** **

**SECURITIES & EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

**ý****                                 QUARTERLYREPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For thequarterly period ended December 31, 2001**

** **

**o****                                 TRANSITIONALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 (No Fee Required)**

** **

**CommissionFile No. 000-24551**

 

**COMPOSITE SOLUTIONS, INC.**

(Name of Small BusinessIssuer in its Charter)

 

| **Florida**                                                     |   | **65-0790758**     |
|-----------------------------------------------------------------|--------|--------------------|
| State or other  jurisdiction of                                 |   | I.R.S. Employer    |
| incorporation or organization                                   |   | Identification No. |
|                                                            |   |               |
| **3252  Holiday Court, Suite 206, La Jolla, California**        |   | **92122**          |
| Address of principal  executive office                          |   | Zip Code           |
|                                                            |   |               |
| Issuer’s  telephone number:  **(858)  459-4843** |
|                                                            |
|                                                            |
| Former name and  address, if changed since last report          |

 

Check whether theissuer has (1) filed all reports required by Section 13 or 15(d) of theExchange Act during the past 12 months, and (2) been subject to such filingrequirements for the past ninety (90) days. Yes ý No  o

 

As of December 31,2001, 15,136,619 shares of Common Stock were outstanding.

 

 

**PART 1 - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

                The following consolidatedfinancial statements contain information regarding the Company’s balance sheet,profit & loss, shareholder’s equity, and cash flow for the quarter endedDecember 31, 2001.

 

 

**INDEX TO FINANCIAL STATEMENTS**

 

Accountant’sReview Report

 

Balance Sheets

 

Statements ofOperations

 

Statementsof Changes in Stockholders’ Equity

 

Statements of CashFlows

 

Notes to Financial Statements

 

 

1

----

 

**ACCOUNTANTS’ REVIEW REPORT**

 

 

To the Board ofDirectors and Stockholders

CompositeSolutions, Inc. and Subsidiaries

 

We have reviewedthe accompanying consolidated balance sheets of Composite Solutions, Inc. (adevelopment stage company) and subsidiaries as of December 31, 2001 and 2000,and the related consolidated statements of operations, changes in shareholders’equity and cash flows for the three months then ended and the period October 1,1999 to December 31, 2001, in accordance with Statements on Standards forAccounting and Review Services issued by the American Institute of CertifiedPublic Accountants.  All informationincluded in these financial statements is the representation of the managementof Composite Solutions, Inc. and subsidiaries.

 

A review consistsprincipally of inquiries of Company personnel and analytical procedures appliedto financial data.  It is substantiallyless in scope than an audit in accordance with generally accepted auditingstandards, the objective of which is the expression of an opinion regarding theconsolidated financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on ourreview, we are not aware of any material modifications that should be made tothe accompanying financial statements in order for them to be in conformitywith generally accepted accounting principles.

 

The consolidated financial statements of Composite Solutions, Inc. andsubsidiaries as of December 31, 1999 and the period October 20, 1997(inception) to September 30, 1999 were reviewed by other accountants, whosereport dated February 11, 2000, stated that they were not aware of any materialmodifications that should be made to those statements in order for them to bein conformity with generally accepted accounting principles.

 

 

 

 

                                                                                                                                 PETERSON & CO.

 

 

San Diego,California

February 27, 2002

 

 

2

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**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**Consolidated Balance Sheets**

 
|                                                                                                                                                                 |   | **December 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                 |   | **2001**         |       | **2000** |   |
| **ASSETS**                                                                                                                                                           |   |             | ** ** |   | ** ** |
|                                                                                                                                                                 |   |             |       |   |   |
| **Current  assets**                                                                                                                                                  |   |             |       |   |   |
| Cash                                                                                                                                                                 |   | $                | 448        |   | $ | 52,364 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $0  in 2001 and $3,333 in 2000                                                                  |   | 41,059           |       | 61,191 |   |
| Related party  receivables                                                                                                                                           |   | —           |       | 9,920 |   |
| Costs in excess  of billings                                                                                                                                         |   | 35,942           |       | — |   |
| Inventory                                                                                                                                                            |   | —           |       | 183,327 |   |
| Prepaid expenses                                                                                                                                                     |   | 341              |       | 2,371 |   |
| Other current  assets                                                                                                                                                |   | 46               |       | 754 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| Total current  assets                                                                                                                                                |   | 77,836           |       | 309,927 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| **Property,  plant and equipment, net**                                                                                                                              |   | 6,558            |       | 89,934 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| **Other  assets**                                                                                                                                                    |   |             | ** ** |   | ** ** |
| Employee  advances                                                                                                                                                   |   | —           |       | 1,150 |   |
| Intangible  assets, net                                                                                                                                              |   | 1,006,291        |       | 1,497,563 |   |
| Deposits                                                                                                                                                             |   | 13,147           |       | 9,152 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| Total assets                                                                                                                                                         |   | $                | 1,103,832  |   | $ | 1,907,726 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                       |   |             | ** ** |   | ** ** |
|                                                                                                                                                                 |   |             |       |   |   |
| **Current  liabilities**                                                                                                                                             |   |             | ** ** |   | ** ** |
| Accounts payable                                                                                                                                                     |   | $                | 344,455    |   | $ | 174,651 |   |
| Employee payable                                                                                                                                                     |   | 230,498          |       | 42,977 |   |
| Related party  payable                                                                                                                                               |   | 50,000           |       | — |   |
| Line of credit                                                                                                                                                       |   | 51,396           |       | 50,968 |   |
| Notes payable                                                                                                                                                        |   | —           |       | 84,500 |   |
| Related party  notes payable                                                                                                                                         |   | 159,764          |       | — |   |
| Accrued expenses                                                                                                                                                     |   | 129,763          |       | 31,242 |   |
| Income taxes  payable                                                                                                                                                |   | 3,200            |       | 3,152 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| Total current  liabilities                                                                                                                                           |   | 969,076          |       | 387,490 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| **Long  term obligations**                                                                                                                                           |   |             | ** ** |   | ** ** |
| Note payable                                                                                                                                                         |   | 102,258          | ** ** | **—** | ** ** |
| Convertible  debenture                                                                                                                                               |   | —           |       | 500,000 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| Total  liabilities                                                                                                                                                   |   | 1,071,334        |       | 887,490 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| **Shareholders’  equity**                                                                                                                                       |   |             | ** ** |   | ** ** |
| Preferred stock;  $0.0001 par value; 10,000,000 shares authorized; 0 shares issued and  outstanding                                                                  |   | —           |       | — |   |
| Common stock;  $0.0001 par value; 50,000,000 shares authorized; 15,136,619 and 13,761,904  shares issued and outstanding at December 31, 2001 and 2000, respectively |   | 1,513            |       | 1,377 |   |
| Additional paid  in capital                                                                                                                                          |   | 3,285,639        |       | 3,140,591 |   |
| Accumulated  deficit                                                                                                                                                 |   | (3,254,654       | )          | (2,121,732 | ) |
|                                                                                                                                                                 |   |             |       |   |   |
| Total  shareholders’ equity                                                                                                                                     |   | 32,498           |       | 1,020,236 |   |
|                                                                                                                                                                 |   |             |       |   |   |
| Total  liabilities and shareholders’ equity                                                                                                                     |   | $                | 1,103,832  |   | $ | 1,907,726 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

3

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**ConsolidatedStatements of Operations**

 
|                                                  |   |                   |     |             |   | **October 20, 1997** |   |
|-------------------------------------------------------|--------|------------------------|----------|------------------|--------|----------------------|--------|
|                                                  |   |                   |     |             |   | **(Inception)**      |   |
|                                                  |   | **Three Months Ended** |     | **to**           |   |
|                                                  |   | **December 31,**       |     | **December 31,** |   |
|                                                  |   | **2001**               |     | **2000**         |   | **2001**             |   |
| **Revenues**                                          |   | $                      | 88,732   |             | $      | 26,081               |   | $ | 170,827 |   |
| **Cost  of sales**                                    |   | 83,297                 |     | 12,078           |   | 129,984              |   |
|                                                  |   |                   |     |             |   |                 |   |
| Gross profit                                          |   | 5,435                  |     | 14,003           |   | 40,843               |   |
|                                                  |   |                   |     |             |   |                 |   |
| **Expenses**                                          |   |                   |     |             |   |                 |   |
| Consulting fees                                       |   | 65,041                 |     | 65,584           |   | 808,104              |   |
| Depreciation and  amortization                        |   | 4,997                  |     | 54,093           |   | 273,227              |   |
| General and  administrative expenses                  |   | 46,177                 |     | 71,978           |   | 705,691              |   |
| Organizational  expenses                              |   | —                 |     | —           |   | 514                  |   |
| Professional  fees — other                       |   | 882                    |     | 37,585           |   | 342,506              |   |
| Professional  fees — related party               |   | —                 |     | —           |   | 60,839               |   |
| Salaries                                              |   | 93,633                 |     | 146,687          |   | 995,770              |   |
| Impairment loss                                       |   | —                 |     | —           |   | 144,772              |   |
|                                                  |   |                   |     |             |   |                 |   |
| Total expenses                                        |   | 210,730                |     | 375,927          |   | 3,331,423            |   |
|                                                  |   |                   |     |             |   |                 |   |
| Loss from  operations                                 |   | (205,295               | )        | (361,924         | )      | (3,290,580           | )      |
|                                                  |   |                   |     |             |   |                 |   |
| **Other  income (expense)**                           |   |                   |     |             |   |                 |   |
| Interest income                                       |   | —                 |     | 1                |   | 8,363                |   |
| Interest income  — forgiveness of debt           |   | —                 |     | —           |   | 17,825               |   |
| Gain on  forgiveness of debt                          |   | —                 |     | —           |   | 8,261                |   |
| Other expenses                                        |   | (2,550                 | )        | —           |   | (9,565               | )      |
| Loss on disposal  of assets                           |   | —                 |     | —           |   | (190                 | )      |
| Interest expense                                      |   | (1,130                 | )        | (1,496           | )      | (72,314              | )      |
| Loss on  forgiveness of debt                          |   | —                 |     | —           |   | (11,021              | )      |
|                                                  |   |                   |     |             |   |                 |   |
| Total other  income (expense)                         |   | (3,680                 | )        | (1,495           | )      | (58,641              | )      |
|                                                  |   |                   |     |             |   |                 |   |
| Loss before  provision for income taxes               |   | (208,975               | )        | (363,419         | )      | (3,349,221           | )      |
|                                                  |   |                   |     |             |   |                 |   |
| Provision for  income taxes                           |   | 600                    |     | —           |   | 10,728               |   |
|                                                  |   |                   |     |             |   |                 |   |
| **Net  loss from continuting operations**             |   | (209,575               | )        | (363,419         | )      | (3,359,949           | )      |
|                                                  |   |                   |     |             |   |                 |   |
| **Discontinued  operation**                           |   |                   |     |             |   |                 |   |
| Loss from  discontinued operation                     |   | —                 |     | (80,554          | )      | (72,460              | )      |
| Gain on sale of  subsidiary                           |   | —                 |     | —           |   | 177,755              |   |
|                                                  |   | —                 |     | (80,554          | )      | 105,295              |   |
|                                                  |   |                   |     |             |   |                 |   |
| **Net  loss**                                         |   | $                      | (209,575 | )                | $      | (443,973             | )      | $ | (3,254,654 | ) |
|                                                  |   |                   |     |             |   |                 |   |
| **Loss  per common share, basic and diluted**         |   |                   |     |             |   |                 |   |
| Net loss from  continuing operations                  |   | $                      | (0.01    | )                | $      | (0.03                | )      | $ | (0.22 | ) |
| Loss from  discontinued operation                     |   | $                      | —   |             | $      | (0.01                | )      | $ | (0.00 | ) |
| Gain on sale of  subsidiary                           |   | $                      | —   |             | $      | —               |   | $ | 0.01 |   |
| Net loss                                              |   | $                      | (0.01    | )                | $      | (0.03                | )      | $ | (0.21 | ) |
|                                                  |   |                   |     |             |   |                 |   |
| Weighted average  number of shares, basic and diluted |   | 15,136,619             |     | 12,952,255       |   | 15,558,232           |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

4

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**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**ConsolidatedStatements of Shareholders’ Equity**

 
|                                             |   | **Common Stock** |   | **Additional** |   | **Deficit  Accumulated  During the Development** |   | **Total  Shareholders’** |   |
|--------------------------------------------------|--------|------------------|--------|----------------|--------|--------------------------------------------------|--------|-------------------------------|--------|
|                                             |   | **Shares**       |   | **Amount**     |   | **Paid in Capital**                              |   | **Stage**                     |   | **Equity** |   |
| **Balance,  October 20, 1997 (inception)**       |   | —           |   | $              | — |                                             | $      | —                        |   | $ | — |   | $ | — |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common stock  issued in exchange for services    |   | 15,233,910       |   | 1,521          |   | (2,120                                           | )      |                          |   | (599 | ) |
| Common Stock  issued for cash                    |   | 5,962,500        |   | 599            |   | 18,335                                           |   |                          |   | 18,934 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (12,193                       | )      | (12,193 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  September 30, 1998**                 |   | 21,196,410       |   | 2,120          |   | 16,215                                           |   | (12,193                       | )      | 6,142 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common stock contributed                         |   | (7,896,410       | )      | (790           | )      | 790                                              |   | —                        |   |   |   |
| Pre-acquisition  income                          |   | 47               |   | 47             |   |                                             |   |                          |   |   |   |
| Common stock  issued in acquisition              |   | 1,000,000        |   | 100            |   | 47                                               |   | (47                           | )      | 100 |   |
| Common stock  issued for payment of note payable |   | 200,000          |   | 20             |   | 999,980                                          |   |                          |   | 1,000,000 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (574,850                      | )      | (574,850 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  September 30, 1999**                 |   | 14,500,000       |   | 1,450          |   | 1,017,032                                        |   | (587,043                      | )      | 431,439 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common stock  surrendered                        |   | (4,300,000       | )      | (430           | )      | 430                                              |   |                          |   | — |   |
| Common Stock  issued for cash                    |   | 668,333          |   | 67             |   | 759,933                                          |   |                          |   | 760,000 |   |
| Pre-acquisition  income                          |   |             |   |           |   |                                             |   | 50,877                        |   | 50,877 |   |
| Common stock  issued in acquisitions             |   | 1,103,371        |   | 110            |   | 808,668                                          |   | (50,877                       | )      | 757,901 |   |
| Common stock  issued in exchange for services    |   | 300,000          |   | 30             |   | 173,970                                          |   |                          |   | 174,000 |   |
| Common stock  issued for finder’s fee       |   | 100,000          |   | 10             |   | (10                                              | )      |                          |   | — |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (1,090,716                    | )      | (1,090,716 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  September 30, 2000**                 |   | 12,371,704       |   | 1,237          |   | 2,760,023                                        |   | (1,677,759                    | )      | 1,083,501 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common Stock  issued for cash                    |   | 850,000          |   | 86             |   | 294,914                                          |   |                          |   | 295,000 |   |
| Common stock  issued in exchange for services    |   | 340,200          |   | 34             |   | 85,674                                           |   |                          |   | 85,708 |   |
| Common stock  issued for finder’s fee       |   | 200,000          |   | 20             |   | (20                                              | )      |                          |   | — |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (443,973                      | )      | (443,973 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  December 31, 2000**                  |   | 13,761,904       |   | 1,377          |   | 3,140,591                                        |   | (2,121,732                    | )      | 1,020,236 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common stock  surrendered                        |   | (150,000         | )      | (15            | )      | (93,735                                          | )      |                          |   | (93,750 | ) |
| Common stock  cancelled                          |   | (125,000         | )      | (13            | )      | (49,987                                          | )      |                          |   | (50,000 | ) |
| Common stock  issued in exchange for services    |   | 721,560          |   | 72             |   | 42,553                                           |   |                          |   | 42,625 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (923,347                      | )      | (923,347 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  September 30, 2001**                 |   | 14,208,464       |   | 1,421          |   | 3,039,422                                        |   | (3,045,079                    | )      | (4,236 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Common stock  issued for Services                |   | 120,000          |   | 12             |   | 34,788                                           |   |                          |   | 34,800 |   |
| Common stock  issued for Compensation            |   | 808,155          |   | 80             |   | 161,429                                          |   |                          |   | 161,509 |   |
| Subscriptions  Paid                              |   |             |   |           |   | 50,000                                           |   |                          |   | 50,000 |   |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| Net loss                                         |   |             |   |           |   |                                             |   | (209,575                      | )      | (209,575 | ) |
|                                             |   |             |   |           |   |                                             |   |                          |   |   |   |
| **Balance,  December 31, 2001**                  |   | 15,136,619       |   | $              | 1,513  |                                             | $      | 3,285,639                     |   | $ | (3,254,654 | ) | $ | 32,498 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

5

----

 

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**ConsolidatedStatements of Cash Flow**

 
|                                                                         |   |                   |     |             |   | **October 20, 1997** |   |
|------------------------------------------------------------------------------|--------|------------------------|----------|------------------|--------|----------------------|--------|
|                                                                         |   |                   |     |             |   | **(Inception)**      |   |
|                                                                         |   | **Three Months Ended** |     | **to**           |   |
|                                                                         |   | **December 31,**       |     | **December 31,** |   |
|                                                                         |   | **2001**               |     | **2000**         |   | **2001**             |   |
| **Cash  flows from operating activities**                                    |   |                   |     |             |   |                 |   |
| Net loss                                                                     |   | $                      | (209,575 | )                | $      | (443,973             | )      | $ | (3,254,654 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                   |     |             |   |                 |   |
| Depreciation and  amortization                                               |   | 4,997                  |     | 57,707           |   | 273,227              |   |
| Loss on disposal  of assets                                                  |   | —                 |     | —           |   | 190                  |   |
| Common stock  issued in exchange for services                                |   | 34,800                 |     | 85,708           |   | 245,361              |   |
| Common stock  issued for compensation                                        |   | 161,509                |     | —           |   | 256,016              |   |
| Pre-acquisition  income                                                      |   | —                 |     | —           |   | 47                   |   |
| Loss from  discontinued operations                                           |   | —                 |     | —           |   | 72,460               |   |
| Gain on disposal  of subsidiary                                              |   | —                 |     | —           |   | (177,755             | )      |
| Impairment loss                                                              |   | —                 |     | —           |   | 144,772              |   |
| Interest                                                                     |   | 2,258                  |     | —           |   | 2,258                |   |
| (Increase)  decrease in operating assets                                     |   |                   |     |             |   |                 |   |
| Accounts  receivable                                                         |   | (41,059                | )        | 17,986           |   | (23,566              | )      |
| Related party  receivable                                                    |   | (7,840                 | )        | —           |   | (29,861              | )      |
| Costs in excess  of billings                                                 |   | (35,942                | )        | —           |   | (35,942              | )      |
| Inventory                                                                    |   | —                 |     | (16,326          | )      | (2,055               | )      |
| Prepaid expenses                                                             |   | 411                    |     | (802             | )      | (187                 | )      |
| Employee  advances                                                           |   | 271                    |     | —           |   | —               |   |
| Deposit                                                                      |   | 46                     |     | (3,379           | )      | (13,451              | )      |
| Increase  (decrease) in operating liabilities                                |   |                   |     |             |   |                 |   |
| Accounts payable                                                             |   | 30,395                 |     | 39,994           |   | 630,322              |   |
| Forgiveness of  accounts payable                                             |   | —                 |     | —           |   | (3,400               | )      |
| Accrued expenses                                                             |   | (11,066                | )        | 8,991            |   | 150,564              |   |
| Income taxes  payable                                                        |   | —                 |     | (3,200           | )      | 7,152                |   |
| Net cash used in  operating activities                                       |   | (70,795                | )        | (257,294         | )      | (1,758,502           | )      |
|                                                                         |   |                   |     |             |   |                 |   |
| **Cash  flows from investing activities**                                    |   |                   |     |             |   |                 |   |
| Purchase of  property, plant and equipment                                   |   | —                 |     | (2,446           | )      | (29,660              | )      |
| Acquisition of  intangible assets                                            |   | (144                   | )        | (1,270           | )      | (604,278             | )      |
| Loans made to  related party                                                 |   | —                 |     | —           |   | (10,000              | )      |
| Repayments of  loans to related party                                        |   | —                 |     | —           |   | 10,000               |   |
| Acquisition of  subsidiary                                                   |   | —                 |     | —           |   | (500,000             | )      |
| Cash of  discontinued operations                                             |   | —                 |     | —           |   | (19,999              | )      |
| Cash of acquired  subsidiaries                                               |   | —                 |     | —           |   | 17,261               |   |
| Net cash used in  investing activities                                       |   | (144                   | )        | (3,716           | )      | (1,136,676           | )      |
|                                                                         |   |                   |     |             |   |                 |   |
| **Cash  flows from financing activities**                                    |   |                   |     |             |   |                 |   |
| Bank overdraft                                                               |   | —                 |     | (1,214           | )      | —               |   |
| Increase  (decrease) in line of credit                                       |   | —                 |     | (526             | )      | 662                  |   |
| Proceeds from  note payable to officer/employee                              |   | 117,433                |     | 5,680            |   | 361,698              |   |
| Payments of note  payable to officer                                         |   | (100,250               | )        | (30,496          | )      | (101,934             | )      |
| Proceeds from  convertible debenture                                         |   | —                 |     | —           |   | 500,000              |   |
| Proceeds from  notes payable                                                 |   | —                 |     | 20,000           |   | 1,064,500            |   |
| Proceeds from  subscriptions paid                                            |   | 50,000                 |     | —           |   | 50,000               |   |
| Proceeds from  issuance of common stock, net                                 |   | —                 |     | 295,000          |   | 1,020,700            |   |
| Net cash  provided by financing activities                                   |   | 67,183                 |     | 288,444          |   | 2,895,626            |   |
|                                                                         |   |                   |     |             |   |                 |   |
| Net (decrease)  increase in cash                                             |   | (3,756                 | )        | 27,434           |   | 448                  |   |
| Cash, beginning  of period                                                   |   | 4,204                  |     | 24,930           |   | —               |   |
| Cash, end of  period                                                         |   | $                      | 448      |             | $      | 52,364               |   | $ | 448 |   |
|                                                                         |   |                   |     |             |   |                 |   |
| **Supplementary  disclosures**                                               |   |                   |     |             |   |                 |   |
| Interest paid                                                                |   | $                      | 1,310    |             | $      | 1,505                |   | $ | 3,481 |   |
| Income taxes  paid                                                           |   | $                      | 600      |             | $      | —               |   | $ | 8,328 |   |
|                                                                         |   |                   |     |             |   |                 |   |
| **Non-cash  financing and investing activities**                             |   |                   |     |             |   |                 |   |
| Note payable  paid through issuance of common stock                          |   | $                      | —   |             | $      | —               |   | $ | 1,000,000 |   |
| Investment in  subsidiary                                                    |   | $                      | —   |             | $      | 808,778              |   | $ | 796,732 |   |
| Interest on note  payable                                                    |   | $                      | —   |             | $      | —               |   | $ | 17,825 |   |
| Forgiveness of  interest on note payable                                     |   | $                      | —   |             | $      | —               |   | $ | (17,825 | ) |
| Inter-company  receivable released in sale of subsidiary                     |   | $                      | —   |             | $      | —               |   | $ | 22,021 |   |
| Common stock  acquired in sale of subsidiary                                 |   | $                      | —   |             | $      | —               |   | $ | (93,750 | ) |
| 8% debenture  released in sale of subsidiary                                 |   | $                      | —   |             | $      | —               |   | $ | (500,000 | ) |
| Note payable  released in sale of subsidiary                                 |   | $                      | —   |             | $      | —               |   | $ | (64,500 | ) |
| Accrued interest  released in sale of subsidiary                             |   | $                      | —   |             | $      | —               |   | $ | (28,867 | ) |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

6

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**NOTE 1- SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

## ***The Company***

 

Composite Solutions, Inc. (the “Company”), formerly JSBusiness Works, Inc., was incorporated in the state of Florida on October 20,1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions, Inc., incorporated in the state of Nevada onDecember 8, 1998 and Trans-Science Corporation, incorporated in the state ofCalifornia on September 15, 1980.  Athird wholly owned subsidiary, Penultimo, Inc. dba Anchor Reinforcements,incorporated in the state of California on January 13, 1992, was sold on March31, 2001.   Composite Solutions Inc. andsubsidiaries were organized to develop, manufacture and market high technologyproducts and processes in key areas of existing and new construction.

 

The Company is in the development stage and itsefforts through December 31, 2001 have been principally devoted to raisingadditional capital and negotiating with potential key personnel and leasingfacilities.  There is no assurance thatany benefit will result from such activities. The Company will continue to incur expenses and losses as it pursues itsdevelopment efforts.

 

**Basis of Presentation**

 

**                                               **The consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany transactionshave been eliminated in consolidation.

 

**                                               ****Cash and Cash Equivalents**

 

**                                               **For purposes ofthe statements of cash flows, the Company considers cash instruments withoriginal maturities of less than three months to be cash equivalents.

 

**Start-up Costs**

 

                                                Costs of start-up activities, includingorganization costs, are expensed as incurred, in accordance with Statement ofPosition (SOP) 98-5.

 

**Advertising**

 

Advertising costsare charged to expense as incurred.

 

**Inventories**

 

Inventories arevalued at lower of the first-in, first-out (FIFO) cost or market.

** **

 

7

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**Property, Plant and Equipment**

 

Property, plant and equipment are recorded at costless depreciation. Depreciation is accounted for on the straight-line andaccelerated methods based on the estimated useful lives of the related assets.** **Betterments and large renewals,which extend the life of an asset, are capitalized; whereas, repairs andmaintenance, which do not increase the useful lives of property and equipment,are charged to operations as incurred.

 

**Intangible Assets**

 

Other assets include intangibles such as licensedtechnology, computer software and goodwill.  In June 2001, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 142, *Goodwill and Other IntangibleAssets. *SFAS No. 142establishes new guidelines for accounting for goodwill and other intangibleassets.  The Company implemented theprovisions of SFAS No. 142 on October 1, 2001. Since adoption, existing goodwill and other intangible assets are nolonger amortized but instead will be assessed for impairment at leaseannually.  The Company is currentlydetermining the impact of adopting this standard under the transitionprovisions of SFAS No. 142. Amortization expense was $50,304and $271,158 for the three months ended December 31, 2000 and for the periodOctober 27, 1997 (inception) to December 31, 2001, respectively.

 

**Revenue Recognition**

 

Revenue from the sale of product is recognized in thefinancial statements when materials are shipped from stock.  Revenues derived from contracts areaccounted for on the percentage-of-completion method of accounting.  Revenue is recognized based on a ratio of theactual cost of work performed to a current estimate of the total cost to completea respective contract.

 

Expected profits realized on contracts are based onthe difference between estimates of total contract revenues and costs ofcompletion.  These estimates arereviewed and revised periodically throughout the contract term, and adjustmentsto profits resulting from such revisions are recorded in the accounting periodin which the revisions are made. Profits are recognized as the contract phase of the work is completed.  Losses on contracts are recorded in full asthey are identified.

### ** **

 

8

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### **IncomeTaxes**

 

The Company accounts for income taxes under SFAS 109, *Accountingfor Income Taxes*. This statement requires an asset and liabilityapproach to account for income taxes. The Company provides deferred income taxes for temporary differencesthat will result in taxable or deductible amounts in future years based on thereporting of certain costs in different periods for financial and income taxpurposes.

 

**Use of Estimates**

 

                                                The presentation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the periods presented.  Actualresults may differ significantly from those estimates.

 

### **Fair Values of Financial Instruments**

 

Statement ofFinancial Accounting Standards No. 107, *Disclosuresabout Fair Value of Financial Instruments,*requires disclosure offair value information about financial instruments, whether or not recognizedin the balance sheet.  In cases wherequoted market prices are not available, fair values are based on estimatesusing present value or other valuation techniques.  Those techniques are significantly affected by the assumptionsused, including the discount rate and estimates of future cash flows.  In that regard, the derived fair valueestimates cannot be substantiated by comparison to independent markets and, inmany cases, could not be realized in immediate settlement of the instruments.Statement No. 107 excludes certain financial instruments and all nonfinancialinstruments from its disclosure requirements. Accordingly, the aggregate fair amounts presented do not represent theunderlying value of the Company.

 

The followingmethods and assumptions were used to estimate the fair value of each class offinancial instrument:

 

#### ***Cash and cash equivalents***: The carrying amounts reported in the balance sheetfor cash and cash equivalents approximate those assets’ fair value.

 

*Accountsreceivable and accounts payable*:  The carryingamounts reported in the balance sheet for accounts receivable and accountspayable approximates those assets’ and liabilities’ fair value.

 

*Notesreceivable*:  The carrying amount of the note receivableapproximates the assets’ fair value.

 

 

9

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*Short-termand long-term obligations*:  The carrying amounts of theline of credit and short-term notes payable approximates those obligations’fair value.   The fair value of theconvertible debenture is estimated by discounting the future cash flows usingthe current rates at which similar obligations would be made to borrowers withsimilar credit ratings and for the same remaining maturities.

 

*Accruedinterest receivable and accrued expenses:* The carrying amounts of accrued interest and accruedexpenses approximate their fair values.

 

**Stock-BasedCompensation**

 

In accordance with the provisions of SFAS 123, the Company follows theintrinsic value based method of accounting as prescribed by APB 25, *Accountingfor Stock Issued to Employees*, for its stock-based compensation.

 

**               **Reclassifications

 

Certain reclassifications have been made to theDecember 31, 2000 balances in order to conform to the December 31, 2001presentation.

** **

**NOTE 2 — ACQUISITIONS**

 

On June 17, 1999 the Company entered into a ShareExchange Agreement.  On June 30, 1999according to the terms of the agreement, the Company issued 1,000,000 shares ofits common stock for all of the shares of the outstanding stock of CompositeSolutions, Inc. (the “Subsidiary”), a Nevada corporation.  The exchange of shares has been accountedfor as a reverse merger, under the purchase method of accounting.  Accordingly, the combination of Company andthe Subsidiary is recorded as a recapitalization of the shareholders’ equity ofthe Subsidiary, the surviving corporation, and for accounting purposes thefinancial statements presented are those of the Subsidiary.

 

On June 23, 2000 the Company entered into a ShareExchange Agreement with Trans-Science Corporation, a California corporation, acompany under common control.  On July7, 2000 the Company completed its acquisition. The acquisition, recorded under the purchase method of accounting,included the purchase of all of the outstanding shares of common stock ofTrans-Science Corporation in exchange for 953,371 shares of the Company’scommon stock at $0.75 per share which resulted in a purchase price of $715,028.The liabilities assumed were in excess of the historical cost of the assetsacquired at the date of acquisition and the total amount of the purchase pricewas recorded as goodwill.

 

10

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On August 16, 2000 the Company entered into a ShareExchange Agreement with Penultimo, Inc. dba Anchor Reinforcements.  On August 31, 2000 the Company completed theacquisition.  The acquisition, recordedunder the purchase method of accounting, included the purchase of all of theoutstanding shares of common stock of Penultimo, Inc. in exchange for 150,000shares of the Company’s common stock at $0.625 per share plus $500,000 in cashwhich resulted in a total purchase price of $593,750.  A portion of the purchase price has been allocated to assetsacquired and liabilities assumed based on estimated fair market value at thedate of acquisition while the balance of $291,050 was recorded as goodwill.

 

**NOTE 3 — DISCONTINUED OPERATIONS**

 

On March 31, 2001 theCompany entered into an Agreement to transfer all of the outstanding shares ofPemultimo, Inc. to an individual in exchange for 150,000 shares of theCompany’s common stock originally valued at $93,750, the release of certaininter-company receivables in the amount of $22,021, an 8% convertible debenturenote in the amount of $500,000 plus accrued interest of $28,199, and notespayable in the amount of $64,500, plus accrued interest of $4,441.

 

**NOTE 4 — INVENTORIES**

 

Inventoriesconsist of the following at December 31, 2001 and 2000:

 
|            |   | **2001** |   | **2000** |   |
|-----------------|--------|----------|--------|----------|--------|
| Raw material    |   | $        | — |     | $      | 118,618 |   |
| Work in process |   | —   |   | —   |   |
| Finished goods  |   | —   |   | 64,709   |   |
|            |   |     |   |     |   |
|            |   | $        | — |     | $      | 183,327 |   |

 

 

11

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**NOTE 5 — PROPERTY, PLANT AND EQUIPMENT**

 

Property, plantand equipment consist of the following at December 31, 2001 and 2000:

 
|                            |   | **2001** |   | **2000** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| Leasehold  improvements         |   | $        | 1,407  |     | $      | 1,407 |   |
| Office furniture  and equipment |   | 174,456  |   | 176,664  |   |
| Machinery and  other assets     |   | 20,838   |   | 86,740   |   |
|                            |   | 196,701  |   | 264,811  |   |
| Less accumulated depreciation   |   | (190,143 | )      | (174,877 | )      |
|                            |   |     |   |     |   |
|                            |   | $        | 6,558  |     | $      | 89,934 |   |

 

Depreciationexpense for the three months ended December 31, 2001, and 2000 was $4,997 and $7,403, respectively and $36,526 for the period October 27, 1997(inception) to December 31, 2001.

 

**NOTE 6**—**INTANGIBLE ASSETS**

 

On April 20, 1999 the Company entered into a licenseagreement with the Regents of the University of California San Diego (UCSD) fora license under patent rights to make, use, sell, offer for sale, importlicensed products, practice licensed methods, and to use certaintechnology.  The agreement terminates onthe later of the expiration date of the longest-lived Patent Rights or thetwenty-first anniversary of the effective date.  A license fee of $40,000 was paid upon execution****ofthe agreement.  The Company must alsopay for one half of all past and future patent costs.  At December 31, 2001 and 2000 the license has a net value of $58,497 and $55,791, respectively. Under the terms of the agreement, the Company must pay to the licensor aroyalty of 1.5% on net sales of the licensed products.

 

On August 4, 1999 the Company entered into a secondlicense agreement with UCSD for a license under patent rights to make, use,sell, offer for sale, import licensed products, to practice licensed methods,and to use certain technology.  Theagreement terminates on the later of the expiration date of the longest-livedPatent Rights or the twenty-first anniversary of the effective date.  A license fee in the amount of $5,000 waspaid upon execution of the agreement. In addition, the Company is obligated to pay for one-half of all past andfuture patent costs.  At December 31,2001 and 2000 the license has a net value of $94,859 and $56,060,respectively.  Under the terms of theagreement, the Company must pay to the licensor a royalty of 1.5% on net salesof licensed products and certain fees and royalties for any executedsub-license agreements.

 

 

12

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In January 1999the Company acquired certain intangible assets from Trans-Science Corporation,a company under common control and subsequently acquired on July 7, 2000. Firetest data concerning overlay systems in the form of technical reports preparedby an independent laboratory in New York performed prior to the Company’sinception was purchased for cash in the amount of $13,979 from Trans-Science Corporation at its cost.  At December 31, 2001 these intangible assetswere not placed in service.

 

In January 1999 Trans-Science Corporation sold,assigned and transferred all of its rights, title and interest in theEarthquake Retrofit Design Software to the Company for cash in the amount of$330,000, and during the year ended September 30, 1999, the Company paidTrans-Science Corporation $90,000 for upgrade services on this software for atotal of $420,000.  At December 31, 2001 this intangible assetwas not placed in service.

 

On July 7, 2000 the Company acquired 100% of theoutstanding shares of common stock of Trans-Science Corporation, a companyunder common control through July 7, 2000. The Company recorded goodwill in the amount of $715,028 representing theexcess of the cost to acquire Trans-Science Corporation over the historicalcost of the net assets acquired.  AtSeptember 30, 2001 goodwill was impaired and a loss was recognized in theamount of $144,772.  At December 31,2001 and 2000 this goodwill has a net value of $418,956 and $680,086,respectively.

 

On August 31, 2000 the Company acquired 100% of theoutstanding shares of common stock of Penultimo, Inc. dba AnchorReinforcements.  The Company recordedgoodwill in the amount of $291,050 representing the excess of the cost toacquire Penultimo, Inc. over the sum of the amounts assigned to identifiablenet assets acquired.  On March 31, theCompany transferred all of the outstanding shares of common stock of Penultimo,Inc. dba Anchor Reinforcements to an individual.  At December 31, 2001 and 2000 this goodwill has a net value of $0 and $236,701, respectively.

 

Amortization expense for the three months endedDecember 31, 2001 and 2000 was $0and $50,304, respectively and$236,701 for the period October 27, 1997 (inception) to December 31, 2001.

 

 

13

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**NOTE 7**—**CAPITALIZATION**

 

#### **Preferred Stock**

 

The Company has authorized the issuance of ten million(10,000,000) shares of preferred stock, having one hundredth of a cent ($.0001)par value per share.  The Board ofDirectors of the Company has discretion to determine the rights, preferencesand privileges of this preferred stock. There are no shares of preferred stock issued and outstanding atDecember 31, 2001 and 2000, respectively.

 

#### **Common Stock**

 

The Company has authorized fifty million (50,000,000)shares of common stock, having one hundredth of a cent ($0.0001) par value pershare.   On October 21, 1997 the Companyissued 1,601,000 shares to its President for the value of services rendered inconnection with the organization of the Company.** **In April 1998 the Company issued 646,000 shares of commonstock under Regulation D offerings in exchange for $18,934 in cash, net ofoffering costs.  Also in April 1998 theCompany issued 49,500 shares to its Executive Vice President****forthe net value of services rendered of $2,378. On June 25, 1999 the Company completed a 9.229876 shares for 1 shareforward split.  Retroactive effect tothis split has been given in the accompanying financial statements.   On June 25, 1999 the Company received7,896,410 shares contributed back to the Company.  On June 30, 1999 the Company issued 1,000,000 shares to acquire100% of the issued and outstanding common stock of the Composite Solutions,Inc., a Nevada corporation.****  On June 30, 1999 the Company issued 200,000 shares in settlementof a note payable with a principal balance of $1,000,000 and accrued interestof $17,825.

 

In December 1999, a trustee shareholder surrendered4,300,000 shares, which have been canceled. During the period December 1999 to June 2000 the Company issued 668,333shares of common stock under a private placement in exchange for $760,000 incash, net of offering costs.  On July 7,2000 the Company issued 953,371 shares of common stock valued at $715,028 inexchange for 100% of the outstanding shares of common stock of Trans-ScienceCorporation.  On August 31, 2000 theCompany issued 150,000 shares of common stock valued at $93,750 plus $500,000in cash in exchange for 100% of the outstanding shares of common stock ofPenultimo, Inc. dba Anchor Reinforcements. On September 15, 2000 the Company issued 100,000 shares of common stockas finder’s fees.  On September 28, 2000the Company issued 300,000 shares of common stock valued at $174,000 inexchange for services.

 

During the three months ended December 31, 2000 theCompany issued shares of common stock in non-cash transactions as follows:  340,200 shares as compensation valued at$85,708 and 200,000 shares as finders’ fees. The Company issued additional shares of common stock in cashtransactions:  850,000 shares for cashin the amount of $295,000.

 

14

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During the period January 1, 2001 to September 30,2001 the Company issued 721,560 shares of common stock for compensation and servicesvalued at $42,625, 150,000 shares of common stock valued at $93,750 weresurrendered, and 125,000 shares of common stock were cancelled and thesubscription price in the amount of $50,000 was recorded as a liability.

 

During the three months ended December 31, 2001 theCompany issued shares of common stock in non-cash transactions: 928,155 sharesvalued at $196,309.  In addition, theCompany received $50,000 in cash for the subscription of 500,000 shares of commonstock.

 

**StockIncentive Plan**

 

On December 1, 2000 the Company andsubsidiaries’ Board of Directors adopted the 2000 Stock Incentive Plan pursuantto which incentive stock options or nonstatutory stock options to purchase upto 1,000,000 shares of common stock may be granted to employees, directors andconsultants.  Stock options may beexercisable up to ten years from the grant date.  Stock options vest over service periods that range from zero tofive years.  Vesting period commencesApril 2001.

 
|                             |   | **Weighted** |   |          |     |       |   |
|----------------------------------|--------|--------------|--------|---------------|----------|------------|--------|
|                             |   | **Average**  |   |          |     |       |   |
|                             |   | **Exercise** |   | **Number of** |     | **Vested** |   |
|                             |   | **Price**    |   | **Shares**    |     | **Shares** |   |
| Outstanding, October  20, 1997   |   | —       |   | —        |     |       |   |
| Granted                          |   | $            | .40    |          | 120,000  |       | — |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   |         |   | —        |     | —     |   |
| Outstanding, December  31, 2000  |   |         |   | 120,000       |     | —     |   |
| Granted                          |   | $            | .10    |          | 100,000  |       | — |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   | $            | .40    |          | (120,000 | )          | — |   |
| Outstanding, September  30, 2001 |   |         |   | 100,000       |     | —     |   |
| Granted                          |   |         |   | —        |     | 50,000     |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   |         |   | —        |     | —     |   |
| Outstanding, December  31, 2001  |   |         |   | 100,000       |     | 50,000     |   |

 

#### ** **

15

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The Companyaccounts for stock-based compensation using the intrinsic value methodprescribed by Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” under which no compensation cost for stock options isrecognized for the stock options awards granted at or above fair marketvalue.  For the three months endedDecember 31, 2000, the Company did not recognize any compensation expense.

** **

**NOTE 8 — LINE OF CREDIT**

 

The Company has a business secured open line of creditwith a bank in the amount of $50,000. The line of credit bears interest at theprime rate, as published in the *Wall Street Journal*, plus 2.5% (12.0% atDecember 31, 2000).  At December 31,2001 and 2000 there was a balance due in the amount of $51,396 and $50,968,respectively.

 

**NOTE 9 — NOTES PAYABLE**

 

On September 19,2000 the Company entered into a demand note payable in the amount of $44,500,with interest at 12% per annum.  AtDecember 31, 2000 there was a balance due in the amount of $44,500 plus accruedinterest in the amount of $1,492.  OnMarch 31, 2001 the note payable and accrued interest were released upon thedisposal of Penultimo, Inc. dba Anchor Reinforcements.

 

On August 29, 2000the Company entered into a demand note payable in the amount of $20,000, withinterest at 12% per annum.  At December31, 2000 there was a balance due in the amount of $20,000 plus accrued interestin the amount of $809.  On March 31,2001 the note payable and accrued interest were released upon the disposal ofPenultimo, Inc. dba Anchor Reinforcements.

 

On November 2,2000 the Company entered into a demand note payable in the amount of $20,000,with interest at 12% per annum.  AtDecember 31, 2000 there was a balance due in the amount of $20,000 plus accruedinterest in the amount of $388.  OnMarch 31, 2001 the note payable and accrued interest are no longer included inthe consolidated financial statements upon the disposal of Penultimo, Inc. dbaAnchor Reinforcements.

 

 

16

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**NOTE 10 — LONG TERM OBLIGATIONS**

 

**Convertible Debenture**

 

On August 17, 2000 the Company issued an 8%convertible debenture note in the amount of $500,000, which is due on August17, 2003.  Interest at the rate of 8%per annum is due on January 1 and July 1 each year until the principal amountof the note is paid in full.  AtDecember 31, 2000 there was a balance due in the amount of $500,000 plusaccrued interest in the amount of $15,054. On March 31, 2001 the debenture note and accrued interest were releasedupon the disposal of Penultimo, Inc. dba Anchor Reinforcements.

 

**Note Payable**

 

On November 20, 2001, the Company entered into a Secured PromissoryNote with Marathon Development Company, Inc. in the amount of $105,000, including$5,000 of interest at a rate of 10% per annum. The note is secured by Company’s assets and is personally guaranteed bya director of the Company.  The note isdue on the earlier of February 20, 2002 or the date on which the directorcompletes a refinance of certain real property.  At December 31, 2001 there is a balance due in the amount of$102,258 plus accrued interest in the amount of $2,742, for the total of$105,000, the face value of the note.

 

**NOTE 11 — COMMITMENTS**

 

The Company and subsidiaries lease office space undera non-cancelable operating lease. Future minimum payments under the lease at December 31, 2001 are asfollows:

 
| **Year Ending**  |   |   |   |
|------------------|--------|--------|--------|
| **December 31,** |   |   |   |
| 2002             |   | $      | 49,027 |   |
| 2003             |   | 24,994 |   |
| 2004             |   | — |   |
|             |   | $      | 74,021 |   |

 

 

Rental expense was $11,554 and $31,235for the three months ended December 31, 2001 and 2000, respectively and was$217,899 for the period October 27, 1997 (inception) to December 31, 2001.

 

 

17

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**NOTE 12 — EARNINGS PER SHARE**

 

At December 31, 2001 and 2000, 100,000 and 72,712weighted-average shares of common stock issuable under stock options,respectively, were not included in the calculation of fully diluted earningsper share because their effects would have been antidilutive.  Therefore, diluted earnings per share werethe same as basic earnings per share at December 31, 2001 and 2000.

 

**NOTE 13 — INCOME TAXES**

 

At December 31,2001 the Company has a net operating loss carryforward for tax purposes ofapproximately $1,580,000 which expires through the year 2021.  Net deferred tax assets at December 31, 2001and 2000 were approximately $1,295,600 and $849,400, respectively, whichrepresent the amount of tax benefits of the net operating loss carryforward,start-up, organization and syndication costs. The Company has established a valuation allowance against these netdeferred tax assets because it is more than likely that the deferred taxbenefits will not be utilized.

 

**NOTE 14 — RELATED PARTY TRANSACTIONS**

 

**Intangible Assets**

 

In January 1999 the Company acquired certainintangible assets from Trans-Science Corporation, a company under commoncontrol through July 7, 2000.  Also inJanuary 1999, Trans-Science Corporation sold, assigned and transferred all ofits rights, title and interest in the Earthquake Retrofit Design Software tothe Company.

 

**Stock-Based Compensation**

 

During the three months ended December 31, 2001 and2000 the Company issued 928,155 shares of common stock valued at $196,309 and340,200 shares of common stock valued at $85,708, respectively for compensationand services.  During the period October27, 1997 (inception) to December 31, 2001 the Company issued 18,020,134 sharesof common stock valued at $498,043 for compensation and services.

 

**Notes Payable**

 

On February 24, 2000 the Company issued an unsecuredpromissory note to borrow up to $75,000 from the director. The note bears aninterest rate of 7% per annum on the outstanding advances.  During the period July 20, 2000 to November21, 2000, the director advanced the Company $31,996, which was repaid, and asof December 31, 2001 and 2000 there was no balance due.

** **

18

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On January 8, 2001, the Company entered into apromissory note with an officer in the amount of $159,439. Principal is to beadvanced in various amounts and will accrue interest at 12%. The principal andinterest are to be paid nine months from the date of latest advance. During thethree months ended December 31, 2001 the officer advanced the Company an additional$11,500 and the Company paid $100,000. As of December 31, 2001, principal in the amount of $70,939 wasoutstanding.

 

On January 15, 2001, the Company issued a promissorynote payable to an employee in the amount of $10,203 for various advances tothe Company. The Company paid back the note in full within 30 days with nointerest charged.

 

On April 20, 2001, the Company issued a promissorynote to an officer for amount of $56,965. Principal is to be advanced invarious amounts and will accrue interest at 12%. The principal and interest areto be paid nine months from the date of the latest advance. As of December 31,2001, principal in the amount of $45,445 was outstanding.

 

On April 23, 2001, the Company issued a promissorynote payable to an employee in the amount of $41,945, plus interest at a rateof 12% per annum. The principal is to be advanced to the Company in variousamounts. The note is due on August 30, 2002, nine months from the date of thelast advance.  As of December 31, 2001,principal in the amount of $41,945 was outstanding.

 

On November 20, 2001, the Company enteredinto a Secured Promissory Note with Marathon Development Company, Inc. in theamount of $105,000, with interest at a rate of 10% per annum.  The note is secured by Company’s assets andis personally guaranteed by a director of the Company.  The note is due on the earlier of February20, 2002 or the date on which the director completes a refinance of certainreal property.

 

During the three months ended December 31, 2001 anemployee loaned the Company a total of $500 to cover operating expenses.  As of December 31, 2001 there is a $250.

 

During the three months ended December 31, 2001 anofficer loaned the Company a total of $400 to cover operating expenses.  As of December 31, 2001 there is a $1,185balance due.

 

**Agreements**

 

In October 1999,the Company entered into a consulting agreement with a shareholder formanagement, marketing and technical services. Under the terms of the agreement, for the three months ended December31, 2000 the Company made payments of $24,000 for management consultingservices.

 

 

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In July 2000, theCompany entered into a consulting agreement with an officer for management andtechnical services.  Under the terms ofthe agreement, for the three months ended December 31, 2000 the Company madepayments of $30,450 for management consulting services.

 

The Company hasseveral consulting agreements with shareholders and officers for management,marketing and technical services. Consulting fees for the three months ended December 31, 2001 and 2000were $45,000 and $54,450, respectively.

 

**NOTE 15 — GLOBAL ALLIANCE AND SUBSCRIPTIONAGREEMENT**

 

On December 7, 2000 the Company entered into a Global Alliance Agreementwith The Prime Group (“Prime”) located in Seoul, Korea.  According to the terms of the Agreement, theCompany would receive a 15% equity position in Prime.  In addition, Prime entered into a Subscription Agreement topurchase between 4,166,667 to 5,000,000 shares of the Company’s common stockfor cash in the amount of $2,000,000. The first 2,500,000 shares of common stock were to be issued quarterlyat $0.40 per share for a total consideration of $1,000,000.  A second 2,500,000 shares of common stockwas to be issued at $0.40 per share if payment is received by May 31, 2001 or1,666,667 were to be issued at $0.60 per share if payment is received after May31,2001.

 

In December 2000, the Company received $250,000 representing asubscription for 625,000 shares of common stock, however, on February 28, 2001the Global Alliance Agreement was terminated by Prime.  In February 2001, the Company cancelled125,000 shares of this issue and recorded $50,000 as a liability.

 

**NOTE 16 — SUBCONTRACT**

 

On January 12, 2001 the Company was awarded a subcontract withKaragozian & Case (K&C).  Thesubcontract for development of retrofit design methodology in the amount of$288,309 began in October 2001 and is supporting K&C’s contract with theUnited States Department of Defense, Defense Threat Reduction Agency, Office ofSpecial Technology.

 

 

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### **Item2.  Management Discussion and Analysis**

 

### **GeneralOverview**

 

                CompositeSolutions, Inc. (CSI)is an early stage company licensing and distributing its proprietary compositematerials technology and engineering services for applications in the civilengineering and civil construction market. CSI’s technology represents arevolutionary breakthrough for the construction industry. This technology usesthe same type of composite materials found in the B-2 Bomber and otherlightweight, high-strength military hardware. These composite materials consistof advanced fiber reinforced polymers (FRPs). Examples include ultrahigh-strength carbon or aramid fibers in a thermoset (e.g., epoxy) matrix. Suchfibers are 10-15 times stringer than construction steel and 5 times lighter.When used in concrete with traditional building material systems, this marriageof new and conventional systems leads to a dramatic enhancement of the latter,and to superior structural performance with a minimization of cost.

 

CSI’s new technology material systems fall into twomain categories: 1) Composite Overlays for structural retrofits and 2) theCarbon Shell System (CSS) for new construction and infrastructure renewal. Inboth cases, the materials consist of FRPs.

 

The Composite Overlay is a “structural skin” which iscreated by saturating fabric woven out of carbon, aramid (e.g., kevlar) orother aerospace-quality fiber with an epoxy-type resin. This product ismarketed under the CSI trade name “RetroShield”. The specific composition,architecture and application of the fabric plus resin overlay is engineered byCSI to specific strength, stiffness, and ductility specifications based on thecharacteristics of the subject structure and use loads. The specified compositesolution is then “wallpapered” to a structural surface to provide significantlyincreased ductility and/or strength. The overlay can be applied to columns,walls, floors, beams and girders, connections, and other such structuralelements. The composite overlay technique has been found to be extremelyeffective for seismic retrofits, blast hardening, structural upgrade, andstructural repairs. Typically only a few layers of a 1mm thick overlay areneeded for such applications.

 

The CSS is a lightweight, high-strengthplant-manufactured advanced carbon fiber-reinforced polymer (CFRP) shell (tube)of circular or non-circular cross-section. In new construction of buildings,bridges and other structures, the shell is typically filled with concrete; inthis application it serves both as a stay-n-place form and reinforcement. As aresult, this system substantially reduces the need for reinforcing steel and theuse of heavy lifting equipment, which constitutes a significant part of systembuilding costs. The CSS can be used for structural elements such as columns,beams and girders for buildings and bridges and for pilings for harbors anddocks.

 

In new construction of infrastructure systems, the CSScan be used for oil, gas, and water pipelines. Advantages over conventionalmaterial in such applications include durability (no corrosion) and thermalstability (no thermal expansion).

 

For infrastructure renewal, the CSS is employed as astructural liner for pipelines that have deteriorated due to age orenvironmental conditions. An example application is the repair of largediameter (2-4m), prestressed concrete cylindrical pipes (PCCPs) that carry highpressure, high flow water from its source to urban areas.

 

                Theeffectiveness and integrity of the Company’s composite overlay technology andthe CSS has been extensivelyvalidated by full-scale laboratory tests at The Charles Lee PowellStructural Research Laboratories (“Powell Laboratories”) located at TheUniversity of California, San Diego (“UCSD”).

 

 

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These tests included both reinforced andun-reinforced wall specimens that ranged from single-story walls to a full-scalefive-story building as well as columns ranging from single columns tofull-scale bridge bents.  The PowellLaboratories are one of the few such facilities in the world with thecapability to execute full-scale tests and have performed extensive testsrelating to the retrofit, and upgrading of structural elements such as walls,columns and floor slabs.

 

#### **Results of Operations**

 

                The following is adiscussion of the financial condition and results of our operations for thethree months ended December 31, 2001 and 2000. This discussion should be read in conjunction with our consolidatedfinancial statements and the notes related thereto.

 

                Net Loss: For the fiscalquarter ended December 31, 2001, the Company recorded net operating loss of$209,575 ($0.01 per share), which is 52.8% of the net loss of $443,973 ($0.03per share) during the fiscal quarter ended December 31, 2000.  This reduction in loss is largely due toless payroll, professional fees and administrative expenses. In order to reduceits overhead costs, on July 7, 2001 the Company moved its corporateheadquarters to a smaller office space with a 3-year lease, affording a savingof almost 45% in rental expense.

 

                Revenue:  The revenues and cost of sales for thefiscal quarter ended December 31, 2001 were $88,732 and $83,297, respectively;as compared to revenues of $26,081 and cost of sales of $12,078 for the fiscalquarter ended December 31, 2000.

##### 0

                Liquidityand Capital Resources:  The Companyoperated with insufficient capital in 2001, as it did in 2000.  It has not met all of its financialobligations in 2001, and has relied heavily on the sale of its Common Stock togenerate additional capital. During the three months ended December 31, 2001, the Company issued928,155 shares of common stock in non-cash transactions valued at$196,309.  In addition, the Companyreceived $50,000 in cash for the subscription of 100,000 shares of commonstock.

 

                The Company hadtotal assets of $1,103,832 as of December 31, 2001, including intangible assetsof $1,006,291, as compared to the total assets of $1,907,726 and intangibleassts of $1,497,563 for the fiscal quarter ended December 31, 2000.  The Company’s current and long-termliabilities as of December 31, 2001 were $969,076 and $102,258, respectively,as compared to current liabilities of $387,490 and long-term liabilities of$500,000 for the fiscal quarter ended December 31, 2000.

 

                In year 2002, the Companyintends to devote substantial part of its financial resources towards themarketing of its products and services to the construction industry.  In order to facilitate such marketingefforts, the Company expects to seek additional capital through the sale ofequity securities.  Also, the Companyintends to pursue licensing technologies as a financing alternative.

 

**SubsequentEvents**

 

                On January 18, 2002, the Companysigned an agreement with an international co. (composite manufacturer) forproviding engineering and design services for a civil infrastructureproject.  According to the terms of thisagreement, the Company will receive $377,000 for engineering fees in the nextsix months.  In addition, the Companywill receive royalties in future for products designed by the Company.

 

                On January 31, 2002, the Companyreceived a contract for the seismic retrofit of the shear walls and columns ofVerizon Corporation’s telecommunications switching complex in Sierra Madre,California.  The Company will use itscarbon composite system RetroshieldTM  for this project.

 

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                On January 18, 2002, the Companyreached an agreement in principle with UCSD, pursuant to which UCSD will acceptpayment for a significant portion of their licensing fees in CSI common stockin lieu of cash, subject to establishing a purchase price for the shares, of which negotiations are stillcontinuing.

 

                The Company is making a seriouseffort to install a top level Management Group, which has experience andexpertise in large-scale civil engineering construction projects as well asinternational marketing. The Company has identified such a Group and iscurrently negotiating the terms and conditions under which the Group will jointhe Company.

 

**CautionaryStatement Regarding****Forward-Looking Statements**

 

                This report contains“forward-looking” statements.  TheCompany is including this statement for the express purpose of availing itselfof protections of the safe harbor provided by the Private Securities LitigationAct of 1995 with respect to all such forward-looking statements.  Examples of forward-looking statementsinclude, but are not limited to: (a) projections of revenues, capitalexpenditures, growth, prospects, dividends, capital structure and otherfinancial matters; (b) statements of plans objectives of the Company or itsmanagement or Board of Directors; (c) statements of future economicperformance; (d) statements of assumptions underlying other statements andstatements about the Company and its business relating to the future; and (e)any statements using the words “expects,” “intends,” “anticipates,” “may,”“plans,” “projects” and “estimates,” and analogous or similar expressions.

 

                The Company’s ability to predictprojected results or the effect of certain events on the Company’s operatingresults is inherently uncertain.  Therefore,the Company wishes to caution each reader of this report to carefully considerthe following factors, any or all of which have in the past and could in thefuture affect the ability of the Company to achieve its anticipated results andcould cause actual results to differ materially than those discussed herein:(1) ability to attract and retain customers to purchase its products andservices, (2) ability to commercialize and market products,    (3)results of research and development,(4) technological advances by third parties and competition, (5) future capitalneeds of the Company, (6) history of operating losses, (7) dependence upon keypersonnel, and (8) general economic and business conditions.  The Company expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward–looking statement contained herein to reflect any change in theCompany’s expectations with regard thereto or any change in events, conditionsor circumstances on which any such statement is based

 

 

 

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**Part II**

 

**Item 1.  LegalProceedings**

 

                Neitherthe Company nor its subsidiary is the subject of any pending legal proceeding.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

**(a)           Exhibits**

 

                The exhibits required to be filed herewith by item601 of Regulation S-B, as described in the following index of exhibits, areincorporated herein by reference, as follows:

 

                None.

 

**(b)**           **Reports on Form 8-K.**

 

None.

 

 

**Signatures**

 

                In accordance withSection 13 or 15(d) of the Securities Exchange Act the Company has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

Date: March 14, 2002

 
|   |   | Composite Solutions, Inc. |
|--------|--------|---------------------------|
|   |   |                      |
|   |   |                      |
|   |   | By:                       | /s/ Gilbert A. Hegemier |   |
|   |   |                      | Gilbert A. Hegemier, Chairman |

 

 

                Pursuant to therequirements of the Securities Exchange Act, of 1934 this report has beensigned below by the following person on behalf of the Company and in thecapacity and on the date indicated.

 

 
| Signature               |   | Capacity              |   | Date           |
|-------------------------|--------|-----------------------|--------|----------------|
|                    |   |                  |   |           |
|                    |   |                  |   |           |
| /s/ Gilbert A. Hegemier |   | Chairman of the Board |   | March 14, 2002 |
| Gilbert A. Hegemier     |   |                  |   |           |

 

 

 

 

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