and the effect of certain
of the measurements on earnings (or changes in net assets). SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. Early adoption, as of the beginning of an entity's
fiscal year, is also permitted, provided interim financial statements have not
yet been issued. The Company expects to adopt the provisions of FIN 48 beginning
in the first quarter of 2008. The Company is currently evaluating the potential
impact, if any, that the adoption of SFAS No. 157 will have on its consolidated
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides guidance on how prior year
misstatements should be considered when quantifying misstatements in the current
year financial statements. SAB No. 108 requires registrants to quantify
misstatements using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB No. 108 does not change the guidance in SAB No. 99, "Materiality,"
when evaluating the materiality of misstatements.
SAB No. 108 is effective for fiscal years ending after November 15, 2006. Upon
initial application, SAB No. 108 permits a one-time cumulative effect adjustment
to beginning retained earnings. The Company adopted SAB No. 108 for the fiscal
year ended December 31, 2006. Adoption of SAB No. 108 did not have a material
impact on the consolidated financial statements.
8
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain other
assets and liabilities that are not otherwise required to be measured at fair
value. SFAS 159 is effective for fiscal years beginning after November 15, 2007.
We have not determined what impact, if any, that adoption will have on our
results of operations, cash flows or financial position.
9
MEYLER & COMPANY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
ONE ARIN PARK
1715 HIGHWAY 35
MIDDLETOWN, NJ 07748
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Australian Forest Industries
Melbourne, Australia
We have audited the accompanying consolidated balance sheets of Australian
Forest Industries as of December 31, 2006 and 2005 (restated) and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 2006 (2005 restated).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Australian Forest
Industries as of December 31, 2006 and 2005 (restated), and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2006 (2005 restated), in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, the Company has incurred a net loss of
$6,232,558 in 2006 and had a stockholders' deficit of $6,834,184 at December 31,
2006, and there are existing uncertain conditions the Company faces relative to
its ability to obtain capital and operate successfully. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
See also Note A as to Restatements of Consolidated Financial Statements of
amounts previously recorded.
/s/ Meyler & Company, LLC
Middletown, NJ
April 10, 2007
F-1
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2006 2005
------------ ------------
(Restated)
ASSETS
CURRENT ASSETS
Cash $ 4,894 $ 127,014
Accounts receivable, net 1,493,473 1,622,974
Inventory 740,384 1,778,340
Prepaid expenses and other 33,121 193,739
------------ ------------
Total Current Assets 2,271,872 3,722,067
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
Of $3,189,690 and $2,402,939 in 2006 and 2005, respectively 17,929,297 13,040,126
OTHER ASSETS
Long term limber supply contract, net of amortization of $144,345 and
$91,843 in 2006 and 2005, respectively 742,307 794,805
------------ ------------
Total Assets 20,943,476 17,556,998
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft 1,899,238 117,772
Due to National Australia Bank 5,209,380 4,818,000
Accounts payable 5,311,101 2,690,957
Current portion of capitalized lease obligations 1,977,755 1,076,013
Due to Timberman shareholders 6,593,951 3,213,912
Related party payable 641,003 592,844
Accrued payroll, related taxes and benefits 1,213,106 599,389
------------ ------------
Total Current Liabilities 22,845,534 13,108,887
OTHER LIABILITIES
Capitalized lease obligations 3,410,322 3,512,882
Deferred capital gain 1,521,804 1,575,514
------------ ------------
4,932,126 5,088,396
STOCKHOLDERS' DEFICIT
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,
257,600,680 and 257,400,680 issued and outstanding in 2006 and 2005,
Respectively 257,600 257,400
Additional paid-in capital 4,573,217 4,503,417
Accumulated other comprehensive income 302,278 333,619
Accumulated deficit (11,967,279) (5,734,721)
------------ ------------
Total Stockholders' Deficit (6,384,184) (640,285)
------------ ------------
Total Liabilities and Stockholders' Deficit 20,943,476 17,556,998
============ ============
See accompanying notes to financial statements.
F-2
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
------------------------------
2006 2005
------------- -------------
(Restated)
REVENUE - SALES $ 15,327,091 $ 13,499,799
COSTS AND EXPENSES
Cost of Goods Sold 9,423,786 15,272,772
Selling, general and administrative 10,460,611 611,867
Interest expense 1,072,772 703,757
Depreciation and amortization 602,511 480,826
------------- -------------
Total costs and expenses 21,559,680 17,069,222
OPERATING LOSS (6,232,589) (3,569,423)
NON-OPERATING INCOME
Interest income 31 1,359
Gain on disposal of assets -- 778,281
------------- -------------
Total non-operating income 31 779,640
NET LOSS (6,232,558) (2,789,783)
============= =============
Net Loss per share (basic and diluted) $ (0.02) $ (0.01)
============= =============
Weighted average shares outstanding 257,600,132 257,400,680
============= =============
See accompanying notes to financial statements.
F-3
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
--------------------------
2006 2005
----------- -----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(6,232,558) $(2,789,783)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation expense 550,013 438,947
Amortization of timber contract 52,498 54,900
Amortization of leaseback gain (53,710) (35,806)
Gain on sale of equipment -- (2,389,601)
Stock based compensation 70,000 --
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses 160,617 (51,389)
Decrease in inventories 1,037,956 204,699
(Increase) decrease in receivables 129,501 (11,217)
(Increase) decrease in related party receivable -- 273,175
Increase (decrease) in accounts payable and other
liabilities 2,620,144 (463,550)
Increase (decrease) in related party payable 48,159 592,844
Increase (decrease) in accrued payroll 613,718 28,203
----------- -----------
Net cash used in Operating Activities (1,003,662) (4,148,578)
CASH FLOWS FROM INVESTING ACTIVITIES
Disposal costs -- (118,866)
Capital additions (5,439,184) (5,200,874)
Investment in long-term timber supply contract -- --
Disposal of capital assets -- 1,652,675
----------- -----------
Net cash used in Investing Activities (5,439,184) (3,667,065)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 1,781,466 (303,325)
Loans from shareholders 3,380,039 2,827,077
Capital leases 799,182 1,059,703
National Australian bank loan 391,380 (411,350)
Proceeds from sale of assets -- 4,233,540
Timberman controlling interest -- --
----------- -----------
Net cash provided by (used in) Financing Activities 6,352,067 7,405,645
EFFECT OF EXCHANGE RATE ON CASH (31,341) 311,823
----------- -----------
DECREASE IN CASH (122,120) (98,175)
CASH AT BEGINNING OF YEAR 127,014 225,189
----------- -----------
CASH AT END OF YEAR $ 4,894 $ 127,014
=========== ===========
See accompanying notes to financial statements.
F-4
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Accumulated
Preferred Stock Common Stock Additional Other Total
---------------- ------------------------ Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Income (loss) Equity
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 5,319,764 $ 9,813,217 $ (2,034,164) $ 7,779,053
Net loss for the year
ended December 31, 2003 (56,369) (56,369)
Adjustments from exchange
rate changes $ 65,590 65,590
------- ------ ----------- ---------- ----------- ------------ --------- -----------
Balance, December 31, 2003
and prior to Reverse
Merger 5,319,764 9,813,217 (2,090,533) 65,590 7,788,274
Reverse Merger (Note 1)
Exchange of Integrated
Forest Products Pty
Ltd shares for
Australian Forest
Industries (5,319,764) (9,813,217) $ 9,813,217
Shareholders equity of
Australian Forest
Industries at date of
merger 400,680 400 11,257,463 (11,257,863)
Reverse Merger
capitalization (11,257,863) 11,257,863
Issuance of shares at
date of merger 240,000,000 240,000 (240,000)
Issuance of shares for
consulting agreement 17,000,000 17,000 238,000 255,000
Timbermans Group Pty.
Ltd. investment in
Company (5,307,400) (5,307,400)
Cumulative losses of
Timber- man's Group
Pty. Ltd. (601,983) (601,983)
Adjustment from exchange
rate changes (43,794) (43,794)
Net loss for the year
ended December 31, 2004 (252,422) (252,422)
------- ------ ----------- ---------- ----------- ------------ --------- -----------
Balance, December 31, 2004 257,400,680 257,400 4,503,417 (2,944,938) 21,796 1,837,675
Adjustments from exchange
rate changes 311,823 311,823
Net loss for the year ended
December 31, 2005 (2,789,783) (2,789,783)
------- ------ ----------- ---------- ----------- ------------ --------- -----------
Balance, December 31, 2005 257,400,680 $ 257,400 $ 4,503,417 $ (5,734,721) $ 333,619 $ (640,285)
Adjustments from exchange
rate changes (251,750) (251,750)
Issuance of shares for services 200,000 200 69,800 70,000
Net loss for the year ended
December 31, 2006 (6,232,558) (6,232,558)
------- ------ ----------- ---------- ----------- ------------ --------- -----------
Balance, December 31, 2006 257,600,680 $ 257,600 $ 4,573,217 $(11,967,279) $ 81,869 $(7,054,593)
======= ====== =========== ========== =========== ============ ========= ===========
See accompanying notes to financial statements.
F-5
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE A - RESTATEMENTS
The Company's financial statements for the year ended December 31, 2005
were restated. The effects of the restatements are presented in the
following table:
As Reported Restated
----------- --------
Balance Sheet
Current liabilities 8,290,887 13,108,887
Other liabilities 4,818,000 nil
Deferred capital gain $ 1,396,481 $ 1,575,514 (1)
Accumulated deficit (5,555,688) (5,734,721)
Statement of Operations
Cost of goods sold 15,441,948 15,272,772 (2)
Selling, general and
administrative 653,091 611,867 (2)
Other income 225,851 nil (2)
Interest income 164,941 1,359 (2)
Net Loss (2,610,750) (2,789,783)
Loss per share (0.01) (0.01)
1) Recalculation of amortization relating to deferred gain on
sale leaseback transaction. Amortization is based upon life of
acquired equipment instead of loan repayment amortization.
2) Reclassification of components of other income deemed to be
operating and therefore offset against cost of sales and
selling, general and administrative expenses.
NOTE B - BASIS OF PRESENTATION AND NATURE OF BUSINESS
Nature of Business
Australian Forest Industries ("the Company"), through its wholly owned
subsidiary Integrated Forest Products Pty Ltd ("Integrated"), operates a
saw mill in Australia which cuts pine timber into building products to
supply the commercial and residential industry along the eastern coast of
Australia.
Reverse Merger
On September 1, 2004, Integrated, owned by the Timbermans Group Pty Ltd
("Timbermans"), entered into a share exchange agreement with the Company
and issued 240,000,000 shares of its common stock to acquire Integrated.
In connection with the share exchange agreement, Integrated became a
wholly owned subsidiary of the Company and Integrated's officers and
directors became the officers and directors of the Company. Prior to the
merger, the Company was a non-operating "shell" corporation.
Pursuant to Securities and Exchange Commission rules, the merger of a
private operating company (Integrated) into a non-operating public shell
corporation with nominal net assets is considered a capital transaction.
Accordingly, for accounting purposes, the merger has been treated as an
acquisition of the Company by Integrated and a recapitalization of the
Company. The historical financial statements for the years ended December
31, 2006 and 2005 are those of Integrated. Since the merger is a
recapitalization and not a business combination, pro forma information is
not presented.
F-6
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE B - BASIS OF PRESENTATION AND NATURE OF BUSINESS (CONTINUED)
Going Concern
As shown in the accompanying consolidated financial statements, the
Company has incurred a net loss of $6,232,558 in 2006 and had a
stockholders' deficit of $6,384,184 at December 31, 2006. Management's
plans include the raising of capital through the equity markets to fund
future operations, seeking additional acquisitions, and generating of
revenue through its business. Additionally, even if the Company does raise
sufficient capital to support its operating expenses and generate adequate
revenues, there can be no assurances that the revenue will be sufficient
to enable it to develop business to a level where it will generate profits
and cash flows from operations. Additionally, during the fourth quarter,
the Company experienced a severe liquidity problem and was having
difficulty obtaining logs to operate its businesses. Currently, management
has entered into a processing contract with Weyerhaeuser to process their
logs for which the Company is receiving a processing fee. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. However, the accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of
business. These consolidated financial statements do not include any
adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Foreign Currency Translation
For 2006 and 2005, the Company considered the Australian dollar to be its
functional currency. Assets and liabilities were translated into US
dollars at year-end exchange rates. Statement of operations amounts were
translated using the average rate during the year. Gains and losses
resulting from translating foreign currency financial statements were
accumulated in other comprehensive income, a separate component of
stockholders' equity.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include investment
instruments purchased with an original maturity of three months or less.
There were no cash equivalents in 2006 or 2005.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method.
F-7
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment and Depreciation
Equipment is stated at cost and is depreciated using the straight line
method over the estimated useful lives of the respective assets. Routine
maintenance, repairs and replacement costs are expensed as incurred and
improvements that extend the useful life of the assets are capitalized.
When equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gain or loss is recognized in operations.
Consolidated Financial Statements
The consolidated financial statements include the Company and its wholly
owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
Net Loss Per Common Share
The Company computes per share amounts in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing the income (loss) available to Common Stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS is based on the weighted-average number of shares of Common
Stock and Common Stock equivalents outstanding during the periods.
Comprehensive Income (Loss)
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components to be presented in association
with a company's financial statements. Comprehensive income is defined as
the change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to non-owner sources, such
as foreign currency translation adjustments and unrealized gains or losses
on available-for-sale securities. It includes all changes in equity during
a period except those resulting from investments by or distributions to
owners. Comprehensive income is accumulated in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Stock Based Compensation
The Company accounts for stock issued for services using the fair value
method. In accordance with the Emergency Issues Task Force ("EITF") 96-18,
the measurement date of shares issued for service is the date at which the
counterpart's performance is complete.
Fair Values of Financial Instruments
The Company uses financial instruments in the normal course of business.
The carrying values of cash, accounts receivable, bank overdraft, accounts
payable and accrued expenses approximate their fair value due to the
short-term maturities of these assets and liabilities. The carrying values
of loans payable approximate their fair value based upon management's
estimates using the best available information.
F-8
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents management's estimate of
the amount of probable credit losses in accounts receivable, based upon
experience and a review of past due balances.
Revenue Recognition
The Company is in the business of producing lumber for the building
industry. In this connection, it receives orders from distributors and
lumber yards throughout Australia. The Company ships its finished products
FOB shipping point and title passes at that point. The Company also
assures itself that there are valid sales arrangements, sales prices are
fixed and determinable, and that collectibility is reasonably assured.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48").
FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as "more-likely-than-not" to be
sustained by the taxing authority. Recently issued literature also
provides guidance on the derecognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company expects to
adopt the provisions of FIN 48 beginning in the first quarter of 2007. The
Company is currently in the process of determining the impact, if any, of
adopting the provisions of FIN 48 on its financial position, results of
operations and liquidity.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for
measuring fair value under other accounting pronouncements that permit or
require fair value measurements, changes the methods used to measure fair
value and expands disclosures about fair value measurements. In
particular, disclosures are required to provide information on the extent
to which fair value is used to measure assets and liabilities; the inputs
used to develop measurements; and the effect of certain of the
measurements on earnings (or changes in net assets). SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Early adoption, as of the beginning of
an entity's fiscal year, is also permitted, provided interim financial
statements have not yet been issued. The Company expects to adopt the
provisions of FIN 48 beginning in the first quarter of 2008. The Company
is currently evaluating the potential impact, if any, that the adoption of
SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides guidance on how prior
year misstatements should be considered when quantifying misstatements in
the current year financial statements. SAB No. 108 requires registrants to
quantify misstatements using both a balance sheet and an income statement
approach and evaluate whether either approach results in quantifying a
misstatement
F-9
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
that, when all relevant quantitative and qualitative factors are
considered, is material. SAB No. 108 does not change the guidance in SAB
No. 99, "Materiality," when evaluating the materiality of misstatements.
SAB No. 108 is effective for fiscal years ending after November 15, 2006.
Upon initial application, SAB No. 108 permits a one-time cumulative effect
adjustment to beginning retained earnings. The Company adopted SAB No. 108
for the fiscal year ended December 31, 2006. Adoption of SAB No. 108 did
not have a material impact on the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain
other assets and liabilities that are not otherwise required to be
measured at fair value. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We have not determined what impact, if any, that
adoption will have on our results of operations, cash flows or financial
position.
NOTE D - VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation 46 ("FIN 46") and in
December 2003, it issued a revised interpretation of FIN 46 (FIN 46-R),
which supersedes FIN 46 and clarifies and expands current accounting
guidance for VIE's. FIN 46 clarifies when a company should consolidate in
its financial statements the assets, liabilities and activities of a VIE.
FIN 46 provides general guidance as to the definition of a variable
interest entity and requires it to be consolidated if a party with an
ownership, contractual or other financial interest, absorbs the majority
of the VIE's expected losses, or is entitled to receive a majority of the
residual returns, or both. A variable interest holder that consolidates
the VIE is the primary beneficiary and is required to consolidate the
VIE's assets, liabilities and noncontrolling interests at fair value at
the date the interest holder first becomes the primary beneficiary of the
VIE.
The Company has concluded that Timbermans Group Pty. Ltd. is deemed to be
a VIE under FIN 46 and accordingly has been consolidated in the financial
statements for 2006 and 2005. Timbermans Group, a holding company which
acquired the Company through an exchange agreement, became the majority
shareholder of Australian Forest Industries by investing $5,307,400 in the
Company which was borrowed from National Australia Bank (See Note H -
Short-Term Borrowing.) Timbermans Group Pty. Ltd. had total assets of
$5,719,107 and $7,357,379, total liabilities of $12,042,392 and
$8,050,323, accumulated deficits of $6,323,285 and $693,017 at December
31, 2006 and 2005, respectively, and net losses of $971,775 and $354,176
for the years then ended.
NOTE E - INVENTORY
Inventory consists of the following at December 31,
2006 2005
------------ ------------
Raw materials and supplies $ 75,093 $ 228,547
Work in progress 212,502 605,692
Finished goods 452,789 944,101
------------ ------------
$ 740,384 $ 1,778,340
============ ============
F-10
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December
31,
Useful Life 2006 2005
------------ ------------ ------------
Land $ 947,160 $ 1,133,042
Buildings 40 1,642,216 1,261,795
Plant and equipment 30 16,885,091 11,866,257
Capital works in progress 1,421,804 987,936
Motor vehicles 5 222,716 194,035
------------ ------------
21,118,987 15,443,065
Less: accumulated depreciation (3,189,690) (2,402,939)
------------ ------------
$ 17,929,297 $ 13,040,126
============ ============
Depreciation expense for the years ended December 31, 2006 and 2005 was
$550,013 and $438,947, respectively.
NOTE G - DUE TO TIMBERMANS SHAREHOLDERS
Due to Related Party
Included in the related party debt is a loan to Timberman's from Oz
Investmentcorp Pty. Ltd. ("Oz")In the amount of $1,578,600, which bears
interest at 7.5% per annum. The loan is due on or before August 9, 2007.
The loan is convertible into Timberman's shares at a conversion price that
will give Oz a proportionate share of the total issued shares of
Timbermans Group (See Note M - Litigation.)
At December 31, 2006 and 2005, the Company was indebted to the
shareholders of Timbermans for $6,593,951 and $3,213,912, respectively.
The loans are non interest bearing, are unsecured and have no specific
repayment date. This indebtedness is the net result of transactions
between the Company and Timbermans.
Long-Term Log Supply Contract
In November 2004, the Timbermans Group entered into a 20 year long-term
log supply contract with the New South Wales State Government. To obtain
the contract, the Timbermans Group paid $886,648. In February 2005, it
assigned the contract to the Company's wholly owned subsidiary, Integrated
Forest Products Pty, Ltd. The contract is being amortized over 20 years.
The Company recognized $52,498 and $54,900 in amortization expense in 2006
and 2005, respectively. Estimated amortization expense for the next five
years is $265,000.
NOTE H - SHORT TERM BORROWING
The Company has an overdraft facility with the National Bank of Australia
in the amount of $2,738,871 at the Australian base rate plus 1.80%
annually. The amount of the overdraft at December 31, 2006 and 2005 was
$1,899,238 and $117,772, respectively. The facility is secured by the
assets of the Company and Timbermans Group Pty. Ltd., and personal
guarantees of the principal Officers and Directors of the Company. The
notes currently bear interest at the rate of 11.9% per annum with a
default rate of 18.4% per annum. The facility is currently due and is
negotiated with the bank on a monthly basis.
F-11
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE H - SHORT TERM BORROWING (CONTINUED)
The Company, in connection with the Long Term Timber Supply contract, has
placed a bank guarantee in the amount of $576,700 with the New South Wales
government with an issue fee of 1.40% of fair value and a fee of 1.40% of
face value payable semi-annually to insure a steady supply of timber. Of
the $576,700 bank guarantees, $489,100 is secured by the wife of a
principal Officer and Director and $87,600 is secured by the assets of the
Company, Timbermans Group Pty. Ltd., and the personal guarantees of the
principal Officer and Directors of the Company.
In 2004, the Timbermans Group Pty. Ltd. obtained a credit facility of
$5,209,380 to acquire a majority interest in Australian Forest Industries.
The credit facility is secured by the assets of Australian Forest
Industries, Timbermans Group Pty. Ltd., the personal guarantees of the
principal Officers and Directors of Australian Forest Industries and
Timbermans Group Pty. Ltd., as well as personal properties of certain
principal Officers and Directors. The loan bears interest at the rate of
6.2% on $2,880,000 and a floating rate on the balance of the loan. The
loan balance at December 31, 2006 and 2005 was $5,209,380 and $4,818,000,
respectively.
In addition, the Company has a $5,760,000 facility with National Australia
Bank to acquire capital equipment which would be secured by such
purchases. At December 31, 2006, the Company has executed Capital Lease
Agreements aggregating $5,388,077 (See Note I - Capital Lease Obligation.)
All of the above credit facilities are renewable every six months.
NOTE I - CAPITAL LEASE OBLIGATIONS
The Company has obtained various pieces of equipment under capital leases
expiring through 2010. The assets and liabilities under these capital
leases ($7,758,474) with the National Bank of Australia are recorded at
the lower of the present values of the minimum lease payments or the fair
values of the assets. The assets are included in property and equipment
and are being depreciated over their estimated useful lives. The
capitalized leases are secured by the equipment purchased.
As of December 31, 2006, minimum future lease payments under these capital
leases are:
For the
Years Ending
December 31, Amount
------------ ----------
2007 1,977,755
2008 1,977,755
2009 1,546,936
2010 711,907
----------
Total minimum lease payments $6,214,353
==========
December 31,
----------------------------
2006 2005
---------- ----------
Total minimum lease payments $6,214,353 $5,354,455
Less: amounts representing interest 826,277 765,560
---------- ----------
Net minimum lease payments 5,388,077 4,588,895
Less: current portion 1,977,755 1,076,013
---------- ----------
Long-term portion $3,410,322 $3,512,882
========== ==========
F-12
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE J - INCOME TAXES
The Company has adopted Financial Accounting Statement SFAS No. 109,
Accounting for Income Taxes. Under this method, the Company recognizes a
deferred tax liability or asset for temporary differences between the tax
basis of an asset or liability and the related amount reported on the
financial statements. The principal types of differences, which are
measured at current tax rates, are net operating loss carry forwards. At
December 31, 2006 and 2005, these differences resulted in a deferred tax
asset of approximately $2,095,000 and $887,700. SFAS No. 109 requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. Since realization is not assured, the
Company has recorded a valuation allowance for the entire deferred tax
asset, and the accompanying financial statements do not reflect any net
asset for deferred taxes at December 31, 2006 or 2005.
The Company's net operating loss carry forwards amounted to approximately
$11,967,000 and $5,735,000 at December 31, 2006 and 2005, which have
unlimited expiration.
NOTE K - STOCKHOLDERS' DEFICIT
In connection with the Reverse Merger on September 1, 2005, the Company
issued 17,000,000 shares to a consultant. The shares were valued at $0.015
per share which was the average trading price for the third quarter.
During the year ended December 31, 2006, the Company issued 200,000 shares
at $0.35 which was recorded as stock based compensation of $70,000.
NOTE L - SALE - LEASEBACK TRANSACTION
In April 2005, the Company entered into a transaction to sell equipment to
the National Bank of Australia and leased it back under a new capitalized
lease agreement. Under SFAS No. 98, the gain of $1,611,320 will be
deferred and amortized over the life of the related equipment. For the
year ended December 31, 2006 and 2005, $ 53,710 and $35,806 has been
included in operating income.
The amortization of the gain for the next five years is as follows.
Gain
Year Amortization
---- ------------
2007 53,710
2008 53,710
2009 53,710
2010 53,710
2011 53,710
Thereafter 1,253,254
------------
$ 1,521,804
============
NOTE M - LITIGATION
Oz has initiated a letter of demand for the $1,578,600 due from the
Timbermans Group for full payment of funds lent to the Timbermans Group.
The Company is currently negotiating with Oz and had agreed to provide
additional collateral.
F-13
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE N - ALLOWANCE FOR DOUBTFUL ACCOUNTS
At December 31, 2006, the allowance for doubtful accounts was $539,172.
F-14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Through the September 30, 2004 reporting period, our accountants were Michael
Johnson & Co., LLC. In January 2005, we changed accountants to Meyler & Company
LLC, independent certified public accountants. At no time has there been any
disagreement with such accountants regarding any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
ITEM 8A. DISCLOSURE CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
As of the end of the period covering this Form 10-KSB, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures". The Company's President conducted this evaluation by himself.
(i) Definition of Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are
designed with the objective of ensuring that information required to be
disclosed in our periodic reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As defined by the SEC, such disclosure
controls and procedures are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the President and Chief Financial Officer, in such a manner as to allow timely
disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and
Internal Controls.
The Company recognizes that a system of disclosure controls and procedures (as
well as a system of internal controls), no matter how well conceived and
operated, cannot provide absolute assurance that the objectives of the system
are met. Further, the design of such a system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented in a number of ways. Because of the inherent limitations in a
cost-effective control system, system failures may occur and not be detected.
However, our officers and directors believe that our system of disclosure
controls and procedures provides reasonable assurance of achieving their
objectives.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and
Procedures.
Our officers and directors have concluded, based on the evaluation of these
controls and procedures, that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in our periodic SEC filings.
(b) Changes in Internal Controls.
There have been no changes in our internal controls over financial reporting
during the last fiscal quarter of 2005 that has materially affected or is
reasonably likely to affect the Company's internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION
Not applicable.
10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
OFFICERS AND DIRECTORS
We have 4 executive officers who also serve as our board of directors. Our
directors are elected at each annual meeting of shareholders. The following
individuals are all of our executive officers and directors:
Name Age Positions and Offices With The Company
------- --- ---------------------------------------------------
Michael Timms 56 Chief Executive Officer; President; Chairman of the
Board
Colin Baird 48 Chief Financial Officer; Director
Tony Esplin 44 Executive Vice President - Marketing; Director
Roger Timms 50 Executive Vice President - Engineering; Director
The following is a biographical summary of the directors and officers of the
Company:
Michael Timms
Mr. Michael Bruce Timms was born at 30 May 1950 in Bega, New South Wales,
Australia. He has spent over thirty years in the sawmilling industry. He has
been involved with design and construction of over seven greenfield sawmill
facilities and scores of equipment upgrades across Australia and Canada in both
the Hardwood and Softwood sectors, through his engineering business, Acora
Reneco Group Pty Ltd. Among other responsibilities he works as Chief Executive
Officer and President of the Company and is Chairman of the Board.
Colin Baird
Mr. Colin Baird was born at 22 June 1958 in Melbourne, Australia. He is a
qualified accountant who has operated his own practice, Colib Pty Ltd since
1987. He has been involved in the timber industry through his association with
some of his clients since 1983. At present his practice has in excess of 500
clients. Mr. Baird is Director of Finance of the Company.
Tony Esplin
Mr. Tony Esplin was born at 23 August 1962 in Melbourne, Australia. He has had
twelve years of experience in the sawmill industry covering fabrication of
sawmill equipment, project management of new sawmills through his own business,
Acora Reneco Group Pty Ltd. Over the last four years he has been involved in the
on site management of Integrated Forest Products, covering all aspects of
sawmill administration, including log procurement and product marketing. He
works as Director of Marketing & Log Procurement for the Company.
Roger Timms
Mr. Roger Kenneth Timms was born 24 April 1956 in Bega, New South Wales,
Australia. He has spent over twenty-five years in the sawmilling industry. He is
currently involved in the design, supply and installation of sawmill equipment
in Australia and part owns a company, Acora Reneco Group Pty Ltd, which performs
these functions. He is the Company's Director of Engineering.
Director Positions in Other Public Companies
11
No director holds any directorship in a company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of such Act. No director holds any
directorship in a company registered as an investment company under the
Investment Company Act of 1940. However, with the exception of Norman Backman,
the remaining directors have other business interest and work for the Company on
a part-time basis at the present time.
Code of Conduct
The Company does not have an Audit or Strategy committee. Neither does the
Company have a standing nominating committee or any committee performing a
similar function. For the above reasons, the Company has not adopted a code of
ethics.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors who beneficially own more than ten percent (10%) of the Company's
Common Stock to file initial reports of ownership and reports of changes of
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than ten percent (10%) beneficial owners are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file.
The information required to be compliant with Section 16(a) is found herein.
However, at the present time the required individuals have not filed the
appropriate Section 16(a) forms although it has been represented to the Company
that such are being prepared and will be filed shortly after the filing of this
annual report.
12
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth all annual and long-term compensation paid by the
Company through the latest practicable date to the Chief Executive Officer of
the Company and to all executive officers of the Company who received total
annual salary and bonus in excess of $100,000 for services rendered in all
capacities to the Company and its subsidiaries during the fiscal years ended
December 31, 2005 and 2006.
Summary Compensation Table
Long-Term
Compensation
Awards
------------
Securities
Underlying
Options (#) All Other
Name and Principal Position Year Salary ($) Bonus /SARS Compensation
---------------------------------------- ---- ---------- ----- ----------- ------------
Michael Timms -
Chairman of the Board; CEO and President 2006 0 None None None
2005 75,000 None None None
Coin Baird - Chief Financial Officer
and Director 2006 0 None None None
2005 60,000 None None None
Tony Esplin - Executive Vice President
- Marketing; Director 2006 0 None None None
2005 75,000 None None None
Norman Backman - Chief Operating
Officer; Director (resigned) 2006 0 None None None
2005 140,000 None None None
Roger Timms - Executive Vice President
- Marketing; Director 2006 0 None None None
2005 20,000 None None None
Directors' Compensation
13
Other than minimal expenses incurred for traveling to Canberra which were
reimbursed by the Company, during the fiscal year ended December 31, 2006 our
Directors did not received a fee for serving in that capacity.
Employment Contracts
There are no employment agreements with the executive officers at this time.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding the beneficial ownership of
the shares of the Common Stock (the only class of shares previously issued by
the Company) at May 15, 2006 by (i) each person known by the Company to be the
beneficial owner of more than five percent (5%) of the Company's outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the executive
officers of the Company, and (iv) by all directors and executive officers of the
Company as a group. Other than the Timbermans Group Pty Ltd, each person named
in the table, has sole voting and investment power with respect to all shares
shown as beneficially owned by such person and can be contacted at the address
of the Company.
-----------------------------------------------------------------------------------------------
Title of Class Name of Beneficial Owner Shares of Common Stock Percent of Class
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Common Timbermans Group Pty Ltd(1) 140,000,000 54.47%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Common Norman Backman(2) 20,000,000 7.78%
-----------------------------------------------------------------------------------------------
Common Colin Baird(3) 20,000,000 7.78%
-----------------------------------------------------------------------------------------------
Common Tony Esplin(4) 20,000,000 7.78%
-----------------------------------------------------------------------------------------------
Common Michael Timms(5) 20,000,000 7.78%
-----------------------------------------------------------------------------------------------
Common Roger Timms(6) 20,000,000 7.78%
-----------------------------------------------------------------------------------------------
Directors and
Officers
as a group 240,000,000 93.39%
-----------------------------------------------------------------------------------------------
(1)Timbermans Group Pty Ltd is an Australian corporation with 5 shareholders who
are the same individuals as our officers and directors. For the purposes of
aggregating the securities ownership of officers and directors, we have included
those shares held by Timbermans Group.
(2)Mr. Backman maintains his shares in his and his wife's name
(3)Mr. Baird maintains his shares in his and his wife's name
(4)Mr. Esplin maintains his shares in his and his wife's name
(5)Mr. Michael Timms maintains his shares in his and his wife's name
(6)Mr. Roger Timms maintains his shares in his and his wife's name
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
14
Timbermans Group Pty Ltd owns the majority of the shares of common stock of the
Company and its shareholders are the same individuals as our officers and
directors. Three of the directors of our Company also own 100% of Acora Reneco
Group which is the largest Australian manufacturer and designer of original
sawmilling equipment as well as an agent for sales and distribution for
sawmilling equipment manufactured by other companies. The Company presently has
an agreement in place pursuant to which Acora supplies the Company's sawmill
equipment needs. All transactions between Acora and the Company are at arms
length terms.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number Exhibit Description
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On September 18, 2006, we filed a current report on Form 8-K disclosing that on
that date, Australian Forest Industries (the "Company"), entered into a stock
purchase and recapitalization agreement (the "Stock Purchase Agreement") with
SIMBA Mines, Inc., a Nevada corporation ("SIMBA") pursuant to which the Company
proposed to purchase from SIMBA all of the issued and outstanding shares of its
wholly-owned subsidiary Simbajamba Mines Limited, a company incorporated
pursuant to the laws of Samoa ("Simbajamba"), for various consideration.
Included in the above Form 8-K we also reported that on September 18, 2006, the
Company entered into a shares sale agreement (the "Share Sale Agreement") with
Bongani International Group Limited ("BIG"), a company incorporated pursuant to
the laws of the British Virgin Islands, pursuant to which the Company proposed
to purchase from BIG all of the issued and outstanding shares of its
wholly-owned subsidiary, Rockbury, for (a) 4,806,625 shares of common stock of
the Company(post consolidation); and (b) the settlement of all outstanding loan
balances between Bongani International Group Limited and Rockbury.
On March 28, 2007, we filed a current report on Form 8-K disclosing that on
March 24, 2007, Australian Forest Industries terminated agreements with each of
Simba Mines, Inc., and Bongani International Group Limited due to the parties'
failure to reach agreement on key terms. As a result of the termination, both
the Stock Purchase Agreement and the Share Sale Agreement (as those terms are
defined below) were mutually terminated by the parties thereto on March 24,
2007.
15
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
For the Company's fiscal year ended December 31, 2006, the cost for professional
services rendered for the audit of our financial statements and the review of
the Form 10-KSB aggregated $40,000.
All Other Fees
The Company did not incur any other fees related to services rendered by our
principal accountant for the fiscal year ended December 31, 2006.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly 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: Chief Executive Officer, President and Chairman
Date: April 17, 2007
/s/ Colin Baird
---------------
Name: Colin Baird
Title: Chief Financial Officer and Director
Date: April 17, 2007
/s/ Roger Timms
---------------
Name: Roger Timms
Title: Executive Vice President and Director
Date: April 17, 2007
16