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 June 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 August 15, 2006 was 257,400,680. ITEM 1 FINANCIAL STATEMENTS Description Page No. FINANCIAL INFORMATION: Financial Statements Consolidated Balance Sheets at June 30, 2006 (Unaudited).................. 1 Consolidated Statement of Operations (Unaudited)............................................................... 2 Consolidated Statements of Cash Flows (Unaudited) ........................ 3 Notes to Consolidated Financial Statements (Unaudited).................... 4 Item 1. Condensed Financial Statements AUSTRALIAN FOREST INDUSTRIES CONSOLIDATED BALANCE SHEETS ASSETS
June 30, December 31, 2006 2005 ------------ ------------ (Unaudited) CURRENT LIABILITIES Bank overdraft $ 1,617,446 $ 117,772 Accounts payable 3,782,209 2,690,957 Current portion of capitalized lease obligations 1,076,013 1,076,013 Due to Timberman shareholders 5,702,293 3,213,912 Related party payable 592,925 592,844 Accrued payroll, related taxes and benefits 643,171 599,389 ------------ ------------ Total Current Liabilities 13,414,057 8,290,887 OTHER LIABILITIES Capitalized lease obligations 4,293,539 3,512,882 Deferred capital gain 1,235,554 1,396,481 Due to National Australian Bank 4,818,660 4,818,000 ------------ ------------ Total Liabilities 23,761,810 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, 257,400,680 issued and outstanding 257,400 257,400 Additional paid-in capital 4,503,417 4,503,417 Accumulated other comprehensive income 256,165 333,619 Accumulated deficit (6,766,385) (5,555,688) ------------ ------------ Total Stockholders' Equity (1,749,403) (461,252) ------------ ------------ Total Liabilities and Stockholders' Equity $ 22,012,407 $ 17,556,998 ============ ============
See accompanying notes to financial statements. 1
AUSTRALIAN FOREST INDUSTRIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended For the Six Months Ended ------------------------------ ------------------------------ June 30, June 30, 2006 2005 2006 2005 ------------- ------------- ------------- ------------- (Restated) (Restated) REVENUE - SALES $ 3,892,949 $ 3,439,748 $ 7,342,061 $ 6,746,314 COSTS AND EXPENSES Cost of goods sold 2,315,311 822,929 4,110,147 3,859,151 Selling, general and administrative 1,970,657 3,208,714 4,030,781 3,941,458 Provision for Doubtful Accounts 631 132,495 Interest expense 191,986 154,472 393,084 279,733 Depreciation and amortization 147,119 173,495 287,125 372,254 ------------- ------------- ------------- ------------- Total Costs and Expenses 4,625,704 4,359,610 8,953,632 8,452,596 ------------- ------------- ------------- ------------- OPERATING LOSS (732,755) (919,862) (1,611,571) (1,706,282) NON-OPERATING INCOME Other income 40,788 (1,371) 133,288 2,533 Interest income 82,406 164,031 Gain on disposal of assets 493 1,164,303 103,555 1,164,303 ------------- ------------- ------------- ------------- Total Non-Operating Income 123,687 1,162,932 400,874 1,166,836 NET INCOME (LOSS) $ (609,068) $ 243,070 $ (1,210,697) $ (539,446) ============= ============= ============= ============= NET LOSS PER SHARE $ 0.01 $ 0.01 $ (0.01) $ 0.01 ============= ============= ============= =============
See accompanying notes to financial statements. 2 AUSTRALIAN FOREST INDUSTRIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, ------------------------ 2006 2005 ---------- ---------- (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(1,210,697) $ (539,446) Adjustments to reconcile net income to cash flows used in operating activities: Depreciation 170,362 372,254 Amortization of Timber contract 3,133 Amortization of leaseback gain (161,148) Changes in operating activities: (Increase) decrease in prepaid expenses (26,347) 110,021 (Increase) decrease in inventories (537,597) (197,888) (Increase) decrease in receivables (1,260,223) (574,235) (Increase) decrease in related party receivable (273,175) (Increase) decrease in timber contract 84,998 13,249 Increase (decrease) in accounts payable and other liabilities 1,091,252 1,082,439 Increase (decrease) in bank overdraft 1,499,674 (421,097) Increase (decrease) in related party payable 81 (7,956) Increase (decrease) in accrued payroll 43,782 (27,294) Increase (decrease) in taxes payable 69,437 ---------- ---------- Net Cash (Used in) Provided by Operating Activities (233,292) (463,128) CASH FLOWS FROM INVESTING ACTIVITIES Capital additions (3,232,510) (906,737) Disposition of capital assets 237,250 ---------- ---------- Net Cash Used in Investing Activities (2,995,260) (906,737) CASH FLOWS FROM FINANCING ACTIVITIES Loans from shareholders 2,488,382 (7,956) Capital leases 780,656 1,633,588 National Australian bank loan 660 (160,957) Sale leaseback deferred credit 221 ---------- ---------- Net Cash Provided by (Used In) Financing Activities 3,269,919 1,464,676 EFFECT OF EXCHANGE RATES ON CASH (168,381) (181,625) ---------- ---------- (DECREASE) INCREASE IN CASH (127,014) (86,814) CASH AT BEGINNING OF PERIOD 127,014 225,189 ---------- ---------- CASH AT END OF PERIOD $ $ 138,375 ========== ==========
See accompanying notes to financial statements. 3 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 six months ended June 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 TO TIMBERMANS GROUP (RELATED PARTY) During the six months ended June 30, 2006, the company received an additional $2,488,382 from Timberman investors. NOTE 3 - CAPITALIZED LEASE OBLIGATIONS During the six months ended June 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. 4 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 six-months ended June 30, 2006 aggregated $8,953,632. 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 $1,611,571 and a total net loss of $1,210,697 or $(0.01) per share. Operating costs for the three-month period ended June 30, 2006 aggregated $4,625,704. This includes an increase in costs of goods sold of $520,475 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 $609,068 for the three-month period ended June 30, 2006 or $(0.01) per share. LIQUIDITY AND CAPITAL RESOURCES On June 30, 2005 and 2006 we had current assets of $5,349,783 and $3,722,067, respectively. 5 Net cash used in operating activities for the period from inception to June 30, 2005 was $463,128. Net cash used in operating activities for the period from inception to June 30, 2006 was $233,292. 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 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 June 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. 6 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 None. 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: August 15, 2006 /s/ Colin Baird - -------------------------------- Name: Colin Baird Title: Chief Financial Officer Date: August 15, 2006 7