10QSB 1 ciai_10qsb-021302.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for quarterly period ended December 31, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE OF 1934 for the transition period from ______________ to _________________ Commission File No. 33-55254-18 COMPOSITE INDUSTRIES OF AMERICA, INC. (exact name of Registrant as Specified in its charter) NEVADA 87-0434297 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4505 W. Hacienda Ave. Unit I-1 Las Vegas, Nevada 89118 Address of principal executive office) (Zip Code) Registrants telephone number, including area code (702) 579-4888 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to filed by Section 13 or 15(d) of the Securities Exchange A ct of 1934 during the preceding 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. [x] yes [ ] no Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10- QSB or any amendment to this Form 10-QSB. [x) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of December 31, 2001 $.001 PAR VALUE CLASS A COMMON STOCK 41,938,856 VALUE Class A Convertible Preferred Stock 428,572 VALUE Class B Convertible Preferred Stock 0 ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED BALANCE SHEETS DECEMBER 31, 2001 and JUNE 30, 2001 (Unaudited) ASSETS December June 2001 2001 ---------- -------- Cash $ 264,410 $ 667,142 Machinery & equipment - net of accumulated depreciation of $49,186 in December and $40,232 in June 207,518 164,805 Patent - net of accumulated amortization of $2,780,000 and $2,258,750 as of December 31, 2001 and June 30, 2001, respectively 14,418,099 14,939,349 Deferred tax asset 3,540,000 2,390,000 Other assets 97,300 65,991 TOTAL ASSETS $18,527,327 $18,227,287 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 1 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED BALANCE SHEETS DECEMBER 31, 2001 and JUNE 30, 2001
(Unaudited) December June LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2001 LIABILITIES Accounts payable and accrued expenses $ 135,796 $ 45,843 Loans payable and advances from related parties 256,445 458,730 Convertible debentures - net of unamortized discount of $22,250 and $68,250 as of December 31, 2001 and June 30, 2001, respectively 1,727,750 931,750 Deferred tax liability 4,790,083 4,963,183 TOTAL LIABILITIES 6,910,074 6,399,506 COMMITMENTS AND CONTINGENCIES (NOTE 7) STOCKHOLDERS' EQUITY Convertible preferred stock class A, (5,000,000 shares authorized; 428,572 shares issued and outstanding at December 31, 2001 and June 30, 2001) 1,511,086 1,511,086 Convertible preferred stock class C (5,000,000 shares authorized: 2,000,000 shares issued and outstanding at December 31, 2001 and 0 shares issued and outstanding at June 30, 2001 2,000 - Common stock ($.001 par value, 200,000,000 shares authorized, 42,129,581 shares issued and 41,938,856 shares outstanding as of December 31, 2001 and 22,761,396 shares issued and outstanding as of June 30, 2001) 42,129 22,761 Additional paid-in capital 23,936,690 17,347,521 Prepaid officers' compensation (4,143,750) - Treasury stock - at cost (81,049) - (Deficit) accumulated during the development stage (9,649,853) (7,053,587) TOTAL STOCKHOLDERS' EQUITY 11,617,253 11,827,781 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,527,327 $18,227,287 The accompanying notes are an integral part of these statements.
F - 2 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 and 2000
(Unaudited) (Unaudited) 2001 2000 Operating expenses: General and administrative expenses $ 358,480 $ 671,325 Depreciation and amortization 265,503 274,044 Officers' and other compensation 1,015,694 40,000 Consulting fees 877,265 227,321 Total operating expenses 2,516,942 1,212,690 (Loss) from operations (2,516,942) (1,212,690) Other income and (expense): Interest and other income 909 - Interest (expense) (52,086) (1,113) Total other (expense) - net (51,177) (1,113) Net (loss) before income taxes (2,568,119) (1,213,803) Benefit for income taxes 866,550 412,600 Net (loss) $ (1,701,569) $ (801,203) Net (loss) per common share $ (.05) $ (.04) Weighted average number of common shares outstanding 35,684,974 21,623,698 The accompanying notes are an integral part of these statements.
F - 3 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000
(Unaudited) (Unaudited) 2001 2000 Operating expenses: General and administrative expenses $ 434,005 $ 772,452 Depreciation and amortization 530,204 548,088 Officers' and other compensation 1,831,937 40,000 Consulting fees 1,030,950 370,225 Total operating expenses 3,827,096 1,730,765 (Loss) from operations (3,827,096) (1,730,765) Other income and (expense): Interest and other income 3,557 1,024 (Loss) on sale of land - (197,650) Interest (expense) (95,827) (6,315) Total other (expense) - net (92,270) (202,941) Net (loss) before income taxes (3,919,366) (1,933,706) Benefit for income taxes 1,323,100 657,460 Net (loss) $ (2,596,266) $ (1,276,246) Net (loss) per common share $ (.08) $ (.06) Weighted average number of common shares outstanding 32,967,865 21,223,698 The accompanying notes are an integral part of these statements.
F - 4 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
Convertible Common Preferred Stock Additional Prepaid Stock A .001 Par Value Paid-in Officers' Shares Amount Shares Amount Capital Compensation -------- ----------- ---------- ---------- --------- ---------- Opening balance - July 1, 2001 428,572 $1,511,086 22,761,396 $ 22,761 $17,347,521 $ - Issuance of common stock for officer's compensation 410,000 410 207,390 Issuance of common stock to officers in lieu of cash compensation 17,000,000 17,000 5,508,000 (5,525,000) Amortization of officers' compensation 1,381,250 Issuance of common stock for legal and consulting services rendered 1,804,300 1,804 835,552 Issuance of common stock 149,385 149 37,197 Purchase of treasury shares Adjustment 4,500 5 1,030 Net (loss) for the six months ended December 31, 2001 -------- ----------- ---------- ---------- --------- ---------- Closing balance - December 31, 2001 428,572 $1,511,086 42,129,581 $ 42,129 $ 23,936,690 $ (4,143,750) ======== =========== ========== ========== ========= ========== The accompanying notes are an integral part of these statements.
COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 (continued)
(Deficit) Accumulated During the Total Treasury Development Stockholders' Stock Stage Equity ------------- -------------- ------------ Opening balance - July 1, 2001 $(7,053,587) $ 11,827,781 Issuance of common stock for officer's compensation 207,800 Issuance of common stock to officers in lieu of cash compensation - Amortization of officers' compensation 1,381,250 Issuance of common stock for legal and consulting services rendered 837,356 Issuance of common stock 37,346 Purchase of treasury shares (81,049) (81,049) Adjustment 1,035 Net (loss) for the six months ended December 31, 2001 (2,275,946) (2,275,946) ------------- -------------- ------------ Closing balance - December 31, 2001 (81,049) $(9,329,533) $ 11,935,573 ============= ============== ============ The accompanying notes are an integral part of these statements.
F - 5 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 2001
Convertible Common Preferred Stock Additional Stock A .001 Par Value Paid-in Shares Amount Shares Amount Capital -------- ----------- ---------- ---------- --------- Opening balance - July 1, 2000 428,572 $1,511,086 20,417,379 $ 20,417 $16,195,761 Issuance of common stock for officer's compensation 1,975,000 1,975 787,350 Issuance of common stock for legal and for consulting services rendered 90,000 90 44,910 Issuance of Common Stock through exercise of stock options 500,000 500 199,500 Issuance of stock option to consultant 120,000 Cancellation of restricted stock issued in the acquisition of Big Mountain Construction Company, Inc. (215,983) (216) Adjustment (5,000) (5) Officer loans converted to compensation Net (loss) for the year ended June 30, 2001 -------- --------- ---------- -------- ---------- Closing balance - June 30, 2001 428,572 $1,511,086 22,761,396 $ 22,761 $ 17,347,521 ======== ========= ========== ======== ========== The accompanying notes are an integral part of these statements.
COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 2001 (continued)
(Deficit) Accumulated During the Total Officer Development Stockholders' Loans Stage Equity ---------- ------------- ------------- Opening balance - July 1, 2000 $ (191,749) $ (4,312,689) $ 13,222,826 Issuance of common stock for officer's compensation 789,325 Issuance of common stock for legal and for consulting services rendered 45,000 Issuance of Common Stock through exercise of stock options 200,000 Issuance of stock option to consultant 120,000 Cancellation of restricted stock issued in the acquisition of Big Mountain Construction Company, Inc. (216) Adjustment (5) Officer loans converted to compensation 191,749 191,749 Net (loss) for the year ended June 30, 2001 (2,740,898) (2,740,898) -------- ---------- ---------- Closing balance - June 30, 2001 $ - $ (7,053,587) $ 11,827,781 ======== ========== ========== The accompanying notes are an integral part of these statements.
F - 6 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Unaudited) (Unaudited) 2001 2000 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash (used) provided by operating activities (859,787) 50,156 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash (used) by investing activities (51,667) ( -) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Loans and advances from (to) related parties (200,000) 93,987 Repayment of officer loans - 191,749 Issuance of convertible debentures 750,000 - Issuance of common stock 19,258 - Purchase of treasury shares (58,251) - Loans and notes payable - (repayments) (2,285) (354,077) -------- ------- Net cash provided (used) by financing activities 508,722 (68,341) -------- ------- Net (decrease) in cash (402,732) (18,185) -------- ------- Cash - beginning of period 667,142 18,516 -------- ------- Cash - end of period $ 264,410 $ 331 ======== ======= Supplemental Disclosure of cash flow information: Cash Paid During the Year for: Interest expense $ 702 $ 6,315 ======== ======= Income taxes $ - $ - ======== ======= The accompanying notes are an integral part of these statements.
F - 7 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 NON-CASH INVESTING AND FINANCING TRANSACTIONS During the six months ended December 31, 2001, Composite issued 1,654,300 shares of common stock to various individuals valued at $771,356 for legal and consulting services performed and 410,000 shares of common stock valued at $207,800 to officers and employees of the Company in lieu of salary. During November and December 2001, Composite purchased 190,725 shares of its common stock for $81,049, $58,251 in cash with the balance of $22,798 due to the former shareholders. Composite issued 17,000,000 shares of common stock to senior corporate officers on August 23, 2001. The shares were issued for future services to be rendered to the Company related to capital raising efforts, building alliances, and overall corporate strategy development. These shares are restricted as to transferability for two years. The shares are valued at $5,525,000 or $0.33 per share. This value reflects discounts totaling 50% for the trading restriction and the volume of shares issued. Accordingly, the unearned compensation of $5,525,000 related to this transaction will be amortized as a charge to compensation expense ratably over a two-year period. For the six months ended December 31, 2001, compensation expense related to this amortization amounted to $1,381,250. The remaining unamortized compensation of $4,143,750 recorded as prepaid officers' compensation is included as a reduction to stockholders' equity. The Company issued 149,385 shares of common stock on July 11, 2001 to two individuals for $37,346 payable at a future date. These shares are valued at $0.25 per share based on discounts applied due to restrictions on transferability for a period of one year. The portion that remained unpaid as of December 30, 2001 amounted to $18,089 that is included in other receivables. On July 2, 2001, the Company issued 150,000 shares of common stock to a financial consulting firm as a "commencement bonus" under an agreement wherein the financial consultant will perform certain evaluations and analyses for the Company. The agreement term is for six months effective July 1, 2001. These shares related to the THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 8 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 NON-CASH INVESTING AND FINANCING TRANSACTIONS (Continued) commencement bonus have been valued at $.44 per share for a total valuation of $66,000. This will be recognized as consulting expenses over six months commencing July, 2001. For the three months ended September 30, 2001, consulting expense amounted to 33,000. The Company recorded the remaining $33,000 as prepaid consulting fees as a current asset. During the six months ended December 31, 2000, Composite Industries issued 675,000 shares of common stock valued at $184,500 to various individuals for legal and consulting services performed and 125,000 shares of common stock valued at $40,000 to an officer of the Company in lieu of salary. During the quarter ended, $27,100 was repaid to the Company and an officer loan was reduced by an additional $101,749 in exchange for services. On May 25, 2000, Composite issued 327,511 shares of common stock valued at $191,749 to an officer of the Company to pay specific company expenses. Accordingly, an officer loan receivable was recorded for $191,749 and was reflected as a reduction of stockholders' equity at June 30, 2000. An additional 300,000 shares valued at $131,000 were issued to the officer during the quarter ended September 30, 2000. During this quarter, the $163,000 was repaid to the Company. The loan was also reduced by an additional $31,000 in exchange for services. During the three months ended September 30, 2000, Composite issued 425,000 shares of common stock valued at $185,725 for legal and consulting services performed. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 9 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 Note 1- Patent Valuation Composite believes that it is appropriate to continue to carry the net amortized cost of $14,418,099 of its Z-MIX patent at December 31, 2001 because of the signing of long-term contracts which demonstrates the patent's commercial viability. Furthermore, management believes that the expected future profits and cash flows will support the carrying value of the patent. The patent is being amortized on a straight-line basis over the remaining life of the patent (195 months as of the acquisition date). Patent amortization expense amounted to $521,250 for the six months ended December 31, 2001 and 2000. NOTE 2 - Acquisitions MJB Towers, Inc. On October 1, 2001, Composite acquired 100% of the common stock of MJB Towers, Inc., a California corporation in the business of acquiring and leasing telecommunication towers, in exchange for 1,000,000 shares of Class C convertible preferred non-voting shares at an exercise price of $100 per share. The exercise price will be attained upon the achievement of certain specified goals. In addition, the terms of the agreement specify a bonus payment beginning with the first month of operations, and there is a provision for an additional bonus based on future performance. The transaction was valued at $1,000 for financial reporting purposes and assigned to goodwill. Tribal Electric Association-2000 Corporation On October 5, 2001, Composite entered into a stock exchange agreement with Tribal Electric Association-2000, "TEA" in the business of developing, constructing and operating power plants, in exchange for 1,000,000 shares of Class C convertible preferred non-voting shares at an exercise price of $150 per share. The exercise price will be attained upon the achievement of certain specified goals. All of the shares owned by "TEA" constitute 100% of its common stock. The transaction was valued at $1,000 for financial reporting purposes and assigned to goodwill. F-10 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 NOTE 3 - Income Taxes Composite accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). For the six months ended December 31, 2001 and 2000, the income tax (benefit) was comprised of the following components: (Unaudited) (Unaudited) 2001 2000 Current - Federal $ - - State - - Total current - Deferred- Federal (1,323,100 ) (657,460 ) State - - Total deferred (1,323,100) (657,460) Total $(1,323,100 ) $(657,460 ) The only differing method of reporting income for tax purposes as compared to financial reporting purposes was in connection with the deferred tax liability resulting from the acquisition of patent rights described in Note 1. In addition, there is a deferred tax asset relating to the benefit provided by the net operating loss carry forward. As there are no state income taxes to be considered, the income tax provision is computed at the federal statutory rate of 34%. Deferred tax assets and liabilities consist of the following: (Unaudited) December June 2001 2001 ----------- ----------- Deferred tax assets- Tax benefit of net operating loss carryovers $ 3,540,000 $ 2,390,000 Valuation allowance - - $ 3,540,000 $ 2,390,000 Deferred tax liabilities- Patent rights acquired $ 4,790,083 $ 4,963,183 F -11 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 NOTE 3 - Income Taxes (continued) No valuation allowance was required for the deferred tax asset for each of the periods presented because management determined that there is a strong likelihood of realization of the deferred tax asset. The deferred tax asset relates to the net operating loss carryforwards. Composite incurred net operating losses for financial reporting purposes totaling $2,596,266 during the six months ended December 31, 2001 available to offset future income for financial reporting purposes expiring in 2022. NOTE 4 - Related Party Transactions Composite has entered into consulting agreements with certain members of the Company's Board of Directors and stockholders to provide services on various strategic and business issues. The agreements are renewable at the discretion of management. Total fees paid for such services by the Company either in stock or cash during the six months ended December 31, 2001 and 2000 were $1,831,936 (including $248,437 cash) and $302,000 respectively and are included in operating expenses in the consolidated statements of operations. Management believes the transactions were at arm's length. The President and Chief Executive Officer has from time to time advanced funds to Composite or one of its subsidiaries to assist with working capital requirements. These transactions are short-term in nature. The joint venture construction project known as Heartland Homes advanced $53,101 to Big Mountain Construction Company, Inc. These advances are non-interest bearing and are short-term in nature. Funds advanced to the Company as of December 31, 2001 and June 30, 2001 amounted to $125,301 and $325,301, respectively, and are carried in loans and advances from related parties. No interest was charged for the six months ended December 31, 2001 and 2000. F - 12 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 NOTE 5- Going Concern Considerations Composite Industries has operated as a development stage enterprise since February 10, 1997, its inception and has operated for over four years without generating revenues. Operating capital has been generated primarily by the extension of loans and advances from officers and directors and the issuance of common and preferred stock and the sale of debentures. The failure to generate revenues from operations has caused Composite to experience liquidity shortfalls from time to time. The Chairman, Merle Ferguson has pledged to continue to contribute money to keep Composite solvent during the next twelve months. Further, the Company has contracts with joint venture partners and expects to commence construction operations during fiscal year 2002. It is for these reasons that management believes that it has alleviated substantial doubt about Composite's ability to continue as a going concern. NOTE 6 - Convertible Debentures On October 22, 2001, Composite issued $750,000 of 6% convertible debentures due November 13, 2002. The Company received proceeds of $565,000, net of expenses of $185,000. The debentures are required or permitted to be repaid at the "Maturity Date" as provided thereunder and to pay interest to the holder on the aggregate unconverted and then outstanding principal amount of the debentures at the rate of 6% per annum, payable on each conversion date (date that a conversion notice is provided) and on the maturity date in cash or shares of common stock. No debentures were converted as of December 31, 2001. Interest of $8,875 was accrued on the debentures during the six months ended December 31, 2001. F-13 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 NOTE 7 - Stock Issued For Services During the six months ended December 31, 2001, Composite Industries issued 1,654,300 shares of common stock to various individuals valued at $771,356 for legal and consulting services performed and 410,000 shares of common stock valued at $207,800 to officers and employees of the Company in lieu of salary. Composite issued 17,000,000 shares of common stock to senior corporate officers on August 23, 2001. The shares were issued for future services to be rendered to the Company related to capital raising efforts, building alliances, and overall corporate strategy development. These shares are restricted as to transferability for two years. The shares are valued at $.33 per share or $5,525,000. This value reflects discounts totaling 50% for the trading restriction and the volume of shares issued. Accordingly, the unearned compensation of $5,525,000 related to this transaction will be amortized as a charge to compensation expense ratably over a two-year period. For the six months ended December 31, 2001, compensation expense amounted to $1,381,250. The remaining unamortized compensation of $4,143,750 recorded as prepaid officers' compensation is included as a reduction to stockholders' equity. On July 2, 2001, the Company issued 150,000 shares of common stock to a financial consulting firm as a "commencement bonus" under an agreement wherein the financial consultant will perform certain evaluations and analyses for the Company. The agreement term is for six months effective July 1, 2001. These shares related to the commencement bonus have been valued at $.44 per share for a total valuation of $66,000. This will be recognized as consulting expenses over six months commencing July, 2001. For the three months ended September 30, 2001, consulting expense amounted to 33,000. The Company recorded the remaining $33,000 as prepaid consulting fees as a current asset. During the six months ended December 31, 2000, Composite issued 1,100,000 shares of common stock valued at $370,225 to various individuals for legal and consulting services performed and 125,000 shares of common stock valued at $40,000 to an officer of the Company in lieu of salary. F - 14 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 and 2000 NOTE 8 - Commitments and Contingencies On December 15, 2001, Composite entered into an agreement to lease its Las Vegas, Nevada headquarters office for 3 years at $2,239 per month for year one, $2,301 per month for year two, and $2,454 per month for the remaining year on its lease ending December 15, 2004. Rent expense amounted to $5,925 and $3,480 for the six months ended December 31, 2001 and 2000, respectively. NOTE 9 - Treasury Stock In the second quarter of 2001, the Company began acquiring shares of its common stock. The Company purchased 190,725 shares for a total of $81,049 or an average of $.43 per share. The Board authorized this repurchase program because it believed that the stock price was undervalued. NOTE 10 - Reclassifications Certain financial statement items during the fiscal period ended December 31, 2000 have been reclassified to reflect comparability with account classifications adopted for the current period presentation with no effect on previously reported net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements, including the corresponding footnotes, which is included within this report. The following discussion contains certain forward-looking statements within the meaning of Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from the results anticipated in those forward-looking statements. These risks and uncertainties include, but are not limited to those set forth below and the risk factors described in the Company's other filings with the Securities and Exchange Commission. Composite Industries of America (Affordable Homes/World Homes) is a homebuilding and development company in the development stage focusing on building for low-income and first-time homebuyers. The Company has and will continue to develop new building techniques and patented products that significantly reduce the overall cost and time, while maintaining or increasing the quality and integrity of new home construction. The Company's plan is to develop and build its "World Home" for sale outside the United States in developing nations where there is an immediate need for permanent affordable shelter. The patented Z MIX material used in the "World Home' provides protection from the elements; hurricanes, earthquakes, as well as being fireproof. Composite Industries of America's immediate focus is to enter into licensing and/or joint venture affiliations in which it will supply its proprietary, patent-protected Z MIX material to established companies for use outside the United States in home construction and other applications such as railroad ties, utility poles and environmental remediation. The Company believes this approach to be the fastest route for the penetration into the global marketplace. The Company projects that the revenues received from licensing Z MIX technology will be recognized by the Company without incurring the usual development and labor expenses associated construction projects. RESULTS OF OPERATIONS Quarter ended December 31, 2001 vs. December 31, 2000 REVENUES. Composite Industries of America is presently a development stage company. Accordingly, the Company has no revenues for the three months ended December 31, 2001. OPERATING EXPENSES. Operating expenses are comprised of General and Administrative Expenses which consists primarily of amortization of patent expense, professional fees, product development expense and office expense. Amortization expense related to the patent amounted to $260,625 and $260,625 during each of the periods ended December 31, 2001 and 2000. The patent is being amortized on a straight-line basis over the remaining life of the patent (195 months as of the acquisition date, April 28, 1999). Operating expenses increased from $1,212,690 for the three months ended December 31, 2000 to $2,516,942 (or by $1,304,252) for the three months ended December 31, 2001. The increase in operating expenses was primarily due to officers' compensation which increased from $40,000 for the three months ended December 31, 2000 to $1,015,694 (refer to Note 7 of the Financial Statement) for the three months ended December 31, 2001. NET LOSS. As a result, our net loss after the tax benefit increased from $1,276,246 for the three months ended December 31, 2000 to $2,596,266 for the three months ended December 31, 2001. LIQUIDITY AND CAPITAL RESOURCES Composite Industries of America is currently a development stage company, however management projects that during the next twelve months revenue derived from one or more of the signed joint ventures, or the proceeds from a private placement which is under negotiations should be sufficient to finance the Company's working capital and capital expenditures. Although Composite Industries of America believes that the revenues projected over the next twelve months will be significant, we are presently in negotiations for a private placement for immediate funds. The Company is confident that with its product and technology, signed joint ventures and stronger balance sheet, that it will successfully complete a private placement. In the event that the Company does not secure additional financing, the Company has made provisions for working capital, for the next twelve months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no market risk sensitive instruments or market risk exposures. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There is no pending or threatened litigation or other legal proceedings, material or otherwise, nor any claims or assessments with respect to Composite Industries of America, Inc. at the present time. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS NONE ITEM 3. DEFAULTS UPON SENIOR INDEBTEDNESS NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to the Company security holders for a vote during the period ending December 31, 2001. ITEM 5. OTHER INFORMATION BUSINESS On March 17, 1999, Kowtow, Inc. received 100% of the common stock of Affordable Homes of America, Inc. in a merger. Additionally, Kowtow, Inc. issued 4,000,000 shares of common stock to SCS Enterprises, Inc. Trust, the sole shareholder of Affordable Homes of America, Inc. On the same date the company accepted the resignation of Krista Nielson and Sasha Belliston as Officers and Directors of the Company and elected Merle Ferguson as President, CEO and Chairman of the Board of Directors. The Company also elected Susan Donohue as Secretary and as a member of the Board of Directors. The Company changed its name to Affordable Homes of America, Inc. on March 19, 1999 and obtained a new trading symbol -AHOA. The Company restructured its common stock with a two for one forward split effective March 31, 1999. The Company changed its name to World Homes, Inc.(WHME) on October 10, 2000 and to Composite Industries of America, Inc. (CIAI) on August 23, 2001. Affordable Homes of America, Inc. and World Homes, Inc. are fully owned subsidiaries of the Company. Composite Industries of America maintains its principle offices at 4505 W. Hacienda Ave., Unit I-1, Las Vegas, Nevada 89118. Composite Industries of America is in the business of building homes for low income and first time home buyers. Founded in 1997, the focus of the Company is to develop and build homes for sale in the United States and international locations with little or no timber products. The Company's methods are patented. There are three methods for new home construction. These include: * Z Mix - A cementitious product that combines diatomaceous earth and used tires to create a lightweight building material that reduces the time and the cost for constructing a house. The Company currently holds the patent on Z Mix. * In-line Framing - A new method of construction that reduces the amount of wood used by one third. This reduces the cost of lumber used in construction, and thereby reduces the overall cost of the home. * Foam-Panelized Construction - This method of construction uses foam slabs covered with panels and strengthened with internal trusses. This allows for increased insulation and quick construction. All three methods (i) reduce the time and cost needed to construct the average home, and (ii) reduce the amount of wood used in building the average home. Company research has shown that more Americans ages 25 to 45 would prefer to purchase homes rather than rent. To make this option viable, the Company's homes are financed 100% by lending institutions and the monthly payments are comparable to the expense of renting. Additionally, older Americans are more inclined to move into homes that are less expensive, due to their retirement status and reduced monthly income. The Company is finishing the certification procedures necessary to sell its Z Mix products in the US. Once complete, the Company will begin sales and distribution of its products in US. The Company has been approached by several international entities to use Z Mix for construction. To date, the Company has made two (2) acquisitions: (a) On April 28, 1999, Affordable Homes acquired Composite Industries of America, Inc. the owner of a patent covering a construction material known as "Z Mix". Z Mix is a cementitious building material and can be used in a two step construction method instead of cement, dry wall or lumber. Affordable Homes believes Z Mix will enable it to build better quality homes at a lower price than if other products were used. (b) On June 28, 1999 Affordable Homes also acquired Big Mountain Construction Company which holds the exclusive right to build all the houses for the Heartland Homes development. The development is planned for the construction of 136 homes, each on an individual site. The inability to maintain the operations of Big Mountain caused the Company to abandon its entire investment in Big Mountain in March 2001. Composite Industries of America, Inc. The acquisition of Composite Industries was accomplished by exchanging one share of Affordable's/World Homes' common stock for two shares of the original Composite's common stock. All stock issued by Affordable/World Homes pursuant to this acquisition was restricted. Affordable Homes/World Homes was the surviving entity and acquired the patents owned by Composite. The patents cover a construction material called "Z MIX". Z MIX is a building material lighter than cement that can be used in home construction instead of cement, lumber or dry wall. The patented construction material is a lightweight cementitious insulating mixture with a high compression strength and thermal resistance values up to 30 to 40 times that of standard concrete. It is fire proof, insect proof, has excellent acoustical properties and is easy to clean up. Z MIX can be used for wall and roof panels and can easily be pumped for walls and floors. Z MIX makes a well insulated cost effective floor that has a slight give to it. Z MIX is excellent for gymnasium floors. This material is used for residential, light commercial and agricultural building. The composition has the unique property of being able to absorb contaminated or hazardous materials, especially petroleum based contaminants and is especially useful in cleaning up and controlling contaminants in underground storage tanks, especially in abandoned or closed service stations. The Company also acquired the plans for a "World Home" and a "US Home" made from this material. These plans have been certified by Larson Engineering, Inc. as earthquake resistant in all four seismic regions in the world. Larson Engineering, Inc. also certified that houses built from these materials are able to withstand hurricane winds up to 150 mph. Composite Industries of America believes that use of Z MIX will permit it to construct lower cost housing at substantial less that the present cost for such housing. Z MIX can also be used in the manufacturing of utility poles, railroad ties and pallets with substantial savings in the manufacturing cost of these items. The Company believes that the use of Z MIX will broaden its market and increase its profitability. Big Mountain Construction Company, Inc. The Company acquired Big Mountain Construction Company, Inc. for $500,000 paid in restrictive common stock in the amount of 215,983 shares. Big Mountain maintains a general contractor license and has the exclusive right to build out 136 homes for Heartland Homes Estates, an affordable housing project near Tacoma, Washington. Big Mountain's master appraisals are generally $10,000 - $12,000 higher than the selling price. This allows Big Mountain to feature 100% financing for their buyers, including VA and FHA programs. This feature will give the Company the ability to qualify more homebuyers and close more loans than their competition. Big Mountain Construction has had a presence in the entry-level and one step-up housing market for over 20 years in the State of Washington. The Company's business is not seasonal although during some snow storms on- site construction generally does not take place unless indoors. The Company uses no special raw materials and the materials it does use are available from numerous suppliers throughout the United States. Composite Industries of America (Affordable Homes/World Homes) has signed Joint Venture Agreements or strategic alliance agreements with the following companies: (a) Tristar USA of LA, Inc. and Affordable Homes signed a five-year Joint Venture Agreement on June 22, 2000. Tristar will act as the construction company and Affordable Homes will supply its proprietary Z MIX material for building affordable housing in Developing Nations, particularly in Nigeria. (b) AL NASR Trading & Industrial Corporation L.L.C. and Affordable Homes signed a three-year Joint Venture Agreement with a 25-year optional extension, on August 17, 2000. AL NASR is to provide a proposal for the establishment of a manufacturing plant for Z MIX in a Middle Eastern country and a working plan for at least four other countries in the Middle Eastern / Northern Africa area. Affordable Homes will provide its patented Z MIX material and its technical expertise in building affordable housing. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows the positions held by the Company's officers and directors. The directors were appointed and will serve until the next annual meeting of the Company's stockholders, and until their successors have been elected and have qualified. The officers were appointed to their positions, and continue in such positions at the discretion of the directors. NAME AGE POSITION -------------- --- ----------------------------------------- Merle Ferguson 55 President, CEO and Chairman of the Board William Morris 63 Vice President of Finance, CFO, Treasurer Susan Donohue 49 Vice President of Operations, Secretary Merle Ferguson, President, CEO and Chairman of the Board, founded Affordable Homes of America, Inc. in 1997 after a successful career in the construction industry. Mr. Ferguson's goal was to form a national construction company able to create affordable, quality homes for first-time and low-income homebuyers. Prior to starting the Company, Mr. Ferguson spent 24 years in the construction industry as a builder and real estate developer in California, Oregon and Washington States. Mr. Ferguson attended Yakima Valley College from 1964-1966 with a major in forestry and a minor in Business Management. In April of 1966, he enlisted in the United States Marine Corps, serving two tours in Vietnam, and was honorably discharged in 1970. For the past 7 years, Mr. Ferguson has been researching new construction products used to reduce deforestation. Some of the construction methods under development by the Company use no timber products. William Morris joined Composite Industries of America as Vice President of Finance, Chief Financial Officer and Treasurer of the Board in May of 2001. Mr. Morris brings over 30 years of financial and accounting experience to the Company. The majority of the 30 years were performing the duties of Chief Financial Officer. He was the CFO for (Sony) / Superscope, Inc. and Maranatz Company, Inc., and at one time was the youngest CFO of a New York Stock Exchange company. Susan Donohue is the Vice President of Operations, and Secretary of the Board. She was one of the two founders of Zawada Technologies, Inc. At Zawada Technologies she worked directly with Joseph Zawada on the research of the Z Mix product. Zawada Technologies merged with Composite Industries, Inc. Ms. Donohue joined Affordable Homes/World Homes when the original Composite merged with the Company. Ms. Donohue attended the University of Wisconsin at Stevens Point with a focus in sociology and psychology. Ms. Donohue also attended Cardinal Stritch College of Madison, where she majored in Business Administration. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is currently trading on the NASD Over-the-Counter Bulletin Board under the symbol "CIAI" since September 4, 2001, and traded under the symbol "WHME" prior to that date. The stock has traded between $3.125 per share and $0.14 per share. There are approximately 900 record holders of the Company's common stock. The Company has not previously declared or paid any dividends on its common stock and does not anticipate declaring any dividends in the foreseeable future. ITEM 6. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) Exhibits - No exhibits to report this quarter (b) Reports on Form 8-K. None Item No. 5- Other Events. The Company changed its name to Composite Industries of America, Inc. on August 24, 2001. Composite Industries of America, Inc. has a new CUSIP number of 20461M101 and a new trading symbol of CIAI. Item No. 7-Financial statements proforma and Exhibits; Company: Amendment to the Articles of Incorporation changing name to Composite Industries of America, Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPOSITE INDUSTRIES OF AMERICA, INC. Date: February 13, 2002 By: /s/ Merle Ferguson ----------------- Merle Ferguson Chairman, President & CEO Date: February 13, 2002 By: /s/ William Morris ----------------- William Morris VP of Finance, CFO & Treasurer