**SECURITIES & EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**           |
|------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                               |
| **For the quarterly period ended June  30, 2003**                                                                                  |
|                                                                                                                               |
| **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.**

(Name of Small BusinessIssuer in its Charter)

 

| **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  June 30, 2003, 20,930,114shares of Common Stock were outstanding.

 

 

----

 

**PART 1 -FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

The followingconsolidated financial statements contain information regarding the Company’sbalance sheet, profit & loss, shareholder’s equity, and cash flow for thequarters ended June 30, 2003 and 2002.

 

 
| **INDEX TO FINANCIAL STATEMENTS**                   |
|-----------------------------------------------------|
|                                                |
| Balance Sheets                                      |
|                                                |
| Statements of  Operations                           |
|                                                |
| Statements of Changes in  Stockholders’ Equity |
|                                                |
| Statements of Cash Flows                            |
|                                                |
| Notes to  Financial Statements                      |

 

2

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**Consolidated Balance Sheets**

(Unaudited)

 
|                                                                                                                                                             |   | **June 30,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|
|                                                                                                                                                             |   | **2003**     |       | **2002** |   |
| **ASSETS**                                                                                                                                                       |   |         | ** ** |   | ** ** |
| **Current  assets**                                                                                                                                              |   |         |       |   |   |
| Cash                                                                                                                                                             |   | $            | 13,755     |   | $ | 70 |   |
| Costs in excess  of billings                                                                                                                                     |   | 2,000        |       | 68,732 |   |
| Prepaid expenses                                                                                                                                                 |   | 10,353       |       | 574 |   |
| Total current  assets                                                                                                                                            |   | 26,108       |       | 69,376 |   |
|                                                                                                                                                             |   |         |       |   |   |
| **Property,  plant and equipment, net**                                                                                                                          |   | 1,034        |       | 3,310 |   |
|                                                                                                                                                             |   |         |       |   |   |
| **Other  assets**                                                                                                                                                |   |         |       |   |   |
| Intangible  assets, net                                                                                                                                          |   | 439,599      |       | 602,697 |   |
| Goodwill                                                                                                                                                         |   | 418,956      |       | 418,955 |   |
| Deposits                                                                                                                                                         |   | 10,071       |       | 11,743 |   |
| Total assets                                                                                                                                                     |   | $            | 895,768    |   | $ | 1,106,081 |   |
|                                                                                                                                                             |   |         |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                   |   |         | ** ** |   | ** ** |
| **Current  liabilities**                                                                                                                                         |   |         |       |   |   |
| Accounts payable                                                                                                                                                 |   | $            | 434,894    |   | $ | 393,130 |   |
| Billings in  excess of costs                                                                                                                                     |   | 71,908       |       | — |   |
| Line of credit                                                                                                                                                   |   | 51,334       |       | 51,396 |   |
| Employee and  director payable                                                                                                                                   |   | —       |       | 416,734 |   |
| Related party  payable                                                                                                                                           |   | 50,000       |       | 50,000 |   |
| Note payable                                                                                                                                                     |   | —       |       | 80,500 |   |
| Related party  notes payable                                                                                                                                     |   | 48,015       |       | 147,425 |   |
| Accrued expenses                                                                                                                                                 |   | 189,644      |       | 267,826 |   |
| Accrued losses  on future contracts                                                                                                                              |   | 2,413        |       | — |   |
| Income taxes  payable                                                                                                                                            |   | 19,985       |       | 3,200 |   |
| Total current  liabilities                                                                                                                                       |   | 868,193      |       | 1,410,211 |   |
|                                                                                                                                                             |   |         |       |   |   |
| **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; 20,930,114 and 17,091,320  shares issued and outstanding at June 30, 2003 and 2002, respectively |   | 2,092        |       | 1,708 |   |
| Additional paid  in capital                                                                                                                                      |   | 5,028,156    |       | 3,452,518 |   |
| Accumulated  deficit                                                                                                                                             |   | (5,002,673   | )          | (3,758,356 | ) |
| Total  shareholders’ equity                                                                                                                                 |   | 27,575       |       | (304,130 | ) |
| Total  liabilities and shareholders’ equity                                                                                                                 |   | $            | 895,768    |   | $ | 1,106,081 |   |

 

See accompanying notes.

 

3

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**ConsolidatedStatements of Operations**

(Unaudited)

 
|                                                                                                   |   | **Three Months Ended  June 30,** |     | **Nine Months Ended  June 30,** |   | **October 20, 1997  (Inception)  to  June 30,  2003** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|----------|---------------------------------|--------|-------------------------------------------------------|--------|
|                                                                                                   |   | **2003**                         |     | **2002**                        |   | **2003**                                              |   | **2002** |   |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Revenues**                                                                                           |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Contract revenue                                                                                       |   | $                                | 192,213  |                            | $      | 5,382                                                 |   | $ | 315,026 |   | $ | 186,210 |   | $ | 583,710 |   |
| Armored panels                                                                                         |   | —                           |     | —                          |   | 5,199                                                 |   | 40,850 |   | 46,049 |   |
| Total revenue                                                                                          |   | 192,213                          |     | 5,382                           |   | 320,225                                               |   | 227,060 |   | 629,759 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Cost  of sales**                                                                                     |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Salaries and  consulting fees                                                                          |   | 144,498                          |     | 4,552                           |   | 279,799                                               |   | 110,077 |   | 527,968 |   |
| Armored panels                                                                                         |   | —                           |     | —                          |   | 3,268                                                 |   | 28,246 |   | 31,514 |   |
| Cost of sales                                                                                          |   | 144,498                          |     | 4,552                           |   | 283,067                                               |   | 138,323 |   | 559,482 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Gross profit                                                                                           |   | 47,715                           |     | 830                             |   | 37,158                                                |   | 88,737 |   | 70,277 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Expenses**                                                                                           |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Consulting fees                                                                                        |   | 94,559                           |     | 39,720                          |   | 300,059                                               |   | 114,015 |   | 830,026 |   |
| Consulting fees  - related party                                                                       |   | 59,055                           |     | 92,000                          |   | 210,756                                               |   | 221,478 |   | 833,255 |   |
| Depreciation and  amortization                                                                         |   | 12,386                           |     | 4,499                           |   | 38,504                                                |   | 14,464 |   | 365,831 |   |
| General and  administrative expenses                                                                   |   | 34,154                           |     | 36,503                          |   | 178,198                                               |   | 160,182 |   | 1,079,265 |   |
| Organizational  expenses                                                                               |   | —                           |     | —                          |   | —                                                |   | — |   | 514 |   |
| Professional  fees - other                                                                             |   | 12,693                           |     | 10,050                          |   | 53,757                                                |   | 66,062 |   | 398,663 |   |
| Professional  fees - related party                                                                     |   | 2,891                            |     | 17                              |   | 8,427                                                 |   | 1,150 |   | 69,266 |   |
| Salaries                                                                                               |   | 17,420                           |     | 61,168                          |   | 58,760                                                |   | 215,969 |   | 1,283,789 |   |
| Provision for  future contract losses                                                                  |   | —                           |     | —                          |   | 26,497                                                |   | — |   | 26,497 |   |
| Impairment loss                                                                                        |   | —                           |     | —                          |   | —                                                |   | — |   | 237,248 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Total expenses                                                                                         |   | 233,158                          |     | 243,957                         |   | 874,958                                               |   | 793,320 |   | 5,124,354 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Loss from  operations                                                                                  |   | (185,443                         | )        | (243,127                        | )      | (837,800                                              | )      | (704,583 | ) | (5,054,077 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Other  income (expense)**                                                                            |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Interest income                                                                                        |   | —                           |     | —                          |   | —                                                |   | — |   | 8,363 |   |
| Interest income  - forgiveness of debt                                                                 |   | —                           |     | —                          |   | —                                                |   | — |   | 17,825 |   |
| Other Income                                                                                           |   | 85,000                           |     | —                          |   | 85,000                                                |   | 10,800 |   | 95,800 |   |
| Gain on  forgiveness of debt                                                                           |   | —                           |     | —                          |   | —                                                |   | — |   | 8,261 |   |
| Other expenses                                                                                         |   | (2,156                           | )        | (1,506                          | )      | (13,730                                               | )      | (16,298 | ) | (21,511 | ) |
| Loss on disposal  of assets                                                                            |   | —                           |     | —                          |   | —                                                |   | — |   | (190 | ) |
| Interest expense                                                                                       |   | (680                             | )        | (1,061                          | )      | (2,640                                                | )      | (3,196 | ) | (116,609 | ) |
| Loss on  forgiveness of debt                                                                           |   | —                           |     | —                          |   | —                                                |   | — |   | (11,021 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Total other  income (expense)                                                                          |   | 82,164                           |     | (2,567                          | )      | 68,630                                                |   | (8,694 | ) | (19,082 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Loss before  provision for income taxes                                                                |   | (103,279                         | )        | (245,694                        | )      | (769,170                                              | )      | (713,277 | ) | (5,073,159 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Provision for  income taxes                                                                            |   | —                           |     | 600                             |   | 21,681                                                |   | — |   | 34,809 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Loss  from continuting operations**                                                                  |   | (103,279                         | )        | (245,094                        | )      | (790,851                                              | )      | (713,277 | ) | (5,107,968 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Discontinued  operations**                                                                           |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Income from  discontinued operations (including gain on sale of subsidiary in the amount  of $177,755) |   | —                           |     | —                          |   | —                                                |   | — |   | 105,295 |   |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Net  loss**                                                                                          |   | $                                | (103,279 | )                               | $      | (245,094                                              | )      | $ | (790,851 | ) | $ | (713,277 | ) | $ | (5,002,673 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| **Loss  per common share, basic and diluted**                                                          |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Net loss from  continuing operations                                                                   |   | $                                | (0.01    | )                               | $      | (0.01                                                 | )      | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.31 | ) |
| Income from  discontinued operations                                                                   |   | $                                | —   |                            | $      | —                                                |   | $ | — |   | $ | — |   | $ | 0.01 |   |
| Net loss                                                                                               |   | $                                | (0.01    | )                               | $      | (0.01                                                 | )      | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.31 | ) |
|                                                                                                   |   |                             |     |                            |   |                                                  |   |   |   |   |   |
| Weighted average  number of shares, basic and diluted                                                  |   | 19,641,382                       |     | 16,904,838                      |   | 19,917,238                                            |   | 15,672,965 |   | 16,284,331 |   |

 

See accompanying notes.

 

4

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**Consolidated Statements ofChanges in Shareholders’ Equity**

(Unaudited)

 
|                                                    |   |       |       | **Additional  Paid in Capital** |       | **Deficit  Accumulated  During the  Development  Stage** |   | **Total  Shareholders’  Equity** |   |
|---------------------------------------------------------|--------|------------|------------|---------------------------------|------------|----------------------------------------------------------|--------|---------------------------------------|--------|
| **Common Stock**                                        |
| **Shares**                                              |   | **Amount** |
|                                                    |   |       | ** ** |                            | ** ** |                                                     |   |                                  |   |   | ** ** |
| **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                                                |   |       |       |                            |       |                                                     |   | (1,367,321                            | )      | (1,367,321 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| **Balance,  September 30, 2001**                        |   | 14,208,464 |       | 1,421                           |       | 3,039,422                                                |   | (3,045,079                            | )      | (4,236 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| 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                                                |   |       |       |                            |       |                                                     |   | (1,166,743                            | )      | (1,166,743 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| **Balance,  September 30, 2002**                        |   | 18,292,044 |       | 1,829                           |       | 3,570,324                                                |   | (4,211,822                            | )      | (639,669 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Common Stock  issued for cash                           |   | 893,028    |       | 89                              |       | 70,211                                                   |   |                                  |   | 70,300 |   |
| Common stock  issued to settle accounts payable         |   | 582,024    |       | 58                              |       | 70,325                                                   |   |                                  |   | 70,383 |   |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Net loss                                                |   |       |       |                            |       |                                                     |   | (214,092                              | )      | (214,092 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| **Balance,  December 31, 2002**                         |   | 19,767,096 |       | 1,976                           |       | 3,710,860                                                |   | (4,425,914                            | )      | (713,078 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Common Stock  issued for cash                           |   | 853,334    |       | 85                              |       | 207,915                                                  |   |                                  |   | 208,000 |   |
| Common stock  issued for services                       |   | 400,000    |       | 40                              |       | 58,960                                                   |   |                                  |   | 59,000 |   |
| Common stock  issued for interest due                   |   | 79,684     |       | 8                               |       | 13,538                                                   |   |                                  |   | 13,546 |   |
| Common stock  issued for compensation                   |   | 50,000     |       | 5                               |       | 8,495                                                    |   |                                  |   | 8,500 |   |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Net loss                                                |   |       |       |                            |       |                                                     |   | (473,480                              | )      | (473,480 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| **Balance,  March 31, 2003**                            |   | 21,150,114 |       | 2,114                           |       | 3,999,768                                                |   | (4,899,394                            | )      | (897,512 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Common stock  surrendered                               |   | (220,000   | )          | (22                             | )          | 22                                                       |   |                                  |   | — |   |
| Recapitalization  of accounts payable and accrued wages |   |       |       |                            |       | 1,028,366                                                |   |                                  |   | 1,028,366 |   |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| Net loss                                                |   |       |       |                            |       |                                                     |   | (103,279                              | )      | (103,279 | ) |
|                                                    |   |       |       |                            |       |                                                     |   |                                  |   |   |   |
| **Balance,  June 30, 2003**                             |   | 20,930,114 |       | $                               | 2,092      |                                                     | $      | 5,028,156                             |   | $ | (5,002,673 | ) | $ | 27,575 |   |

 

See accompanying notes.

 

5

----

 

**COMPOSITESOLUTIONS, INC AND SUBSIDIARIES**

(A Development StageCompany)

**Consolidated Statements of CashFlows**

(Unaudited)

** **
|                                                                         |   | **Nine Months Ended  June 30,** |       | **October 20, 1997  (Inception)  to  June 30,  2003** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|-------------------------------------------------------|--------|
| **2003**                                                                     |   | **2002**                        |
|                                                                         |   |                            |       |                                                  |   |   |   |
| **Cash  flows from operating activities**                                    |   |                            |       |                                                  |   |   |   |
| Net loss                                                                     |   | $                               | (790,851   | )                                                     | $      | (713,277 | ) | $ | (5,002,673 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            |       |                                                  |   |   |   |
| Depreciation and  amortization                                               |   | 38,504                          |       | 14,463                                                |   | 361,804 |   |
| Loss on disposal  of assets                                                  |   | —                          |       | —                                                |   | 190 |   |
| Common stock  issued in exchange for services                                |   | 59,000                          |       | 61,874                                                |   | 361,180 |   |
| Common stock  issued for interest due                                        |   | 13,546                          |       | —                                                |   | 19,228 |   |
| Common stock  issued for compensation                                        |   | 8,500                           |       | 161,509                                               |   | 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 |   |
| Interest                                                                     |   | —                          |       | 5,500                                                 |   | 5,500 |   |
| (Increase)  decrease in operating assets                                     |   |                            |       |                                                  |   |   |   |
| Accounts  receivable                                                         |   | —                          |       | —                                                |   | 17,493 |   |
| Related party  receivable                                                    |   | —                          |       | —                                                |   | (22,021 | ) |
| Costs in excess  of billings                                                 |   | (2,000                          | )          | —                                                |   | (2,000 | ) |
| Inventory                                                                    |   | —                          |       | —                                                |   | (2,055 | ) |
| Prepaid expenses  and other assets                                           |   | (10,171                         | )          | 178                                                   |   | (10,153 | ) |
| Employee  advances                                                           |   | —                          |       | 271                                                   |   | — |   |
| Deposit                                                                      |   | —                          |       | 1,496                                                 |   | (10,375 | ) |
| Increase  (decrease) in operating liabilities                                |   |                            |       |                                                  |   |   |   |
| Accounts payable                                                             |   | 1,040,630                       |       | 257,467                                               |   | 2,103,270 |   |
| Employee and  director payable                                               |   | (416,734                        | )          | —                                                |   | (416,734 | ) |
| Billings in  excess of costs                                                 |   | 27,477                          |       | (68,732                                               | )      | 71,908 |   |
| Accrued expenses                                                             |   | (108,687                        | )          | 127,444                                               |   | 182,036 |   |
| Income taxes  payable                                                        |   | 14,385                          |       | —                                                |   | 23,937 |   |
| Net cash used in  operating activities                                       |   | (126,401                        | )          | (151,807                                              | )      | (1,860,542 | ) |
|                                                                         |   |                            |       |                                                  |   |   |   |
| **Cash  flows from investing activities**                                    |   |                            |       |                                                  |   |   |   |
| Purchase of  property, plant and equipment                                   |   | —                          |       | —                                                |   | (29,660 | ) |
| Acquisition of  intangible assets                                            |   | (5,946                          | )          | (21,723                                               | )      | (631,804 | ) |
| 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                                       |   | (5,946                          | )          | (21,723                                               | )      | (1,164,202 | ) |
|                                                                         |   |                            |       |                                                  |   |   |   |
| **Cash  flows from financing activities**                                    |   |                            |       |                                                  |   |   |   |
| Increase  (decrease) in line of credit                                       |   | (200                            | )          | —                                                |   | 600 |   |
| Proceeds from  notes payable                                                 |   | —                          |       | 100,000                                               |   | 1,064,500 |   |
| Proceeds from  note payable to officer/employee/shareholder                  |   | 2,016                           |       | 38,796                                                |   | 290,834 |   |
| Payments of note  payable to officer/employee/shareholder                    |   | (184,535                        | )          | (159,400                                              | )      | (343,935 | ) |
| Proceeds from  convertible debenture                                         |   | —                          |       | —                                                |   | 500,000 |   |
| Proceeds from  issuance of common stock, net                                 |   | 278,300                         |       | 190,000                                               |   | 1,526,500 |   |
| Net cash  provided by financing activities                                   |   | 95,581                          |       | 169,396                                               |   | 3,038,499 |   |
|                                                                         |   |                            |       |                                                  |   |   |   |
| Net increase  (decrease) in cash                                             |   | (36,766                         | )          | (4,134                                                | )      | 13,755 |   |
| Cash, beginning  of period                                                   |   | 50,521                          |       | 4,204                                                 |   | — |   |
| Cash, end of  period                                                         |   | $                               | 13,755     |                                                  | $      | 70 |   | $ | 13,755 |   |
|                                                                         |   |                            |       |                                                  |   |   |   |
| **Supplementary  disclosures**                                               |   |                            |       |                                                  |   |   |   |
| Interest paid                                                                |   | $                               | 8,035      |                                                  | $      | 3,197 |   | $ | 10,386 |   |
| Income taxes  paid                                                           |   | $                               | —     |                                                  | $      | 600 |   | $ | 8,328 |   |
|                                                                         |   |                            |       |                                                  |   |   |   |
| **Non-cash  financing and investing activities**                             |   |                            |       |                                                  |   |   |   |
| Interest on note  payable                                                    |   | $                               | —     |                                                  | $      | — |   | $ | 17,825 |   |
| Forgiveness of  interest on note payable                                     |   | $                               | —     |                                                  | $      | — |   | $ | (17,825 | ) |
| Note payable  paid through issuance of common stock                          |   | $                               | —     |                                                  | $      | — |   | $ | (1,000,000 | ) |
| Note payable  released in sale of subsidiary                                 |   | $                               | —     |                                                  | $      | — |   | $ | (64,500 | ) |
| Investment in  subsidiary                                                    |   | $                               | —     |                                                  | $      | — |   | $ | 796,732 |   |
| 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 | ) |
| Accrued interest  released in sale of subsidiary                             |   | $                               | —     |                                                  | $      | — |   | $ | (28,867 | ) |
| Common stock  issued to settle accounts payable                              |   | $                               | —     |                                                  | $      | — |   | $ | 70,383 |   |
| Recapitalization  of accounts payable and accrued wages                      |   | $                               | (1,028,366 | )                                                     | $      | — |   | $ | (1,028,366 | ) |

 

See accompanying notes.

 

6

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**COMPOSITESOLUTIONS, INC. AND SUBSIDIARIES**

(A Development StageCompany)

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1- SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**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.  Athird wholly owned subsidiary, Penultimo, Inc. dba Anchor Reinforcements,incorporated in the state of California on January 13, 1992, was sold on March31, 2001.   Composite Solutions, Inc.and subsidiaries were organized to develop, manufacture and market hightechnology products and processes in key areas of existing and newconstruction.

 

The Company is in the development stage and itsefforts through June 30, 2003have been principally devoted to raising additional capital and negotiatingwith potential 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.

 

**Basisof Presentation**

 

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries.  All significant intercompany transactionshave been eliminated in consolidation.

 

**UnauditedFinancial Statements**

 

The accompanying unaudited financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and according to regulatoryrequirements of Article 10 of Regulation S-X for form 10-QSB.  Accordingly, the unaudited financialstatements do not include all of the information and footnotes required byaccounting principles generally accepted in the United States and should beread in conjunction with Form 10-KSB for the fiscal year ended September 30, 2002.

 

**Intangible Assets**

 

Other assets include intangibles such as licensedtechnology, computer software and goodwill.  In June 2001, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 142, *Goodwill and Other IntangibleAssets. *SFAS No. 142establishes new guidelines for accounting for goodwill and other intangibleassets.  The Company implemented theprovisions of SFAS No. 142 on October 1, 2001. Since adoption, existing goodwill and certain intangibles withindefinite useful lives are no longer amortized but instead are

 

6

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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.

 

**Impairment of Long-lived Assets**

 

Long-lived assets andintangible assets subject to amortization are reviewed for impairment inaccordance with SFAS No. 121, *Impairment ofLong-Lived Assets and Long-Lived Assets to Be Disposed Of.  *In accordance with SFAS No. 121,an impairment loss is recognized whenever events or changes in circumstancesindicate that the carrying amount of the asset may not be recovered, based uponan estimate of future cash flows.  Animpairment loss is then recognized whenever the carrying amount of the assetexceeds its fair value.  After animpairment loss is recognized, the adjusted carrying amount of the assetbecomes its new basis.

 

**Revenue Recognition**

 

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

 

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

 

**Use of Estimates**

 

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

 

**StockBased Compensation**

 

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

 

7

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**Reclassifications**

 

Certain reclassifications have been made to the June 30, 2002 balances in order toconform to the June 30, 2003presentation.

 

**Note 2 - Capitalization**

 

**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 at June 30, 2003 and 2002.

 

**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 theCompany issued 150,000 shares of common stock valued at $93,750 plus $500,000in cash in exchange for 100% of the outstanding shares of common stock ofPenultimo, Inc. dba Anchor Reinforcements. On September 15, 2000 the Company issued 100,000 shares of common stockas finder’s fees.  On September 28, 2000the Company issued 300,000 shares of common stock valued at $174,000 inexchange for services. During the period October 2000 through December 2000 theCompany issued 725,000 shares of common stock valued at $245,000 in privateplacement. On March 31, 2001, a shareholder surrendered 150,000 shares ofcommon stock valued at $93,750.  Also onMarch 31, 2001, the Company issued 200,000 shares of common stock as finder’sfees. At September 30, 2001, the Company issued 1,061,760 shares of commonstock valued at $128,333 in exchange for services.  During year ended September 30, 2002, the Company issued 514,034shares of common stock valued at $91,619 in exchange for services, 1,183,149shares of common stock for compensation valued at $206,509, 47,350 shares ofcommon stock valued at $5,682 for interest due, and 2,339,047 shares of commonstock for cash and subscriptions paid in the amount of $227,500.  During the nine months ended June 30, 2003, the Company issued 582,024shares of common stock valued at $70,383 in exchange for accounts payable,400,000 shares of common stock valued at $59,000 for services, 79,684 shares ofcommon stock valued at $13,546 for accrued interest, 50,000 shares of commonstock valued at $8,500 as compensation, and 1,746,362 shares of common stockfor cash in the amount of $278,300.  TheCompany received 220,000 shares of common stock surrendered.  The Company recapitalized accounts payableand accrued

 

8

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wages in the amount of $1,028,366.

 

**StockIncentive Plan**

 

On December 1, 2000 the Company and subsidiaries’Board of Directors adopted the 2000 Stock Incentive Plan pursuant to whichincentive stock options or nonstatutory stock options to purchase up to1,000,000 shares of common stock may be granted to employees, directors andconsultants.  Stock options may beexercisable up to ten years from the grant date.  Stock options vest over service periods that range from zero tofive years.

 
| **Outstanding  Options** |   | **Shares  Available for  Grant** |   | **Options  Outstanding** |   | **Exercise Price** |       |
|--------------------------|--------|----------------------------------|--------|--------------------------|--------|--------------------|------------|
| Authorized               |   | 1,000,000                        |   |                     |   |               |       |
| Granted                  |   | (391,428                         | )      | 391,428                  |   | $                  | 0.10-$0.40 |   |
| Canceled                 |   | 120,000                          |   | (120,000                 | )      | $                  | 0.40       |   |
| Balance, June 30, 2003   |   | 728,572                          |   | 271,428                  |   | $                  | 0.10       |   |

 

At June 30, 2003 there were 221,428 exercisable options.

 

The Company accounts for stock-based compensationusing the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensationcost for stock options is recognized for the stock options awards granted at orabove fair market value.  For the threeand nine months ended June 30, 2003and 2002 and for the periodOctober 1, 1997 to June 30, 2003,the Company did not recognize any compensation expense.

 

Had compensation expense for options issued toemployees and directors been determined upon fair values at the grant dates inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation” and SFAS  No. 148,  “Accounting forStock-Based Compensation-Transition and Disclosure an amendment of FASBStatement No. 123”, the Company’s net loss and net loss per share would haveincreased, to the pro forma amounts indicated below:

 
|                  |   | **Three  Months  Ended  June 30, 2003** |     | **Nine  Months  Ended  June 30, 2003** |   | **October 20, 1977  (Inception)  to  June 30, 2003** |   |
|-----------------------|--------|-----------------------------------------|----------|----------------------------------------|--------|------------------------------------------------------|--------|
| Net loss              |   |                                    |     |                                   |   |                                                 |   |
| As reported           |   | $                                       | (103,279 | )                                      | $      | (790,851                                             | )      | $ | (5,002,673 | ) |
| Pro forma             |   | $                                       | (104,169 | )                                      | $      | (794,718                                             | )      | $ | (5,005,540 | ) |
|                  |   |                                    |     |                                   |   |                                                 |   |
| Loss per common share |   |                                    |     |                                   |   |                                                 |   |
| As reported           |   | $                                       | (0.01    | )                                      | $      | (0.04                                                | )      | $ | (0.26 | ) |
| Pro forma             |   | $                                       | (0.01    | )                                      | $      | (0.04                                                | )      | $ | (0.26 | ) |

 

9

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|                  |   | **Three  Months  Ended  June 30, 2002** |     | **Nine  Months  Ended  June 30, 2002** |   |
|-----------------------|--------|-----------------------------------------|----------|----------------------------------------|--------|
| Net loss              |   |                                    |     |                                   |   |
| As reported           |   | $                                       | (245,094 | )                                      | $      | (713,277 | ) |
| Pro forma             |   | $                                       | (245,578 | )                                      | $      | (715,224 | ) |
|                  |   |                                    |     |                                   |   |
| Loss per common share |   |                                    |     |                                   |   |
| As reported           |   | $                                       | (0.01    | )                                      | $      | (0.05 | ) |
| Pro forma             |   | $                                       | (0.01    | )                                      | $      | (0.05 | ) |

 

The fair value of each option grant is estimated on the dateof grant using the Black-Scholes option pricing model with the followingweighted-average assumptions and results:

 
|                                              |   | **June 30,** |   |
|---------------------------------------------------|--------|--------------|--------|
|                                              |   | **2003**     |   | **2002** |   |
|                                              |   |         |   |   |   |
| Dividend yield                                    |   | 0.00         | %      | 0.00 | % |
| Risk free interest rate                           |   | 2.99         | %      | 3.50 | % |
| Expected life                                     |   | 5.92 Yrs.    |   | 5.00 Yrs. |   |
| Expected volatility                               |   | 16.21        | %      | 17.70 | % |
| Estimated fair value of options granted per share |   | $            | 0.0354 |   | $ | 0.0194 |   |
|                                                   |        |              |        |  |  |  |  |

 

**NOTE 3 – LINE OF CREDIT**

 

The Company has a business secured open line of creditwith a bank in the amount of $50,000. The line of credit bears interest at theprime rate, as published in the *Wall Street Journal*, plus 2.5% (7.75% at June 30, 2003).  At June30, 2003 and 2002 therewas a balance due in the amount of $51,334and $51,396, respectively.

 

**Note 4 - Commitments**

 

The Company and subsidiary lease office space under anon-cancelable operating lease.  At June 30, 2003, there are futureminimum payments under the lease of $49,988, which are due through June 30,2004.

 

Rental expense was$36,009 and $36,341 for the nine months ended June 30, 2003 and 2002, respectively and was $286,492for the period October 27, 1997 (inception) to June 30, 2003.

 

10

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**Note 5 – Earnings Per Share**

 

At June 30,2003 and 2002 there were271,428 and 100,000 weighted-average shares of common stock issuable understock options, respectively, not included in the calculation of fully dilutedearnings per share because their effects would have been antidilutive.  Therefore, diluted earnings per share werethe same as basic earnings per share at June30, 2003 and 2002.

 

**Note 6 - Related Party Transactions**

 

**Intangible Assets**

 

In January 1999 the Company acquired certainintangible assets from Trans-Science Corporation, a company with commonshareholders through July 7, 2000.  Alsoin January 1999, Trans-Science Corporation sold, assigned and transferred allof its rights, title and interest in the Earthquake Retrofit Design Software tothe Company for $330,000 in cash, an amount significantly less than the costincurred by Trans-Science Corporation. In addition, during the period ended September 30, 1999, the Companypaid Trans-Science Corporation $90,000 for upgrade services on this software.

 

**Notes Payable**

 

On November 20, 2001, the Company entered into aSecured Promissory Note with Marathon Development Company, Inc. (Marathon) inthe amount of $105,000, including $5,000 of interest at a rate of 10% perannum.  Marathon was a non-affiliatedentity at that date.  The note issecured by the Company’s assets and is personally guaranteed by a director ofthe Company.  The note was due onFebruary 20, 2002.  In addition, if notpaid when due, the Company is to issue 10,000 shares of common stock per monthto Marathon, until the note is paid. Accordingly, the Company issued 97,350 shares of common stock valued at$14,182. At June 30, 2003 and 2002 there was a balance due in theamount of $0 and $80,500, respectively and accruedinterest in the amount of $0 and$13,851, respectively.

 

On January 8, 2001 and April 20, 2001 the Companyentered into promissory notes with an officer in the amount of $159,439 and56,965, respectively.  Principal is tobe advanced in various amounts and will accrue interest at 12%. The principaland interest are to be paid nine months from the date of latest advance. Duringthe nine months ended June 30, 2003 the officer advanced the Company $2,016 andthe Company paid $98,783.  At June 30,2003 and 2002 there was a balance due in the amount of $454 and $98,184, respectivelyand accrued interest in the amount of $29,798 and $23,781, respectively.

 

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

 

11

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from the date of the last advance.  At June30, 2003 and 2002 therewas a balance due in the amount of $33,376 and $34,608, respectively andaccrued interest in the amount of $9,020 and $5,008, respectively.

 

An officer of the Company loaned Trans-ScienceCorporation a total of $1,585 to cover operating expenses.  At June30, 2003 and 2002 therewas a balance due in the amount of $1,185.

 

On January 17, 2002, the Company issued a promissorynote payable to a shareholder in the amount of $10,000, plus interest at a rateof 10% per annum.  The principal is tobe advanced to the Company in various amounts. The accrued interest shall be paid in the Company’s common stock eachquarter.  The note is due on January 17,2003.  At June 30, 2003 and 2002 therewas a $10,000 balance due and accrued interest in the amount of $449.

 

On June 17, 2002, the Company issued a promissory notepayable to a shareholder in the amount of $3,000, plus interest at a rate of10% per annum.  The note was due on July17, 2002.  At June 30, 2003 and 2002there was a $3,000 balance due and accrued interest in the amount of $319 and$12, respectively.

 

On July 23, 2002, the Company issued a promissory notepayable to a shareholder in the amount of $5,000, plus interest at a rate of 8%per annum.  The note was due on July 24,2003.  At June 30, 2003 there was a$5,000 balance due and accrued interest in the amount of $375.

 

**Agreements**

 

The Company has several consulting agreements withshareholders and officers for management, marketing and technicalservices.  Consulting fees for the threeand nine months ended June 30, 2003were $59,055 and $210,756, respectively and for the three and nine months endedJune 30, 2002 were $92,000 and $221,478, respectively.  Consulting fees for the period October 27,1997 (inception) to June 30, 2003 were $833,255.

 

**Note 7 – Cancellation of Consulting Agreement**

 

On January 28, 2002 theCompany entered into an agreement with a consultant to assist the Companydeveloping market demand for composite technologies.  According to the terms of the agreement, theCompany agreed to pay the consultant $10,000 per month, payable in installmentsof $5,000 per month, with any unpaid balance due upon specific performancedefined in the agreement.

 

On June 30, 2002 the agreement was cancelled, and theunpaid balance due in the amount of $85,000 was cancelled and recognized asother income (expenses) in the statement of operations.

 

12

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**Note 8 – Going Concern**

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.The Company’s financial position and operating results raise substantial doubtabout the Company’s ability to continue as a going concern, as reflected by thenet loss of $103,279 and $790,851 for the three and nine months ended June 30,2003, respectively and losses of $5,002,673 accumulated from October 20, 1997(Inception) to June 30, 2003. In addition the Company’s current liabilitiesexceed current assets by $842,085 at June 30, 2003. The ability of the Companyto continue as a going concern is dependent upon commencing operations, developingsales and obtaining additional capital and financing. The consolidatedfinancial statements do not include any adjustments that might be necessary ifthe Company is unable to continue as a going concern.

 

The Company is currently seeking additional capital toallow it to begin its planned operations. Management believes the Company’s sales and marketing efforts willpartially reduce the negative impact of accumulated losses.    In addition, the Company continues effortsto re-capitalize accounts payables into shareholders’ equity and negotiatereductions in other accounts payable. The Company’s management believes these efforts will substantiallyreduce current liabilities.

 

13

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###  

### **Item 2.  Management Discussion and Analysis**

 

**General Overview**

 

Composite Solutions, Inc. (CSI) is a development stage companylicensing and distributing proprietary composite materials technology andengineering services for applications in the civil engineering and civilconstruction markets. CSI’s technology represents a revolutionary breakthroughfor the construction 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 stronger thanconstruction steel and 5 times lighter. When used in concert 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 two main categories: 1)Composite Overlays for structural retrofits and 2) the Carbon Shell System(CSS) for new construction and infrastructure renewal. In both cases, thematerials consist of FRPs.

 

The Composite Overlay is a “structural skin” which is created bysaturating fabric woven out of carbon, aramid (e.g., kevlar) or otheraerospace-quality fiber with an epoxy-type resin. This product is marketedunder the CSI trade name “RetroShield”. The specific composition, architectureand application of the fabric plus resin overlay is engineered by CSI tospecific 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 extremely effectivefor seismic retrofits, blast hardening, structural upgrades, and structuralrepairs. Typically only a few layers of a 1mm thick overlay are needed for suchapplications.

 

The CSS is a lightweight, high-strength plant-manufactured advancedcarbon fiber-reinforced polymer (CFRP) shell (tube) of circular or non-circularcross-section. In new construction of buildings, bridges and other structures,the shell is typically filled with concrete; in this application it serves bothas a stay-in-place form and reinforcement. As a result, this systemsubstantially reduces the need for reinforcing steel and the use of heavylifting equipment, which constitutes a significant part of system buildingcosts. The CSS can be used for structural elements such as columns, beams andgirders for buildings and bridges and for pilings for harbors and docks.

 

In new construction of infrastructure systems, the CSS can be used foroil, gas, and water pipelines. Advantages over conventional material in suchapplications include durability (no corrosion) and thermal stability (nothermal expansion).

 

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For infrastructure renewal, the CSS is employed as a structural linerfor pipelines that have deteriorated due to age or environmental conditions. Anexample application is the repair of large diameter (2-4m), prestressedconcrete cylindrical pipes (PCCPs) that carry high pressure, high flow waterfrom its source to urban areas.

 

The effectiveness and integrity of the Company’s composite overlaytechnology and the CSS has been extensively validated by full-scale laboratorytests at The Charles Lee Powell Structural Research Laboratories (“PowellLaboratories”) located at The 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 one of the few such facilities in theworld with the capability to execute full-scale tests and have performedextensive tests relating to the retrofit, and upgrading of structural elementssuch as walls, columns and floor slabs.

 

For blast retrofits, the composite overlay technology has beenvalidated in U.S. Government field tests. These tests range from structuralcomponents to a full-scale building.

 

**Business Areas**

 

CSI is marketing its new material systems and technologies in fourprimary areas. These are: 1) Homeland Security; 2) Seismic retrofits andStructural Upgrades; 3) Infrastructural Renewal; and 4) New Construction.

 

The CSI technologies and product lines for the Homeland Security areaincludes: 1) Carbon Fiber Reinforced Polymer (CFRP) and Aramid Fiber ReinforcedPolymer (AFRP)- based blast retrofit methodologies, material systems, and datafor civil, marine and aircraft structures; 2) CFRP- based Carbon Shell Systemfor blast hardening of new structures; 3) Window Catcher Systems for occupantprotection against blast generated glass fragments; and 4) AFRP- basedComposite Ballistic Systems for the mitigation of projectiles from firearms anddebris from blast loads.

 

The CSI technologies and product lines for the Seismic Retrofits andStructural Upgrades include CFRP material systems, data bases, designmethodologies, and design software for civil structures such as buildings andbridges.

 

CSI’s efforts in the area of Infrastructure Renewal are currentlyfocused on the rehabilitation of water transmission lines in the form of largediameter prestressed concrete cylindrical pipes (PCCPs). The technologies andproduct lines here include CFRP- based structural liner designs and materialsystems, cost metrics and installation methodologies. The associated productlines include design methodologies, data bases, and distribution of CFRP forms.

 

CSI’s products for the area of new construction include thedistribution of CFRP stay in place structural forms, design methodologies forthe use of such forms, and data bases on performance.

 

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**Marketing and Sales**

 

CSI has commenced operations in all four areas during 2002/2003. Asummary of events follows:

 

Infrastructure Renewal – The Companycompleted a design/build project in Seoul, Korea in May, 2003. For this effort,which concerned a structural upgrade of a parking structure, CSI provideddesign/engineering services, CFRP material systems, application training, andquality control. Other projects in Korea are in the planning stage.

 

The Company continues to provide testing as part of our agreement witha large market international general contractor. We anticipate moving forwardwith additional business derived from this relationship once the testing hasbeen completed.

 

Homeland Security - A TeamingAgreement has been executed with a large defense contractor to utilize theCompany’s services in the areas of vulnerability assessment, threat reductionand the use of FRP composite technologies for blast and ballistic remediationin an anti-terrorism/force protection environment. On June 5, 2003 acontract with said defense contractor was signed for these services.

 

Seismic Retrofits - A TeamingAgreement was executed on June 30, 2003 with a large market nationalgeneral contractor. This Agreement is focused on developing a synergisticrelationship using the Company’s FRP composite design and engineeringcapabilities in conjunction with the general contractor’s build capabilitiesand market presence to pursue opportunities in the hospital, commercial, andmilitary/federal marketplace.

 

A contract has been signed with a national health care group for theseismic retrofit of a hospital in California. Work on this project hascommenced and is currently in the design/engineering phase.

 

A seismic retrofit was completed in 2003 on a residence (AmbassadorRichard Sklar) in northern California. This project was design/build andincluded design, engineering, material system, and application.

 

A seismic retrofit is underway on a church in southern California. Thisis a historic structure; CSI’s FRP composite technology will preserve theoriginal architecture. This project is currently in the design/engineeringphase.

 

Subsequent to the close of the quarter ending June 30, 2003, CSIsigned a contract (design/build) for the seismic retrofit of a commercialstructure in San Diego, California. This project is currently in thedesign/engineering phase.

 

New Construction - New opportunitiesare being developed , on an international basis, with respect to theutilization of the Carbon Shell System (CSS) for building and transportationsystems. In connection with this effort, a FRP composite bridge in Seoul, Koreais under

 

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consideration by a Korean customer. Under this effort, CSI wouldprovide design/engineering services, material and component systems,construction training and supervision, and quality control.

 

**Critical Accounting Policies andEstimates**

 

We describe our significant accounting policies in the notes to ourfinancial statements included in our Annual Report on Form 10-KSB. However, in response to the SEC’s Release No. FR-60, “Cautionary AdviceRegarding Disclosure About Critical Accounting Policy,” issuedDecember 12, 2001, we have identified the policies we believe are mostcritical to an understanding of our financial statements. The most criticalaccounting policies are related to the following areas: revenue recognition,accounting for equity securities issued in exchange for services and insettlement of liabilities, intangible assets, and impairment of long-livedassets.  Since application of these accounting policies involves theexercise of judgment and use of estimates, actual results could differ fromthose estimates.  There have been no material changes in our criticalaccounting policies that impacted our financial condition or results ofoperations as of and for the three and nine month periods ended June 30,2003.

 

Revenue Recognition - Revenue fromthe sale of product is recognized when materials 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 on the differencebetween estimates of total contract revenues and costs of completion. These estimates are reviewed and revised periodically throughout the contractterm, and adjustments to profits resulting from such revisions are recorded inthe accounting period in which the revisions are made.  Profits arerecognized as the contract phase of the work is completed.  Losses oncontracts are recorded in full as they are identified.

 

Accounting for Equity Securities Issued in Exchangefor Services and In Settlement of Liabilities**-** The Company measures the value oftransactions in which equity instruments are issued for services or insettlement of liabilities at the fair value of the common stock issued inaccordance with SFAS No. 123.  The fair value is measured at the dateservice is complete (EITF 96-18).

 

In the case of settlement of liabilities, the fair value is measured atthe date the settlement agreement is reached, which approximates the date theequity instrument is issued.  Differences between liabilities, asoriginally recorded and the fair value of equity instruments issued insettlement of liabilities are recorded as an adjustment to expenses.

 

Intangible Assets**-**Other assets include intangibles such aslicensed technology, computer software and goodwill.   InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 142, *Goodwill and Other IntangibleAssets. *SFAS No. 142 establishes new

 

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guidelines for accounting for goodwill and other intangibleassets.  The Company implemented the provisions of SFAS No. 142 onOctober 1, 2001.  Since adoption, existing goodwill and certain intangibleswith indefinite useful lives are no longer amortized but instead are assessedfor impairment at least annually.  Other intangible assets are recorded athistorical cost less amortization on the straight line method based onestimated useful lives.  Periods of amortization are evaluated continuallyto determine whether later events and circumstances warrant revised estimateduseful lives.

 

Impairment of Long-Lived Assets**-**Long-lived assets and intangible assetssubject to amortization are reviewed for impairment in accordance with SFAS No.121, *Impairment of Long-Lived Assets andLong-Lived Assets to Be Disposed Of.  *In accordance withSFAS No. 121, an impairment loss is recognized whenever events or changes incircumstances indicate that the carrying amount of the asset may not berecovered, based upon an estimate of future cash flows.  An impairmentloss is then recognized whenever the carrying amount of the asset exceeds itsfair value.  After an impairment loss is recognized, the adjusted carryingamount of the asset becomes its new basis.

 

**Results of Operations**

 

The following is a discussion of the financial condition and results ofoperations for the quarter ended June 30, 2003.  This discussionshould be read in conjunction with our consolidated financial statements andthe notes related thereto.

 

Net Loss:  For the quarterended June 30, 2003, the Company recorded a net loss of $103,279 ($0.01per share), compared to a net loss of $245,094 ($0.01 per share) during thequarter ended June 30, 2002. The decreased loss, on a year over yearcomparison, is mainly due to an increase in revenues (see below) and otherincome.

 

Revenue:  The revenues and costof sales for the quarter ended June 30, 2003 were $192,213 and $144,498,respectively; as compared to revenues of $5,382 and cost of sales of $4,552 forthe quarter ended June 30, 2002. The increase in revenues reflects theCompany’s successful sales and marketing efforts to acquire contracts as wellas the commencement of work on such contracts. As a result, gross profitsincreased to $47,715 for the quarter ended June 30, 2003, as compared togross profits of $830 for the quarter ended June 30, 2002.

 

**Reduction of Liabilities andRecapitalization**

 

A reduction in the Company’s liabilities occurred during the quarterended June 30, 2003. This action reduced the total liabilities from$1,831,362 as of the quarter ended March 31, 2003 to $868,193 as of thequarter ended June 30, 2003. This compares to total liabilities of$1,410,211 as of the quarter ended June 30, 2002. This debt reduction wasaccomplished by a recapitalizing the Company with employee and directoraccountspayable and accrued wages to additional paid in capital. In total,during the quarter ended June 30, 2003 the Company recapitalized accountspayable and accrued wages in the amount of $1,028,366 (see note 2 to theFinancial Statements). Additional recapitalization is under negotiation whichmay or may not occur in the

 

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future. These will consist of further recapitalization of accountspayable and accrued wages. In addition, negotiations with creditors areanticipated to result in the conversion of certain payables to equity.

 

As a result of the aforementioned reduction of liabilities, the totalshareholders equity increased to $27,575 at June 30, 2003; this comparedto a deficit of ($304,130) at June 30, 2002.

 

**Liquidity and Capital Resources**

 

The Company had total assets of $895,768 as of June 30, 2003,including intangible assets of $439,599 and goodwill of $418,956, as comparedto the total assets of $1,106,081, including intangible assets of $602,697 andgoodwill of $418,955 as of June 30, 2002.

 

Although the Company’s revenues have significantly increased during thequarter ending June 30, 2003 (see “Results of Operation” above), theCompany has been operating with insufficient capital. As a consequence, it hasnot met all of its’ financial obligations. Previously, in an effort to remedythis situation, the Company has sold its common stock to generate additionalcapital. However, no such stock sale transactions occurred during the quarterending June 30, 2003.

 

The Company’s cash position is anticipated to improve significantly asbillings on new contracts (see “Marketing and Sales” above) are executed.Nevertheless, the Company is pursuing outside investment to augment increasedrevenue generation and the furtherance of key strategic relationships andteaming arrangements in the construction and military/federal markets.

 

**Cautionary Statement RegardingForward-Looking Statements**

 

This report contains “forward-looking” statements.  The Company isincluding this statement for the express purpose of availing itself ofprotections of the safe harbor provided by the Private Securities LitigationAct of 1995 with respect to all such forward-looking statements.  Examplesof forward-looking statements include, but are not limited to: (a) projectionsof revenues, capital expenditures, growth, prospects, dividends, capitalstructure and other financial matters; (b) statements of plans objectives ofthe Company or its management or Board of Directors; (c) statements of futureeconomic performance; (d) statements of assumptions underlying other statementsand statements 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 or the effect ofcertain events on the Company’s operating results is inherentlyuncertain.  Therefore, the Company wishes to caution each reader of thisreport to carefully consider the following factors, any or all of which have inthe past and could in the future affect the ability of the Company to achieveits anticipated results and could cause actual results to differ materiallythan those discussed herein: (1) ability to attract and retain customers topurchase its products and services, (2) ability to commercialize and marketproducts (3) results of research and development, (4) technological advances bythird parties and competition, (5) future capital needs of the Company, (6)history of operating

 

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losses, (7) dependence upon key personnel, and (8) general economic andbusiness conditions.  The Company expressly disclaims any obligation orundertaking to release publicly any updates or revisions to any forward—lookingstatement contained herein to reflect any change in the Company’s expectationswith regard thereto or any change in events, conditions or circumstances onwhich any such statement is based.

 

**Risks**

 

Need for Additional Capital**-**The Company’s future is subject tosubstantial risks and uncertainties. The Company has operated at a loss for itsentire history and there can be no assurance of ever achieving profitability.The Company had a net loss of $5,002,673 for the period October 20, 1997(Inception) to June 30, 2003.  Current liabilities exceed currentassets by $842,085.  Our future capital requirements will depend ourability to successfully market our composite materials technology.  Ourrecurring operating losses and growing working capital needs will requireadditional capital to support operations and there can be no assurance thatworking capital will become available, if at all.

 

The occurrence of any of the aforementioned events could adverselyaffect our ability to meet our business plans.

 

Limited Public Market for Common Stock **-**There currently is a very limited publicmarket for the Company’s common stock and no assurance can be given that alarge public market will develop in the future. The Company’s common stock maybe thinly traded, if at all, even if the Company achieves full operation andhas significant revenues.

 

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

 

Future Sales of Common Stock by Our ExistingShareholders Could Reduce the Price of Our Common Stock**-**The market price of our common stockcould decline as a result of sales by our existing shareholders of shares ofcommon stock in the market.  Likewise, the perception that these salescould occur may result in the decline of the market price of our common stock.These sales also might make it more difficult for us to sell equity securitiesin the future.

 

Unless We Can Establish Significant Sales of OurCurrent Products, Our Potential Revenues May Be Significantly Reduced**-**We expect the licensing and distributionof our composite materials technology, and related engineering services willaccount for a majority, if not all, of our future revenue.  Continued andexpanded market acceptance of composite overlays and carbon fiber-reinforced polymershells in construction of infrastructure systems and infrastructure renewal is,therefore, critical to our future success and to our ability to generaterevenues.  Failure to achieve market acceptance of our composite materialstechnology would significantly harm our business. Our future financialperformance will depend in significant part on the continued market acceptanceof our composite materials technology, and on the development, introduction andmarket acceptance of any future products.  There can be no assurance thatwe will be successful in marketing our composite materials technology or anyfuture products and any failure to do so would significantly harm our business.

 

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The Loss of Our Key Technical Individuals Would Havean Adverse Impact on Future Development and Could Impair Our Ability to Succeed**-**Our performance is substantiallydependent on the technical expertise of Gilbert A. Hegemier, Ph.D. and ourability to hire and retain personnel with similar technical expertise. The lossof any of Gilbert A. Hegemier, Ph.D. could have a materially adverse effect onour business, development, financial condition, and operating results.  Wedo not maintain “key person” life insurance on any of our directors or seniorexecutive officers and we do not have life insurance on Gilbert A. Hegemier,Ph.D.

 

We Do Not Expect to Declare or Pay Any Dividends**-**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, It IsDifficult to Predict Our Future Revenues - As a result of ourlimited operating history and the new technology, which we seek to introduceinto the markets in which we compete, we are unable to accurately forecast ourrevenues.  Our current and future expense levels are based largely on ourplan of operation.  Revenues and operating results generally depend on ourability to develop a base of customers and businesses.  We may be unableto adjust spending in a timely manner to compensate for any unexpected revenueshortfall.  Accordingly, any significant shortfall in estimated revenuesin relation to our planned expenditures would have an immediate adverse effecton our business, prospects, financial condition and results of operations.

 

We Expect to Experience Significant Fluctuations inOur Future Annual Operating Results - Factors that mayadversely affect our annual operating results include but are not limited to:

•      our ability to obtain market acceptance ofour composite materials technology;

•      our ability to attract and retaincustomers and maintain customer satisfaction;

•      our ability to attract new personnel in atimely and effective manner;

the amount and timing of operating costs and capitalexpenditures relating to expansion of our business, operations andinfrastructure;

•      governmental regulation;

•      general economic conditions.

 

We Will Have to Expend Substantial Funds onAdvertising, Sales and Marketing in the Future**-**We have not incurred significantadvertising, sales and marketing expenses to date.  To increase awarenessfor our composite materials technology, we expect to spend significantly moreon advertising, sales and 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 andsales campaign that will effectively demonstrate the advantages of our,services and products.  To date, our experience with respect to marketingour products and services is very limited.  We may also elect to enterinto agreements or relationships with third parties regarding the promotion ormarketing of our composite materials technology.  There can be noassurance that we will be able to establish adequate sales and marketingcapabilities, that we will be able to enter into marketing agreements orrelationships with third parties on financially acceptable terms, or that anythird parties with whom we enter into such

 

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arrangements will be successful in marketing and promoting ourcomposite materials technology, or other products and services offered by us.

 

Our Future Revenues are Dependent on the Acceptance ofthe Products and Services that We Offer **-**Our future revenues and our ability togenerate profits in the future are substantially dependent upon the widespreadacceptance and use of our composite materials technology.  There can be noassurance that our composite materials technology will become widely acceptedor that a sufficiently broad base of new construction or infrastructure renewalwill use our composite materials technology.

 

There May Be the Possibility of Volatile SharePrices**-**Thetrading price of our common shares may be subject to wide fluctuations. Tradingprices of the common shares may fluctuate in response to a number of factors,many of which are beyond our control. In addition, the stock market in general hasexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of such companies.Broad market and industry factors may adversely affect the market price of thecommon shares, regardless of our operating performance.

 

 

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

 
| **Item 1.**  | **Legal  Proceedings**                                                                                                                                                         |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                           |
|         | Neither the Company nor  its subsidiary is the subject of any pending legal proceeding.                                                                                        |
|         |                                                                                                                                                                           |
| **Item  6.** | **Exhibits  and Reports on Form 8-K**                                                                                                                                          |
|         |                                                                                                                                                                           |
| **(a)**      | **Exhibits**                                                                                                                                                                   |
|         |                                                                                                                                                                           |
|         | The exhibits required to be filed herewith by item  601 of Regulation S-B, as described in the following index of exhibits, are  incorporated herein by reference, as follows: |
|         |                                                                                                                                                                           |
|         | None.                                                                                                                                                                          |
|         |                                                                                                                                                                           |
| **(b).**     | **Reports on Form 8-K.**                                                                                                                                                       |
|         |                                                                                                                                                                           |
|         | None.                                                                                                                                                                          |

 

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**Signatures**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act the Company has caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| Date: August 18, 2003 |                      |
|----------------------------|---------------------------|
|                       |                      |
|                       | 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 |     | August 18, 2003 |
| Gilbert A. Hegemier     |   |         |                  |     |
|                         |        |              |                       |          |  |

 

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