** **

**SECURITIES& EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 

**ý****   QUARTERLY REPORT PURSUANT TO SECTION13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended December 31,2003**

** **

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

** **

**Commission File No. 000-24551**

 

**COMPOSITESOLUTIONS, INC.**

(Name of Small Business Issuer in itsCharter)

 

| **Florida**                                                   |   | **65-0790758**                      |
|---------------------------------------------------------------|--------|-------------------------------------|
| State or other jurisdiction of  incorporation or organization |   | I.R.S. Employer  Identification No. |
|                                                          |   |                                |
| **3252 Holiday Court, Suite 206, La Jolla,  California**      |   | **92037**                           |
| Address of principal executive office                         |   | Zip Code                            |
|                                                          |   |                                |
| Issuer’s telephone number:  **(858)  459-4843**     |

 

 

Former name and address, if changed since last report

 

Check whether the issuer has (1) filed all reports required by Section13 or 15(d) of the Exchange Act during the past 12 months, and (2) been subjectto such filing requirements for the past ninety (90) days.  Yes  ý   No  o

 

 

As of December 31, 2003, 21,670,555 shares of Common Stock wereoutstanding.

 

 

----

 

**PART 1 - FINANCIALINFORMATION**

 

**Item 1. FinancialStatements.**

 

The following consolidated financial statements contain informationregarding the Company’s balance sheets, operating results, stockholders’ equity,and cash flows for the quarters ended December 31, 2003 and 2002, and theperiod October 20, 1997 (inception) to December 31, 2003.

 

 

**INDEX TO FINANCIALSTATEMENTS**

 

 
| Balance  Sheets                                     |   |
|-----------------------------------------------------|--------|
|                                                |   |
| Statements of Operations                            |   |
|                                                |   |
| Statements of Changes in Stockholders’  Equity |   |
|                                                |   |
| Statements of Cash Flows                            |   |
|                                                |   |
| Notes to Financial Statements                       |   |

 

2

----

 

**COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

**ConsolidatedBalance Sheets**

 
|                                                                                                     |   | **December 31,  2003** |       | **September 30,  2003** |       |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-------------------------|------------|
|                                                                                                     |   | **(unaudited)**        |       | **(audited)**           |       |
| **ASSETS**                                                                                               |   |                   | ** ** |                    | ** ** |
| **Current assets**                                                                                       |   |                   | ** ** |                    | ** ** |
| Cash                                                                                                     |   | $                      | 190,365    |                    | $          | 49,495 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $0                                       |   | 274,605                |       | —                  |       |
| Costs in excess of billings                                                                              |   | 1,963                  |       | 6,832                   |       |
| Prepaid expenses                                                                                         |   | 1,786                  |       | 416                     |       |
| Total current assets                                                                                     |   | 468,719                |       | 56,743                  |       |
|                                                                                                     |   |                   |       |                    |       |
| **Property, and  equipment, net**                                                                        |   | —                 |       | 649                     |       |
|                                                                                                     |   |                   |       |                    |       |
| **Other assets**                                                                                         |   |                   | ** ** |                    | ** ** |
| Deposits                                                                                                 |   | 10,025                 |       | 10,071                  |       |
| Intangible assets, net                                                                                   |   | 420,931                |       | 427,684                 |       |
| Goodwill                                                                                                 |   | 418,956                |       | 418,956                 |       |
| Total assets                                                                                             |   | $                      | 1,318,631  |                    | $          | 914,103 |   |
|                                                                                                     |   |                   |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                            |   |                   | ** ** |                    | ** ** |
| **Current liabilities**                                                                                  |   |                   | ** ** |                    | ** ** |
| Accounts payable                                                                                         |   | $                      | 269,305    |                    | $          | 266,775 |   |
| Billings in excess of costs                                                                              |   | 324,561                |       | 131,169                 |       |
| Line of credit                                                                                           |   | —                 |       | 51,887                  |       |
| Employee and director payable                                                                            |   | 80,592                 |       | 62,415                  |       |
| Related party payable                                                                                    |   | 284,016                |       | 132,205                 |       |
| Current portion of long-term debt                                                                        |   | 23,992                 |       | —                  |       |
| Related party notes payable                                                                              |   | 46,376                 |       | 46,376                  |       |
| Accrued expenses                                                                                         |   | 153,884                |       | 181,817                 |       |
| Accrued losses on future contracts                                                                       |   | 3,013                  |       | 3,013                   |       |
| Income taxes payable                                                                                     |   | 19,985                 |       | 24,881                  |       |
| Total current liabilities                                                                                |   | 1,205,724              |       | 900,538                 |       |
|                                                                                                     |   |                   |       |                    |       |
| **Long term debt**                                                                                       |   |                   | ** ** |                    | ** ** |
| Note payable, less current portion                                                                       |   | 23,754                 |       | —                  |       |
| Total liabilities                                                                                        |   | 1,229,478              |       | 900,538                 |       |
|                                                                                                     |   |                   |       |                    |       |
| **Stockholders’  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; 21,670,555 shares issued and outstanding |   | 2,166                  |       | 2,166                   |       |
| Additional paid in capital                                                                               |   | 5,120,957              |       | 5,120,957               |       |
| Accumulated deficit                                                                                      |   | (5,033,970             | )          | (5,109,558              | )          |
| Total stockholders’ equity                                                                          |   | 89,153                 |       | 13,565                  |       |
| Total liabilities and stockholders’ equity                                                          |   | $                      | 1,318,631  |                    | $          | 914,103 |   |

 

See accompanying notes.

 

3

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**COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

**ConsolidatedStatements of Operations**

(Unaudited)

 
|                                                                                                  |   | **Three Months Ended  December 31,** |       | **October 20, 1997  (Inception)  to  December 31,** |       |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                                                  |   | **2003**                             |       | **2002**                                            |       | **2003** |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Contract revenue**                                                                                  |   | $                                    | 687,170    |                                                | $          | 66,908 |   | $ | 1,422,725 |   |
|                                                                                                  |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| **Cost of sales**                                                                                     |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Salaries and consulting fees                                                                          |   | 15,600                               |       | 37,677                                              |       | 472,575 |   |
| Consulting fees - related party                                                                       |   | 52,165                               |       | —                                              |       | 261,803 |   |
| Materials                                                                                             |   | 304,022                              |       | 327                                                 |       | 329,723 |   |
| Materials - related party                                                                             |   | 166,447                              |       | —                                              |       | 243,234 |   |
| Cost of sales                                                                                         |   | 538,234                              |       | 38,004                                              |       | 1,307,335 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Gross profit                                                                                          |   | 148,936                              |       | 28,904                                              |       | 115,390 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Expenses**                                                                                          |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Consulting fees                                                                                       |   | —                               |       | 85,107                                              |       | 628,354 |   |
| Consulting fees - related party                                                                       |   | 16,250                               |       | 80,800                                              |       | 1,056,266 |   |
| Depreciation and amortization                                                                         |   | 12,631                               |       | 13,196                                              |       | 390,761 |   |
| General and administrative expenses                                                                   |   | 27,110                               |       | 34,733                                              |       | 1,121,290 |   |
| Organizational expenses                                                                               |   | —                               |       | —                                              |       | 514 |   |
| Professional fees - other                                                                             |   | 1,001                                |       | 3,035                                               |       | 411,550 |   |
| Professional fees - related party                                                                     |   | 381                                  |       | 3,073                                               |       | 10,396 |   |
| Salaries                                                                                              |   | 10,920                               |       | 10,920                                              |       | 1,305,629 |   |
| Provision for future contract losses                                                                  |   | —                               |       | —                                              |       | 3,013 |   |
| Impairment loss                                                                                       |   | —                               |       | —                                              |       | 237,248 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Total expenses                                                                                        |   | 68,293                               |       | 230,864                                             |       | 5,165,021 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Income (loss) from operations                                                                         |   | 80,643                               |       | (201,960                                            | )          | (5,049,631 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Other income  (expense)**                                                                           |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Interest income                                                                                       |   | —                               |       | —                                              |       | 8,363 |   |
| Interest income - forgiveness of debt                                                                 |   | —                               |       | —                                              |       | 17,825 |   |
| Other Income                                                                                          |   | —                               |       | —                                              |       | 96,058 |   |
| Gain on forgiveness of debt                                                                           |   | —                               |       | —                                              |       | 8,261 |   |
| Other expenses                                                                                        |   | (1,133                               | )          | (569                                                | )          | (23,452 | ) |
| Loss on disposal of assets                                                                            |   | —                               |       | —                                              |       | (190 | ) |
| Interest expense                                                                                      |   | (2,122                               | )          | (11,563                                             | )          | (148,869 | ) |
| Loss on forgiveness of debt                                                                           |   | —                               |       | —                                              |       | (11,021 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Total other income (expense)                                                                          |   | (3,255                               | )          | (12,132                                             | )          | (53,025 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Income (loss) before provision for income  taxes                                                      |   | 77,388                               |       | (214,092                                            | )          | (5,102,656 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Provision for income taxes                                                                            |   | 1,800                                |       | —                                              |       | 36,609 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Income (loss) from  continuting operations**                                                        |   | 75,588                               |       | (214,092                                            | )          | (5,139,265 | ) |
|                                                                                                  |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| **Discontinued  operations**                                                                          |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Income from discontinued operations  (including gain on sale of subsidiary in the amount of $177,755) |   | —                               |       | —                                              |       | 105,295 |   |
|                                                                                                  |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| **Net income (loss)**                                                                                 |   | $                                    | 75,588     |                                                | $          | (214,092 | ) | $ | (5,033,970 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Income (loss) per  common share basic**                                                             |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Net income (loss) from continuing  operations                                                         |   | $                                    | 0.00       |                                                | $          | (0.01 | ) | $ | (0.31 | ) |
| Income from discontinued operations                                                                   |   | $                                    | —     |                                                | $          | — |   | $ | 0.01 |   |
| Income (loss) per share basic                                                                         |   | $                                    | 0.00       |                                                | $          | (0.01 | ) | $ | (0.30 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Weighted average number of shares basic                                                               |   | 21,670,555                           |       | 18,805,912                                          |       | 16,708,603 |   |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| **Income (loss) per  common share diluted**                                                           |   |                                 | ** ** |                                                | ** ** |   | ** ** |
| Net income (loss) from continuing  operations                                                         |   | $                                    | 0.00       |                                                | $          | (0.01 | ) | $ | (0.31 | ) |
| Income from discontinued operations                                                                   |   | $                                    | —     |                                                | $          | — |   | $ | 0.01 |   |
| Income (loss) per share basic                                                                         |   | $                                    | 0.00       |                                                | $          | (0.01 | ) | $ | (0.30 | ) |
|                                                                                                  |   |                                 |       |                                                |       |   |   |
| Weighted average number of shares diluted                                                             |   | 21,870,555                           |       | 18,805,912                                          |       | 16,708,603 |   |

 

See accompanying notes.

 

4

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**COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

ConsolidatedStatements of Changes in Stockholders’Equity

(unaudited)

 
|                                                    |   |             |       |           |       |                |       | **Deficit**            |       |       |       |
|---------------------------------------------------------|--------|------------------|------------|----------------|------------|---------------------|------------|------------------------|------------|------------|------------|
|                                                    |   |             |       |           |       |                |       | **Accumulated**        |       |       |       |
|                                                    |   |             |       |           |       |                |       | **During the**         |       | **Total**  |       |
|                                                    |   | **Common Stock** |       | **Additional** |       | **Development**     |       | **Stockholders’** |       |
|                                                    |   | **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    |       |
| Common stock issued in acquisitions                     |   | 1,103,371        |       | 110            |       | 808,668             |       |                   |       | 808,778    |       |
| Common stock issued for finder’s fee               |   | 100,000          |       | 10             |       | (10                 | )          |                   |       | —     |       |
| Common stock issued in exchange for  services           |   | 300,000          |       | 30             |       | 173,970             |       |                   |       | 174,000    |       |
|                                                    |   |             |       |           |       |                |       |                   |       |       |       |
| 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     | )          |
|                                                    |   |             |       |           |       |                |       |                   |       |       |       |
| Common stock issued for cash                            |   | 2,339,047        |       | 234            |       | 227,266             |       |                   |       | 227,500    |       |
| Common stock issued for compensation                    |   | 1,183,149        |       | 118            |       | 206,391             |       |                   |       | 206,509    |       |
| Common stock issued in exchange for  services           |   | 514,034          |       | 51             |       | 91,568              |       |                   |       | 91,619     |       |
| Common stock issued for interest due                    |   | 47,350           |       | 5              |       | 5,677               |       |                   |       | 5,682      |       |
|                                                    |   |             |       |           |       |                |       |                   |       |       |       |
| Net loss                                                |   |             |       |           |       |                |       | (1,166,742             | )          | (1,166,742 | )          |
|                                                    |   |             |       |           |       |                |       |                   |       |       |       |
| **Balance, September  30, 2002**                        |   | 18,292,044       |       | 1,829          |       | 3,570,324           |       | (4,211,822             | )          | (639,669   | )          |
|                                                    |   |             | ** ** |           | ** ** |                | ** ** |                   | ** ** |       | ** ** |
| Common stock issued for cash                            |   | 2,404,696        |       | 240            |       | 365,060             |       |                   |       | 365,300    |       |
| Common stock issued to settle accounts  payable         |   | 582,024          |       | 58             |       | 70,325              |       |                   |       | 70,383     |       |
| Common stock issued for services                        |   | 400,000          |       | 40             |       | 58,960              |       |                   |       | 59,000     |       |
| Common stock issued through exercise of  options        |   | 71,428           |       | 7              |       | 4,993               |       |                   |       | 5,000      |       |
| Common stock issued for interest due                    |   | 90,363           |       | 9              |       | 14,412              |       |                   |       | 14,421     |       |
| Common stock issued for compensation                    |   | 50,000           |       | 5              |       | 8,495               |       |                   |       | 8,500      |       |
| Common stock surrendered                                |   | (220,000         | )          | (22            | )          | 22                  |       |                   |       | —     |       |
| Recapitalization of accounts payable and  accrued wages |   |             |       |           |       | 1,028,366           |       |                   |       | 1,028,366  |       |
|                                                    |   |             | ** ** |           | ** ** |                | ** ** |                   | ** ** |       | ** ** |
| Net loss                                                |   |             |       |           |       |                |       | (897,736               | )          | (897,736   | )          |
|                                                    |   |             | ** ** |           | ** ** |                | ** ** |                   | ** ** |       | ** ** |
| **Balance, September  30, 2003**                        |   | 21,670,555       |       | 2,166          |       | 5,120,957           |       | (5,109,558             | )          | 13,565     |       |
|                                                    |   |             | ** ** |           | ** ** |                | ** ** |                   | ** ** |       | ** ** |
| Net income                                              |   |             |       |           |       |                |       | 75,588                 |       | 75,588     |       |
|                                                    |   |             |       |           |       |                |       |                   |       |       |       |
| **Balance, December  31, 2003**                         |   | 21,670,555       |       | $              | 2,166      |                | $          | 5,120,957              |       | $          | (5,033,970 | ) | $ | 89,153 |   |
|                                                         |        |                  |            |                |            |                     |            |                        |            |            |            |  |  |  |  |  |  |

 

See accompanying notes.

 

5

----

 

**COMPOSITE SOLUTIONS, INC. AND SUBSIDIARIES**

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

 
|                                                                                                |   |                   |       |             |       | **October 20, 1997** |       |
|-----------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------|------------|----------------------|------------|
|                                                                                                |   |                   |       |             |       | **(Inception)**      |       |
|                                                                                                |   | **Three Months Ended** |       | **to**           |       |
|                                                                                                |   | **December 31,**       |       | **December 31,** |       |
|                                                                                                |   | **2003**               |       | **2002**         |       | **2003**             |       |
|                                                                                                |   |                   |       |             |       |                 |       |
| **Cash flows from  operating activities**                                                           |   |                   | ** ** |             | ** ** |                 | ** ** |
| Net income (loss)                                                                                   |   | $                      | 75,588     |             | $          | (214,092             | )          | $ | (5,033,970 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                   |       |             |       |                 |       |
| Depreciation and amortization                                                                       |   | 12,631                 |       | 13,196           |       | 390,761              |       |
| Loss on disposal of assets                                                                          |   | —                 |       | —           |       | 190                  |       |
| Common stock issued in exchange for  services                                                       |   | —                 |       | —           |       | 361,180              |       |
| Common stock issued for interest due                                                                |   | —                 |       | —           |       | 20,103               |       |
| Common stock issued for compensation                                                                |   | —                 |       | —           |       | 309,516              |       |
| Forgiveness of accounts payable                                                                     |   | —                 |       | —           |       | (3,400               | )          |
| Pre-acquisition income                                                                              |   | —                 |       | —           |       | 47                   |       |
| Loss from discontinued operations                                                                   |   | —                 |       | —           |       | 93,267               |       |
| Gain on disposal of subsidiary                                                                      |   | —                 |       | —           |       | (177,755             | )          |
| Impairment loss                                                                                     |   | —                 |       | —           |       | 237,248              |       |
| Provision for future contract losses                                                                |   | —                 |       | —           |       | 3,013                |       |
| (Increase) decrease in operating assets                                                             |   |                   |       |             |       |                 |       |
| Accounts receivable                                                                                 |   | (274,605               | )          | (25,000          | )          | (257,112             | )          |
| Related party receivable                                                                            |   | —                 |       | —           |       | (22,021              | )          |
| Costs in excess of billings                                                                         |   | 4,869                  |       | —           |       | (1,963               | )          |
| Inventory                                                                                           |   | —                 |       | —           |       | (2,055               | )          |
| Prepaid expenses and other assets                                                                   |   | (1,370                 | )          | (31,588          | )          | (1,586               | )          |
| Employee advances                                                                                   |   | —                 |       | —           |       | —               |       |
| Deposit                                                                                             |   | 46                     |       | —           |       | (10,329              | )          |
| Increase (decrease) in operating  liabilities                                                       |   |                   |       |             |       |                 |       |
| Accounts payable                                                                                    |   | 2,530                  |       | 8,364            |       | 1,271,404            |       |
| Employee and director payable                                                                       |   | 18,177                 |       | —           |       | 273,570              |       |
| Billings in excess of costs                                                                         |   | 193,392                |       | 65,241           |       | 324,561              |       |
| Related party payable                                                                               |   | 151,811                |       | —           |       | 198,339              |       |
| Accrued expenses                                                                                    |   | (28,914                | )          | 159,783          |       | 234,873              |       |
| Income taxes payable                                                                                |   | (4,896                 | )          | —           |       | 23,937               |       |
| Net cash provided by (used in) operating  activities                                                |   | 149,259                |       | (24,096          | )          | (1,768,182           | )          |
|                                                                                                |   |                   |       |             |       |                 |       |
| **Cash flows from  investing activities**                                                           |   |                   | ** ** |             | ** ** |                 | ** ** |
| Purchase of property, plant and equipment                                                           |   | —                 |       | —           |       | (29,660              | )          |
| Acquisition of intangible assets                                                                    |   | (5,229                 | )          | (2,276           | )          | (633,006             | )          |
| Loans made to related party                                                                         |   | —                 |       | —           |       | (10,000              | )          |
| Repayments of loans to related party                                                                |   | —                 |       | —           |       | 10,000               |       |
| Acquisition of subsidiary                                                                           |   | —                 |       | —           |       | (500,000             | )          |
| Cash of discontinued operations                                                                     |   | —                 |       | —           |       | (19,999              | )          |
| Cash of acquired subsidiaries                                                                       |   | —                 |       | —           |       | 17,261               |       |
| Net cash used in investing activities                                                               |   | (5,229                 | )          | (2,276           | )          | (1,165,404           | )          |
|                                                                                                |   |                   |       |             |       |                 |       |
| **Cash flows from  financing activities**                                                           |   |                   | ** ** |             | ** ** |                 | ** ** |
| Increase (decrease) in line of credit                                                               |   | (1,153                 | )          | —           |       | —               |       |
| Proceeds from notes payable                                                                         |   | —                 |       | —           |       | 1,064,500            |       |
| Payment of notes payable                                                                            |   | (2,007                 | )          | —           |       | (82,507              | )          |
| Proceeds from notes payable to related  parties                                                     |   | —                 |       | 184              |       | 284,181              |       |
| Payments of notes payable to related  parties                                                       |   | —                 |       | (41,050          | )          | (247,669             | )          |
| Proceeds from convertible debenture                                                                 |   | —                 |       | —           |       | 500,000              |       |
| Proceeds from issuance of common stock, net                                                         |   | —                 |       | 70,300           |       | 1,613,500            |       |
| Net cash (used in) provided by financing  activities                                                |   | (3,160                 | )          | 29,434           |       | 3,132,005            |       |
|                                                                                                |   |                   |       |             |       |                 |       |
| Net increase in cash                                                                                |   | 140,870                |       | 3,062            |       | 190,365              |       |
| Cash, beginning of period                                                                           |   | 49,495                 |       | 50,521           |       | —               |       |
| Cash, end of period                                                                                 |   | $                      | 190,365    |             | $          | 53,583               |       | $ | 190,365 |   |
|                                                                                                |   |                   |       |             |       |                 |       |
| **Supplementary  disclosures**                                                                      |   |                   | ** ** |             | ** ** |                 | ** ** |
| Interest paid                                                                                       |   | $                      | 1,052      |             | $          | —               |       | $ | 27,137 |   |
| Income taxes paid                                                                                   |   | $                      | 6,696      |             | $          | —               |       | $ | 17,424 |   |
|                                                                                                |   |                   |       |             |       |                 |       |
| **Non-cash financing  and investing activities**                                                    |   |                   | ** ** |             | ** ** |                 | ** ** |
| Note payable paid through issuance of  common stock                                                 |   | $                      | —     |             | $          | —               |       | $ | 1,000,000 |   |
| Note payable paid through exercise of  option                                                       |   | $                      | —     |             |       |                 |       | $ | 5,000 |   |
| Investment in subsidiary                                                                            |   | $                      | —     |             | $          | —               |       | $ | 796,732 |   |
| Interest on note payable                                                                            |   | $                      | —     |             | $          | —               |       | $ | 17,825 |   |
| Forgiveness of interest on note payable                                                             |   | $                      | —     |             | $          | —               |       | $ | (17,825 | ) |
| Inter-company receivable released in sale  of subsidiary                                            |   | $                      | —     |             | $          | —               |       | $ | 22,021 |   |
| Common stock acquired in sale of subsidiary                                                         |   | $                      | —     |             | $          | —               |       | $ | (93,750 | ) |
| 8% debenture released in sale of subsidiary                                                         |   | $                      | —     |             | $          | —               |       | $ | (500,000 | ) |
| Note payable released in sale of subsidiary                                                         |   | $                      | —     |             | $          | —               |       | $ | (64,500 | ) |
| Accrued interest released in sale of  subsidiary                                                    |   | $                      | —     |             | $          | —               |       | $ | (28,867 | ) |
| Common stock issued to settle accounts  payable                                                     |   | $                      | —     |             | $          | 70,383               |       | $ | 70,383 |   |
| Recapitalization of accounts payable and  accrued wages                                             |   | $                      | —     |             | $          | —               |       | $ | (1,028,366 | ) |
| Line of credit converted into note payable                                                          |   | $                      | 49,752     |             | $          | —               |       | $ | 49,752 |   |
|                                                                                                     |        |                        |            |                  |            |                      |            |  |  |  |  |

 

See accompanying notes.

 

6

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**COMPOSITESOLUTIONS, INC. AND SUBSIDIARIES**

 (A Development Stage Company)

**NOTESTO CONSOLIDATED****FINANCIALSTATEMENTS**

 

**NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

## ***TheCompany***

 

Composite Solutions, Inc. (the “Company”), formerly JS Business Works,Inc., was incorporated in the state of Florida on October 20, 1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions, Inc., incorporated in the state of Nevada onDecember 8, 1998 and Trans-Science Corporation, incorporated in the state ofCalifornia on September 15, 1980.  Athird wholly owned subsidiary, Penultimo, Inc. dba Anchor Reinforcements,incorporated in the state of California on January 13, 1992, was sold on March31, 2001.  The Company is also a generalpartner in CSI Construction Services, an inactive majority ownedpartnership.  Composite Solutions, Inc.and subsidiaries were organized to develop, manufacture and market hightechnology products and processes in key areas of existing and new construction.

 

The Company is in the development stage and its efforts through December 31, 2003 have beenprincipally devoted to raising additional capital and negotiating withpotential key personnel and leasing facilities.  There is no assurance that any benefit will result from suchactivities.  The Company will continueto incur expenses and losses as it pursues its development efforts.

 

**Basis of Presentation**

 

The consolidated financial statements include the accounts of theCompany and its subsidiaries.  Allsignificant intercompany transactions have been eliminated in consolidation.

 

**Unaudited Financial Statements**

 

The accompanying unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and according to regulatory requirements ofArticle 10 of Regulation S-X for form 10-QSB. Accordingly, the unaudited financial statements do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States and should be read in conjunction with Form10-KSB for the fiscal year ended September30, 2003.

 

**IntangibleAssets**

 

Other assets include intangibles such as licensed technology, computersoftware and goodwill.   In June 2001,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, *Goodwill and Other Intangible Assets. *SFAS No. 142 establishes newguidelines for accounting for goodwill and other intangible assets.  The Company implemented the provisions ofSFAS No. 142 on October 1, 2001.  Sinceadoption, existing goodwill and

 

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certain intangibles with indefinite useful lives are no longeramortized but instead are assessed for impairment at least annually.  Other intangible assets are recorded athistorical cost less amortization on the straight line method based onestimated useful lives.  Periods ofamortization are evaluated continually to determine whether later events andcircumstances warrant revised estimated useful lives.

 

**Impairmentof Long-lived Assets**

 

Long-lived assets and intangible assets subject to amortization arereviewed for impairment in accordance with SFAS No. 121, *Impairment of Long-Lived Assets and Long-Lived Assetsto Be Disposed Of.  *Inaccordance with SFAS No. 121, an impairment loss is recognized whenever eventsor changes in circumstances indicate that the carrying amount of the asset maynot be recovered, based upon an estimate of future cash flows.  An impairment loss is then recognizedwhenever the carrying amount of the asset exceeds its fair value.  After an impairment loss is recognized, theadjusted carrying amount of the asset becomes its new basis.

 

**RevenueRecognition**

 

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 on the differencebetween 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 the revisionsare made.  Profits are recognized as thecontract phase of the work is completed. Losses on contracts are recorded in full as they are identified.

 

Revenues from the sale of materials are recognized when shipped and inthe consolidated statements of operations for the period October 20, 1997(inception) to December 31, 2003 are included in income from discontinuedoperations.

 

8

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**Useof Estimates**

 

The presentation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during theperiods presented.  Actual results maydiffer significantly from those estimates.

 

**Stock Based Compensation**

** **

In accordance withthe provisions of SFAS 123, the Company follows the intrinsic value based methodof accounting as prescribed by APB 25, *Accounting for Stock Issued to Employees*,for its stock-based compensation.

** **

**Reclassifications**

 

Certain prior period amounts have been reclassified to conform to the December 31, 2003 presentation.  These changes had no impact on previouslyreported consolidated results of operations or stockholders’ equity.

 

**NOTE 2 – NOTE PAYABL**E

 

In November 2003 theCompany converted their existing line of credit in the amount of $49,752 intoan installment loan.  The loan is payablein 24 monthly installments of $2,262 including interest (8.5% per annum).

 

**Note 3 - Commitments**

 

The Company and subsidiaries lease officespace under a non-cancelable operating lease. At December 31, 2003,there are future minimum payments under the lease of $24,994, which are duethrough June 30, 2004.

 

Rental expense was$12,496 and $12,016 for the three months ended December 31, 2003 and 2002,respectively and was $311,484 for the period October 27, 1997 (inception) to December 31, 2003.

 

9

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**NOTE 4 – EARNINGS PER SHARE**

 

At December 31, 2003 and 2002 there were 0, 100,000 and 60,923 weightedaverage number of options to purchase shares of common stock not included inthe calculation of diluted earnings per share for the three months then ended,and for the period October 20, 1997 (inception) to December 31, 2003,respectively.  The options were notincluded in diluted earnings per share because they would have beenantidilutive.

 

**NOTE 5 - RELATED PARTY TRANSACTIONS**

 

**RelatedParty Payable, Consulting Fees, Materials, and Professional Fees**

 

The Company has and expects to continue to have transactions, includingadvances and notes payable, with its officers, directors, stockholders, andtheir affiliates.

 

**NotesPayable**

 

On January 8, 2001, the Company entered into a promissory note with anofficer in the amount of $159,439 and again with the same officer on April 20,2001 and June 5, 2002 in the amount of $56,965 and $26,584, respectively.   Terms required principal to be advanced invarious amounts, accrue interest at 12%, and the principal and interest were tobe paid nine months from the date of latest advance. As of December 31, 2003 and September 30, 2003, there was noprincipal balance outstanding, however there was accrued interest due in theamount of $0 and $26,053, respectively.

 

On April 23, 2001, the Company issued a promissory note payable to anemployee in the amount of $41,945. The principal is to be advanced to theCompany in various amounts.  As of December 31, 2003 and September 30, 2003, there was aprincipal balance outstanding in the amount of $33,376 and accrued interest in the amount of $11,046 and $10,033, respectively.  Principal and interest at 12% are past due,payable nine months from the date of the latest advance.

 

On January 17,2002, the Company issued a promissory note payable to a stockholder in theamount of $10,000, plus interest at a rate of 10% per annum.  The accrued interest shall be paid in theCompany’s common stock each quarter. The note was originally due on January 17, 2003 and has been extended toJanuary 17, 2005 under the same terms. As of December 31, 2003and September 30, 2003,principal in the amount of $10,000was outstanding.  As of December 31, 2003 the Company has accrued a liability to issue5,040 shares of common stock valued at $504.

 

On June 17, 2002, the Company issued a promissory note payable to astockholder in the amount of $3,000, plus interest at a rate of 10% perannum.  The note was due on July 17,2002.  As of December 31, 2003 and September30, 2003, there was a principal balance outstanding in the amount of $3,000 and accrued interest in theamount of $470 and $395,

 

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respectively.  The note is pastdue.

 

**Agreements**

 

The Company hasseveral consulting agreements with stockholders and officers for management,marketing and technical services which are applied between cost of goods soldand expenses as appropriate. Consulting fees for the three months endedDecember 31, 2003 and 2002 were $68,415 and $80,800, respectively.  The balance payable at December 31, 2003 andSeptember 30, 2003 was $91,195 and $69,118, respectively

 

**NOTE 6 – CONCENTRATIONS OF CREDIT RISK**

 

The Company maintains some of its cash inbank deposit accounts, which may be uninsured or exceed the federally insuredlimits. No losses have been experienced related to such accounts. The Companybelieves it places its cash with quality financial institutions and is notexposed to any significant concentrations of credit risk on cash.

 

For the three months ended December 31, 2003 and 2002, and for theperiod October 20, 1997 (inception) to December 31, 2003, one customer locatedin Korea accounted for approximately 100%, 0% and 48% of consolidated sales,respectively.  At December 31, 2003,this customer accounted for substantially all of the Company’s accountsreceivable.

 

**NOTE 7 – GOING CONCERN**

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern. The Company’sfinancial position and operating results raise substantial doubt about theCompany’s ability to continue as a going concern, as reflected by losses of$5,033,970 accumulated from October 20, 1997 (inception) to December 31, 2003.In addition, the Company’s current liabilities exceed current assets by$737,005 at December 31, 2003. The ability of the Company to continue as agoing concern is dependent upon commencing operations, developing sales and obtainingadditional capital and financing. The consolidated financial statements do notinclude any adjustments that might be necessary if the Company is unable tocontinue as a going concern.

 

The Company is currently seeking additional capital to allow it tobegin its planned operations. Management believes the Company’s sales and marketing efforts willpartially reduce the impact of accumulated losses and the negative workingcapital.  In addition, the Companycontinues its efforts to re-capitalize accounts payable into stockholders’equity and negotiate reductions in other accounts payable.  The Company’s management believes theseefforts will substantially reduce current liabilities.

 

11

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**NOTE 8 - SUBSEQUENT EVENTS**

 

In January 2004 the Company hired a new president and chief executiveofficer and issued 1,000,000 shares of common stock valued at $220,000 forcompensation.

 

12

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**Item2. Management’s Discussion and Analysis**

 

 

**GeneralOverview**

 

CompositeSolutions, Inc. (“CSI or the Company”) is a development stage company licensingand distributing composite materials technology, engineering services, andspecial applications for use in the civil engineering and civil constructionmarkets. These composite materials consist of advanced fiber reinforcedpolymers (FRPs). Examples include ultra high-strength carbon or aramid fibersin a thermoset (e.g., epoxy) matrix. When used in concert with traditionalbuilding material systems, these provide superior structural performance with aminimization of cost. The Company’s new technology material/composite systemsfall into the following main categories: 1) Composite Overlays for structuralretrofits; 2) the Carbon Shell System (CSS) for new construction andinfrastructure renewal; and 3) Specialty Systems for ballistic and blastprotection.

 

Theeffectiveness and integrity of the Company’s composite overlay technologies andthe CSS has been extensively validated by full-scale laboratory tests at TheCharles Lee Powell Structural Research Laboratories (“Powell Laboratories”)located at The University of California, San Diego (“UCSD”). These testsincluded both reinforced and un-reinforced wall specimens that ranged fromsingle-story walls to a full-scale five-story building as well as columnsranging from single columns to full-scale bridge bents.  The PowellLaboratories are one of the few such facilities in the world with thecapability to execute full-scale tests and have performed extensive testsrelating to the retrofit, and upgrading of structural elements such as walls,columns and floor slabs. For blast retrofits, the composite overlay technologyhas been validated in U.S. Government field tests. These tests range from structuralcomponents to a full-scale building.

 

**BusinessAreas**

 

The Company ismarketing its new material systems and technologies in four primary areas.These are: 1) Force Protection/Homeland Security; 2) Seismic Retrofits andStructural Upgrades; 3) Infrastructure Renewal; and 4) New Construction. Ineach area the CSI product lines include design services, FRP material systems,data bases, design methodologies, and design software for civil structures suchas buildings, bridges, roadways, and pipelines.

 

**Critical AccountingPolicies and Estimates**

 

These are as described in our Annual Report,Form 10-KSB.

 

13

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**Resultsof Operations**

 

In the following paragraphs we discuss theresults of operations for the first quarter (ending December 31, 2003) of theCompany’s current fiscal year relative to the first quarter of the previousfiscal year. We also show the results for the Company from its inception,

 

Revenue- The currentquarter contract revenue of $687,170 is more than ten times greater than therevenue for the comparable quarter (Q1, 2003) last year. Adding perspective, wenote that the current quarter revenue is substantially greater than the annualrevenue reported in Form 10-KSB for the Company’s fiscal years 2003 and 2002($426,021 and $227,439, respectively). This reflects a large sale of theCompany’s RetroshieldTM system under terms of an exclusive license agreementwith Composite Solutions, Korea (CSK). CSK installed Retroshield to strengthenthe Cheonggye Expressway in central Seoul as part of a large project to restorethe Cheonggyecheon River to a natural river environment.

 

Cost of Sales - Thecost of sales for the current period is dominated by “Materials” reflecting thefact that most of the CSK revenue is obtained from sales of composite overlaymaterial systems to CSK who markets and executes projects in Korea withtechnical advice from the Company.

 

Gross Profit -Thegross profit for the current period is $148,936, or 22% of contract revenue. Therelatively low percent (compared to 57% on much smaller revenue in thecomparable quarter last year) reflects the large fraction of material sales inthe contract revenue.

 

Net Income - The netincome for the current quarter was $75,588, compared to a loss of $214,092 inthe comparable period last year. This reflects the improved gross profit.

 

**Shareholders’Equity**

 

For the current quarter, the Company hadcurrent assets of $468,719 and current liabilities of $1,205,724, for adifference of $737,005, compared to a comparable difference of $843,795 at theend of the Company’s fiscal year 2003. This is reflected in the shareholders’equity which is $89,153 at the end of the current quarter compared to $13,565at the end of the Company’s fiscal year 2003.

 

**Liquidityand Capital Resources**

 

For the current period the net cash providedby operating activities was $149,258 compared to a negative $24,096 for thecomparable period last year. This total increase of $173,354 reflects the largeincrease in revenue.

 

Although the Company’s revenues and otherbusiness indicators have significantly improved during the current quarter, theCompany has been operating with insufficient capital. As a consequence, thedifference between current assets and current liabilities ($737,005) remainsseveral times larger than the net cash provided by operating activities. Toremedy this situation, the Company is considering sale of common stock togenerate additional capital. Additional 

 

14

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outside investment will also provide thecapital needed for marketing and other activities needed for increased revenuegrowth.

 

**RelatedParty Debt Obligations**

 

The following payment obligations are due torelated parties. These amounts are included in current liabilities.

 

**Relation**

 
| **Employee and director payable**                      |   |                 |   |    |   |
|--------------------------------------------------------|--------|----------------------|--------|---------|--------|
| Jang Lee                                               |   | Employee             |   | 27,440  |   |
| Gilbert Hegemier                                       |   | Officer              |   | 51,553  |   |
| Other                                                  |   | Employee             |   | 1,599   |   |
| Total                                                  |   |                 |   | 80,592  |   |
| **Related party payable**                              |   |                 |   |    |   |
| Blanchard Krasner & French                         |   | Stockholder          |   | 9,611   |   |
| Smaha & Daley                                      |   | Stockholder          |   | 20,987  |   |
| UC Regents                                             |   | Stockholder          |   | 90,481  |   |
| Composite Designs                                      |   | Stockholder          |   | 147,331 |   |
| Other                                                  |   | Stockholder          |   | 15,606  |   |
| Total                                                  |   |                 |   | 284,016 |   |
| **Accrued expenses & related party notes payable** |   |                 |   |    |   |
| Accrued wages                                          |   | Employee/Stockholder |   | 138,510 |   |
| Loan P&I                                           |   | Employee/Stockholder |   | 44,422  |   |
| Loan P&I                                           |   | Stockholder          |   | 10,504  |   |
| Other                                                  |   | Stockholder          |   | 6,824   |   |
| Total                                                  |   |                 |   | 200,260 |   |

 

A payment arrangement has been made withBlanchard, Krasner & French as follows: 50% of balance payable in January2004 followed by 3 equal payments each month thereafter. The other creditorshave deferred payment without specific terms.

 

**ManagementTeam**

 

As reported under Results of Operation, theCompany has a growing business base. To lead continued growth and reachsustained profitability, the Company has hired Dr. Thomas Bache to serve asPresident and CEO. Dr. Bache is an experienced manager (most recently SeniorVice President and Group Manager at SAIC, a $6.5B/year corporation) with a strongfoundation in composite materials technology (he completed his PhD at UCSD witha thesis on the dynamic response of composite materials).

 

**CautionaryStatement Regarding Forward-Looking Statements**

 

This report contains “forward-looking”statements.  The Company is including this statement for the expresspurpose of availing itself of protections of the safe harbor provided by thePrivate Securities Litigation Act of 1995 with respect to all suchforward-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 

 

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relating to the future; and (e) any statementsusing the words “expects,” “intends,” “anticipates,” “may,” “plans,” “projects”and “estimates,” and analogous or similar expressions.

 

The Company’s ability to predict projectedresults or the effect of certain events on the Company’s operating results isinherently uncertain.  Therefore, the Company wishes to caution eachreader of this report to carefully consider the following factors, any or allof which have in the past and could in the future affect the ability of theCompany to achieve its anticipated results and could cause actual results todiffer materially than those discussed herein: (1) ability to attract andretain customers to purchase its products and services, (2) ability tocommercialize and market products (3) results of research and development, (4)technological advances by third parties and competition, (5) future capitalneeds of the Company, (6) history of operating losses, (7) dependence upon keypersonnel, and (8) general economic and business conditions.  The Companyexpressly disclaims any obligation or undertaking to release publicly anyupdates or revisions to any forward—looking statement contained herein toreflect any change in the Company’s expectations with regard thereto or anychange in events, conditions or circumstances on which any such statement isbased.

 

**Risks**

 

Need for Additional Capital**-**TheCompany’s future is subject to substantial risks and uncertainties. In thecurrent quarter the Company achieved a net profit on operations for the firsttime in its history with a single quarter’s revenue that is 48% of the totalrevenue during its entire 6+ years of operation. There is no assurance ofcontinuing this level of performance. The Company had a net loss of $5,033,970for the period October 20, 1997 (Inception) to December 31,2003.  Current liabilities exceed current assets by $737,005. Profitability from operations is unlikely to generate adequate capital for theincreased investment in marketing, management, and technical staff that isrequired for future growth. Additional capital is needed to support operations,and there can be no assurance that such capital will become available.

 

Limited Public Market for Common Stock **-**Therecurrently is a very limited public market for the Company’s common stock and noassurance can be given that a large public market will develop in the future.The Company’s common stock may be thinly traded, if at all, even if the Companyachieves full operation and has significant revenues.

 

Our shares of common stock should be consideredspeculative. Prospective investors should consider carefully all risk factors.

 

Future Sales of Common Stock by Our ExistingShareholders Could Reduce the Price of Our Common Stock**-**Themarket price of our common stock could decline as a result of sales by ourexisting shareholders of shares of common stock in the market.  Likewise,the perception that these sales could occur may result in the decline of themarket price of our common stock. These sales also might make it more difficultfor us to sell equity securities in the future.

 

The Loss of Our Key Technical IndividualsWould Have an Adverse Impact on Future Development and Could Impair Our Abilityto Succeed**-**Our performance is substantiallydependent on the technical expertise of Gilbert A. Hegemier, Ph.D. and ourability to hire and 

 

16

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retain personnel with similar technicalexpertise. The loss of any of Gilbert A. Hegemier, Ph.D.’s services could havea materially adverse effect on our business, development, financial condition,and operating results.  We do not maintain “key person” life insurance onany of our directors or senior executive officers and we do not have lifeinsurance on Gilbert A. Hegemier, Ph.D.

 

We Do Not Expect to Declare or Pay AnyDividends**-**We have not declared or paid anydividends on our common stock since our inception, and we do not anticipatepaying any such dividends for the foreseeable future.

 

Because of Our Limited Operating History, ItIs Difficult to Predict Our Future Revenues - As aresult of our limited operating history and uncertainty about the pace ofacceptance of the new technology we seek to introduce into the market, we areunable to accurately forecast our revenues.  Our current and futureexpense levels are based largely on our plan of operation.  Revenues andoperating results generally depend on our ability to develop a base ofcustomers and businesses.  We may be unable to adjust spending in a timelymanner to compensate for any unexpected revenue shortfall.  Accordingly,any significant shortfall in estimated revenues in relation to our plannedexpenditures would have an immediate adverse effect on our business, prospects,financial condition and results of operations.

 

Our Future Revenues are Dependent on theAcceptance of the Products and Services that We Offer **-**Ourfuture revenues and our ability to generate profits in the future aresubstantially dependent upon the widespread acceptance and use of our compositematerials technology.  There can be no assurance that our compositematerials technology will become widely accepted or that a sufficiently broadbase of new construction or infrastructure renewal will use our compositematerials technology.

 

We Will Have to Expend Substantial Funds on Managementand Marketing in the Future**-**We have not incurredsignificant advertising, sales, and marketing expenses to date.  We havebeen operating without full-time dedicated management since 2001. To increasemarket penetration of our composite materials technology, we expect to spendsignificantly more on focused marketing in the future.  If our marketingstrategy is unsuccessful, we may not be able to recover these expenses or evengenerate any revenues.  We will be required to develop a marketing and salescampaign that will effectively demonstrate the advantages of our, services andproducts.  To date, our experience with respect to marketing our productsand services is very limited.  We may also elect to enter into agreementsor relationships with third parties regarding the promotion or marketing of ourcomposite materials technology.  There can be no assurance that we will beable to establish adequate sales and marketing capabilities, that we will beable to enter into marketing agreements or relationships with third parties onfinancially acceptable terms, or that any third parties with whom we enter intosuch arrangements will be successful in marketing and promoting our compositematerials technology, or other products and services offered by us.

 

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**Part II**

 

**Item 1.   Legal Proceedings**

 

Neither the Company nor its subsidiary is the subject of any pendinglegal proceeding.

 

**Item 6.   Exhibits and Reports on Form8-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. SD96-040)(2)       |
| 10.2                |   | Share Exchange Agreement(3)                              |
| 10.3                |   | Share Exchange Agreement with and Acquisition of  TSC(4) |
| 31                  |   | Sarbanes-Oxley Section 302 Certification            |
| 32                  |   | Sarbanes-Oxley Section 906 Certification            |

 

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(1)                                  Incorporated by reference to the referenceddocument filed as an exhibit to the Company’s Registration Statement on Form10SB12G/A, Commission File No. 000-24551, filed on October 20, 1998.

 

(2)                                  Incorporated by reference to the referenceddocument filed as an exhibit to the Company’s Annual Report on Form 10-KSB,Commission File No. 000-24551, filed on January 13, 2000.

 

(3)                                  Incorporated by reference to the referenceddocument filed as an exhibit to the Company’s Current Report on Form 8-K,Commission File No. 000-24551, filed on July 14, 2000 and August 31,2000.

 

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

 

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

 

None.

 

**Signatures**

 

In accordance with Section 13 or 15(d) of the Securities Exchange Actthe Company has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date: February 11, 2004 |                      |
|-------------------------|---------------------------|
|                    |                      |
|                    |                      |
|                    | Composite Solutions, Inc. |
|                    |                      |
|                    |                      |
|                    | By:                  | */s/ Thomas C.  Bache* |   |
|                    |                      | Thomas C. Bache, President & CEO |

 

Pursuant to the requirements of the Securities Exchange Act, of 1934this report has been signed below by the following person on behalf of theCompany and in the capacity and on the date indicated.

 
| **Signature**          |   | **Capacity** |              | **Date** |
|------------------------|--------|--------------|-------------------|----------|
|                   |   |         |              |     |
| */s/ Thomas C.  Bache* |   |         | President and CEO |     | February 11, 2004 |
| Thomas C. Bache        |   |         |              |     |
|                        |        |              |                   |          |  |

 

18

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