** **

**SECURITIES & EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

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

 

**For the quarterly period ended March31, 2003**

 

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

** **

**CommissionFile No. 000-24551**

 

**COMPOSITE SOLUTIONS, INC.**

(Name of Small BusinessIssuer in its Charter)

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

 

 

Former name andaddress, if changed since last report

 

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

 

 

 

As of  April 30, 2003, 21,152,114 shares of CommonStock were outstanding.

 

 

 

 

----

 

**PART 1 - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

        The following consolidated financialstatements contain information regarding the Company’s balance sheet, profit& loss, shareholder’s equity, and cash flow for the quarters ended March31, 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

----

 
| **COMPOSITE  SOLUTIONS, INC AND SUBSIDIARIES** |
|------------------------------------------------|
| (A Development Stage  Company)                 |
| **Consolidated Balance Sheets**                |
| (Unaudited)                                    |

 
|                                                                                                                                                           |   | **March 31,** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------|
|                                                                                                                                                           |   | **2003**      |    | **2002** |   |
|                                                                                                                                                           |   |          |    |   |   |
| **ASSETS**                                                                                                                                                     |   |          |    |   |   |
|                                                                                                                                                           |   |          |    |   |   |
| **Current  assets**                                                                                                                                            |   |          |    |   |   |
| Cash                                                                                                                                                           |   | $             | 10,377  |   | $ | 5,663 |   |
| Accounts  receivable, net of allowance for doubtfulaccounts of $0 at March 31, 2003 and  2002                                                                  |   | —        |    | 4,443 |   |
| Accounts  receivable — related party                                                                                                                      |   | 16,081        |    | 44,640 |   |
| Costs in excess  of billings                                                                                                                                   |   | 2,000         |    | 78,322 |   |
| Prepaid expenses                                                                                                                                               |   | 24,916        |    | 775 |   |
| Other current  assets                                                                                                                                          |   | 37            |    | 46 |   |
|                                                                                                                                                           |   |          |    |   |   |
| Total current  assets                                                                                                                                          |   | 53,411        |    | 133,889 |   |
|                                                                                                                                                           |   |          |    |   |   |
| **Property,  plant and equipment, net**                                                                                                                        |   | 1,521         |    | 818 |   |
|                                                                                                                                                           |   |          |    |   |   |
| **Other  assets**                                                                                                                                              |   |          |    |   |   |
| Intangible  assets, net                                                                                                                                        |   | 449,894       |    | 601,676 |   |
| Goodwill                                                                                                                                                       |   | 418,956       |    | 395,295 |   |
| Deposits                                                                                                                                                       |   | 10,071        |    | 12,067 |   |
|                                                                                                                                                           |   |          |    |   |   |
| Total assets                                                                                                                                                   |   | $             | 933,853 |   | $ | 1,143,745 |   |
|                                                                                                                                                           |   |          |    |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                 |   |          |    |   |   |
|                                                                                                                                                           |   |          |    |   |   |
| **Current  liabilities**                                                                                                                                       |   |          |    |   |   |
| Accounts payable                                                                                                                                               |   | $             | 551,289 |   | $ | 441,125 |   |
| Billings in  excess of costs                                                                                                                                   |   | 89,118        |    | 2,135 |   |
| Employee and  director payable                                                                                                                                 |   | 642,174       |    | 230,498 |   |
| Related party  payable                                                                                                                                         |   | 66,081        |    | 94,640 |   |
| Line of credit                                                                                                                                                 |   | 51,334        |    | 51,396 |   |
| Related party  notes payable                                                                                                                                   |   | 47,416        |    | 147,014 |   |
| Accrued expenses                                                                                                                                               |   | 332,572       |    | 269,535 |   |
| Income taxes  payable                                                                                                                                          |   | 24,881        |    | 3,200 |   |
| Accrued future  losses on contracts                                                                                                                            |   | 26,497        |    | — |   |
|                                                                                                                                                           |   |          |    |   |   |
| Total current  liabilities                                                                                                                                     |   | 1,831,362     |    | 1,239,543 |   |
|                                                                                                                                                           |   |          |    |   |   |
| **Shareholders’  equity**                                                                                                                                 |   |          |    |   |   |
| Preferred stock;  $0.0001 par value; 10,000,000shares authorized; 0 shares issued and  outstanding                                                             |   | —        |    | — |   |
| Common stock;  $0.0001 par value; 50,000,000shares authorized; 21,152,114 and  16,749,055shares issued and outstanding at March 31, 2003and 2002, respectively |   | 2,113         |    | 1,674 |   |
| Additional paid  in capital                                                                                                                                    |   | 3,999,768     |    | 3,415,790 |   |
| Accumulated  deficit                                                                                                                                           |   | (4,899,390    | )       | (3,513,262 | ) |
|                                                                                                                                                           |   |          |    |   |   |
| Total  shareholders’ equity                                                                                                                               |   | (897,509      | )       | (95,798 | ) |
|                                                                                                                                                           |   |          |    |   |   |
| Total  liabilities and shareholders’ equity                                                                                                               |   | $             | 933,853 |   | $ | 1,143,745 |   |

 

See AccompanyingFootnotes.

 

 

3

----

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

 
|                                                                                                  |   |                   |       |                 |       |          |       |       |     | **October  20, 1997** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------|------------|----------------------|------------|---------------|------------|------------|----------|-----------------------|--------|
|                                                                                                  |   |                   |       |                 |       |          |       |       |     | **(Inception)**       |   |
|                                                                                                  |   | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** | **to**        | ** ** |
|                                                                                                  |   | **March 31,**          | ** ** | **March 31,**        | ** ** | **March 31,** | ** ** |
|                                                                                                  |   | **2003**               |       | **2002**             |       | **2003**      |       | **2002**   |     | **2003**              |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Revenues**                                                                                          |   |                   |       |                 |       |          |       |       |     |                  |   |
| Contract revenue                                                                                      |   | $                      | 61,104     |                 | $          | 132,946       |       | $          | 128,012  |                  | $      | 221,676 |   | $ | 396,696 |   |
| Armored panels                                                                                        |   | —                 |       | —               |       | —        |       | —     |     | 40,850                |   |
| Total revenue                                                                                         |   | 61,104                 |       | 132,946              |       | 128,012       |       | 221,676    |     | 437,546               |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Cost  of sales**                                                                                    |   |                   |       |                 |       |          |       |       |     |                  |   |
| Salaries and  consulting fees                                                                         |   | 100,565                |       | 50,474               |       | 138,569       |       | 133,771    |     | 386,738               |   |
| Consulting fees  — related party                                                                 |   | —                 |       | —               |       | —        |       | —     |     | 109,500               |   |
| Armored panels                                                                                        |   | —                 |       | —               |       | —        |       | —     |     | 28,246                |   |
| Cost of sales                                                                                         |   | 100,565                |       | 50,474               |       | 138,569       |       | 133,771    |     | 524,484               |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Gross profit                                                                                          |   | (39,461                | )          | 82,472               |       | (10,557       | )          | 87,905     |     | (86,938               | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Expenses**                                                                                          |   |                   |       |                 |       |          |       |       |     |                  |   |
| Consulting fees                                                                                       |   | 117,291                |       | 138,732              |       | 213,201       |       | 203,773    |     | 743,168               |   |
| Consulting fees  — related party                                                                 |   | 74,000                 |       | —               |       | 144,000       |       | —     |     | 656,999               |   |
| Depreciation and  amortization                                                                        |   | 12,922                 |       | 15,619               |       | 26,118        |       | 20,614     |     | 353,445               |   |
| General and  administrative expenses                                                                  |   | 98,753                 |       | 66,851               |       | 144,041       |       | 113,028    |     | 1,045,108             |   |
| Organizational  expenses                                                                              |   | —                 |       | —               |       | —        |       | —     |     | 514                   |   |
| Professional  fees — other                                                                       |   | 40,492                 |       | 56,263               |       | 46,600        |       | 57,145     |     | 391,506               |   |
| Professional  fees — related party                                                               |   | —                 |       | —               |       | —        |       | —     |     | 60,839                |   |
| Salaries                                                                                              |   | 30,420                 |       | 61,168               |       | 41,340        |       | 154,801    |     | 1,266,369             |   |
| Provision for  future contract losses                                                                 |   | 26,497                 |       | —               |       | 26,497        |       | —     |     | 26,497                |   |
| Impairment loss                                                                                       |   | —                 |       | —               |       | —        |       | —     |     | 237,248               |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Total expenses                                                                                        |   | 400,375                |       | 338,633              |       | 641,797       |       | 549,361    |     | 4,781,693             |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Loss from  operations                                                                                 |   | (439,836               | )          | (256,161             | )          | (652,354      | )          | (461,456   | )        | (4,868,631            | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Other  income (expense)**                                                                           |   |                   |       |                 |       |          |       |       |     |                  |   |
| Interest income                                                                                       |   | —                 |       | —               |       | —        |       | —     |     | 8,363                 |   |
| Interest income  — forgiveness of debt                                                           |   | —                 |       | —               |       | —        |       | —     |     | 17,825                |   |
| Other Income                                                                                          |   | —                 |       | 10,534               |       | —        |       | 10,534     |     | 10,800                |   |
| Gain on  forgiveness of debt                                                                          |   | —                 |       | 266                  |       | —        |       | 266        |     | 8,261                 |   |
| Other expenses                                                                                        |   | (11,005                | )          | (12,242              | )          | (11,574       | )          | (14,792    | )        | (19,355               | )      |
| Loss on disposal  of assets                                                                           |   | —                 |       | —               |       | —        |       | —     |     | (190                  | )      |
| Interest expense                                                                                      |   | (955                   | )          | (1,005               | )          | (1,960        | )          | (2,135     | )        | (115,929              | )      |
| Loss on  forgiveness of debt                                                                          |   | —                 |       | —               |       | —        |       | —     |     | (11,021               | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Total other  income (expense)                                                                         |   | (11,960                | )          | (2,447               | )          | (13,534       | )          | (6,127     | )        | (101,246              | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Loss before  provision for income taxes                                                               |   | (451,796               | )          | (258,608             | )          | (665,888      | )          | (467,583   | )        | (4,969,877            | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Provision for  income taxes                                                                           |   | 21,681                 |       | —               |       | 21,681        |       | 600        |     | 34,809                |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Loss  from continuting operations**                                                                 |   | (473,477               | )          | (258,608             | )          | (687,569      | )          | (468,183   | )        | (5,004,686            | )      |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Discontinued  operations**                                                                          |   |                   |       |                 |       |          |       |       |     |                  |   |
| Income from  discontinued operations (includinggain on sale of subsidiary in the  amount of $177,755) |   | —                 |       | —               |       | —        |       | —     |     | 105,295               |   |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Net  loss**                                                                                         |   | $                      | (473,477   | )                    | $          | (258,608      | )          | $          | (687,569 | )                     | $      | (468,183 | ) | $ | (4,899,391 | ) |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| **Loss  per common share, basic and diluted**                                                         |   |                   |       |                 |       |          |       |       |     |                  |   |
| Net loss from  continuing operations                                                                  |   | $                      | (0.02      | )                    | $          | (0.02         | )          | $          | (0.04    | )                     | $      | (0.03 | ) | $ | (0.31 | ) |
| Income from  discontinued operations                                                                  |   | $                      | —     |                 | $          | —        |       | $          | —   |                  | $      | — |   | $ | 0.01 |   |
| Net loss                                                                                              |   | $                      | (0.02      | )                    | $          | (0.02         | )          | $          | (0.04    | )                     | $      | (0.03 | ) | $ | (0.31 | ) |
|                                                                                                  |   |                   |       |                 |       |          |       |       |     |                  |   |
| Weighted average  number of shares, basic and diluted                                                 |   | 19,767,096             |       | 15,711,514           |       | 19,281,223    |       | 15,057,029 |     | 16,059,809            |   |

 

See AccompanyingFootnotes.

 

 

4

----

 
| **COMPOSITE  SOLUTIONS, INC AND SUBSIDIARIES**                       |
|----------------------------------------------------------------------|
| (A Development Stage  Company)                                       |
| **Consolidated  Statements of Changes in Shareholders’ Equity** |
| (Unaudited)                                                          |

 
|                                                            |   |              |   |                                   |   |      |   | **Deficit********Accumulated********During the********Development********Stage** |                                              |       |       |
|-----------------------------------------------------------------|--------|-------------------|--------|----------------------------------------|--------|-----------|--------|----------------------------------------------------------------------------------|---------------------------------------------------|------------|------------|
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             | **Total********Shareholders’********Equity** |       |
|                                                            |   |              |   | **Additional********Paid in  Capital** |   |      |   |
|                                                            |   | **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 compensation                           |   | 808,155           |   | 80                                     |   | 161,429   |   |                                                                             |                                              | 161,509    |       |
| Common stock  issued in exchange for services                   |   | 120,000           |   | 12                                     |   | 34,788    |   |                                                                             |                                              | 34,800     |       |
| Subscription  paid                                              |   |              |   |                                   |   | 50,000    |   |                                                                             |                                              | 50,000     |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Net loss                                                        |   |              |   |                                   |   |      |   | (209,575                                                                         | )                                                 | (209,575   | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| **Balance,  December 31, 2001**                                 |   | 15,136,619        |   | 1,513                                  |   | 3,285,639 |   | (3,254,654                                                                       | )                                                 | 32,498     |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Common stock  issued for cash                                   |   | 1,503,334         |   | 150                                    |   | 109,850   |   |                                                                             |                                              | 110,000    |       |
| Common stock  issued for compensation                           |   |              |   |                                   |   |      |   |                                                                             |                                              | —     |       |
| Common stock  issued in exchange for services                   |   | 109,102           |   | 11                                     |   | 20,301    |   |                                                                             |                                              | 20,312     |       |
| Common stock  issued for interest due                           |   |              |   |                                   |   |      |   |                                                                             |                                              | —     |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Net loss                                                        |   |              |   |                                   |   |      |   | (258,608                                                                         | )                                                 | (258,608   | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| **Balance,  March 31, 2002**                                    |   | 16,749,055        |   | 1,674                                  |   | 3,415,790 |   | (3,513,262                                                                       | )                                                 | (95,798    | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Common stock  issued for cash                                   |   | 835,713           |   | 84                                     |   | 67,416    |   |                                                                             |                                              | 67,500     |       |
| Common stock  issued for compensation                           |   | 374,994           |   | 37                                     |   | 44,962    |   |                                                                             |                                              | 44,999     |       |
| Common stock  issued in exchange for services                   |   | 284,932           |   | 28                                     |   | 36,479    |   |                                                                             |                                              | 36,507     |       |
| Common stock  issued for interest due                           |   | 47,350            |   | 5                                      |   | 5,677     |   |                                                                             |                                              | 5,682      |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Net loss                                                        |   |              |   |                                   |   |      |   | (698,559                                                                         | )                                                 | (698,559   | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| **Balance,  September 30, 2002**                                |   | 18,292,044        |   | 1,828                                  |   | 3,570,324 |   | (4,211,821                                                                       | )                                                 | (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        |   | 1,975                                  |   | 3,710,860 |   | (4,425,913                                                                       | )                                                 | (713,078   | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Common stock  issued for cash                                   |   | 855,334           |   | 85                                     |   | 207,915   |   |                                                                             |                                              | 208,000    |       |
| Common stock  issued for compensation                           |   | 50,000            |   | 5                                      |   | 8,495     |   |                                                                             |                                              | 8,500      |       |
| Common stock  issued for services                               |   | 400,000           |   | 40                                     |   | 58,960    |   |                                                                             |                                              | 59,000     |       |
| Common stock  issued to settle accrued interest on note payable |   | 79,684            |   | 8                                      |   | 13,538    |   |                                                                             |                                              | 13,546     |       |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| Net loss                                                        |   |              |   |                                   |   |      |   | (473,477                                                                         | )                                                 | (473,477   | )          |
|                                                            |   |              |   |                                   |   |      |   |                                                                             |                                              |       |       |
| **Balance,  March 31, 2003**                                    |   | 21,152,114        |   | $                                      | 2,113  |      | $      | 3,999,768                                                                        |                                              | $          | (4,899,390 | ) | $ | (897,509 | ) |

 

See AccompanyingFootnotes.

 

5

----

** **
| **COMPOSITE  SOLUTIONS, INC AND SUBSIDIARIES** |
|------------------------------------------------|
| (A Development Stage  Company)                 |
| **Consolidated Statements of Cash  Flows**     |
| (Unaudited)                                    |

 
|                                                                        |   |                    |     |                  |   |          |   |     |     | **October  20, 1997** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|----------|-----------------------|--------|---------------|--------|----------|----------|-----------------------|--------|
|                                                                        |   |                    |     |                  |   |          |   |     |     | **(Inception)**       |   |
|                                                                        |   | **Three  Months Ended** |     | **Six Months  Ended** |   | **to**        |   |
|                                                                        |   | **March 31,**           |     | **March 31,**         |   | **March 31,** |   |
|                                                                        |   | **2003**                |     | **2002**              |   | **2003**      |   | **2002** |     | **2003**              |   |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| **Cash  flows from operating activities**                                   |   |                    |     |                  |   |          |   |     |     |                  |   |
| Net loss                                                                    |   | $                       | (473,477 | )                     | $      | (258,608      | )      | $        | (687,569 | )                     | $      | (468,183 | ) | $ | (4,899,391 | ) |
| Adjustments to  reconcile net loss tonet cash used in operating activities: |   |                    |     |                  |   |          |   |     |     |                  |   |
| Depreciation and  amortization                                              |   | 12,922                  |     | 15,616                |   | 26,118        |   | 20,615   |     | 349,418               |   |
| Loss on disposal  of assets                                                 |   | —                  |     | —                |   | —        |   | —   |     | 190                   |   |
| Common stock  issued in exchange for services                               |   | 59,000                  |     | 20,312                |   | 59,000        |   | 55,112   |     | 361,180               |   |
| Common stock  issued for interest due                                       |   | 13,546                  |     | 3,242                 |   | 13,546        |   | 5,500    |     | 19,228                |   |
| Common stock  issued for compensation                                       |   | 8,500                   |     | —                |   | 8,500         |   | 161,509  |     | 309,516               |   |
| Accrued loss on  future contracts                                           |   | 26,497                  |     | —                |   | 26,497        |   | —   |     | 26,497                |   |
| Pre-acquisition  income                                                     |   | —                  |     | —                |   | —        |   | —   |     | 47                    |   |
| Loss from  discontinued operations                                          |   | —                  |     | —                |   | —        |   | —   |     | 93,267                |   |
| Gain on disposal  of subsidiary                                             |   | —                  |     | —                |   | —        |   | —   |     | (177,755              | )      |
| Impairment loss                                                             |   | —                  |     | —                |   | —        |   | —   |     | 237,248               |   |
| (Increase)  decrease in operating assets                                    |   |                    |     |                  |   |          |   |     |     |                  |   |
| Accounts  receivable                                                        |   | 25,000                  |     | 36,616                |   | —        |   | (4,443   | )        | 17,493                |   |
| Related party  receivable                                                   |   | (16,081                 | )        | (36,800               | )      | (16,081       | )      | (44,640  | )        | (38,102               | )      |
| Costs in excess  of billings                                                |   | (2,000                  | )        | (42,380               | )      | (2,000        | )      | (78,322  | )        | (2,000                | )      |
| Inventory                                                                   |   | —                  |     | —                |   | —        |   | —   |     | (2,055                | )      |
| Prepaid expenses                                                            |   | 6,854                   |     | (434                  | )      | (24,734       | )      | (23      | )        | (24,716               | )      |
| Employee  advances                                                          |   | —                  |     | —                |   | —        |   | 271      |     | —                |   |
| Deposit                                                                     |   | (37                     | )        | 1,080                 |   | (37           | )      | 1,126    |     | (10,412               | )      |
| Increase  (decrease) in operating liabilities                               |   |                    |     |                  |   |          |   |     |     |                  |   |
| Accounts payable                                                            |   | 235,378                 |     | 133,472               |   | 243,742       |   | 163,866  |     | 1,306,382             |   |
| Billings in  excess of costs                                                |   | (20,554                 | )        | 2,135                 |   | 44,687        |   | 2,135    |     | 89,118                |   |
| Forgiveness of  accounts payable                                            |   | —                  |     | —                |   | —        |   | —   |     | (3,400                | )      |
| Accrued expenses                                                            |   | (86,108                 | )        | 59,272                |   | 73,675        |   | 48,205   |     | 364,398               |   |
| Income taxes  payable                                                       |   | 19,281                  |     | —                |   | 19,281        |   | —   |     | 28,833                |   |
| Net cash used in  operating activities                                      |   | (1,914,279              | )        | (66,477               | )      | (215,375      | )      | (137,272 | )        | (1,955,016            | )      |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| **Cash  flows from investing activities**                                   |   |                    |     |                  |   |          |   |     |     |                  |   |
| Purchase of  property, plant and equipment                                  |   | —                  |     | —                |   | —        |   | —   |     | (29,660               | )      |
| Acquisition of  intangible assets                                           |   | (2,066                  | )        | (558                  | )      | (4,342        | )      | (702     | )        | (630,200              | )      |
| 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                                      |   | (2,066                  | )        | (558                  | )      | (4,342        | )      | (702     | )        | (1,162,598            | )      |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| **Cash  flows from financing activities**                                   |   |                    |     |                  |   |          |   |     |     |                  |   |
| Increase  (decrease) in line of credit                                      |   | (200                    | )        | —                |   | (200          | )      | —   |     | 600                   |   |
| Proceeds from  note payable to officer/employee                             |   | (184                    | )        | 10,400                |   | —        |   | 127,833  |     | 282,165               |   |
| Payments of note  payable to officer                                        |   | (57,477                 | )        | (48,150               | )      | (98,527       | )      | (148,400 | )        | (245,774              | )      |
| Proceeds from  convertible debenture                                        |   | —                  |     | —                |   | —        |   | —   |     | 500,000               |   |
| Proceeds from  notes payable                                                |   | —                  |     | —                |   | —        |   | —   |     | 1,064,500             |   |
| Subcriptions  paid                                                          |   | —                  |     | —                |   | —        |   | —   |     | —                |   |
| Proceeds from  issuance of common stock, net                                |   | 208,000                 |     | 110,000               |   | 278,300       |   | 160,000  |     | 1,526,500             |   |
| Net cash  provided by financing activities                                  |   | 150,139                 |     | 72,250                |   | 179,573       |   | 139,433  |     | 3,127,991             |   |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| Net increase  (decrease) in cash                                            |   | (27,125                 | )        | 5,215                 |   | (24,063       | )      | 1,459    |     | 26,458                |   |
| Cash, beginning  of period                                                  |   | 53,583                  |     | 448                   |   | 50,521        |   | 4,204    |     | —                |   |
| Cash, end of  period                                                        |   | $                       | 10,377   |                  | $      | 5,663         |   | $        | 10,377   |                  | $      | 5,663 |   | $ | 10,377 |   |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| **Supplementary  disclosures**                                              |   |                    |     |                  |   |          |   |     |     |                  |   |
| Interest paid                                                               |   | $                       | —   |                  | $      | 1,005         |   | $        | —   |                  | $      | 1,310 |   | $ | 2,351 |   |
| Income taxes  paid                                                          |   | $                       | 2,400    |                  | $      | —        |   | $        | —   |                  | $      | 600 |   | $ | 8,328 |   |
|                                                                        |   |                    |     |                  |   |          |   |     |     |                  |   |
| **Non-cash  financing and investing activities**                            |   |                    |     |                  |   |          |   |     |     |                  |   |
| Note payable  paid through issuance of common stock                         |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | 1,000,000 |   |
| Investment in  subsidiary                                                   |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | 796,732 |   |
| Interest on note  payable                                                   |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | 17,825 |   |
| Forgiveness of  interest on note payable                                    |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | (17,825 | ) |
| Inter-company  receivable released in sale of subsidiary                    |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | 22,021 |   |
| Common stock  acquired in sale of subsidiary                                |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | (93,750 | ) |
| 8% debenture  released in sale of subsidiary                                |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | (500,000 | ) |
| Note payable  released in sale of subsidiary                                |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | (64,500 | ) |
| Accrued interest  released in sale of subsidiary                            |   | $                       | —   |                  | $      | —        |   | $        | —   |                  | $      | — |   | $ | (28,867 | ) |
| Common stock  issued to settle accounts payable                             |   | $                       | —   |                  | $      | —        |   | $        | 70,383   |                  | $      | — |   | $ | 70,383 |   |

 

See AccompanyingFootnotes.

 

6

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| **Composite Solutions, Inc And Subsidiaries**  |
|------------------------------------------------|
| (A Development Stage  Company)                 |
| **Notes to Consolidated Financial Statements** |

 

**Note 1 -Summary of Significant Accounting Policies**

 

## ***The Company***

 

Composite Solutions Inc. (the “Company”), formerly JSBusiness Works, Inc., was incorporated in the state of Florida on October 20,1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions Inc., incorporated in the state of Nevada onDecember 8, 1998, and Trans-Science Corporation, incorporated in the state ofCalifornia on September 15, 1980. During the period August 16, 2000 to March31, 2001, the Company had another wholly owned subsidiary, Penultimo, Inc. dbaAnchor Reinforcements which was incorporated in the state of California onJanuary 13, 1992.   Composite SolutionsInc. and subsidiaries were organized to develop, manufacture and market hightechnology products and processes to be utilized in key areas of existing andnew construction.

 

The Company is in the development stage and itsefforts through March 31, 2003 have been principally devoted to raisingadditional capital and negotiating with potential key personnel and leasingfacilities.  There is no assurance thatany benefit will result from such activities. The Company will continue to incur expenses and losses as it pursues itsdevelopment efforts.

 

**Basis of Presentation**

 

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

 

                                                **Unaudited FinancialStatements**

 

                                                The accompanying unaudited financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and according to regulatory requirements of Article 10 ofRegulation S-X for form 10-QSB. Accordingly, the unaudited financial statements do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States and should be read in conjunction with Form10-KSB for the fiscal year ended 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 the

 

6

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provisions of SFAS No. 142 on October 1, 2001.  Since adoption, existing goodwill andcertain intangibles with indefinite useful lives are no longer amortized butinstead are assessed for impairment at least annually.  Other intangible assets are recorded athistorical cost less amortization on the straight line method based onestimated useful lives.  Periods ofamortization are evaluated continually to determine whether later events andcircumstances warrant revised estimated useful lives.

 

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

 

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

 

 

7

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**Use of Estimates**

 

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

 

**Stock-BasedCompensation**

 

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

 

**Note 2 -Acquisitions**

 

On June 23, 2000 the Company entered into a ShareExchange Agreement with Trans-Science Corporation, a California corporation anda company with a common shareholder.  OnJuly 7, 2000 the Company completed its acquisition.  The acquisition, recorded under the purchase method ofaccounting, included the purchase of all of the outstanding shares of commonstock of Trans-Science Corporation in exchange for 953,371 shares of theCompany’s common stock at $0.75 per share which resulted in a purchase price of$715,028. The liabilities assumed were in excess of the historical cost of theassets acquired at the date the total amount of the purchase price was recordedas goodwill.

 

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

 

8

----

 

 

**Note 3 - Shareholders’ Equity**

 

#### **Preferred Stock**

 

The Company has authorized the issuance of ten million(10,000,000) shares of preferred stock, having one hundredth of a cent ($.0001)par value per share.  The Board ofDirectors of the Company has discretion to determine the rights, preferencesand privileges of this preferred stock. There are no shares of preferred stock issued and outstanding at March 31, 2003 and 2002, respectively.

 

#### **Common Stock**

 

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 quoted market$174,000 in exchange for services. On March 31, 2001, a shareholder surrendered150,000 shares of common stock valued at $93,750.  Also on March 31, 2001, the Company issued 200,000 shares ofcommon stock as finder’s fees. At September 30, 2001, the Company issued 1,061,760shares of common stock valued at $128,333 in exchange for services.  During the period October 2000 throughDecember 2000 the Company issued 725,000 shares of common stock valued at$245,000 in private placement. During year ended September 30, 2002, theCompany issued 514,034 shares of common stock valued at $91,619 in exchange forservices, 1,183,149 shares of common stock for compensation valued at $206,509,47,350 shares of common stock valued at $5,682 for interest due, and 2,339,047shares of common stock valued at $227,500 for cash and subscription paid.  During the six months ended March 31, 2003,the Company issued 400,000 shares of common stock valued at $59,000 in exchangefor services, 50,000 shares of common stock for compensation valued at $8,500,79,684 shares of common stock valued at $13,546 for interest due, 582,024shares of common stock to settle accounts payable of $70,383, and 1,748,362shares of common stock valued at $278,300 for cash.

 

There are21,152,114 and 16,749,055 shares of common stock issued and outstanding atMarch 31, 2003 and 2002, respectively.

 

9

----

 

 

**StockIncentive Plan**

 

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

 

|                     |   | **Shares**         |   |            |   |               |       |
|--------------------------|--------|--------------------|--------|-----------------|--------|--------------------|------------|
|                     |   | **Available  for** |   | **Options**     |   |               |       |
| **Outstanding  Options** |   | **Grant**          |   | **Outstanding** |   | **Exercise Price** |       |
| Authorized               |   | 1,000,000          |   |            |   |               |       |
| Granted                  |   | (391,428           | )      | 391,428         |   | $                  | 0.10-$0.40 |   |
| Canceled                 |   | 120,000            |   | (120,000        | )      | $                  | 0.40       |   |
| Balance, March  31, 2002 |   | 728,572            |   | 271,428         |   | $                  | 0.10       |   |

 

At March 31, 2003 there were221,428 exercisable options.

 

The Companyaccounts for stock-based compensation using the intrinsic value methodprescribed by Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” under which no compensation cost for stock options isrecognized for the stock options awards granted at or above fair market value.  For the three and six months ended March 31,2003 and 2002 and for the period October 1, 1997 (inception) to March 31, 2003,the Company did not recognize any compensation expense.

 

Had compensationexpense for the Company’s 2000 StockIncentive Plan been determined based upon fair values at grant dates for awardsunder the plan in accordance with SFAS No. 123, “Accounting for Stock-BasedCompensation,” the Company’s net loss and loss per share would have beenincreased to the proforma amounts indicated below.  Additional option awards are anticipated in future years.

 

|                    |   | **Three  Months Ended March 31,** |     | **Six Months  Ended March 31,** |   |
|-------------------------|--------|-----------------------------------|----------|---------------------------------|--------|
|                    |   | **2003**                          |     | **2002**                        |   | **2003** |   | **2002** |   |
| Net loss                |   |                              |     |                            |   |   |   |   |   |
| As originally  reported |   | $                                 | (473,477 | )                               | $      | (258,608 | ) | $ | (687,569 | ) | $ | (468,183 | ) |
| Proforma                |   | $                                 | (474,294 | )                               | $      | (258,608 | ) | $ | (689,203 | ) | $ | (468,183 | ) |
|                    |   |                              |     |                            |   |   |   |   |   |
| Loss per share          |   |                              |     |                            |   |   |   |   |   |
| As originally  reported |   | $                                 | (0.02    | )                               | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.03 | ) |
| Proforma                |   | $                                 | (0.02    | )                               | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.03 | ) |

 

 

10

----

 

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions and results:

 

|                                               |   | **2002** |   | **2001** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
|                                               |   |     |   |     |   |
| Dividend yield                                     |   | 0.00     | %      | N/A      |   |
| Risk free  interest rate                           |   | 2.99     | %      | N/A      |   |
| Expected life                                      |   | 5.92 Yrs |   | N/A      |   |
| Expected  volatility                               |   | 16.21    | %      | N/A      |   |
| Estimated fair  value of options granted per share |   | $        | 0.0354 |     | N/A    |   |
|                                                    |        |          |        |          |        |  |

 

 

**Note 4 - EarningsPer Share**

 

At March 31, 2003 and 2002, 271,428 and 100,000 weighted-averageshares of common stock issuable under stock options, respectively, were notincluded in the calculation of fully diluted earnings per share because theireffects would have been antidilutive. Therefore, diluted earnings per sharewere the same as basic earnings per share at March 31, 2003 and 2002.

 

**Note 5 - 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.

 

 

11

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**Note 6 - GoingConcern**

 

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 $473,477 and $687,569 for the three and six months ended March 31,2003, respectively and losses of $4,899,391 accumulated from October 20, 1997(Inception) to March 31, 2003. In addition the Company’s current liabilitiesexceed current assets by $1,777,951 at March 31, 2003. The ability of theCompany to continue as a going concern is dependent upon commencing operations,developing sales and obtaining additional capital and financing. Theconsolidated financial statements do not include any adjustments that might benecessary if the Company is unable to continue as a going concern.

 

The 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 is planning tore-capitalize certain related party accounts payables into shareholders’ equityand negotiate reductions in other accounts payable.  The Company’s management believes these efforts willsubstantially reduce current liabilities.

 

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

 

**GeneralOverview**

 

CompositeSolutions, Inc. (CSI) is a development stage company licensing and distributingproprietary composite materials technology and engineering services forapplications in the civil engineering and civil construction markets. CSI’stechnology represents a revolutionary breakthrough for the construction industry.This technology uses the same type of composite materials found in the B-2Bomber and other lightweight, high-strength military hardware. These compositematerials consist of advanced fiber reinforced polymers (FRPs). Examplesinclude ultra high-strength carbon or aramid fibers in a thermoset (e.g.,epoxy) matrix. Such fibers are 10-15 times stronger than construction steel and5 times lighter. When used in concert with traditional building materialsystems, this marriage of new and conventional systems leads to a dramaticenhancement of the latter, and to superior structural performance with aminimization of cost.

 

CSI’s newtechnology material systems fall into two main categories: 1) CompositeOverlays for structural retrofits and 2) the Carbon Shell System (CSS) for newconstruction and infrastructure renewal. In both cases, the materials consistof FRPs.

 

The CompositeOverlay is a “structural skin” which is created by saturating fabric woven outof carbon, aramid (e.g., kevlar) or other aerospace-quality fiber with anepoxy-type resin. This product is marketed under the CSI trade name“RetroShield”. The specific composition, architecture and application of thefabric plus resin overlay is engineered by CSI to specific strength, stiffness,and ductility specifications based on the characteristics of the subjectstructure and use loads. The specified composite solution is then “wallpapered”to a structural surface to provide significantly increased ductility and/orstrength. The overlay can be applied to columns, walls, floors, beams andgirders, connections, and other such structural elements. The composite overlaytechnique has been found to be extremely effective for seismic retrofits, blasthardening, structural upgrades, and structural repairs. Typically only a fewlayers of a 1mm thick overlay are needed for such applications.

 

The CSS is alightweight, high-strength plant-manufactured advanced carbon fiber-reinforcedpolymer (CFRP) shell (tube) of circular or non-circular cross-section. In new constructionof buildings, bridges and other structures, the shell is typically filled withconcrete; in this application it serves both as a stay-in-place form andreinforcement. As a result, this system substantially reduces the need forreinforcing steel and the use of heavy lifting equipment, which constitutes asignificant part of system building costs. The CSS can be used for structuralelements such as columns, beams and girders for buildings and bridges and forpilings for harbors and docks.

 

In newconstruction of infrastructure systems, the CSS can be used for oil, gas, andwater pipelines. Advantages over conventional material in such applicationsinclude durability (no corrosion) and thermal stability (no thermal expansion).

 

For infrastructurerenewal, the CSS is employed as a structural liner for pipelines that havedeteriorated due to age or environmental conditions. An example application isthe repair of large diameter (2-4m), prestressed concrete cylindrical pipes(PCCPs) that carry high pressure, high flow water from its source to urbanareas.

 

The effectivenessand integrity of the Company’s composite overlay technology and the CSS hasbeen extensively validated by full-scale laboratory tests at The Charles LeePowell Structural Research Laboratories (“Powell Laboratories”) located at TheUniversity of California, San Diego (“UCSD”). These tests included bothreinforced and un-reinforced wall specimens that ranged from single-story wallsto a full-scale five-story building as well as columns ranging from singlecolumns to full-scale bridge bents.  The Powell Laboratories are one ofthe few such facilities in the world with the capability to execute full-scaletests and have performed extensive tests relating to the retrofit, and upgradingof structural elements such as walls, columns and floor slabs.

 

For blastretrofits, the composite overlay technology has been validated in U.S.Government field tests. These tests range from structural components to afull-scale building.

 

 

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**BusinessAreas**

 

CSI is marketingits new material systems and technologies in four primary areas. These are: 1)Homeland Security; 2) Seismic retrofits and Structural Upgrades; 3)Infrastructural Renewal; and 4) New Construction.

 

The CSItechnologies and product lines for the Homeland Security area includes: 1)Carbon Fiber Reinforced Polymer (CFRP) and Aramid Fiber Reinforced Polymer(AFRP)- based blast retrofit methodologies, material systems, and data forcivil, marine and aircraft structures; 2) CFRP- based Carbon Shell System forblast 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 CSItechnologies and product lines for the Seismic Retrofits and StructuralUpgrades include CFRP material systems, data bases, design methodologies, anddesign software for civil structures such as buildings and bridges.

 

CSI’s efforts inthe area of Infrastructure Renewal are currently focused on the rehabilitationof water transmission lines in the form of large diameter prestressed concretecylindrical pipes (PCCPs). The technologies and product lines here includeCFRP- based structural liner designs and material systems, cost metrics andinstallation methodologies. The associated product lines include designmethodologies, data bases, and distribution of CFRP forms.

 

**Marketingand Sales**

 

CSI has beenactive in all four areas during 2002/2003. A summary of events follows:

 

InfrastructureRenewal - TheCompany continues to provide testing as part of our agreement with a largemarket international general contractor. We anticipate moving forward with additional business derived from thisrelationship once the testing has been completed.

 

Homeland Security - A Teaming Agreement has been executedwith a national defense contractor to utilize the Company’s services in theareas of vulnerability assessment, threat reduction and the applicability ofFRP for blast remediation in an anti-terrorism/Force Protection environment.

 

Seismic Retrofits - A Teaming Agreement is in negotiation(with the executed Agreement anticipated prior to close of next quarter) with alarge market national general contractor. This Agreement will focus on developing a synergistic relationship usingthe Company’s design and engineering capabilities in conjunction with thegeneral contractor’s build capabilities and market presence to pursueopportunities in the hospital, commercial and military/federal marketplace.

 

New Construction - New opportunities are being developedin the domestic market with respect to utilization of the Carbon Shell System(CSS) for building and transportation systems.

 

****Critical Accounting Policies and Estimates****

We describe our significant accounting policies inthe notes to our financial statements included in our Annual Report on Form10-KSB.  However, in response to theSEC’s Release No. FR-60, “Cautionary Advice Regarding Disclosure About CriticalAccounting Policy,” issued December 12, 2001, we have identified the policieswe believe are most critical to an understanding of our financial statements.The most critical accounting policies are related to the following areas:revenue recognition, accounting for equity securities issued in exchange forservices and in settlement of liabilities, intangible assets, and impairment oflong-lived assets.  Since application ofthese accounting policies involves the exercise of judgment and use ofestimates, actual results could differ from those estimates.  There have been no material changes in ourcritical accounting policies that impacted our financial condition or resultsof operations for 2002.

**Revenue Recognition** - Revenue from the sale of product isrecognized when materials are shipped from stock.  Revenues derived from contracts are accounted for on thepercentage-of-completion method of accounting. 

 

 

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Revenue is recognized based on a ratio of the actual cost of workperformed to a current estimate of the total cost to complete a respectivecontract.

 

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

 

**Accounting for Equity SecuritiesIssued in Exchange for 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 fairvalue is measured at the date service 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, as originally recorded and the fair valueof equity instruments issued in settlement of liabilities are recorded as anadjustment to expenses.

 

**Intangible Assets -**Other assets include intangibles such aslicensed technology, computer software and goodwill.   In June 2001, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 142, *Goodwill and OtherIntangible Assets. *SFAS No.142 establishes 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 assessed forimpairment at least annually.  Otherintangible assets are recorded at historical cost less amortization on thestraight line method based on estimated useful lives.  Periods of amortization are evaluated continually to determinewhether later events and circumstances warrant revised estimated useful lives.

 

**Impairment of Long-Lived Assets -**Long-livedassets and intangible assets subject to amortization are reviewed forimpairment in accordance with SFAS No. 121, *Impairmentof Long-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.

 

 

**Resultsof Operations**

 

The following is a discussion of the financial condition and results ofoperations for the quarter ended March 31, 2003.  This discussion should be read in conjunction with ourconsolidated financial statements and the notes related thereto.

 

Net Loss:  For thequarter ended March 31, 2003, the company recorded a net loss of $473,477($0.02 per share), compared to a net loss of $258,608 ($0.02 per share) duringthe quarter ended March 31, 2002.

 

The increased loss is mainly due to: (1) a decrease in Revenues on ayear over year comparison to $61,104 as of March 31, 2003 versus $132,946 as ofMarch 31, 2002; (2) an increase in Cost of Sales from $50,474 as of March 31,2002 versus $100,565 as of March 31, 2003; and (3) an increase in ConsultingFees and General & Administrative expenses for the same period.

 

The decrease in revenues is attributable to the Company’s refocusing ofefforts on acquiring contracts and building strategic relationships in the newmarkets of Homeland Security and Seismic Retrofits.  As a result of this effort, there has been a lull in Revenues.  We fully expect our new sales and marketingefforts to provide future revenues. We have made significant headway as regardsacquisition of both contracts and strategic ally teaming relationships. Theincrease in cost of sales is primarily due to contracts with zero gross profitsand the allocation of minimum royalty payments to the cost of sales beginningin January 2003. The increase in Consulting Fees and General & 

 

 

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Administrative expenses is attributable to the refocusing efforts inthe new markets of Homeland Security and Seismic Retrofits.

 

Revenue:  The revenuesand cost of sales for the quarter ended March 31, 2003 were $61,604 and$100,565, respectively; as compared to revenues of $132,946 and cost of salesof $50,474 for the quarter ended March 31, 2002.

 

The decrease in revenues is attributable to the Company’s refocusingefforts to acquiring contracts and building strategic relationships in the newmarkets of Homeland Security and Seismic Retrofits.  As a result of this effort, there has been a lull in Revenues.  We fully expect our new sales and marketingefforts to provide future revenues. We have made significant headway as regardsacquisition of both contracts and strategic ally teaming relationships.

 

Increased control over materials costs and a better negotiating posturewith our suppliers is beginning to yield results as regards reducing costs ofsales.  Additional revenue generationwill also deliver better volume discounts on materials and afford us further leveragewith subcontractors as we generate more work.

 

Liquidity and Capital Resources: The Company has been operating with insufficient capital since October1997.  It has not met all of itsfinancial obligations, and has relied heavily on the sale of its common stockto generate additional capital.  Duringthe quarter ended March 31, 2003, the Company issued 855,334 shares of commonstock for cash in the amount of $208,000, 50,000 shares of common stock forcompensation in the amount of $8,500, 400,000 shares of common stock forservices in the amount of $59,000, and 79,684 shares of common stock to settleaccrued interest on notes in the amount of $13,546.

 

The Company had total assets of $933,853 as of March 31, 2003,including intangible assets of $449,894, as compared to the total assets of $1,143,745and intangible assets of $601,676 as of March 31, 2002.  The Company’s current liabilities as ofMarch 31, 2003 were $1,831,362, as compared to current liabilities of$1,239,543 as of March 31, 2002.

 

The increased liability position is due to: (1) an increase in AccountsPayable from $441,125 as of March 31, 2002 to $551,289 as of March 31, 2003;and (2) an increase in the category of Employee and Director Payable from$230,498 as of March 31, 2002 to $642,174 as of March 31, 2003.

 

The above increases were due to increased efforts in sales andmarketing as relates to the new Homeland Security and Seismic Retrofitsmarkets.

 

For the balance of the 2003 calendar year, the Company will continuepursuing outside investment to augment efforts as regards increased revenuegeneration and the furtherance of key strategic relationships and teamingarrangements in the construction and military/federal markets.  As articulated above, our efforts to datehave been yielding favorable results and we anticipate that continued andaggressive marketing will be rewarded, as well.

 

**CautionaryStatement Regarding Forward-Looking Statements**

 

This reportcontains “forward-looking” statements.  The Company is including thisstatement for the express purpose of availing itself of protections of the safeharbor provided by the Private Securities Litigation Act of 1995 with respectto all such forward-looking statements.  Examples of forward-lookingstatements include, but are not limited to: (a) projections of revenues, capitalexpenditures, growth, prospects, dividends, capital structure and otherfinancial matters; (b) statements of plans objectives of the Company or itsmanagement or Board of Directors; (c) statements of future economicperformance; (d) statements of assumptions underlying other statements andstatements about the Company and its business relating to the future; and (e)any statements using the words “expects,” “intends,” “anticipates,” “may,”“plans,” “projects” and “estimates,” and analogous or similar expressions.

 

The Company’sability to predict projected results or the effect of certain events on theCompany’s operating results is inherently uncertain.  Therefore, theCompany wishes to caution each reader of this report to carefully consider thefollowing factors, any or all of which have in the past and could in the futureaffect the ability of the Company to achieve its anticipated results and couldcause actual results to differ materially than those discussed 

 

 

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herein: (1)ability to attract and retain customers to purchase its products and services,(2) ability to commercialize and market products (3) results of research anddevelopment, (4) technological advances by third parties and competition, (5)future capital needs of the Company, (6) history of operating losses, (7)dependence upon key personnel, and (8) general economic and businessconditions.  The Company expressly disclaims any obligation or undertakingto release publicly any updates or revisions to any forward—looking statementcontained herein to reflect any change in the Company’s expectations withregard thereto or any change in events, conditions or circumstances on whichany such statement is based

 

**Risks**

**Need for Additional Capital -**The Company’sfuture is subject to substantial risks and uncertainties. The Company hasoperated at a loss for its entire history and there can be no assurance of everachieving profitability. The Company had a net loss of $4,899,391 for theperiod October 20, 1997 (Inception) to March 31, 2003.  Current liabilities exceed current assets by$1,777,951.  Our future capitalrequirements will depend our ability to successfully market our compositematerials technology.  Our recurringoperating losses and growing working capital needs will require additionalcapital to support operations and there can be no assurance that workingcapital will become available, if at all.

The occurrence of any of the aforementioned eventscould adversely affect our ability to meet our business plans.

**Limited Public Market for CommonStock -**There currently is a very limited public market forthe Company’s common stock and no assurance can be given that a large publicmarket will develop in the future. The Company’s common stock may be thinlytraded, if at all, even if the Company achieves full operation and hassignificant revenues.

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

**FutureSales of Common Stock by Our Existing Shareholders Could Reduce the Price ofOur Common Stock -**Themarket price of our common stock could decline as a result of sales by ourexisting shareholders of shares of common stock in the market.  Likewise, the perception that these 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 SignificantSales of Our Current Products, Our Potential Revenues May Be SignificantlyReduced -**We expect the licensing and distribution of ourcomposite materials technology, and related engineering services will accountfor a majority, if not all, of our future revenue.  Continued and expanded market acceptance of composite overlaysand carbon fiber-reinforced polymer shells in construction of infrastructuresystems and infrastructure renewal is, therefore, critical to our futuresuccess and to our ability to generate revenues.  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 that we will be successful in marketing ourcomposite materials technology or any future products and any failure to do sowould significantly harm our business.

**The Loss of Our Key TechnicalIndividuals Would Have an Adverse Impact on Future Development and Could ImpairOur Ability to Succeed -**Our performance is substantially dependent onthe technical expertise of Gilbert A. Hegemier, Ph.D. and our ability to hire andretain personnel with similar technical expertise. The loss of any of GilbertA. Hegemier, Ph.D. could have a materially adverse effect on our business,development, financial condition, and operating results.  We do not maintain “key person” life insuranceon any of our directors or senior executive officers and we do not have lifeinsurance on Gilbert A. Hegemier, Ph.D.

**We Do Not Expect to Declare or PayAny Dividends -**We have not declared or paid any dividends on ourcommon stock since our inception, and we do not anticipate paying any suchdividends for the foreseeable future.

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**Because of Our Limited OperatingHistory, It Is Difficult to Predict Our Future Revenues -**As a result ofour limited operating history and the new technology, which we seek tointroduce into the markets in which we compete, we are unable to accuratelyforecast our revenues.  Our current andfuture expense levels are based largely on our plan of operation.  Revenues and operating results generallydepend on our ability to develop a base of customers and businesses.  We may be unable to adjust spending in atimely manner to compensate for any unexpected revenue shortfall.  Accordingly, any significant shortfall inestimated revenues in relation to our planned expenditures would have animmediate adverse effect on our business, prospects, financial condition andresults of operations.

**We Expect to Experience SignificantFluctuations in Our Future Annual Operating Results** - Factors thatmay adversely affect our annual operating results include but are not limitedto:

•                  our ability to obtain marketacceptance of our composite materials technology;

•                  our ability to attract andretain customers and maintain customer satisfaction;

•                  our ability to attract newpersonnel in a timely and effective manner;

•                  the amount and timing ofoperating costs and capital expenditures relating to expansion of our business,operations and infrastructure;

•                  governmental regulation;

•                  general economic conditions.

**We WillHave to Expend Substantial Funds on Advertising, Sales and Marketing in theFuture -**We have not incurred significant advertising, salesand marketing expenses to date.  Toincrease awareness for our composite materials technology, we expect to spendsignificantly more on advertising, sales and marketing in the future.  If our marketing strategy is unsuccessful,we may not be able to recover these expenses or even generate any revenues.  We will be required to develop a marketingand sales campaign that will effectively demonstrate the advantages of our,services and products.  To date, ourexperience with respect to marketing our products and services is verylimited.  We may also elect to enterinto agreements or relationships with third parties regarding the promotion ormarketing of our composite materials technology.  There can be no assurance that we will be able to establishadequate sales and marketing capabilities, that we will be able to enter intomarketing agreements or relationships with third parties on financiallyacceptable terms, or that any third parties with whom we enter into sucharrangements will be successful in marketing and promoting our compositematerials technology, or other products and services offered by us.

**Our FutureRevenues are Dependent on the Acceptance of the Products and Services that WeOffer -**Our future revenues and our ability to generateprofits in the future are substantially dependent upon the widespreadacceptance and use of our composite materials technology.  There can be no assurance that our compositematerials technology will become widely accepted or that a sufficiently broadbase of new construction or infrastructure renewal will use our compositematerials technology.

**There May Be the Possibility ofVolatile Share Prices -**The trading price of our common shares may be subject to widefluctuations. Trading prices of the common shares may fluctuate in response toa number of factors, many of which are beyond our control. In addition, thestock market in general has experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof such companies. Broad market and industry factors may adversely affect themarket price of the common shares, regardless of our operating performance.

 

 

**Reduction of Debt Obligations/Recapitalization of CSI stock**

 

Following athorough-going review of operations with management and subsequent review offinancials, we have formulated the following viable plan for continuingoperations as a going concern.  We plan,in the upcoming fiscal period (Quarter ended June 30, 2003) to re-capitalizecertain related party accounts payables into shareholders’

 

 

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equity and negotiatereductions in other accounts payable. The Company’s management believes these efforts will substantiallyreduce current liabilities.

 

Additionally, an itemappearing as a Related Party Payable, in the amount of $50,000.00, will bedischarged.  This amount represents acanceled stock subscription and, per the advice of our attorney, we will draftand execute a letter legally releasing this liability.

 

Another aspect of the financial review was discovery of multipleAccounts Payable exceeding the statutory limitation.  As of the date of this writing, we have not fully completedcompiling the total, but will begin the write off process in the nextaccounting period (Quarter ended June 30, 2003).  Since we have not fully completed this process we cannot opine asto whether the amount in question crosses the material threshold, but we willcover this in the subsequent MD&A.

 

**RevenueStream/Improving Cash Balances**

Continuing operations will be further bolstered by significant progressin sales and marketing.  CSI hasfinalized a Teaming Agreement with a large, national defense contractor toparticipate on a multi-year Homeland Security contract (a subsequent contractis pending).  CSI is finalizing aTeaming Agreement with a large market national general contractor to co-marketCFRP in the Homeland Security and seismic retrofit markets.  CSI is in negotiations with another largemarket national general contractor to assess a large backlog of projects forvalue engineering opportunities utilizing CFRP.  Lastly, CSI has expanded into the overseas market with theacquisition of an Asian construction project using CFRP for seismic retrofitpurposes.

 

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

 

**Item 1.  LegalProceedings**

                                                Neither theCompany nor its subsidiary is the subject of any pending legal proceeding.

 

 

 

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

 

**(a)           Exhibits**

 

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

 

                None.

 

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

                None.

 

 

 

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**Signatures**

 

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

 

Date: May 20, 2003

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

 

 

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

 

 
| **Signature**           |   | **Capacity**          |   | **Date**    |
|-------------------------|--------|-----------------------|--------|-------------|
|                    |   |                  |   |        |
| /s/ Gilbert A. Hegemier |   | Chairman of the Board |   | May 20,2003 |
| Gilbert A. Hegemier     |   |                  |   |        |

 

 

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**SECTION 302 CERTIFICATION**

 

I, Dr. Gil Hegemier, certify that:

1. I have reviewed this quarterly report on Form10-QSB of Composite Solutions, Inc.;

2. Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4. I am responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and I have:

a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to me by others within those entities,particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report my conclusionsabout the effectiveness of the disclosure controls and procedures based on myevaluation as of the Evaluation Date;

5. I have disclosed, based on my most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

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6. I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of mymost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.
| Date:  May 20, 2003 |   |   |   | /s/ Dr. Gilbert A. Hegemier        |
|---------------------|--------|--------|--------|------------------------------------|
|                |   |   |   | Dr.  Gilbert A. Hegemier, Chairman |

 

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