**SECURITIES& EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

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

 

**For the quarterly period ended March31, 2002**

 

**o****  TRANSITIONALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No FeeRequired)**

 

**Commission File No. 000-24551**

 

 
| **COMPOSITE SOLUTIONS, INC.**                   |
|-------------------------------------------------|
| (Name of Small Business  Issuer 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 andaddress, 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 March 31,2002, 16,749,055 shares of Common Stock were outstanding.

 

 

----

 

**PART 1 - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

                The followingconsolidated financial statements contain information regarding the Company’sbalance sheet, profit & loss, shareholder’s equity, and cash flow for thequarters ended March 31, 2002 and 2001.

 

**INDEX TOFINANCIAL STATEMENTS**

 

Accountant’s Review Report

 

Balance Sheets

 

Statements of Operations

 

Statements of Changes in Stockholders’ Equity

 

Statements of Cash Flows

 

Notes to Financial Statement

 

----

 

**Accountants’Review Report**

 

To the Board of Directorsand Stockholders

Composite Solutions, Inc. and Subsidiaries

 

We have reviewed theaccompanying consolidated balance sheets of Composite Solutions, Inc. (adevelopment stage company) and subsidiaries as of March 31, 2002 and 2001, andthe related consolidated statements of operations, changes in shareholders’equity and cash flows for the three months then ended and the period October20, 1997 to March 31, 2002, 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 consists principally of inquiries of Company personnel andanalytical procedures applied  tofinancial 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 our review, we are not aware of any material modificationsthat should be made to the accompanying financial statements in order for themto be in conformity with generally accepted accounting principles.

 

The consolidated financial statements of Composite Solutions, Inc. andsubsidiaries as of March 31, 2000 and for the period October 20, 1997(inception) to September 30, 1999 were reviewed by other accountants, whosereport dated May 17, 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 |                |
| May 14, 2002          |                |

 

 

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES******(A Development Stage Company)**Consolidated Balance Sheets**

** **
|                                                                                                                                                            |          |      |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|-----------|-------------|
|                                                                                                                                                            |          |      |        |
|                                                                                                                                                            | **March 31,** |
|                                                                                                                                                            | **2002**      |      | **2001**    |
|                                                                                                                                                            |          |      |        |
| **ASSETS**                                                                                                                                                      |          |      |        |
|                                                                                                                                                            |          |      |        |
| **Current  assets**                                                                                                                                             |          |      |        |
| Cash                                                                                                                                                            | $             | 5,663     |        | $ | 2,947 |
| Accounts receivable, net of allowance for doubtfulaccounts of $0 in 2002 and 2001                                                                               | 4,443         |      | 17,571      |
| Related party receivables                                                                                                                                       | 44,640        |      | —      |
| Costs in excess of billings                                                                                                                                     | 78,322        |      | —      |
| Prepaid expenses                                                                                                                                                | 775           |      | 1,674       |
| Prepaid income taxes                                                                                                                                            | —        |      | 200         |
| Other current assets                                                                                                                                            | 46            |      | —      |
|                                                                                                                                                            |          |      |        |
| Total current assets                                                                                                                                            | 133,889       |      | 22,392      |
|                                                                                                                                                            |          |      |        |
| **Property,  plant and equipment, net**                                                                                                                         | 818           |      | 22,057      |
|                                                                                                                                                            |          |      |        |
| **Other  assets**                                                                                                                                               |          |      |        |
| Intangible assets, net                                                                                                                                          | 996,971       |      | 1,191,702   |
| Deposits                                                                                                                                                        | 12,067        |      | 10,845      |
|                                                                                                                                                            |          |      |        |
| Total assets                                                                                                                                                    | $             | 1,163,745 |        | $ | 1,246,996 |
|                                                                                                                                                            |          |      |        |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                   |          |      |        |
|                                                                                                                                                            |          |      |        |
| **Current  liabilities**                                                                                                                                        |          |      |        |
| Accounts payable                                                                                                                                                | $             | 441,125   |        | $ | 245,724 |
| Billings in excess of costs                                                                                                                                     | 2,135         |      | —      |
| Employee payable                                                                                                                                                | 230,498       |      | —      |
| Related party payable                                                                                                                                           | 94,640        |      | —      |
| Line of credit                                                                                                                                                  | 51,396        |      | 51,466      |
| Note payable                                                                                                                                                    | 80,500        |      | **—**  |
| Related party notes payable                                                                                                                                     | 147,014       |      | 159,419     |
| Accrued expenses                                                                                                                                                | 189,035       |      | 3,823       |
| Income taxes payable                                                                                                                                            | 3,200         |      | —      |
|                                                                                                                                                            |          |      |        |
| Total current liabilities                                                                                                                                       | 1,239,543     |      | 460,432     |
|                                                                                                                                                            |          |      |        |
| **Shareholders’  equity**                                                                                                                                  |          |      |        |
| Preferred stock; $0.0001 par value; 10,000,000shares authorized; 0 shares issued and outstanding                                                                | —        |      | —      |
| Common stock; $0.0001 par value; 50,000,000shares authorized; 16,749,055 and 13,965,641  shares issued and outstanding at March 31, 2002 and 2001, respectively | 1,674         |      | 1,397       |
| Additional paid in capital                                                                                                                                      | 3,415,790     |      | 3,088,107   |
| Accumulated deficit                                                                                                                                             | (3,513,262)   |      | (2,302,940) |
|                                                                                                                                                            |          |      |        |
| Total shareholders’ equity                                                                                                                                 | (75,798)      |      | 786,564     |
|                                                                                                                                                            |          |      |        |
| Total liabilities and shareholders’ equity                                                                                                                 | $             | 1,163,745 |        | $ | 1,246,996 |
|                                                                                                                                                            |          |      |        |   |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

2

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**COMPOSITE SOLUTIONS, INC AND SUBSIDIARIES******(A Development Stage Company)**Consolidated Statements of Operations**

 
|                                                 |   |                   |     |                 |   |          |   |       |     | **October 20, 1997** |   |
|------------------------------------------------------|--------|------------------------|----------|----------------------|--------|---------------|--------|------------|----------|----------------------|--------|
|                                                 |   |                   |     |                 |   |          |   |       |     | **(Inception)**      |   |
|                                                 |   | **Three Months Ended** |     | **Six Months Ended** |   | **to**        |   |
|                                                 |   | **March 31,**          |     | **March 31,**        |   | **March 31,** |   |
|                                                 |   | **2002**               |     | **2001**             |   | **2002**      |   | **2001**   |     | **2002**             |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Revenues**                                         |   | $                      | 132,946  |                 | $      | 15,921        |   | $          | 221,676  |                 | $      | 42,002 |   | $ | 303,773 |   |
| **Cost of sales**                                    |   | 50,474                 |     | 4,273                |   | 133,771       |   | 16,351     |     | 180,458              |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Gross profit (loss)                                  |   | 82,472                 |     | 11,648               |   | 87,905        |   | 25,651     |     | 123,315              |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Expenses**                                         |   |                   |     |                 |   |          |   |       |     |                 |   |
| Consulting fees                                      |   | 138,732                |     | 83,675               |   | 203,773       |   | 149,259    |     | 946,836              |   |
| Depreciation and amortization                        |   | 15,619                 |     | 54,247               |   | 20,614        |   | 108,340    |     | 288,846              |   |
| General and administrative expenses                  |   | 66,851                 |     | 72,316               |   | 113,028       |   | 131,738    |     | 772,542              |   |
| Organizational expenses                              |   | —                 |     | —               |   | —        |   | —     |     | 514                  |   |
| Professional fees — other                       |   | 56,263                 |     | 49,865               |   | 57,145        |   | —     |     | 398,769              |   |
| Professional fees — related party               |   | —                 |     | —               |   | —        |   | 87,450     |     | 60,839               |   |
| Salaries                                             |   | 61,168                 |     | 85,828               |   | 154,801       |   | 232,515    |     | 1,056,938            |   |
| Impairment loss                                      |   | —                 |     | —               |   | —        |   | —     |     | 144,772              |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Total expenses                                       |   | 338,633                |     | 345,931              |   | 549,361       |   | 709,302    |     | 3,670,056            |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Loss from operations                                 |   | (256,161               | )        | (334,283             | )      | (461,456      | )      | (683,651   | )        | (3,546,741           | )      |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Other income (expense)**                           |   |                   |     |                 |   |          |   |       |     |                 |   |
| Interest income                                      |   | —                 |     | 1                    |   | —        |   | 2          |     | 8,363                |   |
| Interest income — forgiveness of debt           |   | —                 |     | —               |   | —        |   | —     |     | 17,825               |   |
| Gain on forgiveness of debt                          |   | 10,534                 |     | 3,400                |   | 10,534        |   | 3,400      |     | 18,795               |   |
| Other Income                                         |   | 266                    |     | —               |   | 266           |   | —     |     | 266                  |   |
| Other expenses                                       |   | (12,242                | )        | —               |   | (14,792       | )      | —     |     | (21,807              | )      |
| Loss on disposal of assets                           |   | —                 |     | —               |   | —        |   | —     |     | (190                 | )      |
| Interest expense                                     |   | (1,005                 | )        | (19,099              | )      | (2,135        | )      | (33,151    | )        | (73,319              | )      |
| Loss on forgiveness of debt                          |   | —                 |     | —               |   | —        |   | —     |     | (11,021              | )      |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Total other income (expense)                         |   | (2,447                 | )        | (15,698              | )      | (6,127        | )      | (29,749    | )        | (61,088              | )      |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Loss before provision for income taxes               |   | (258,608               | )        | (349,981             | )      | (467,583      | )      | (713,400   | )        | (3,607,829           | )      |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Provision for income taxes                           |   | —                 |     | —               |   | 600           |   | —     |     | 10,728               |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Net loss from continuting operations**             |   | (258,608               | )        | (349,981             | )      | (468,183      | )      | (713,400   | )        | (3,618,557           | )      |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Discontinued operation**                           |   |                   |     |                 |   |          |   |       |     |                 |   |
| (Loss) from discontinued operation                   |   | —                 |     | (12,712              | )      | —        |   | (93,266    | )        | (72,460              | )      |
| Gain on sale of subsidiary                           |   | —                 |     | 181,484              |   | —        |   | 181,484    |     | 177,755              |   |
|                                                 |   | —                 |     | 168,772              |   | —        |   | 88,218     |     | 105,295              |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Net loss**                                         |   | $                      | (258,608 | )                    | $      | (181,209      | )      | $          | (468,183 | )                    | $      | (625,182 | ) | $ | (3,513,262 | ) |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| **Loss per common share, basic and diluted**         |   |                   |     |                 |   |          |   |       |     |                 |   |
| Net loss from continuing operation                   |   | $                      | (0.02    | )                    | $      | (0.03         | )      | $          | (0.03    | )                    | $      | (0.05 | ) | $ | (0.23 | ) |
| (Loss)  from discontinued  operation            |   | $                      | —   |                 | $      | (0.00         | )      | $          | —   |                 | $      | (0.01 | ) | $ | (0.00 | ) |
| Gain on sale of subsidiary                           |   | $                      | —   |                 | $      | 0.01          |   | $          | —   |                 | $      | 0.01 |   | $ | 0.01 |   |
| Net loss                                             |   | $                      | (0.02    | )                    | $      | (0.01         | )      | $          | (0.03    | )                    | $      | (0.05 | ) | $ | (0.23 | ) |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |
| Weighted average number of shares, basic and diluted |   | 15,711,514             |     | 13,765,834           |   | 15,057,029    |   | 13,354,575 |     | 15,566,732           |   |
|                                                 |   |                   |     |                 |   |          |   |       |     |                 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**(A Development StageCompany)**ConsolidatedStatements of Changes in Shareholders’ Equity**
|                                            |   |             |       |           |       |                |       | **Deficit**            |       |       | ** ** |
|-------------------------------------------------|--------|------------------|------------|----------------|------------|---------------------|------------|------------------------|------------|------------|------------|
|                                            |   |             |       |           |       |                |       | **Accumulated**        |       |       | ** ** |
|                                            |   |             |       |           |       |                |       | **During the**         |       | **Total**  | ** ** |
|                                            |   | **Common Stock** |       | **Additional** |       | **Development**     |       | **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 issued for compensation            |   | 303,737          |       | 30             |       | 36,756              |       |                   |       | 36,786     |       |
| Common stock issued in exchange for services    |   | 50,000           |       | 5              |       | 4,495               |       |                   |       | 4,500      |       |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| Net loss                                        |   |             |       |           |       |                |       | (181,209               | )          | (181,209   | )          |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| **Balance, March 31, 2001**                     |   | 13,965,641       |       | 1,397          |       | 3,088,107           |       | (2,302,941             | )          | 786,563    |       |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| Common stock cancelled                          |   | (125,000         | )          | (13            | )          | (49,987             | )          |                   |       | (50,000    | )          |
| Common stock issued in exchange for services    |   | 367,823          |       | 37             |       | 1,302               |       |                   |       | 1,339      |       |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| Net loss                                        |   |             |       |           |       |                |       | (742,138               | )          | (742,138   | )          |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| **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     |       |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| Common stock issued for Services                |   | 109,102          |       | 11             |       | 20,301              |       |                   |       | 20,312     |       |
| Common stock issued for Compensation            |   | —           |       | —         |       | —              |       |                   |       | —     |       |
| Subscriptions Paid                              |   | 1,503,334        |       | 150            |       | 109,850             |       |                   |       | 110,000    |       |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| Net loss                                        |   |             |       |           |       |                |       | (258,608               | )          | (258,608   | )          |
|                                            |   |             |       |           |       |                |       |                   |       |       |       |
| **Balance, March 31, 2002**                     |   | 16,749,055       |       | $              | 1,674      |                | $          | 3,415,790              |       | $          | (3,513,262 | ) | $ | (95,798 | ) |

 

The accompanying notesare an integral part of these financial statements.

 

4

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|                                                                        |   |                   |     |                 |   |          |   |     |     | **(Inception)** |   |
|-----------------------------------------------------------------------------|--------|------------------------|----------|----------------------|--------|---------------|--------|----------|----------|-----------------|--------|
|                                                                        |   | **Three Months Ended** |     | **Six Months Ended** |   | **to**        |   |
|                                                                        |   | **March 31,**          |     | **March 31,**        |   | **March 31,** |   |
|                                                                        |   | **2002**               |     | **2001**             |   | **2002**      |   | **2001** |     | **2002**        |   |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| **Cash flows from operating activities**                                    |   |                   |     |                 |   |          |   |     |     |            |   |
| Net loss                                                                    |   | $                      | (258,608 | )                    | $      | (181,209      | )      | $        | (468,183 | )               | $      | (625,182 | ) | $ | (3,513,262 | ) |
| Adjustments to reconcile net loss tonet cash used  in operating activities: |   |                   |     |                 |   |          |   |     |     |            |   |
| Depreciation and amortization                                               |   | 15,616                 |     | 59,497               |   | 20,615        |   | 115,104  |     | 288,848         |   |
| Loss on disposal of assets                                                  |   | —                 |     | —               |   | —        |   | —   |     | 190             |   |
| Common stock issued in exchange for services                                |   | 20,312                 |     | 4,500                |   | 55,112        |   | 4,500    |     | 265,673         |   |
| Common stock issued for compensation                                        |   | —                 |     | 36,786               |   | 161,509       |   | 122,494  |     | 256,016         |   |
| Pre-acquisition income                                                      |   | —                 |     | —               |   | —        |   | —   |     | 47              |   |
| Loss from discontinued operations                                           |   | —                 |     | —               |   | —        |   | —   |     | 72,460          |   |
| Gain on disposal of subsidiary                                              |   | —                 |     | (181,484             | )      | —        |   | (181,484 | )        | (177,755        | )      |
| Impairment loss                                                             |   | —                 |     | —               |   | —        |   | —   |     | 144,772         |   |
| Interest                                                                    |   | 500                    |     | —               |   | 2,758         |   | —   |     | 2,758           |   |
| (Increase) decrease in operating assets                                     |   |                   |     |                 |   |          |   |     |     |            |   |
| Accounts receivable                                                         |   | 36,616                 |     | (9,427               | )      | (4,443        | )      | 8,559    |     | 13,047          |   |
| Related party receivable                                                    |   | (36,800                | )        | —               |   | (44,640       | )      | 12,251   |     | (66,661         | )      |
| Costs in excess of billings                                                 |   | (42,380                | )        | —               |   | (78,322       | )      | —   |     | (78,322         | )      |
| Inventory                                                                   |   | —                 |     | 16,577               |   | —        |   | 251      |     | (2,055          | )      |
| Prepaid expenses                                                            |   | (434                   | )        | 497                  |   | (23           | )      | (305     | )        | (621            | )      |
| Employee advances                                                           |   | —                 |     | —               |   | 271           |   | —   |     | —          |   |
| Deposit                                                                     |   | 1,080                  |     | (1,243               | )      | 1,126         |   | (4,622   | )        | (12,371         | )      |
| Increase (decrease) in operating liabilities                                |   |                   |     |                 |   |          |   |     |     |            |   |
| Accounts payable                                                            |   | 133,472                |     | 53,027               |   | 163,866       |   | 80,770   |     | 763,792         |   |
| Billings in excess of costs                                                 |   | 2,135                  |     |                 |   | 2,135         |   |     |     | 2,135           |   |
| Forgiveness of accounts payable                                             |   | —                 |     | —               |   | —        |   | —   |     | (3,400          | )      |
| Accrued expenses                                                            |   | 59,272                 |     | 8,869                |   | 48,205        |   | 17,830   |     | 209,836         |   |
| Income taxes payable                                                        |   | —                 |     | —               |   | —        |   | (3,200   | )        | 7,152           |   |
| Net cash used in operating activities                                       |   | (69,219                | )        | (193,610             | )      | (140,014      | )      | (453,034 | )        | (1,827,721      | )      |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| **Cash flows from investing activities**                                    |   |                   |     |                 |   |          |   |     |     |            |   |
| Purchase of property, plant and equipment                                   |   | —                 |     | (1,956               | )      | —        |   | (1,956   | )        | (29,660         | )      |
| Acquisition of intangible assets                                            |   | (558                   | )        | (1,140               | )      | (702          | )      | (2,756   | )        | (604,836        | )      |
| Loans made to related party                                                 |   | —                 |     | —               |   | —        |   | —   |     | (10,000         | )      |
| Repayments of loans to related party                                        |   | —                 |     | —               |   | —        |   | —   |     | 10,000          |   |
| Acquisition of subsidiary                                                   |   | —                 |     | —               |   | —        |   | —   |     | (500,000        | )      |
| Cash of discontinued operations                                             |   | —                 |     | (12,628              | )      | —        |   | (12,628  | )        | (19,999         | )      |
| Cash of acquired subsidiaries                                               |   | —                 |     | —               |   | —        |   | —   |     | 17,261          |   |
| Net cash used in investing activities                                       |   | (558                   | )        | (15,724              | )      | (702          | )      | (17,340  | )        | (1,137,234      | )      |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| **Cash flows from financing activities**                                    |   |                   |     |                 |   |          |   |     |     |            |   |
| Bank overdraft                                                              |   | —                 |     | —               |   | —        |   | (1,214   | )        | —          |   |
| Increase (decrease) in line of credit                                       |   | —                 |     | 498                  |   | —        |   | (28      | )        | 662             |   |
| Proceeds from note payable to officer/employee                              |   | 10,400                 |     | 159,419              |   | 127,833       |   | 165,129  |     | 372,098         |   |
| Payments of note payable to officer                                         |   | (45,408                | )        | —               |   | (145,658      | )      | (30,496  | )        | (147,342        | )      |
| Proceeds from convertible debenture                                         |   | —                 |     | —               |   | —        |   | —   |     | 500,000         |   |
| Proceeds from notes payable                                                 |   | —                 |     | —               |   | —        |   | 20,000   |     | 1,064,500       |   |
| Proceeds from issuance of common stock, net                                 |   | 110,000                |     | —               |   | 160,000       |   | 295,000  |     | 1,180,700       |   |
| Net cash provided by financing activities                                   |   | 74,992                 |     | 159,917              |   | 142,175       |   | 448,391  |     | 2,970,618       |   |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| Net (decrease) increase in cash                                             |   | 5,215                  |     | (49,417              | )      | 1,459         |   | (21,983  | )        | 5,663           |   |
| Cash, beginning of period                                                   |   | 448                    |     | 52,364               |   | 4,204         |   | 24,930   |     | —          |   |
| Cash, end of period                                                         |   | $                      | 5,663    |                 | $      | 2,947         |   | $        | 5,663    |            | $      | 2,947.00 |   | $ | 5,663.00 |   |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| **Supplementary disclosures**                                               |   |                   |     |                 |   |          |   |     |     |            |   |
| Interest paid                                                               |   | $                      | 1,005    |                 | $      | 498           |   | $        | 1,310    |            | $      | 1,184 |   | $ | 3,481 |   |
| Income taxes paid                                                           |   | $                      | —   |                 | $      | —        |   | $        | 600      |            | $      | 3,200 |   | $ | 8,328 |   |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |
| **Non-cash financing and investing activities**                             |   |                   |     |                 |   |          |   |     |     |            |   |
| Note payable paid through issuance of common stock                          |   | $                      | —   |                 | $      | —        |   | $        | —   |            | $      | — |   | $ | 1,000,000 |   |
| Investment in subsidiary                                                    |   | $                      | —   |                 | $      | —        |   | $        | —   |            | $      | — |   | $ | 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                                 |   | $                      | —   |                 | $      | 564,500       |   | $        | —   |            | $      | 564,500 |   | $ | (64,500 | ) |
| Accrued interest released in sale of subsidiary                             |   | $                      | —   |                 | $      | —        |   | $        | —   |            | $      | — |   | $ | (28,867 | ) |
|                                                                        |   |                   |     |                 |   |          |   |     |     |            |   |

 

5

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**COMPOSITESOLUTIONS, INC. AND SUBSIDIARIES**(A DevelopmentStage Company)**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**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.  A thirdwholly 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 March 31, 2002 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 statements include theaccounts of the Company and its wholly owned subsidiaries.  All significant intercompany transactionshave been eliminated in consolidation.

 

**Cash and Cash Equivalents**

 

For purposes of thestatements of cash flows, the Company considers cash instruments with originalmaturities of less than three months to be cash equivalents.

 

**Start-up Costs**

 

Costs of start-up activities, including organizationcosts, are expensed as incurred, in accordance with Statement of Position (SOP)98-5.

 

**Advertising**

 

Advertising costsare charged to expense as incurred.

 

6

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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 equipmentare 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”) issued SFASNo. 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 is no longer amortized but insteadwill be assessed for impairment at least annually.  The Company is currently determining the impact of adopting thisstandard under the transition provisions of SFAS No. 142.  Other intangible assets are recorded at historicalcost less amortization.  Otherintangibles are amortized on the straight line method based on estimated usefullives.  Amortization expense was $6,218for the three and six months ended March 31, 2002, respectively, and $277,376for the period October 20, 1997 (inception) to March 31, 2002, 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 ofthe actual cost of work performed to a current estimate of the total cost tocomplete a 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 iscompleted.  Losses on contracts arerecorded in full as they are identified.

### ** **

 

7

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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 statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe periods presented.  Actual resultsmay differ significantly from those estimates.

 

### **FairValues of Financial Instruments**

 

Statement of Financial Accounting Standards No. 107, *Disclosures about Fair Value of FinancialInstruments,*requires disclosure of fair value information aboutfinancial instruments, whether or not recognized in the balance sheet.  In cases where quoted market prices are notavailable, fair values are based on estimates using present value or othervaluation techniques.  Those techniquesare significantly affected by the assumptions used, including the discount rateand estimates of future cash flows.  Inthat regard, the derived fair value estimates cannot be substantiated bycomparison to independent markets and, in many cases, could not be realized inimmediate settlement of the instruments. Statement No. 107 excludes certainfinancial instruments and all nonfinancial instruments from its disclosurerequirements.  Accordingly, theaggregate fair amounts of financial instruments presented do not represent theunderlying value of the Company.

 

The following methods and assumptions were used toestimate the fair value of each class of financial instrument:

 

#### ***Cash and cash equivalents***: The carrying amounts reported in the balance sheetfor cash and cash equivalents approximates 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.

 

 

8

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### **FairValues of Financial Instruments (Continued)**

 

*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 using thecurrent 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 the March31, 2001 balances in order to conform to the March 31, 2002 presentation.

** **

**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.

 

 

9

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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 the Company entered into anAgreement to transfer all of the outstanding shares of Pemultimo, Inc. to anindividual in exchange for 150,000 shares of the Company’s common stockoriginally valued at $93,750, the release of certain inter-company receivablesin the amount of $22,021, an 8% convertible debenture note in the amount of$500,000 plus accrued interest of $28,199, and notes payable in the amount of$64,500, plus accrued interest of $4,441.

 

**NOTE 4 — PROPERTY, PLANT AND EQUIPMENT**

 

Property, plantand equipment consist of the following at March 31, 2002 and 2001:

 

|                            |   | **2001** |   | **2000** |   |
|---------------------------------|--------|----------|--------|----------|--------|
|                            |   |     |   |     |   |
| Leasehold  improvements         |   | $        | 1,407  |     | $      | 1,407 |   |
| Office furniture  and equipment |   | 174,456  |   | 195,594  |   |
| Machinery and  other assets     |   | 20,838   |   | —   |   |
|                            |   | 196,701  |   | 197,001  |   |
| Less accumulated depreciation   |   | (195,883 | )      | (174,877 | )      |
|                            |   |     |   |     |   |
|                            |   | $        | 818    |     | $      | 22,057 |   |

 

Depreciationexpense for the three and six months ended March 31, 2002 was $9,401 and$14,398,  respectively, $9,197 and$14,504 for the three and six months ended March 31, 2001, respectively, and$45,927 for the period October 20, 1997 (inception) to March 31, 2002.

 

**NOTE 5 —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 certain

 

 

10

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technology. The agreement terminates on the later of the expiration date of thelongest-lived Patent Rights or the twenty-first anniversary of the effectivedate.  A license fee of $40,000 was paidupon execution****of the agreement.  TheCompany must also pay for one half of all past and future patent costs.  At March 31, 2002 and 2001 the license has anet value of $56,108 and$54,782, respectively.  Under the termsof the agreement, the Company must pay to the licensor a royalty of 1.5% on netsales 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 pastand future patent costs.  At March 31,2002 and 2001 the license has a net value of $111,589 and $33,354, respectively.  Under the terms of the agreement, the Company must pay to thelicensor a royalty of 1.5% on net sales of licensed products and certain feesand royalties for any executed sub-license agreements.

 

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 March 31, 2002 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 March 31, 2002 this intangible asset wasnot 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 March 31, 2002and 2001 this goodwill has a net value of $391,500 and $715,028, 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

 

 

11

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sum of the amounts assigned to identifiable net assetsacquired.  On March 31, the Companytransferred all of the outstanding shares of common stock of Penultimo, Inc.dba Anchor Reinforcements to an individual. At March 31, 2002 and 2001 this goodwill has a net value of $0 and $291,050, respectively.

 

Amortization expense for the three and six monthsended March 31, 2002 was $6,218 and $6,218, respectively, and $277,376 for theperiod October 20, 1997 (inception) to March 31, 2002.

 

**NOTE 6 —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 at March31, 2002 and 2001, 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.****  OnJune 30, 1999 the Company issued 200,000 shares in settlement of a note payablewith a principal balance of $1,000,000 and accrued interest of $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-

 

12

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Science Corporation. On August 31, 2000 the Company issued 150,000 shares of common stockvalued at $93,750 plus $500,000 in cash in exchange for 100% of the outstandingshares of common stock of Penultimo, Inc. dba Anchor Reinforcements.  On September 15, 2000 the Company issued100,000 shares of common stock as finder’s fees.  On September 28, 2000 the Company issued 300,000 shares of commonstock valued at $174,000 in exchange 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.

 

During the period January 1, 2001 to September 30,2001 the Company issued 721,560 shares of common stock for compensation andservices valued at $42,625, 150,000 shares of common stock valued at $93,750were surrendered, 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 928,115 shares of common stock in non-cash transactions valuedat $196,309.  In addition, the Companyreceived $50,000 in cash for the purchase of 500,000 shares of common stock.

 

During the three months ended March 31, 2002 theCompany issued 109,102 shares of common stock in non-cash transactions valuedat $20,312.  In addition, the Companyreceived $110,000 in cash for the purchase of 1,503,334 shares of common stock.

 

**StockIncentive Plan**

 

On December 1, 2000 the Company and subsidiaries’Board of Directors adopted the 2000 Stock Incentive Plan pursuant to whichincentive stock options or nonstatutory stock options to purchase up to1,000,000 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 commencing April 2001, over service periodsthat range from zero to five years.

 

13

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|                             |   | **Weighted** |   |          |     |       |   |
|----------------------------------|--------|--------------|--------|---------------|----------|------------|--------|
|                             |   | **Average**  |   |          |     |       |   |
|                             |   | **Exercise** |   | **Number of** |     | **Vested** |   |
|                             |   | **Price**    |   | **Shares**    |     | **Shares** |   |
|                             |   |         |   |          |     |       |   |
| Outstanding, October  20, 1997   |   | —       |   | —        |     |       |   |
| Granted                          |   | $            | .40    |          | 120,000  |       | — |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   |         |   | —        |     | —     |   |
| Outstanding, March 31,  2001     |   |         |   | 120,000       |     | —     |   |
| Granted                          |   | $            | .10    |          | 100,000  |       | — |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   | $            | .40    |          | (120,000 | )          | — |   |
| Outstanding, September  30, 2001 |   |         |   | 100,000       |     | —     |   |
| Granted                          |   |         |   | —        |     | 50,000     |   |
| Exercised                        |   |         |   | —        |     | —     |   |
| Cancelled                        |   |         |   | —        |     | —     |   |
| Outstanding, March 31,  2002     |   |         |   | 100,000       |     | 50,000     |   |

 

 

The Company accounts for stock-based compensationusing the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” under which nocompensation cost for stock options is recognized for the stock options awards grantedat or above fair market value.  For thethree and six months ended March 31, 2002, the Company did not recognize anycompensation expense.

** **

**NOTE 7 — 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 March 31, 2002and 2001 there was a balance due in the amount of $51,396 and $51,466, respectively.

 

**NOTE 8 — NOTE PAYABLE**

 

On November 20, 2001, the Company enteredinto a Secured Promissory Note with Marathon Development Company, Inc. in theamount of $105,000, including $5,000 of interest at a rate of 10% perannum.  The note is secured by theCompany’s assets and is personally guaranteed by a director of theCompany.  The note is due on the earlierof February 20, 2002 or the date on which the director completes a refinance ofcertain real property.  At March 31,2002 there is a balance due in the amount of $80,500 plus accrued interest inthe amount of $1,083, for the total of $81,583.

 

 

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**NOTE 9 — COMMITMENTS**

 

The Company and subsidiaries lease office space undera non-cancelable operating lease. Future minimum payments under the lease at March 31, 2000 are asfollows:

 

| **Year  Ending** |   |   |
|------------------|--------|--------|
| **March 31,**    |   |   |
| 2003             |   | $      | 47,603 |
| 2004             |   | 49,507 |
| 2005             |   | 12,497 |
|             |   | $      | 109,607 |

 

Rental expense was $9,227 and $20,781 for the threeand six months ended March 31, 2002, respectively and was $227,126 for theperiod October 20, 1997 (inception) to March 31, 2002.

 

**NOTE 10 — EARNINGS PER SHARE**

 

At March 31, 2002 and 2001 there were 100,000 and120,000 weighted-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 March 31, 2002 and 2001.

 

**NOTE 11 — INCOME TAXES**

 

At March 31, 2002the Company has a net operating loss carryforward for tax purposes ofapproximately $1,580,000 which expires through the year 2022.  Net deferred tax assets at March 31, 2002and 2001 were approximately $1,295,600 and $2,600,000, respectively, whichrepresent the amount of tax benefits of start-up, organization and syndicationcosts.  The Company has established avaluation allowance against these net deferred tax assets because it is morethan likely that the deferred tax benefits will not be utilized.

 

**NOTE 12 — 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.

 

 

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**Stock-Based Compensation**

 

During the three months ended March 31, 2002 and 2001the Company issued 109,102 shares of common stock valued at $20,312 forservices.  During the period October 20,1997 (inception) to March 31, 2002 the Company issued 17,632,927 shares ofcommon stock valued at $518,355 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 March 31, 2002 and 2001 there was no balance due.

 

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 anadditional $11,500 and the Company paid $100,000.  As of March 31, 2002, principal in the amount of $57,939 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 March 31,2002, 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 March 31, 2002,principal in the amount of $32,445 was outstanding.

 

During the three and six months ended March 31, 2002an employee loaned the Company a total of $500 to cover operatingexpenses.  As of March 31, 2002 there isa $0 balance due.

 

During the three and six months ended March 31, 2002an officer loaned the Company a total

 

 

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of $400 to cover operating expenses.  As of March 31, 2002 there is a $1,185balance due.

On January 17, 2002, the Company issued a promissorynote payable to a shareholder in the amount of $10,000, plus interest at a rateof 10% pre annum.  The principal is tobe advanced to the Company in various amounts. The accrued interest shall be paid in the Company’s common stock eachquarter.  The note is due on January 17,2003.  As of March 31, 2002, principalin the amount of $10,000 was outstanding.

 

**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 and six months endedMarch 31, 2002 the Company made payments of $3,000 and $19,000, respectively,for management consulting services.

** **

In July 2000, theCompany entered into a consulting agreement with an officer for management andtechnical services.  Under the terms ofthe agreement, for the three and six months ended March 31, 2002 the Companymade payments of $42,500 and $71,500, respectively, for management consultingservices.

 

The Company hasseveral consulting agreements with shareholders and officers for management,marketing and technical services. Consulting fees for the three and six months ended March 31, 2002 were$45,500 and $90,500, respectively

 

**NOTE 13 —****GLOBAL ALLIANCEAND SUBSCRIPTION AGREEMENT**

 

On December 7, 2000 the Company entered into a Global AllianceAgreement with 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 was to be issued quarterly at$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 was 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.

 

 

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**NOTE 14 — GOING CONCERN**

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.The Company’s financial position and operating results raise substantial doubtabout the Company’s ability to continue as a going concern, as reflected by thenet loss of $258,608 and $468,183, respectively, for the three and six monthsended March 31, 2002 and losses of $3,513,262 accumulated from October 20, 1997(Inception) to March 31, 2002. In addition the Company’s current liabilitiesexceed current assets by $1,025,154 at March 31, 2002. The ability of theCompany to continue as a going concern is dependent upon commencing operations,developing sales and obtaining additional capital and financing. Theconsolidated financial statements do not include any adjustments that might benecessary if the Company is unable to continue as a going concern. The Companyis currently seeking additional capital to allow it to begin its plannedoperations.

 

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

 

### **GeneralOverview**

 

                CompositeSolutions, Inc. (CSI)is an development stage company licensing and distributing its proprietarycomposite materials technology and engineering services for applications in thecivil engineering 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 structural elements. Thecomposite overlay technique has been found to be extremely effective forseismic retrofits, blast hardening, structural upgrade, and structural repairs.Typically only a few layers of a 1mm thick overlay are needed for suchapplications.

 

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 andthe use of heavy lifting equipment, which constitutes a significant part ofsystem building costs. The CSS can be used for structural elements such ascolumns, beams and girders for buildings and bridges and for pilings forharbors and docks.

 

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 afull-scale five-story building as well as columns ranging from single columnsto full-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 tests relatingto the retrofit, and upgrading of structural elements such as walls, columnsand floor slabs.

 

#### **Management**

 

Composite Solutions, Inc. has entered into anagreement to retain the services of Richard Sklar as a consultant to theCompany to explore and develop commercial opportunities for the exploitation ofCSI’s technology as well as identifying and soliciting interest from potentialjoint venture partners.  He will alsoadvise the company in its effort to explore an appropriate business structure,including changes with CSI itself, to most effectively accomplish thoseends.  This action is the first step inwhat Management hopes to be an aggressive strategy to attract highly talentedmanagement services to the Company and to restructure the Company into a modewhich will allow it to generate the revenues which it believes the Company’stechnology warrants.

 

Ambassador Sklar has a distinguished and honored40-year career in private and public sector management.  He received his bachelor’s degree in mechanicalengineering from Cornell University in 1957 and went on to found a Clevelandbased manufacturer of construction equipment of which he was president andCEO.  That company was sold in 1973.  He later became president and a principalowner of the San Francisco based construction management firm of O’BrienKreitzberg, Inc. which, at the time that it was sold, was one of the largestmanagement construction firms in North America.  In 1996, Ambassador Mr. Sklar was appointed as the President’sSpecial Representative for Economic Reform and Reconstruction to carry outcivilian development in Bosnia as part of the U.S. brokered peace accords.   More recently, he was named by GovernorDavis to lead a task force of engineering and project management firms to helpspeed the construction of new power plants in California.

 

Management is extremely encouraged to have been ableto attract the services of someone with his proven competence and managementexperience as well as his personal stature within the national andinternational construction community.

 

#### **Results ofOperations**

 

The following is a discussion of the financial condition and results ofour operations for the three months ended March 31, 2002 and 2001.  This discussion should be read inconjunction with our consolidated financial statements and the notes relatedthereto.

 

Net Loss: For the fiscal quarter ended March 31, 2002, theCompany recorded net operating loss of $258,608 ($0.02 per share) fromcontinuing operations, compared to a net loss of $349,981 ($0.03 per share)during the fiscal quarter ended March 31, 2001.  This reduction in loss is mainly due to added revenue.

 

 

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Revenue: The revenues and cost of sales for the fiscal quarter ended March 31,2002 were $132,946 and $50,474, respectively; as compared to revenues of$15,921 and cost of sales of $4,273 for the fiscal quarter ended March 31,2001.  These numbers indicate asubstantial growth in revenue for the quarter ended March 31, 2002.

#####  

Liquidityand Capital Resources:  TheCompany is operating with insufficient capital since January 2001.  It has not met all of its financialobligations, and has relied heavily on the sale of its Common Stock to generateadditional capital.During the three months ended March 31, 2002, the Company issued 109,102 sharesof common stock in non-cash transactions valued at $20,312.  In addition, the Company received $110,000in cash for the subscription of 1,503,334 shares of common stock. 

 

TheCompany had total assets of $1,163,745 as of March 31, 2002, includingintangible assets of $996,971, as compared to the total assets of $1,246,996and intangible assts of $1,191,702  asof March 31, 2001.  The Company’scurrent liabilities as of March 31, 2002 were $1,239,543, as compared tocurrent liabilities of $460,432 as of March 31, 2001.

 

Inyear 2002, the Company intends to devote substantial part of its financialresources towards the marketing of its products and services to theconstruction industry.  In order to facilitatesuch marketing efforts, the Company expects to seek additional capital throughthe sale of equity securities.  Also,the Company intends to pursue licensing technologies as a financingalternative.

 

**Marketing& Sales**

 

OnJanuary 18, 2002, the Company signed an agreement with an international co.(manufacturer) for providing engineering and design services for a large civilinfrastructure project.  According tothe terms of this agreement, the Company will receive $377,000 for engineeringfees in the next six months.  Inaddition, the Company will receive royalties in the future for productsdesigned by the Company.

 

OnJanuary 31, 2002, the Company received a contract for the seismic retrofit ofthe shear walls and columns of Verizon Corporation’s telecommunicationsswitching complex in Sierra Madre, California. The Company has used its carbon composite system Retroshield for thisproject.

 

Duringthis reporting period, the Company performed Blast retrofits on structuralelements as part of a Blast Damage Mitigation program supported by the DefenseThreat Reduction Agency (DTRA) and TSWG. CSI’s RetroShield CFRP system was usedin both laboratory and field blast tests. The financial vehicle for this workwas a subcontract from Karagozian & Case.

 

Duringthis reporting period the Company introduced a new product in the form ofhybrid Kevlar —type composite panels for ballistic protection. This product istargeted for the civil and defense construction industry. Initial sales werefor use in Safe Rooms.

 

TheCompany has formed strategic alliances with several key companies in the civilsector in an effort to execute a design-build capability for large civilengineering projects as well as international marketing of the Company’stechnology.

 

TheCompany is currently developing strategic alliance and technology licensingagreements with a larger international company in the area of HomelandSecurity. This will include the Company’s new FRP technologies for theprotection of a variety of structures.

 

**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 

 

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Litigation Act of 1995 with respect to allsuch forward-looking statements. Examples of forward-looking statements include, but are not limited to:(a) projections of revenues, capital expenditures, growth, prospects,dividends, capital structure and other financial matters; (b) statements ofplans objectives of the Company or its management or Board of Directors; (c)statements of future economic performance; (d) statements of assumptionsunderlying other statements and statements about the Company and its businessrelating to the future; and (e) any statements using the words “expects,”“intends,” “anticipates,” “may,” “plans,” “projects” and “estimates,” andanalogous or similar expressions.

 

The Company’sability to predict projected results or the effect of certain events on theCompany’s operating results is inherently uncertain.  Therefore, the Company wishes to caution each reader of thisreport to carefully consider the following factors, any or all of which have inthe past and could in the future affect the ability of the Company to achieveits anticipated results and could cause actual results to differ materiallythan those discussed herein: (1) ability to attract and retain customers to purchaseits products and services, (2) ability to commercialize and marketproducts,    (3)results of research anddevelopment, (4) technological advances by third parties and competition, (5)future capital needs of the Company, (6) history of operating losses, (7)dependence upon key personnel, and (8) general economic and businessconditions.  The Company expresslydisclaims any obligation or undertaking to release publicly any updates orrevisions to any forward–looking statement contained herein to reflectany change in the Company’s expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based

 

 

 

###### **Part II**

** **

**Item 1.    Legal Proceedings**

 

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

 

 

**Item 6.    Exhibits and Reports on Form 8-K**

 

**(a)           Exhibits**

 

                The exhibitsrequired to be filed herewith by item 601 of Regulation S-B, as described inthe following index of exhibits, are incorporated herein by reference, asfollows:

 

                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: May 15, 2002

 

 

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

 

Pursuant to the requirements of the SecuritiesExchange Act, of 1934 this report has been signed below by the following personon behalf of the Company and in the capacity and on the date indicated.

 
|                    |   |                  |   |         |   |
|-------------------------|--------|-----------------------|--------|--------------|--------|
| **Signature**           |   | **Capacity**          |   | **Date**     |   |
|                    |   |                  |   |         |   |
| /s/ Gilbert A. Hegemier |   | Chairman of the Board |   | May 15, 2002 |   |
| Gilbert A. Hegemier     |   |                  |   |         |   |

 

 

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