# ** **

 

 

# **UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-KSB**

 
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**For the Fiscal Year Ended September 30, 2001**

 

**or**

 
| **o** | **TRANSITIONAL  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No  Fee Required)** |
|-------|--------------------------------------------------------------------------------------------------------------|

 

**Commission File No. 000-24551**

 

**Composite Solutions, Inc.**

(Nameof Small Business Issuer in its Charter)

 

| **Florida**                                                   |   | **65-0790758**                         |
|---------------------------------------------------------------|--------|----------------------------------------|
| State  or other jurisdiction of incorporation or organization |   | I.R.S.  Employer Identification Number |

 

 

| **3252 Holiday Court, Suite 206**      |   | **La Jolla, CA 92037** |
|----------------------------------------|--------|------------------------|
| Address  of principal executive office |   | Zip  Code              |

 

Issuer’stelephone number:  **(858) 459-4843**

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT**

 

**Common Stock, $0.0001 Par Value**

(Titleof Class)

 

Check whether the issuer has (i) filed all reportsrequired by Section 13 or 15(d) of the Exchange Act during the past 12 months,and (ii) been subject to such filing requirements for the past ninety (90)days.  Yes   ý   No   o

 

Check if there isno disclosure of delinquent filers in response to Item 405 of regulation S-Bnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-KSB or any amendment tothis Form 10-KSB.   o

 

The Company’srevenues for the fiscal year ended September 30, 2001 were $79,207.

 

As of September 30, 2001, 14,208,464 shares of Common Stock wereoutstanding and the aggregate market value of the Common Stock (based on thelatest sale price on the Nasdaq OTC Bulletin Board on September 28, 2001) heldby non-affiliates ( 10,774,213 shares) was $1,831,616.

 

Transitional Small Business Disclosure Format (check one):      Yes  o  No   ý

 

 

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**Part I**

 

**Item1.  Description of Business**

 

### **General Overview**

 

The Company was incorporated under the laws of theState of Florida on October 20, 1997 as JS Business Works, Inc.  On June 30, 1999, the Company consummated areverse acquisition pursuant to which the Company acquired Composite Solutions,Inc., which was incorporated under the laws of the State of Nevada (“CSINevada”) in December 1998 to engage in “composite overlay” technology forconstruction industry.  Pursuant to theterms of a Share Exchange Agreement executed in connection with suchtransaction, the former stockholders of CSI Nevada were issued 1,000,000 sharesof the Company’s Common Stock and the Company’s corporate name was changed toComposite Solutions, Inc. (“the Company” or “CSI”)

 

CSI is an early stage company licensing anddistributing its proprietary composite materials technology and engineeringservices for applications in the civil engineering and civil constructionmarket. CSI’s technology represents a revolutionary breakthrough for theconstruction industry. This technology uses the same type of compositematerials found in the B-2 Bomber and other lightweight, high-strength militaryhardware. These composite materials consist of advanced fiber reinforcedpolymers (FRPs). Examples include ultra high-strength carbon or aramid fibersin a thermoset (e.g., epoxy) matrix. Such fibers are 10-15 times stringer thanconstruction steel and 5 times lighter. When used in concrete with traditionalbuilding material systems, this marriage of new and conventional systems leadsto a dramatic enhancement of the latter, and to superior structural performancewith a minimization of cost.

 

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

 

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

 

The CSS is a lightweight, high-strengthplant-manufactured advanced carbon fiber-reinforced polymer (CFRP) shell (tube)of circular or non-circular cross-section. In new construction of buildings,bridges and other structures, the shell is typically filled with concrete; inthis application it serves both as a stay-n-place form and reinforcement. As aresult, this system substantially reduces the need for reinforcing steel 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.

 

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

 

The effectiveness andintegrity of the Company’s compositeoverlay technology and the CSS has been extensively validated by full-scale laboratory tests at The CharlesLee Powell Structural Research Laboratories (“Powell Laboratories”) located atThe University of California, San Diego (“UCSD”).  These tests included both reinforced and un-reinforced wallspecimens that ranged from single-story walls to a full-scale five-storybuilding as well as columns ranging from single columns to full-scale bridgebents.  The Powell Laboratories are oneof the few such facilities in the world with the capability to executefull-scale tests and have performed extensive tests relating to the retrofit,and upgrading of structural elements such as walls, columns and floor slabs.

 

**Acquisitionsand Disposition**

 

In July 2000, the Companyexpanded its advanced composite technology base by acquiring Trans-ScienceCorporation (TSC), a San Diego-based privately held CaliforniaCorporation.  As reported in the 8-Kfiling dated July 25, 2000, the transaction involved exchange of TSC shares forCSI shares.

 

Since its inception in 1980,TSC is specialized in the development of computer simulation programs forsophisticated design analysis related to complex structures, including blasteffects; and for the past several years in the development of design softwarefor the use of advanced composite materials. TSC has developed a comprehensivedesign software for the seismic retrofit of reinforced concrete columns usingcomposite jackets, and is now extending its design software to include blasteffects.  TSC’s work on explosive blastsis part of a counter-terrorism program sponsored by the Defense ThreatReduction Agency (DTRA).  In recenttests conducted by DTRA on a full-scale building at the White Sands MissileRange in New Mexico, composite overlays prevented damage to structural elementsafter an explosion.

 

On August 31, 2000 theCompany acquired Penultimo Inc., dba Anchor Reinforcements (“Anchor”) aCalifornia corporation of Huntington Beach, California, specializing inmanufacturing carbon and aramid fabrics. As reported in the 8-K filing dated September 15, 2000, the transactionincluded payment of $500,000 in cash and 150,000 shares of the Company’s commonstock.  The Company issued an 8%Convertible Debenture Note in the amount of $500,000, due on August 17, 2003and secured it by a Security Agreement, California UCC-1 Financial Statement,and non-recourse guarantee issued by Penultimo, Inc.

 

The business from Anchor acquisition did not turnoutto be profitable and the Company incurred additional debt due to thisacquisition. On March 31, 2001, the Company entered into a Stock Purchase andSettlement Agreement with Penultimo, Inc. and Luc Vergaelen (“Vergaelen”), theholder of an 8% convertible Debenture Note in the principal sum of $500,000 andother related party promissory notes totaling $64,500.  As reported in the 10-QSBfiling dated May 15, 2001, this agreement resulted in sale of Anchor to Vergaelen and release ofall debentures and notes payable, plus related accrued interests, a total of$597,096. In addition, all intra-company receivables and payables werereleased, and goodwill, 

 

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assets and liabilities related to Penultimo, Inc. were writtenoff.  The sale resulted in a gain of$177,755  for the Company.

 

 

**GlobalStrategic Alliance Agreements**

 

In August 2000, the Companyentered into a Global Strategic Alliance Agreement with The Prime Group(“Prime”), a consortium of related companies located in Seoul, Korea, and engaged in various construction-relatedprojects.  Pursuant to the Agreement,the Company was to receive a 15% equity position in Prime, and Prime wasobligated to invest $2,000,000 into CSI in exchange for CSI’s common stock at apredetermined price ranging from $0.40 to $0.60 per share.  As reported in the 10-KSB filing datedJanuary 15, 2001, the investment schedule for Prime included installmentpayments of $250,000 every three months, with the first payment due by December12, 2000, and the second due by February 28,2001. Prime defaulted in itsobligations under the Agreement by not making any payments after the firstinstallment of $250,000 on December 12, 2000.

 

On July 25, 2001, the Company signed a Letter of Intent (“LOI”) with Composite Solution Korea,Ltd. (“CSK”) and Value & Company (“V&C) of Seoul, Korea, to providecomposite construction materials and engineering services, on an exclusivebasis, for the repair and remodeling of a large department store building inforeclosure in Seoul, Korea.  On August14, 2001, the Company submitted its preliminary proposal and budget formaterials supply and engineering services for the project to CSK and V&C,which was accepted and signed by the parties. Due to some issues related to the acquisition of the building, theproject has been delayed until the end of February 2002. Pursuant to theagreement, a non-refundable deposit of $300,000 is due to CSI, if and when theproject starts.

 

### **Markets**

 

Based on earnings potential, CSI has targeted four main areas forapplications of its technologies. These are Seismic Retrofit, Blast Hardening,Infrastructure Renewal, and New Construction.

 

The *Seismic Retrofit market*is a global market with a customer base in all seismically active regions ofthe world. Consideration of structural types ranges from buildings to bridges.Examples include Hospitals, Commercial Buildings, Schools, TelecommunicationCenters, Power Generating Facilities, Military Bases, Government Buildings, andBridges.

 

The *Blast Hardening market*  stems form a demonstrated need to protectthe public from terrorist acts as well as from accidental explosions. Thetarget markets here involve the following government and industrial facilities:Embassies, Federal Buildings, Military Complexes, Foreign Embassies,Communication/Control Centers, and Industrial Plants.

 

The *Infrastructure Renewal market*exists because a very large portion of the U.S infrastructure requires renewaldue to deterioration. This is repeated on a global basis. CSI has targetedthose segments of this infrastructure renewal problem with the highest priorityby the U.S for treatment. These include Large Water Conduits, Bridges, Oil andGas Pipelines, Harbor and Docks.

 

The *New Construction market:*CSI management estimates that the economic and structural advantages of the CSSstay-in-place forms render the CSS applicable on a worldwide basis. The focushere is on the following structures: Bridges, Buildings, Parking Structures,Historic Buildings, Harbors, Off-shore Platforms.

 

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**Competition**

 

The use of compositeoverlays for retrofit and repair of large structures, including buildings,bridges and highways, is dominated by a number of larger material supplycompetitors who are well financed and have well recognized industry names, andare aggressively competing in the market. However, these competing companiesare primarily focused on the sale of the material components through supplyhouses or partnering construction firms

 

**Employees**

 

As of September 30, 2001,the Company has three full-time and one part-time employees.  None of the employees are represented by alabor union, and the Company considers its relations with employees to begood.  The Company also engagesconsultants from time to time for various services.

 

**Research & Development**

 

The Company’s research anddevelopment activities are focused on the following three main areas: (1)advanced composite overlays for *blastretrofits*; (2) *the CSS*as structural stay-in-place forms for new construction; and (3) advanced compositeoverlays for *seismic and infrastructurerenewal retrofits*, repairs, and upgrades.

 

With respect to (1),government field tests (e.g., at White Sands Missile Range in New Mexico) havedemonstrated that composite overlays constitute an extremely effective andaffordable method for protecting primary structural elements (e.g., columns)against blast threats.  As a result,this technology is under consideration by the Department of State and theDepartment of Defense for protection of key foreign and domestic structures.

 

With respect to (2), the newCSS technology has reached an operational stage.  The first bridge based on the use of the CSS system (the King’sStorm water Channel Bridge) was recently completed in California, near theSalton Sea.  This structure serves as animportant technology demonstrator.

 

With respect to (3), CSI hasdeveloped a material system for seismic retrofits, which has better performanceand cost metrics than CSI’s previous system. This is expected to improve current profit margins.  In addition to material systems, CSI hascompleted PC-based design software, which allows an engineer to rapidly executecomposite overlay designs for the seismic retrofit of key structural elementssuch as columns.  The Company iscurrently extending this software to include retrofit designs for blast loads.

 

**Intellectual Property**

 

The Company owns a unique retrofit design softwareprogram for the seismic loading of structures, which is subject to copyrights.This program is being expanded to include blast retrofit designs; the expandedprogram too will be subject to copyrights.  The Company has licensed additional key retrofit/repair and newconstruction technology from the University of California. This license isco-exclusive(see item 12 below). If the third party license is surrendered orotherwise terminated, the licensor has granted the Company the right of firstnegotiations to become the exclusive licensee for that technology. TheUniversity of California has retained the priority rights to enforce the patentprotection against infringements by any third party. The foregoing licenses arebased on two patent applications. One has been granted (Patent Number 6,003,276issued December 21, 1999). The other patent application is under review by theU.S. Patent and Trademark Office.

 

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The Company intends to relyon patent and copyright protection, to the extent that such protection isavailable under applicable law. However, any such patents and copyrights wouldnot foreclose all possibilities of protection to that technology. It ispossible that certain patent or copyright claims superior to those of theUniversity of California’s currently pending patent, either within the U.S. orother countries, could impact the Company’s rights to the use of some aspectsof the Company’s technology.

 

**Governmental and Industry Regulations.**

 

Widespread commercializationof certain of the Company’s technology into buildings is necessarily dependentupon building and other code approvals of a number of the governmentaljurisdictions in which sales are to be made. Local governments which adopt and administer the building codes,generally adopt the model codes of either the International Conference ofBuilding Officials (ICBO) with its Uniform Building Code (UBC), or the AmericanConcrete Institute (ACI), each of which apply primarily to building structures.The Company’s technology is presently acknowledged by ICBO and ACI, throughpublished acceptance criteria and preliminary guideline documents. No formalapprovals of the technology have been granted to date.  Therefore, approval through any governmentaloffice within the United States will require departmental review in order to begranted an exemption to the current code. However, such exemptions are readilyallowed for the nature of the work contemplated by the Company.  The Company believes that previous testing,approvals, and technology use, along with future testing will provide thenecessary justification to obtain approvals. Additionally, the Company intends to contribute aggressively to theadoption of new codes to include the technology.

 

#### **Item 2. Description of Property**

 

In order to reduce itsoverhead expenses, the Company, along with Trans-Science Corporation, moved itsexecutive offices from 3655 Nobel Drive, Suite 440, San Diego, CA 92122 to 3252Holiday Court, Suite 206, La Jolla, CA 92037 on July 1, 2001. The new leasedoffice space of approximately 1572 sq. ft. is within walking distance to UCSD.The lease obligation is for three years with monthly payments of approximately$3,851, subject to periodic adjustments for inflation.

 

The Company closed its EastCoast office in Washington, D.C. area, located at 15200 Shady Grove Road, Suite202, Rockville, Maryland 20850 on June 30, 2001.

 

**Item 3.  LegalProceedings**

 

Neither the Company nor itssubsidiary is the subject of any pending legal proceeding

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

 

 

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**Part II**

 

 

**Item 5.  Marketfor Company’s Common Equity and Related Stockholders Matters**

 

The shares of the Company’sCommon Stock are traded on the OTC Bulletin Board (Symbol “KIPS”). Thefollowing table sets forth, for the periods indicated, the high and low closingbid prices for the Company’s Common Stock, as reported by the NationalQuotation Bureau, for the quarters presented. Bid prices represent inter-dealer quotations without adjustments formarkups, markdowns, and commissions.

 

Quarterly Common Stock PriceRange (High Low)

 
| **Fiscal year ended September 30, 2000:**  |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 1st Quarter                                |   | $      | 5.00   |   | $ | 0.65 |   |
| 2nd Quarter                                |   | $      | 4.90   |   | $ | 0.80 |   |
| 3rd Quarter                                |   | $      | 3.45   |   | $ | 0.75 |   |
| 4th Quarter                                |   | $      | 1.00   |   | $ | 0.50 |   |
|                                       |   |   |   |   |   |
| **Fiscal  year ended September 30, 2001:** |   |   |   |
| 1st Quarter                                |   | $      | 0.58   |   | $ | 0.15 |   |
| 2nd Quarter                                |   | $      | 0.24   |   | $ | 0.07 |   |
| 3rd Quarter                                |   | $      | 0.45   |   | $ | 0.07 |   |
| 4th Quarter                                |   | $      | 0.18   |   | $ | 0.07 |   |

 

 

As of September 30, 2001, there were 14,208,464 sharesof Common Stock outstanding, and there were approximately 60 shareholders ofthe Company’s Common Stock.

 

The Company has not paid anydividends since its inception and has no current plans to pay dividends on theCommon Stock in the foreseeable future. The Company intends to reinvest futureearnings in the development and expansion of its business. Any futuredetermination to pay dividends will depend upon the Company’s results ofoperations, financial condition and capital requirements and such other factorsdeemed relevant by the Company’s Board of Directors.

 

**Item 6. Management’s Discussion and Analysis**

 

**Results of Operations**

 

For the period from inception (October 20, 1997)through September 30, 1999, the Company had no revenues from operations and hadno significant business operations other than organizational and capitalraising activities.  On June 30, 1999,as mentioned above, the Company consummated a reverse acquisition pursuant towhich the Company acquired CSI Nevada, a developer of composite overlaytechnology for construction.  Since thatdate, the Company’s business activities have consisted of, (1) research anddevelopment activities relating to design software development and developmentof new material systems, (2) identification and acquisition of relatedcompanies (TSC and Anchor) to enhance Company’s technology base and growthpotential, (3) formation of Global Strategic Alliance with the Prime Group ofKorea to expand the Company’s markets in the Asian Region, and  (4) marketing of its products and servicesto potential customers.

 

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The results of the newacquisitions and alliance have been mixed. The acquisition of TSC has allowed the Company to secure a DTRA researchand development contract related to application of composite overlay technologyto blast effects on structures and valued at approximately $289,000, which isin progress. However, the Company lost $93,267 from the operations of Anchor,and the Prime Group of Korea defaulted in its obligations after making only oneinstallment payment.

 

For the fiscal year ended September 30, 2001, theCompany’s revenues and cost of sales were $79,207 and $41,048, respectively; ascompared to revenues of $2,888 and cost of sales of $5,639 for the fiscal yearended September 30, 2000.  For the year 2001,the Company had a net loss of $1,367,322 or $0.10 per share, as compared to anet loss of $1,090,715 or $0.09 per share for the fiscal year ended September30, 2000.  The increased loss wasprimarily due to professional fees, salaries, and depreciation &amortization expenses.  Its general andadministrative expenses decreased from $282,274 in 2000 to $232,674 in 2001.

 

The sale of Anchor Operations resulted in a netgain of $84,488.

 

##### **Liquidity and Capital Resources**

 

The Company operated withinsufficient capital in 2001, as it did in 2000.  It has not met all of its financial obligations in 2001, and hasrelied heavily on the sale of its Common Stock to generate additional capital.In October 2000 the Company issued 175,000 shares of Common Stock under aprivate placement in exchange for $35,000 in cash, net of offering costs.  On January 4, 2001 the Company issued550,000 shares of Common Stock under a share prescription agreement in exchangefor $210,000 in cash.  As of September30, 2001, the Company issued 1,061,760 shares of common stock valued at$128,333 in exchange for services.

 

The Company had total assetsof $1,036,168 as of September 30, 2001, including intangible assets of$1,006,147, as compared to the total assets of $1,931,762 and intangible asstsof $1,546,597 for the fiscal year ended September 30, 2000.  The Company’s current and long-termliabilities as of September 30, 2001 were $1,040,405 and $0, respectively, ascompared to current liabilities of $348,260 and long-term liabilities of$500,000 for the fiscal year ended September 30, 2000.

 

In year 2002, the Company intends to devotesubstantial part of its financial resources towards the marketing of itsproducts and services to the construction industry.  In order to facilitate such marketing efforts, the Companyexpects to seek additional capital through the sale of equity securities.  Also, the Company intends to pursuelicensing technologies as a financing alternative.

 

**Subsequent Events**

 

On January 18, 2002, the Company signed an agreementwith an international co. (composite manufacturer) for providing engineeringand design services for a civil infrastructure project.  According to the terms of this agreement,the Company will receive $377,000 for engineering fees in the next sixmonths.  In addition, the Company willreceive royalties in future for products designed by the Company.

 

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

 

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On January 18, 2002, the Company reached an agreementin principle with UCSD, pursuant to which UCSD will accept payment for asignificant portion of their licensing fees in CSI common stock in lieu ofcash, subject to establishing a purchase price for the shares, of which negotiations are stillcontinuing.

 

The Company is making a serious effort to install atop level Management Group, which has experience and expertise in large-scalecivil engineering construction projects as well as international marketing. TheCompany has identified such a Group and is currently negotiating the terms andconditions under which the Group will join the Company.

 

**Cautionary Statement Regarding****Forward-LookingStatements**

 

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 Litigation Actof 1995 with respect to all such forward-looking statements.  Examples of forward-looking statementsinclude, but are not limited to: (a) projections of revenues, capitalexpenditures, growth, prospects, dividends, capital structure and otherfinancial matters; (b) statements of plans objectives of the Company or itsmanagement or Board of Directors; (c) statements of future economicperformance; (d) statements of assumptions underlying other statements andstatements about the Company and its business relating to the future; and (e)any statements using the words “expects,” “intends,” “anticipates,” “may,”“plans,” “projects” and “estimates,” and analogous or similar expressions.

 

The Company’s ability to predict projected results orthe effect of certain events on the Company’s operating results is inherentlyuncertain.  Therefore, the Companywishes to caution each reader of this report to carefully consider thefollowing factors, any or all of which have in the past and could in the futureaffect the ability of the Company to achieve its anticipated results and couldcause actual results to differ materially than those discussed herein: (1)ability to attract and retain customers to purchase its products and services,(2) ability to commercialize and market products,    (3)results of research and development, (4) technologicaladvances by third parties and competition, (5) future capital needs of theCompany, (6) history of operating losses, (7) dependence upon key personnel,and (8) general economic and business conditions.  The Company expressly disclaims any obligation or undertaking torelease publicly any updates or revisions to any forward–looking statementcontained herein to reflect any change in the Company’s expectations withregard thereto or any change in events, conditions or circumstances on whichany such statement is based

 

**Item 7. Financial Statements**  

 

See the ConsolidatedFinancial Statements and related Report of Independent CertifiedPublic Accountants included herewith as pages F-1 through F-21.

 

**Item 8.  Changein and Disagreement with Accountants on Accounting and Financial Disclosure**

 

None

 

 

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**PartIII**

 

 

## **Item 9.  Directors, Executive Officers, Promoters andControl Persons**

 

 

The Directors and Executive Officers of the Companyduring the fiscal year ended September 30, 2001 were as follows:

 

Dr. Gilbert A. Hegemier, Chairman of the Board ofDirectors since June 1999;Mark Olson, Director, President and Chief Operating Officer from February 1,2000 to February 28, 2001 when he resigned;Dr. Michael Perlman, Director, President and Chief Executive Officer from July3, 2001 to September 30, 2001 when he resigned;Edward H. Davis, Director, Executive Vice President, Chief Financial Officer,General Counsel and Secretary from July 3, 2001 to September 30, 2001 when heresigned;

 

**Gilbert A. Hegemier, Ph.D.**  Dr. Hegemier is one of the developers of the composite overlaytechnology and has served as the Company’s Chairman since June 1999.  Dr. Hegemier also served as President ofCSI Nevada from December 1998 through June 1999.  Dr. Hegemier has served as a professor at the University ofCalifornia, San Diego since 1968, where he currently serves as a Professor ofStructural Engineering and also serves as Co-Director of The Powell StructuralSystems Laboratory.  Since 1980, Dr.Hegemier has also served as President and CEO of Trans-Science Corporationwhere he directed research and development work in shock wave simulationprograms and advanced material models for the Department of Defense in a widerange of technical areas.

 

**Item 10. Executive Compensation**

 

The following table setsforth information concerning compensation of the **former** Chief Executive Officers of the Company and otherDirectors and Executive Officers who received total annual compensationin excess of $100,000 for the fiscal years ended September 30, 2001, 2000 and1999:  ( * indicates accrued amounts notyet paid)

 
| **Name**               |   | **Position**                                      |   | **Fiscal Year** |   | **Salary****($)** |   | **Consulting Fee**** ($)** |
|------------------------|--------|---------------------------------------------------|--------|-----------------|--------|-------------------|--------|---------------------------------|
| Dr. Gilbert A Hegemier |   | Chairman & Consultant                         |   | 2001            |   |              |   | 199,000                         | * |
|                   |   |                                              |   | 2000            |   |              |   | 130,000                         |   |
|                   |   |                                              |   | 1999            |   |              |   | 113,750                         |   |
| Dr. Michael Perlman    |   | Former CEO, President,  Director & Consultant |   | 2001            |   |              |   | 30,000                          | * |
| Mark Olson             |   | Former COO, President,  Director &            |   | 2001            |   |              |   | 34,800                          |   |
|                   |   | Consultant                                        |   | 2000            |   |              |   | 48385                           |   |
| Donald Nicholson       |   | Former CEO & Director                         |   | 2000            |   | 97,489            |   |                            |   |
|                   |   |                                              |   | 1999            |   | 29,667            |   |                            |   |

 

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**Item 11.  SecurityOwnership of Certain Beneficial Owners and Management**

 

Currently, Dr. Gilbert A.Hegemier is the sole Director of the Company. He holds 3,584,242 shares of theCompany’s Common Stock, which represents approximately 25% beneficial ownershipof the Company.

 

**Item 12. Certain Relationships and Related Transactions**

 

**Transactions with Dr. Gilbert A. Hegemier and Affiliates**

 

Dr. Hegemier is a full-timeprofessor and staff member with the University of California, San Diego,Department of Engineering, as well as Co-Director of The Powell StructuralSystems Laboratory, which is the University’s testing laboratory for materialsand technologies similar to the Company’s products.  In that position, he is responsible to the University and allentities dealing with it to be open, fair and even handed in his research,testing and public information.  Hecannot provide preference to the Company or its clientele, even though he isthe largest single stockholder and principal of the Company.

 

In June 1999, the Companyentered into a Share Exchange Agreement with CSI Nevada of which Dr. Gilbert A.Hegemier was the principal shareholder. Pursuant to that Share Exchange Agreement, the Company acquired 100% ofthe outstanding stock of CSI Nevada by issuing 1,000,000 new shares of theCompany to Dr. Hegemier

 

In June 2000, through aShare Exchange Agreement the Company acquired TSC where Dr. Gilbert A. Hegemierwas the Director and CEO and owned approximately 56% of TSC’s privately heldStocks.  Pursuant to the Agreement, Dr.Hegemier received 532,960 shares of the Company’s Common Stock in exchange forhis 1217 shares of TSC.

 

**LicensesWith the University of California**

 

The University of Californiais the holder of a patent for the Retrofit and Repair of Concrete and MasonryWalls from the inventions made in the course of research by Prof. Gilbert A.Hegemier and his associates.   On April20, 1999, the Company entered into a License Agreement with the University ofCalifornia, San Diego, under which the University granted to the Company alicense for that patent.   That documentgrants the Company a license to use that technology throughout the world forthe life of the patent.  Inconsideration, the Company paid a licensing fee of $40,000 and is to pay royaltyfees of 1.5% of its net sales revenues. Under the terms of the agreement, the Company must also pay one-half ofall past and future patent costs. The license is co-exclusive with one otherthird party licensee.  That third partylicensee does not have access to the other ancillary technology, has notrecently been active in the retrofit/repair business and is subject to adefault notice by the University.  Inthe event of a termination of that license, the University has expressed itswillingness to negotiate in good faith with the Company to reach an arrangementin which the Company would be the exclusive licensee for that technology.

 

The University of Californiahas developed certain proprietary technology for the *Carbon Shell**System*from the inventions made in the course of research by Prof. Gilbert A. Hegemierand his associates. On August 4, 1999, the Company entered into a LicenseAgreement with the University of California, San Diego, under which theUniversity granted to the Company a co-exclusive license throughout the part ofthe world the Company designates (after payment of costs) for thattechnology.  In consideration, theCompany paid a licensing fee of $5,000 and is to pay royalties of 1.5% of itsnet sales 

 

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revenues. Under the terms of the agreement, the Company must also pay one-half ofall past and future patent costs.

 

**Item13.  Exhibits and Reports on Form 8-K**

 

**(a)           Exhibits**

 
| **Exhibit** |   |                                                     |
|-------------|--------|----------------------------------------------------------|
| **Number**  |   | **Description**                                          |   |
|        |   |                                                     |
| 3.1         |   | Articles of Incorporation of the Company, as  amended(1) |
| 3.2         |   | Bylaws of the Company, as amended(1)                     |
| 10.1        |   | License Agreement with UCSD (Case No. SD96-103)(2)       |
| 10.2        |   | License Agreement with UCSD (Case No. SD96-040)(2)       |
| 10.3        |   | Share Exchange Agreement(3)                              |
| 10.4        |   | Share Exchange Agreement with and Acquisition of  TSC(4) |
| 10.5        |   | Acquisition of Penultimo, Inc.(5)                        |
| 10.6        |   | Global Strategic Alliance Agreement with Prime (6)  |
| 23.1        |   | Consent of Independent Accountants’                 |

 

----

(1)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Registration Statementon Form 10SB12G/A, Commission File No. 000-24551, filed on October 20, 1998.

 

(2)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Annual Report on Form10-KSB, Commission File No. 000-24551, filed on January 13, 2000.

 

(3)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Current Report on Form8-K, Commission File No. 000-24551, filed on July 14, 2000 and August 31, 2000.

 

(4)                                  Incorporated by reference to thereferenced documents related to the Acquisition of TSC and filed on Form 8-K,Commission File No. 000-24551, on June 26, 2000 and July 25, 2000.

 

(5)                                  Incorporated by reference to thereferenced document related to the Acquisition of Penultimo, Inc. and filed onForm 8-K, Commission File No. 000-24551, on September 15, 2000 and amended onSeptember 18, 2000.

 

(6)                                  Incorporated by reference to thereferenced document filed as an exhibit to the Company’s Annual Report on Form10-KSB, Commission File No. 000-24551, filed on January 13, 2001.

 

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

 

On October 31, 2000, the Company filed an amendment toCurrent Report on Form 8-K/A related to the financial statements of Penultimo,Inc.

 

On March 29, 2001, the Company filed a Current Reporton Form 8-K related to the resignation of its President, Chief OperatingOfficer, and Director, Mark Olson.

 

 

12

----

 

**Signatures**

 

In accordance with Section 13 or 15(d) of the SecuritiesExchange Act the Company has caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

Date: February 11, 2002

 
|   |   |   |   |   |   |   | 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 |   | February 11, 2002 |
| Gilbert A. Hegemier     |   |                  |   |              |

 

 

13

----

 

**Composite Solutions Inc. andSubsidiaries**

**Formerly JS Business Works, Inc.**

(A DevelopmentStage Company)

 

**Financial Statements**

 

September 30, 2001 and 2000

 

 

 

**INDEX TO FINANCIAL STATEMENTS**

 

 

 
| Independent Auditors’ Report                     |   |
|-------------------------------------------------------|--------|
|                                                  |   |
| Consolidated Balance Sheets                           |   |
|                                                  |   |
| Consolidated  Statements of Operations                |   |
|                                                  |   |
| Consolidated  Statements of Stockholders’ Equity |   |
|                                                  |   |
| Consolidated  Statements of Cash Flows                |   |
|                                                  |   |
| Notes to  Consolidated Financial Statements           |   |

 

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholders

Composite Solutions Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets ofComposite Solutions Inc. (a development stage company) and Subsidiaries as ofSeptember 30, 2001 and 2000, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

Except as discussed in the following paragraph,we conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Because of inadequacies in Penultimo, Inc. dbaAnchor Reinforcements’ accounting records, we were unable to form an opinionregarding the amounts of the loss from discontinued operations (stated at$93,267) and the gain on the sale of subsidiary (stated at $177,755).  The effects of such adjustments, if any,would be reciprocal and accordingly would not result in a change in the netloss (stated at $1,367,322) in the accompanying consolidated statements ofoperations.

 

In our opinion, except for the effects of such adjustments, if any, asmight have been determined to be necessary had we been able to examine evidenceregarding the loss from discontinued operations and the gain on the sale ofsubsidiary, the financial statements referred to in the first paragraph presentfairly, in all material respects, the financial position of Composite SolutionsInc. and Subsidiaries as of September 30, 2001 and 2000, and the results of itsoperations and its cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as a goingconcern. As discussed in Note 17 to the consolidated financial statements, theCompany has experienced losses since inception and has a net capital deficiencythat raise substantial doubt about its ability to continue as a going concern.Management’s plans in regard to these matters are also described in Note 17.The consolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

Peterson& Co.

 

San Diego, California

January 25, 2002

 

 

F-2

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                  |       | **September 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
|                                                                                                                                                                  |       | **2001**          |       | **2000** |   |
| **ASSETS**                                                                                                                                                            | ** ** |
|                                                                                                                                                                  |       |              |       |   |   |
| **Current  assets**                                                                                                                                                   |       |              | ** ** |   | ** ** |
| Cash                                                                                                                                                                  |       | $                 | 4,204      |   | $ | 24,930 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $0 in 2001 and $3,333  in 2000                                                                        |       | -                 |       | 79,177 |   |
| Related party  receivables                                                                                                                                            |       | -                 |       | 9,920 |   |
| Inventory                                                                                                                                                             |       | -                 |       | 167,001 |   |
| Prepaid expenses                                                                                                                                                      |       | 761               |       | 1,369 |   |
| Prepaid income  taxes                                                                                                                                                 |       | 37                |       | 200 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| Total current  assets                                                                                                                                                 |       | 5,002             |       | 282,597 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| **Property,  plant and equipment, net**                                                                                                                               |       | 11,555            |       | 94,891 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| **Other  assets**                                                                                                                                                     |       |              | ** ** |   | ** ** |
| Employee  advances                                                                                                                                                    |       | 271               |       | - |   |
| Intangible  assets, net                                                                                                                                               |       | 1,006,147         |       | 1,546,597 |   |
| Deposits                                                                                                                                                              |       | 13,193            |       | 7,677 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| Total assets                                                                                                                                                          |       | $                 | 1,036,168  |   | $ | 1,931,762 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**                                                                                                                             | ** ** |
|                                                                                                                                                                  |       |              |       |   |   |
| **Current  liabilities**                                                                                                                                              |       |              | ** ** |   | ** ** |
| Bank overdraft                                                                                                                                                        |       | $                 | —     |   | $ | 1,214 |   |
| Accounts payable                                                                                                                                                      |       | 346,520           |       | 177,634 |   |
| Employee payable                                                                                                                                                      |       | 205,878           |       | — |   |
| Related party  payable                                                                                                                                                |       | 50,000            |       | — |   |
| Line of credit                                                                                                                                                        |       | 51,396            |       | 51,494 |   |
| Notes payable                                                                                                                                                         |       | -                 |       | 64,500 |   |
| Related party  notes payable                                                                                                                                          |       | 242,581           |       | 24,816 |   |
| Accrued expenses                                                                                                                                                      |       | 140,830           |       | 22,250 |   |
| Income taxes  payable                                                                                                                                                 |       | 3,200             |       | 6,352 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| Total current  liabilities                                                                                                                                            |       | 1,040,405         |       | 348,260 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| **Long  term obligations**                                                                                                                                            |       |              | ** ** |   | ** ** |
| Convertible  debenture                                                                                                                                                |       | —            |       | 500,000 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| Total  liabilities                                                                                                                                                    |       | 1,040,405         |       | 848,260 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| **Shareholders'  equity**                                                                                                                                             |       |              | ** ** |   | ** ** |
| Preferred stock;  $0.0001 par value; 10,000,000 shares authorized; 0 shares issued and  outstanding                                                                   |       | —            |       | — |   |
| Common stock;  $0.0001 par value; 50,000,000 shares authorized; 14,208,464 and 12,371,704  shares issued and outstanding at September 30, 2001 and 2000, respectively |       | 1,421             |       | 1,237 |   |
| Additional paid  in capital                                                                                                                                           |       | 3,039,422         |       | 2,760,023 |   |
| Accumulated  deficit                                                                                                                                                  |       | (3,045,080        | )          | (1,677,758 | ) |
|                                                                                                                                                                  |       |              |       |   |   |
| Total  shareholders' equity                                                                                                                                           |       | (4,237            | )          | 1,083,502 |   |
|                                                                                                                                                                  |       |              |       |   |   |
| Total  liabilities and shareholders' equity                                                                                                                           |       | $                 | 1,036,168  |   | $ | 1,931,762 |   |
|                                                                                                                                                                       |            |                   |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an itegral part of these financial statements.

 

 

F-3

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Operations**

 
|                                                  |   |              |       |              |   | **October 20, 1997** |   |
|-------------------------------------------------------|--------|-------------------|------------|-------------------|--------|----------------------|--------|
|                                                  |   |              |       |              |   | **(Inception)**      |   |
|                                                  |   | **Year Ended**    |       | **to**            |   |
|                                                  |   | **September 30,** |       | **September 30,** |   |
|                                                  |   | **2001**          |       | **2000**          |   | **2001**             |   |
| **Revenues**                                          |   | $                 | 79,207     |              | $      | 2,888                |   | $ | 82,095 |   |
| **Cost  of sales**                                    |   | 41,048            |       | 5,639             |   | 46,687               |   |
|                                                  |   |              |       |              |   |                 |   |
| Gross profit  (loss)                                  |   | 38,159            |       | (2,751            | )      | 35,408               |   |
|                                                  |   |              |       |              |   |                 |   |
| **Expenses**                                          |   |              |       |              |   |                 |   |
| Consulting fees                                       |   | 386,978           |       | 274,985           |   | 743,063              |   |
| Depreciation and  amortization                        |   | 216,253           |       | 50,322            |   | 268,230              |   |
| General and  administrative expenses                  |   | 232,674           |       | 282,274           |   | 659,325              |   |
| Organizational  expenses                              |   | —            |       | —            |   | 514                  |   |
| Professional  fees - other                            |   | 89,237            |       | 239,746           |   | 341,624              |   |
| Professional  fees - related party                    |   | 34,955            |       | —            |   | 60,839               |   |
| Salaries                                              |   | 327,538           |       | 253,938           |   | 902,137              |   |
| Impairment loss                                       |   | 144,772           |       | —            |   | 144,772              |   |
|                                                  |   |              |       |              |   |                 |   |
| Total expenses                                        |   | 1,432,407         |       | 1,101,265         |   | 3,120,504            |   |
|                                                  |   |              |       |              |   |                 |   |
| Loss from  operations                                 |   | (1,394,248        | )          | (1,104,016        | )      | (3,085,096           | )      |
|                                                  |   |              |       |              |   |                 |   |
| **Other  income (expense)**                           |   |              |       |              |   |                 |   |
| Interest income                                       |   | 2                 |       | 2,412             |   | 8,363                |   |
| Interest income  - forgiveness of debt                |   | —            |       | —            |   | 17,825               |   |
| Gain on  forgiveness of debt                          |   | 3,400             |       | —            |   | 8,261                |   |
| Other expenses                                        |   | (7,205            | )          |              |   | (7,205               | )      |
| Loss on disposal  of assets                           |   | (190              | )          |              |   |                 |   |
| Interest expense                                      |   | (45,841           | )          | (7,518            | )      | (71,184              | )      |
| Loss on  forgiveness of debt                          |   | —            |       | —            |   | (11,021              | )      |
|                                                  |   |              |       |              |   |                 |   |
| Total other  income (expense)                         |   | (49,834           | )          | (5,106            | )      | (54,961              | )      |
|                                                  |   |              |       |              |   |                 |   |
| Loss before  provision for income taxes               |   | (1,444,082        | )          | (1,109,122        | )      | (3,140,057           | )      |
|                                                  |   |              |       |              |   |                 |   |
| Provision for  income taxes                           |   | 7,728             |       | 2,400             |   | 10,128               |   |
|                                                  |   |              |       |              |   |                 |   |
| **Net  loss from continuting operations**             |   | (1,451,810        | )          | (1,111,522        | )      | (3,150,185           | )      |
|                                                  |   |              |       |              |   |                 |   |
| **Discontinued  operation**                           |   |              |       |              |   |                 |   |
| (Loss) income  from discontinued operation            |   | (93,267           | )          | 20,807            |   | (72,460              | )      |
| Gain on sale of  subsidiary                           |   | 177,755           |       | —            |   | 177,755              |   |
|                                                  |   | 84,488            |       | 20,807            |   | 105,295              |   |
|                                                  |   |              |       |              |   |                 |   |
| **Net  loss**                                         |   | $                 | (1,367,322 | )                 | $      | (1,090,715           | )      | $ | (3,044,890 | ) |
|                                                  |   |              |       |              |   |                 |   |
| **Loss  per common share, basic and diluted**         |   |              |       |              |   |                 |   |
| Net loss from  continuing operation                   |   | $                 | (0.10      | )                 | $      | (0.09                | )      | $ | (0.19 | ) |
| (Loss)income  from discontinued operation             |   | $                 | (0.01      | )                 | $      | —               |   | $ | (0.01 | ) |
| Gain on sale of  subsidiary                           |   | $                 | 0.01       |              | $      | —               |   | $ | 0.01 |   |
| Net loss                                              |   | $                 | (0.10      | )                 | $      | (0.09                | )      | $ | (0.19 | ) |
|                                                  |   |              |       |              |   |                 |   |
| Weighted average  number of shares, basic and diluted |   | 13,582,193        |       | 11,943,406        |   | 16,326,140           |   |

 

The accompanying notesare an itegral part of these financial statements.

 

 

F-4

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Shareholders' Equity**

 
| ** **                                      | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Deficit********Accumulated********During the********Development** |   | **Total********Shareholders'** | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------|------------|---------------------------------------------------------------------|--------|--------------------------------|------------|
|                                            |       | **Shares**       |       | **Amount**     |       | **Paid in Capital**                                                 |   | **Stage**                      |       | **Equity** |   |
| **Balance, October 20, 1997 (inception)**       |       | —           |       | $              | —     |                                                                | $      | —                         |       | $ | — |   | $ | — |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Common stock issued in exchange for services    |       | 15,233,910       |       | 1,521          |       | (2,120                                                              | )      |                           |       | (599 | ) |
| Common Stock issued for cash                    |       | 5,962,500        |       | 599            |       | 18,335                                                              |   |                           |       | 18,934 |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Net loss                                        |       |             |       |           |       |                                                                |   | (12,193                        | )          | (12,193 | ) |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| **Balance, September 30, 1998**                 |       | 21,196,410       |       | 2,120          |       | 16,215                                                              |   | (12,193                        | )          | 6,142 |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Common stock contributed                        |       | (7,896,410       | )          | (790           | )          | 790                                                                 |   |                           |       | — |   |
| Pre-acquisition income                          |       |             |       |           |       |                                                                |   | 47                             |       | 47 |   |
| Common stock issued in acquisition              |       | 1,000,000        |       | 100            |       | 47                                                                  |   | (47                            | )          | 100 |   |
| Common stock issued for payment of note payable |       | 200,000          |       | 20             |       | 999,980                                                             |   |                           |       | 1,000,000 |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Net loss                                        |       |             |       |           |       |                                                                |   | (574,850                       | )          | (574,850 | ) |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| **Balance, September 30, 1999**                 |       | 14,500,000       |       | 1,450          |       | 1,017,032                                                           |   | (587,043                       | )          | 431,439 |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Common stock surrendered                        |       | (4,300,000       | )          | (430           | )          | 430                                                                 |   |                           |       | — |   |
| Common Stock issued for cash                    |       | 668,333          |       | 67             |       | 759,933                                                             |   |                           |       | 760,000 |   |
| Pre-acquisition income                          |       |             |       |           |       |                                                                |   | 50,877                         |       | 50,877 |   |
| Common stock issued in acquisitions             |       | 1,103,371        |       | 110            |       | 808,668                                                             |   | (50,877                        | )          | 757,901 |   |
| Common stock issued in exchange for services    |       | 300,000          |       | 30             |       | 173,970                                                             |   |                           |       | 174,000 |   |
| Common stock issued for finder's fee            |       | 100,000          |       | 10             |       | (10                                                                 | )      |                           |       | — |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Net loss                                        |       |             |       |           |       |                                                                |   | (1,090,715                     | )          | (1,090,715 | ) |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| **Balance, September 30, 2000**                 |       | 12,371,704       |       | 1,237          |       | 2,760,023                                                           |   | (1,677,758                     | )          | 1,083,502 |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Common stock surrendered                        |       | (150,000         | )          | (15            | )          | (93,735                                                             | )      |                           |       | (93,750 | ) |
| Common Stock issued for cash                    |       | 725,000          |       | 73             |       | 244,927                                                             |   |                           |       | 245,000 |   |
| Common stock issued in exchange for services    |       | 1,061,760        |       | 106            |       | 128,227                                                             |   |                           |       | 128,333 |   |
| Common stock issued for finder's fee            |       | 200,000          |       | 20             |       | (20                                                                 | )      |                           |       | — |   |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| Net loss                                        |       |             |       |           |       |                                                                |   | (1,367,322                     | )          | (1,367,322 | ) |
|                                            |       |             |       |           |       |                                                                |   |                           |       |   |   |
| **Balance, September 30, 2001**                 |       | 14,208,464       |       | $              | 1,421      |                                                                | $      | 3,039,422                      |       | $ | (3,045,080 | ) | $ | (4,237 | ) |

 

The accompanying notesare an itegral part of these financial statements.

 

F-5

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**ConsolidatedStatements of Cash Flow**

 
|                                                                        |   | **Year Ended********September 30,** |       | **October 20, 1997  (Inception) to  September 30,** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------------|------------|-----------------------------------------------------|--------|
|                                                                        |   | **2001**                            |       | **2000**                                            |   | **2001** |   |
| **Cash  flows from operating activities**                                   |   |                                |       |                                                |   |   |   |
| Net loss                                                                    |   | $                                   | (1,367,322 | )                                                   | $      | (1,090,715 | ) | $ | (3,045,080 | ) |
| Adjustments to  reconcile net loss tonet cash used in operating activities: |   |                                |       |                                                |   |   |   |
| Depreciation and  amortization                                              |   | 216,253                             |       | 50,592                                              |   | 268,500 |   |
| Loss on disposal  of assets                                                 |   | 190                                 |       |                                                |   | 190 |   |
| Common stock  issued in exchange for services                               |   | 33,926                              |       | 174,000                                             |   | 210,561 |   |
| Common stock  issued for compensation                                       |   | 94,407                              |       | —                                              |   | 94,507 |   |
| Pre-acquisition  income                                                     |   | —                              |       | —                                              |   | 47 |   |
| Loss from  discontinued operations                                          |   | 93,267                              |       | —                                              |   | 93,267 |   |
| Gain on disposal  of subsidiary                                             |   | (177,755                            | )          | —                                              |   | (177,755 | ) |
| Impairment loss                                                             |   | 144,772                             |       | —                                              |   | 144,772 |   |
| (Increase)  decrease in operating assets                                    |   |                                |       |                                                |   |   |   |
| Accounts  receivable                                                        |   | 1,650                               |       | 15,840                                              |   | 17,490 |   |
| Related party  receivable                                                   |   | (22,021                             | )          | —                                              |   | (22,021 | ) |
| Inventory                                                                   |   | —                              |       | (2,055                                              | )      | (2,055 | ) |
| Prepaid expenses                                                            |   | 771                                 |       | 2,857                                               |   | (598 | ) |
| Employee  advances                                                          |   | (271                                | )          | —                                              |   | (271 | ) |
| Deposit                                                                     |   | (5,820                              | )          | (7,677                                              | )      | (13,497 | ) |
| Increase  (decrease) in operating liabilities                               |   |                                |       |                                                |   |   |   |
| Accounts payable                                                            |   | 437,904                             |       | 50,319                                              |   | 578,853 |   |
| Forgiveness of  accounts payable                                            |   | (3,400                              | )          | —                                              |   | (3,400 | ) |
| Accrued expenses                                                            |   | 151,999                             |       | (8,367                                              | )      | 161,631 |   |
| Income taxes  payable                                                       |   | 800                                 |       | 6,352                                               |   | 7,152 |   |
| Long term  obligation for accounts payable                                  |   | —                              |       | (13,773                                             | )      | — |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Net cash used in  operating activities                                      |   | (400,650                            | )          | (822,627                                            | )      | (1,687,707 | ) |
|                                                                        |   |                                |       |                                                |   |   |   |
| **Cash  flows from investing activities**                                   |   |                                |       |                                                |   |   |   |
| Purchase of  property, plant and equipment                                  |   | (1,956                              | )          | (12,906                                             | )      | (29,660 | ) |
| Acquisition of  intangible assets                                           |   | (59,574                             | )          | (16,899                                             | )      | (604,134 | ) |
| Loans made to  related party                                                |   | —                              |       | —                                              |   | (10,000 | ) |
| Repayments of  loans to related party                                       |   | —                              |       | —                                              |   | 10,000 |   |
| Acquisition of  subsidiary                                                  |   | —                              |       | (500,000                                            | )      | (500,000 | ) |
| Cash of  discontinued operations                                            |   | (19,999                             | )          | —                                              |   | (19,999 | ) |
| Cash of acquired  subsidiaries                                              |   | —                              |       | 17,261                                              |   | 17,261 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Net cash used in  investing activities                                      |   | (81,529                             | )          | (512,544                                            | )      | (1,136,532 | ) |
|                                                                        |   |                                |       |                                                |   |   |   |
| **Cash  flows from financing activities**                                   |   |                                |       |                                                |   |   |   |
| Bank overdraft                                                              |   | (1,214                              | )          | 1,214                                               |   | — |   |
| Increase  (decrease) in line of credit                                      |   | (98                                 | )          | 760                                                 |   | 662 |   |
| Proceeds from  note payable to officer/employee                             |   | 217,765                             |       | 26,500                                              |   | 244,265 |   |
| Payments of note  payable to officer                                        |   | —                              |       | (1,684                                              | )      | (1,684 | ) |
| Proceeds from  convertible debenture                                        |   | —                              |       | 500,000                                             |   | 500,000 |   |
| Proceeds from  notes payable                                                |   | —                              |       | 64,500                                              |   | 1,064,500 |   |
| Proceeds from  issuance of common stock, net                                |   | 245,000                             |       | 760,000                                             |   | 1,020,700 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Net cash  provided by financing activities                                  |   | 461,453                             |       | 1,351,290                                           |   | 2,828,443 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Net (decrease)  increase in cash                                            |   | (20,726                             | )          | 16,119                                              |   | 4,204 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Cash, beginning  of period                                                  |   | 24,930                              |       | 8,811                                               |   | — |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| Cash, end of  period                                                        |   | $                                   | 4,204      |                                                | $      | 24,930 |   | $ | 4,204 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| **Supplementary  disclosures**                                              |   |                                |       |                                                |   |   |   |
| Interest paid                                                               |   | $                                   | 666        |                                                | $      | 1,505 |   | $ | 2,171 |   |
| Income taxes  paid                                                          |   | $                                   | 7,728      |                                                | $      | — |   | $ | 7,728 |   |
|                                                                        |   |                                |       |                                                |   |   |   |
| **Non-cash  financing and investing activities**                            |   |                                |       |                                                |   |   |   |
| Note payable  paid through issuance of common stock                         |   | $                                   | —     |                                                | $      | — |   | $ | 1,000,000 |   |
| Investment in  subsidiary                                                   |   | $                                   | —     |                                                | $      | 808,778 |   | $ | 796,732 |   |
| Interest on note  payable                                                   |   | $                                   | —     |                                                | $      | — |   | $ | 17,825 |   |
| Forgiveness of  interest on note payable                                    |   | $                                   | —     |                                                | $      | — |   | $ | (17,825 | ) |
| Inter-company  receivable released in sale of subsidiary                    |   | $                                   | 22,021     |                                                | $      | — |   | $ | 22,021 |   |
| Common stock  acquired in sale of subsidiary                                |   | $                                   | (93,750    | )                                                   | $      | — |   | $ | (93,750 | ) |
| 8% debenture  released in sale of subsidiary                                |   | $                                   | (500,000   | )                                                   | $      | — |   | $ | (500,000 | ) |
| Note payable  released in sale of subsidiary                                |   | $                                   | (64,500    | )                                                   | $      | — |   | $ | (64,500 | ) |
| Accrued interest  released in sale of subsidiary                            |   | $                                   | (28,867    | )                                                   | $      | — |   | $ | (28,867 | ) |

 

The accompanying notesare an itegral part of these financial statements.

 

 

F-6

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A DevelopmentStage Company)

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

# **NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**TheCompany**

 

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. During the period August 16, 2000 to March31, 2001, the company had another wholly owned subsidiary, Penultimo, Inc. dbaAnchor Reinforcements which was incorporated in the state of California onJanuary 13, 1992.   Composite SolutionsInc. and subsidiaries were organized to develop, manufacture and market hightechnology products and processes to be utilized in key areas of existing andnew construction.

 

The Company is in the development stage and itsefforts through September 30, 2001 have been principally devoted to raisingadditional capital and negotiating with potential key personnel and leasingfacilities.  There is no assurance thatany benefit will result from such activities. The Company will continue to incur expenses and losses as it pursues itsdevelopment efforts.

 

**Basis ofPresentation**

 

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries.  Allsignificant inter-company transactions have been eliminated in consolidation.

 

**Cash and Cash Equivalents**

 

For purposes of the statements of cashflows, the Company considers cash instruments with original maturities of lessthan three months to be cash equivalents.

 

**Start-up Costs**

 

Costs ofstart-up activities, including organization costs, are expensed as incurred, inaccordance with Statement of Position (SOP) 98-5.

 

**Advertising**

 

Advertising costs are charged to expenseas incurred.

 

**Inventories**

 

Inventories are valued at lower of thefirst-in, first-out (FIFO) cost or market.

** **

 

F-7

----

 

**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.** **Bettermentsand large renewals, which extend the life of an asset, are capitalized whereas,repairs and maintenance, which do not increase the useful lives of property andequipment are charged to operations as incurred.

 

**IntangibleAssets**

 

Other assets include intangibles such as licensedtechnology, computer software and goodwill. Intangible assets are recorded at historical cost lessamortization.  Goodwill is amortized onthe straight-line method based on an estimated useful life of five years.  Other intangibles are amortized on thestraight-line method beginning on the date the assets are placed in service,over their estimated useful lives.  Thecost of software has been capitalized in accordance with SFAS 86, *Accounting for the Costs of Computer Software to BeSold, Leased, or Otherwise Marketed*and amortization is accountedfor at the greater of a ratio equal to current revenue divided by estimatedfuture gross revenue or on the straight-line method over a period of fiveyears.

 

**RevenueRecognition**

 

Revenue from the sale of product is recognized whenmaterials are shipped from stock. Revenues derived from contracts are accounted for on thepercentage-of-completion method of accounting. Revenue is recognized based on a ratio of the actual cost of workperformed to a current estimate of the total cost to complete a respectivecontract.

 

Expected profits realized on contracts are based onthe difference between estimates of total contract revenues and costs of completion.  These estimates are reviewed and revisedperiodically throughout the contract term, and adjustments to profits resultingfrom such revisions are recorded in the accounting period in which therevisions are made.  Profits arerecognized as the contract phase of the work is completed.  Losses on contracts are recorded in full asthey are identified.

### ** **

### **IncomeTaxes**

 

The Company accounts for income taxesunder SFAS 109, *Accounting for Income Taxes*.This statement requires an asset and liability approach to account for incometaxes.  The Company provides deferredincome taxes for temporary differences that will result in taxable ordeductible amounts in future years based on the reporting of certain costs indifferent periods for financial and income tax purposes.

 

 

F-8

----

 

**Use ofEstimates**

 

Thepresentation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the periodspresented.  Actual results may differsignificantly from those estimates.

 

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

 

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

 

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

 

*Cashand cash equivalents*:The carrying amounts reported in the balance sheet for cash and cashequivalents 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.

 

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

 

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

 

 

F-9

----

 

**Stock-Based Compensation**

 

In accordance with the provisions of SFAS123, the Company follows the intrinsic value based method of accounting asprescribed by APB 25, *Accounting for StockIssued to Employees*, for its stock-based compensation.

 

**NOTE 2 — ACQUISITIONS**

 

On June 23, 2000 the Company entered into a ShareExchange Agreement with Trans-Science Corporation, a California corporation anda company 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 and is being amortized over five years using thestraight-line method.

 

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 and is being amortized over five yearsusing the straight-line method.

 

**NOTE3 — 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 $500,000plus accrued interest of $28,199, and notes payable in the amount of $64,500,plus accrued interest of $4,441.

 

 

F-10

----

 

**NOTE 4 — INVENTORIES**

 

Inventories consist of the following at September 30,2001 and 2000:

 
|            |   | **2001** |   | **2000** |   |
|-----------------|--------|----------|--------|----------|--------|
| Raw material    |   | $        | — |     | $      | 108,055 |   |
| Work in process |   | —   |   | —   |   |
| Finished goods  |   | —   |   | 58,946   |   |
|            |   |     |   |     |   |
|            |   | $        | — |     | $      | 167,001 |   |

 

**NOTE 5 — PROPERTY, PLANT ANDEQUIPMENT**

** **

Property, plant and equipment consist of the followingat September 30, 2001 and 2000:

 
|                            |   | **2001** |   | **2000** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| Leasehold  improvements         |   | $        | 1,407  |     | $      | 1,407 |   |
| Office furniture  and equipment |   | 181,311  |   | 181,073  |   |
| Software                        |   | 13,983   |   | 13,983   |   |
| Machinery                       |   | —   |   | 65,902   |   |
|                            |   | 196,701  |   | 262,365  |   |
| Accumulated  depreciation       |   | (185,146 | )      | (167,474 | )      |
|                            |   |     |   |     |   |
| Property and  equipment, net    |   | $        | 11,555 |     | $      | 94,891 |   |

 

Depreciation expense for the years ended September 30,2001 and 2000 was $18,052 and $9,992, respectively.

 

**NOTE 6 -INTANGIBLE ASSETS**

 

On April 20, 1999 the Company entered into a licenseagreement with the Regents of the University of California San Diego (UCSD) fora license under patent rights to make, use, sell, offer for sale, importlicensed products, practice licensed methods, and to use certain technology.The agreement terminates on the later of the expiration date of thelongest-lived Patent Rights or the twenty-first anniversary of effectivedate.  A license fee of $40,000 was paidupon executionof theagreement.  The Company must also payfor one half of all past and future patent costs.  The license is being amortized over 17 years and at September 30,2001 and 2000 this license has a net value of $58,497 and $54,782,respectively.  Amortization expense forthe years ended September 30, 2001 and 2000 was $8,520 and $0, respectively.  Under the terms of the agreement, the Companymust pay to the licensor a royalty of 1.5% on net sales of the licensedproducts.

 

 

F-11

----

 

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. The agreement terminates on the later of theexpiration date of the longest-lived Patent Rights or the twenty-firstanniversary of the effective date. A license fee in the amount of $5,000 waspaid upon execution of the agreement. In addition, the Company is obligated to pay for one-half of all past andfuture patent costs.  The license is beingamortized over 20 years and at September 30, 2001 and 2000 this license has anet value of $94,715 and $55,799, respectively.  Amortization expense for the years ended September 30, 2001 and2000 was $8,423 and $0, respectively. Under the terms of the agreement, the Company must pay to the licensor aroyalty of 1.5% on net sales of the licensed products.

 

At September 30, 2001 and 2000 patent costs payable onthe license agreements was $77,776 and $17,445, respectively.

 

In January 1999 the Company acquired certain assetsfrom Trans-Science Corporation, a company under common control and subsequentlyacquired on July 7, 2000. Fire test data concerning overlay systems in the formof technical reports prepared by an independent laboratory in New York performedprior to the Company’s inception was purchased for cash in the amount of$13,979 from Trans-Science Corporation at its cost. At September 30, 2001 theseassets were 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.   In addition, during the yearended September 30, 1999, the Company paid Trans-Science Corporation $90,000for upgrade services on this software. At September 30, 2001 this asset was not placed in service.

 

On July 7, 2000 the Company acquired 100% of theoutstanding shares of common stock of Trans-Science Corporation, a companyunder common control through July 7, 2000. The Company recorded goodwill in the amount of $751,636 representing theexcess of the cost to acquire Trans-Science Corporation over the historicalcost of the net assets acquired.  Thegoodwill is being amortized over a period of five years.  Amortization expense for the years endedSeptember 30, 2001 and 2000 was $152,158 and $35,751, respectively.  At September 30, 2001 goodwill was impairedand a loss was recognized in the amount of $144,772.  At September 30, 2001 and 2000 this goodwill has a net value of$418,956 and $715,885, respectively.

 

 

F-12

----

 

On August 31, 2000 the Company acquired 100% of theoutstanding shares of common stock of Penultimo, Inc. dba AnchorReinforcements.  The Company recordedgoodwill in the amount of $291,050 representing the excess of the cost toacquire Penultimo, Inc. over the sum of the amounts assigned to identifiablenet assets acquired. On March 31, 2001, the Company transferred all of theoutstanding shares of common stock of Penultimo, Inc. dba Anchor Reinforcementsto an individual.  The goodwill wasbeing amortized over a period of five years. Amortization expense for the years ended September 30, 2001 and 2000 was$29,099 and $4,851, respectively.  AtSeptember 30, 2001 and 2000 this goodwill has a net value of $0 and $286,199,respectively.

 

**NOTE 7 -SHAREHOLDERS’ EQUITY**

 

**PreferredStock**

 

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 atSeptember 30, 2001 and 2000, respectively.

 

**CommonStock**

 

In December 1999, a trustee shareholder surrendered4,300,000 shares, which have been canceled. During the period December 1999 to June 2000 the Company issued 668,333shares of common stock under a private placement in exchange for $760,000 incash, net of offering costs.  On July 7,2000 the Company issued 953,371 shares of common stock valued at $715,028 inexchange for 100% of the outstanding shares of common stock of Trans-ScienceCorporation.  On August 31, 2000 the Companyissued 150,000 shares of common stock valued at $93,750 plus $500,000 in cashin exchange for 100% of the outstanding shares of common stock of Penultimo,Inc. dba Anchor Reinforcements.  OnSeptember 15, 2000 the Company issued 100,000 shares of common stock asfinder’s fees.  On September 28, 2000the Company issued 300,000 shares of common stock valued at $174,000 inexchange for services. On March 31, 2001, a shareholder surrendered 150,000shares  of common stock valued at$93,750.  Also on March 31, 2001, theCompany issued 200,000 shares of common stock as finder’s fees. At September30, 2001, the Company issued 1,061,760 shares of common stock valued at$128,333 in exchange for services. During the period October 2000 through December 2000 the Company issued725,000 shares of common stock valued at $245,000 in private placement. Thereare 14,208,464 and 12,371,704 shares of common stock issued and outstanding atSeptember 30, 2001 and 2000, respectively.

 

 

F-13

----

**NOTE 8 —LINE OF CREDIT**

 

The Company has a business secured open line of creditwith a bank in the amount of $50,000. The line of credit bears interest at theprime rate, as published in the *Wall StreetJournal*, plus 2.5% (9% at September 30, 2001).  At September 30, 2001 and 2000 balances duewere $51,396 and $51,494, respectively. Balances included accrued interest of$333  for the year ended September 30,2001, and a loan fee in the amount of $250 and accrued interest of $510 for theyear ended September 30,2000.

 

**NOTE 9 —NOTES PAYABLE**

 

On September 19, 2000 the Company issued a demand notepayable in the amount of $44,500, with interest at 12% per annum.  At September 30, 2000 there is a balance duein the amount of $44,500 plus accrued interest in the amount of $210.

 

On August 29, 2000 the Company issued a demand notepayable in the amount of $20,000, with interest at 12% per annum.  At September 30, 2000 there is a balance duein the amount of $20,000 plus accrued interest in the amount of $161.

 

On March 31, 2001 the notes payable and accruedinterest were released upon the disposal of Penultimo, Inc. dba AnchorReinforcements.

 

**NOTE 10 —LONG TERM OBLIGATIONS**

 

**ConvertibleDebenture**

 

On August 17, 2000 the Company issued an 8% convertibledebenture note in the amount of $500,000, which was due on August 17,2003.  Interest at the rate of 8% perannum was due on January 1 and July 1 each year until the principal amount ofthe note is paid in full.  At September30, 2000 there was a balance due in the amount of $500,000 plus accruedinterest in the amount of $4,822. On March 31, 2001 the debenture note andaccrued interest of $28,155 were released upon the disposal of Penultimo, Inc.dba Anchor Reinforcements.

 

 

F-14

----

 

**NOTE 11 -COMMITMENTS**

 

The Company and subsidiaries lease its office under anoperating lease agreement.  Futureminimum payment under the lease is as follows:

 
| **Year Ended**    |   |   |    |
|-------------------|--------|--------|---------|
| **September 30,** |   |   |    |
| 2002              |   | $      | 46,679  |   |
| 2003              |   | 48,546 |    |
| 2004              |   | 37,491 |    |
| Thereafter        |   | — |    |
|              |   |   |    |
|              |   | $      | 132,716 |   |

 

Rental expense was $97,814 and $70,731 for the yearsended September 30, 2001 and 2000, respectively, and $206,131 for the periodfrom October 27, 1997(inception) to September 30, 2001.

 

**NOTE 12 — EARNINGSPER SHARE**

 

The computations of basic and diluted earnings pershare from continuing operations for the years ended September 30, 2001 and2000 and the period October 27, 1997 (inception) to September 30, 2001 were asfollows:

 
|                                       |   |               |       |                |   | **October  20, 1997** |   |
|--------------------------------------------|--------|--------------------|------------|---------------------|--------|-----------------------|--------|
|                                       |   | **Year Ended**     |       | **(Inception)  to** |   |
|                                       |   | **September  30,** |       | **September  30,**  |   |
|                                       |   | **2001**           |       | **2000**            |   | **2001**              |   |
| **Loss  per common share, basic**          |   |               |       |                |   |                  |   |
|                                       |   |               |       |                |   |                  |   |
| Numerator                                  |   |               |       |                |   |                  |   |
| Net loss from  continuing operations       |   | $                  | (1,451,810 | )                   | $      | (1,111,522            | )      | $ | (3,150,185 | ) |
| (Loss) income  from discontinued operation |   | (93,267            | )          | 20,807              |   | (72,460               | )      |
| Gain on sale of  subsidiary                |   | 177,755            |       | —              |   | 177,755               |   |
| Net loss                                   |   | $                  | (1,367,322 | )                   | $      | (1,090,715            | )      | $ | (3,044,890 | ) |
|                                       |   |               |       |                |   |                  |   |
| Denominator                                |   |               |       |                |   |                  |   |
| Weighted-average  shares                   |   | 13,582,193         |       | 11,943,406          |   | 16,326,140            |   |

 

 

F-15

----

 

At September 30, 2001 and 2000, 72,712 and 0weighted-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 were the same as basic earnings per share atSeptember 30, 2001 and 2000.

 

**NOTE 13 -INCOME TAXES**

 

At September 30, 2001the Company has a net operatingloss carryforwards for tax purpose of approximately $1,400,000 which expiresthrough the year 2021. The Internal Revenue Code contains provisions which maylimit the loss carryforward available if significant changes in shareholderownership of the Company occur.

 

The components of the provision for income taxes forthe years ended September 30, 2001 and 2000 are as follows:

 
|                        |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|
| Current                     |   |     |   |     |   |
| Federal                     |   | $        | 68     |     | $      | — |   |
| State                       |   | 7,660    |   | 2,400    |   |
|                        |   | 7,728    |   | 2,400    |   |
| Deferred                    |   |     |   |     |   |
| Federal                     |   | —   |   | —   |   |
| State                       |   | —   |   | —   |   |
|                        |   | —   |   | —   |   |
| Provision for  income taxes |   | $        | 7,728  |     | $      | 2,400 |   |

 

The components of the net deferred tax assets were asfollows:

 
|                      |   | **September  30,** |    |
|---------------------------|--------|--------------------|---------|
|                      |   | **2001**           |    | **2000** |   |
| Deferred tax  assets      |   |               |    |   |   |
| Start-up costs            |   | $                  | 714,432 |   | $ | 714,432 |   |
| Organization  costs       |   | 398                |    | 398 |   |
| Syndication  costs        |   | 1,168              |    | 1,168 |   |
| Net operating  loss       |   | 592,496            |    | 7,571 |   |
|                      |   | 1,308,494          |    | 723,569 |   |
| Deferred tax  liabilities |   |               |    |   |   |
| State income  taxes       |   | 91,620             |    | 51,165 |   |
|                      |   | 1,216,874          |    | 672,404 |   |
| Less valuation  allowance |   | (1,216,874         | )       | (672,404 | ) |
| Net deferred tax  assets  |   | $                  | —  |   | $ | — |   |

 

 

F-16

----

 

**NOTE 14 -RELATED PARTY TRANSACTIONS**

 

**Stock-BasedCompensation**

 

During the year ended September 30, 2001, the Companyissued 643,937 shares of common stock with value of $94,407 to certainemployees in exchange for compensation.

 

**NotesPayable**

 

On February 14, 2000, a director advanced the Company$25,000.  The principal plus interest of$243 was paid in full in April 2000. On February 24, 2000 the Company issued anunsecured promissory note to borrow up to $75,000 from the director. The notebears an interest rate of 7% per annum on the outstanding advances.  On March 31, 2001 the note was canceled uponsale of a subsidiary. In the period July 20, 2000 through August 18, 2000, thedirector advanced the Company $26,316 of which $1,500 was repaid, and thebalance of $24,816 and accrued interest of $292 were outstanding at September30, 2000.

 

In October and November of 2000, an officer advancedthe Company $5,680. The loan was paid in full at September 30, 2001.

 

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. As ofSeptember 30, 2001, principal in the amount of $159,439 and accrued interest of$10,696 were outstanding.

 

On January 15, 2001, the Company issued a promissory notepayable to an employee in the amount of $10,203 for various advances to theCompany. The Company paid back the note in full within 30 days with no interestcharged.

 

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 September 30,2001, principal in the amount of $45,445 and accrued interest of $1,663 wereoutstanding.

 

On April 23, 2001, the Company issued a promissorynote payable to an employee in the amount of $41,945. The principal is to beadvanced to the Company in various amounts. As of September 30, 2001, loanbalance of $36,912 and accrued interest of $1,578 were outstanding. Principaland interest at 12% are to be paid nine months from the date of the latestadvance.

 

In July and September of 2001 an officer of theCompany loaned $785 to Trans-Science Corporation to cover operating costs. Thisadvance was outstanding at September 30, 2001.

 

 

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**ConsultingAgreements**

 

The Company has several consultingagreements with shareholders and officers for management, marketing and technicalservices. Consulting fee for years ended September 30, 2001 and 2000 were$386,978 and $188,900, respectively.

 

**Representationand Advisory Agreement**

 

On March 6, 2001, the Company enteredinto a Representation and Advisory Agreement (the “Agreement”) with AF Capitaland Ace International Domaine (collectively referred as “AFA”) for corporatefinancing and investment advisory services. According to the agreement, theCompany would pay a non-refundable engagement retainer of $50,000, of which$15,000 was payable on or before March 14, 2001 with the balance of $35,000payable in full on April 15, 2001. In addition the Agreement required theCompany to make monthly retainer of $10,000 for twelve months beginning onApril 1, 2001. Total amount of such retainers shall be payable in full upon theCompany receiving at least $2,000,000 in financing. The Company is alsorequired to pay a representation and placement fee equal to 10% of the amountof capital raised, and warrants to purchase shares of common stock of theCompany equal to 15% of the number of shares of common stock and common stockequivalents issued pursuant to the Agreement.

 

Effective July 18, 2001, the Agreementwas terminated by the Company. According to the terms of the Agreement, in the event of termination,the Company would not be liable to pay the monthly payments of $10,000 afterthe termination date. The $35,000 balance of the non-refundable engagementretainer remains an unpaid liability of the Company at September 30, 2001.

 

On July 3, 2001 Michael Perlman,president and chief executive officer of Ace International Domaine wasappointed president and chief executive officer of the Company.  Initial compensation for prior andcontinuing services in the amount of $17,500 will offset the $35,000 due to AceInternational Domaine.

 

**NOTE 15 — STRATEGIC ALLIANCE AGREEMENT**

 

On December 7, 2000 the Company enteredinto a Global Alliance Agreement (the “Agreement”) with The Prime Group(“Prime”) located in Seoul, Korea. According to the terms of the Agreement, the Company would receive a 15%equity position in The Prime Group.  ThePrime Group entered into a subscription agreement to purchase between 4,166,667and 5,000,000 shares of the Company’s common stock for cash in the amount of$2,000,000.  The first 2,500,000 sharesof common stock was to be equally issued quarterly at $0.40 per share for atotal consideration of $1,000,000.  Asecond 2,500,000 shares of common stock was to be issued at $0.40 per share ifpayment was received by May 31, 2001 or 1,666,667 was to be issued at $0.60 pershare if payment was received after May 31,2001.

 

 

F-18

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In December 2000, the Company received$250,000 representing a subscription for 625,000 shares of common stock.  On January 4, 2001 the Company issued500,000 shares of common stock valued at $200,000.  However, on February 28, 2001 the agreement was terminated byPrime.  The Company did not issue theremaining 125,000 shares of common stock and has recorded $50,000 as aliability at September 30, 2001.

 

**NOTE 16 — STOCK INCENTIVE PLAN**

 

On December 1, 2000 the Company andsubsidiaries’ Board of Directors adopted the 2000 Stock Incentive Plan pursuantto which incentive stock options or nonstatutory stock options to purchase upto 1,000,000 shares of common stock may be granted to employees, directors and consultants.  Stock options may be exercisable up to ten years from the grantdate.  Stock options vest over serviceperiods that range from zero to five years.

 

A summary of the Company’s stock optionsfor the year ended September 30, 2001 and 2000 is as follow:

 
|                            |   | **2001**    |   | **2000**            |   |
|---------------------------------|--------|-------------|--------|---------------------|--------|
|                            |   |        |   | **Weighted**        |   |   |   | **Weighted** |   |
|                            |   |        |   | **Average**         |   |   |   | **Average** |   |
|                            |   | **Options** |   | **Exercise  Price** |   | **Options** |   | **Exercise  Price** |   |
| Outstanding,  beginning of year |   | —      |   | $                   | — |   | — |   | $ | — |   |
| Granted                         |   | 220,000     |   | 0.27                |   | — |   | — |   |
| Exercised                       |   | —      |   | $                   | — |   | — |   | — |   |
| Cancelled                       |   | (120,000    | )      | 0.40                |   | — |   | — |   |
| Outstanding, end  of year       |   | 100,000     |   |                |   | — |   |   |   |
|                                 |        |             |        |                     |        |  |  |  |  |  |  |

 

**NOTE 17 —GOING CONCERN**

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company’s financial positionand operating results raise substantial doubt about the Company’s ability tocontinue as a going concern, as reflectedby the net loss of $1,367,322 for the year ended September 30, 2001 and lossesof $3,045,080 accumulated from October 20, 1997 (Inception) to September 30,2001. In addition the Company’s current liabilities exceeds current assets by$1,035,403 at September 30, 2001. The ability of the Company to continue as agoing concern is dependent upon commencing operations, developing sales andobtaining additional capital and financing. The consolidated financialstatements do not include any adjustments that might be necessary if theCompany is unable to continue as a going concern. The Company is currentlyseeking 

 

 

F-19

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additionalcapital to allow it to begin its planned operations.

 

**Note 18 -Subsequent Events**

 

**NotePayable**

 

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

 

**StockIssued In Exchange For Services**

 

During the period November 2001 through December2001, the Company issued 808,155 shares of common stock valued at $135,611 inexchange for compensation and 120,000 shares of common stock valued at $24,000in exchange for consulting fees.

 

**StockIssued In Private Placement**

 

On January 11, 2002, the Company issued500,000 shares of common stock valued at $95,000 in private placement.

 

 

F-20

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**NOTE 19 —FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The estimated fair values of the Company’s financialinstruments are as follows:

 
|                            |   | **September  30, 2001** |   | **September  30, 2000** |   |
|---------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                            |   | **Carrying**            |   | **Fair**                |   | **Carrying** |   | **Fair** |   |
|                            |   | **Value**               |   | **Value**               |   | **Value** |   | **Value** |   |
| Cash                            |   | $                       | 4,204  |                    | $      | 4,204 |   | $ | 24,930 |   | $ | 24,930 |   |
| Accounts  receivable            |   | —                  |   | —                  |   | 79,177 |   | 79,177 |   |
| Related party  receivables      |   | —                  |   | —                  |   | 9,920 |   | 9,920 |   |
| Accounts payable                |   | 552,398                 |   | 552,398                 |   | 178,848 |   | 178,848 |   |
| Related party  accounts payable |   | 50,000                  |   | 50,000                  |   | — |   | — |   |
| Line of credit                  |   | 51,396                  |   | 51,396                  |   | 51,494 |   | 51,494 |   |
| Notes payable                   |   | —                  |   | —                  |   | 64,500 |   | 64,500 |   |
| Related party  notes payable    |   | 242,581                 |   | 242,581                 |   | 24,816 |   | 24,816 |   |
| Accrued expenses                |   | 140,830                 |   | 140,830                 |   | 22,250 |   | 22,250 |   |
| Convertible  debenture          |   | —                  |   | —                  |   | 500,000 |   | 429,309 |   |
|                                 |        |                         |        |                         |        |  |  |  |  |  |  |  |  |

 

 

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