[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT For the transition period from n/a to n/a 333-90031 Commission file number Northstar Electronics, Inc. Exact name of small business issuer as specified in its charter Delaware State or other jurisdiction of organization #33-0803434 IRS Employee Identification No. Suite # 1455 - 409 Granville Street, Vancouver, British Columbia, Canada V6C 1T2 Address of principal executive offices (604) 685-0364 Issuer's telephone number Not Applicable Former name, former address and former fiscal year, if changed since last report APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [] No [] Not Applicable PART I - FINANCIAL INFORMATION Item 1. Financial Statements NORTHSTAR ELECTRONICS, INC. Consolidated Financial Statements Six Months Ended June 30, 2002 U.S. Dollars Unaudited Prepared by management Consolidated Balance Sheets at June 30, 2002 and at December 31, 2001 Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2002 Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2002 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 Notes to Consolidated Financial Statements PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8K SIGNATURES. NORTHSTAR ELECTRONICS, INC. Consolidated Balance Sheets Unaudited U.S. Dollars June 30 December 31 ASSETS 2002 2001 Current Cash $31,824 $ 39,699 Receivables 55,211 139,453 Inventory and work in progress 184,858 107,257 Prepaid expenses 10,837 5,398 Total Current Assets 282,730 291,807 Property and Equipment 90,245 91,903 Total Assets $372,975 $383,710 LIABILITIES Current Accounts payable and accrued liabilities $270,117 $325,075 Loans payable - 6,778 Current portion of long term debt 215,000 211,208 Total Current Liabilities 485,117 543,061 Long Term Debt 440,442 428,808 Due to Cabot Management Limited 59,211 56,249 Due to Director 26,093 24,401 Total Liabilities 1,010,863 1,052,519 STOCKHOLDERS' EQUITY Common Stock Authorized 100,000,000 shares of common stock with a par value of $0.0001 each 20,000,000 shares of preferred stock with a par value of $0.0001 each Issued and outstanding 10,108,102 shares of common stock 1,010 794 (7,942,009 December 31, 2001) Additional Paid in Capital 1,583,819 1,146,447 Other Comprehensive Income 16,618 37,308 Deficit (2,239,335) (1,853,358) Total Stockholders' Equity (Deficit) (637,888) (668,809) Total Liabilities and Stockholders' Equity $372,975 $383,710 NORTHSTAR ELECTRONICS, INC. Consolidated Statements of Operations Three Months and Six Months Ended June 30 Unaudited U.S. Dollars Three Months Six Months 2002 2001 2002 2001 Sales $167,526 $201,933 $364,778 $554,969 Cost of goods sold 97,352 44,951 298,140 130,054 Gross margin 70,174 156,982 156,638 424,915 Other income (6,062) 13,113 98 14,715 64,112 170,095 156,736 439,630 Expenses Salaries 126,868 131,264 220,025 236,522 Consulting 25,920 0 54,523 0 Professional fees (6,533) 36,590 13,286 87,876 Value of Director's uncompensated services 0 14,450 0 37,700 Advertising and marketing 21,535 10,729 35,548 28,955 Rent 20,154 16,759 40,123 34,311 Research and development 35,035 39,940 63,700 55,547 Investor relations 19,651 0 33,367 0 Office and administration 11,705 15,057 21,749 26,501 Travel and business development 2,593 15,681 11,943 24,672 Interest on debt 10,302 9,208 19,872 16,275 Telephone and utilities 7,198 5,738 14,253 10,386 Amortization 921 1,363 2,761 2,959 Proposal development costs 8 0 7,020 0 Repairs and maintenance (267) 0 3,765 0 Transfer agent fees 508 0 778 0 Total expenses 275,598 314,314 542,713 561,704 Net income (loss) for period $(181,876) $(144,219) $(385,977) $(122,074) Net income (loss) per share $(0.02) $(0.02) $(0.04) $(0.02) Weighted average number of shares Outstanding 9,513,987 7,681,737 8,841,912 7,704,807 NORTHSTAR ELECTRONICS, INC. Consolidated Statement of Changes in Stockholders' Equity Six Months Ended June 30, 2002 Unaudited U.S. Dollars Other Additional Compre- Accumu- Total Paid in hensive lated Stockholder Shares Amount Capital Income Deficit Equity (Deficit) Balance December 31, 2001 7,942,009 $794 $1,146,447 $37,308 $(1,853,358) $(668,809) Net loss for six months - - - - (385,977) (385,977) Other comprehensive credits (debits) - - - (20,690) - (20,690) Issuance of common stock for cash 1,889,950 189 585,978 - - 586,167 Share issuance Cost - - (212,910) - - (212,910) Exercise of stock option 78,123 7 - - - 7 Issuance of common stock for services 198,020 20 64,304 - - 64,324 --------------------------------------------------------------------------- Balance June 30, 2002 10,108,102 $1,010 $1,583,819 $16,618 $(2,239,335) $(637,888) --------------------------------------------------------------------------- NORTHSTAR ELECTRONICS, INC. Consolidated Statement of Cash Flows Six Months Ended June 30, 2002 Unaudited U.S. Dollars June 30 2002 2001 Operating Activities Net income (loss) $(385,977) $(122,074) Adjustments to reconcile net income (loss) to net cash used by operating activities Amortization 2,761 2,959 Issuance of common stock for services 64,324 65,831 Uncompensated services 0 37,700 Changes in operating assets and liabilities (56,735) (12,505) Net cash provided by (used by) operating activities (375,627) (28,089) Investing Activity Acquisition of property and equipment (1,103) (14,111) Financing Activities Issuance of common stock - net proceeds 373,257 10 Increase (repayment) of long term debt 11,634 17,406 Due to Cabot Management Limited 2,962 (2,420) Advances from (repayment to) director 1,692 (4,556) Net cash (used) provided by financing activities 389,545 10,440 Effect of foreign currency translation on cash (20,690) 3,636 Inflow (outflow) of cash (7,875) (68,124) Cash, beginning of period 39,699 125,602 Cash, end of period $ 31,824 $ 57,478 Supplemental information Interest paid $19,872 $16,275 Shares issued for services 198,020 201,253 Corporate income taxes paid $0 $0 NORTHSTAR ELECTRONICS, INC. Notes to Consolidated Financial Statements Six Months Ended June 30, 2002 Unaudited U.S. Dollars 1. 1. ORGANIZATION AND BASIS OF PRESENTATION These financial statements include the accounts of Northstar Electronics, Inc. ("the Company") and its wholly owned subsidiaries Northstar Technical Inc. ("NTI") and Northstar Network Ltd. ("NN"). All inter company account Balances and transactions are eliminated. The Company was incorporated May 11, 1998 in the State of Delaware and had no operations other than organizational activities prior to the January 1999 merger with NTI described below. The Company's business activities are conducted principally in Canada but these financial statements are prepared in accordance with accounting principles generally accepted in the United States with all figures translated into United States dollars for reporting purposes. On January 26, 1999 the Company completed the acquisition of 100% of the Shares of NTI. The Company, with the former shareholders of NTI receiving a majority of the total shares then issued and outstanding, effected the merger through the issuance of 4,901,481 shares of common stock from treasury. The transaction has been accounted for as a reverse take over resulting in the consolidated financial statements including the results of operations of the acquired subsidiary prior to the merger. These unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information, are condensed and do not include all disclosures required for annual financial statements. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company's audited consolidated financial statements filed as part of the Company's December 31, 2001 Form 10-KSB. In the opinion of the Company's management, these consolidated financial statements reflect all adjustments necessary to present fairly the Company's consolidated financial position at June 30, 2002 and the consolidated results of operations and the consolidated statement of cash flows for the six months then ended. The results of operations for the six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the entire fiscal year. 2. COMMON STOCK During the six months ended June 30, 2002, the following shares of common Stock were issued: For services 198,020 For cash 1,889,950 Pursuant to options 78,123 ---------- 2,166,093 ---------- The above common shares issued for services received represent fair value at the market value of those services. Item 2. Management's Discussion and Analysis or Plan of Operation. The following discussion should be read in conjunction with the Accompanying unaudited consolidated financial statements prepared by management for the six month periods ended June 30, 2002 and June 30, 2001 and the audited consolidated financial statements for the twelve months ended December 31, 2001 as presented in the Company's Form 10KSB. Although the Company has experienced a net loss this quarter, it has expended considerable effort in developing new business in new markets for NETMIND and for new design and contract manufacturing work. Funding has been approved for the AQUACOMM sonar technology development program by the Canadian Government. The AQUACOMM project funding will be received over a period of three years. The first progress payment is expected to be received in October, which will include reimbursement for work done over the past year. Special Note Regarding Forward Looking Statements Certain statements in this report and elsewhere (such as in other filings by the company with the Securities and Exchange Commission ("SEC"), press releases, presentations by the company of its management and oral statements) may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and "should," and variations of these words and similar expressions, are intended to identify these forward-looking statements. Actual results may materially differ from any forward-looking statements. Factors that might cause or contribute to such differences include, among others, competitive pressures and constantly changing technology and market acceptance of the company's products and services. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The Company's Services The Company is a Multiple Applications underwater sonar technology developer, A defense electronics manufacturer and a defense systems integrator. The Company's operations currently are those of its wholly owned subsidiaries Northstar Technical Inc. (NTI) and Northstar Network Ltd. (NN) and it is in this context that the company's services are described. We have three main activities: underwater wireless communications, electronic contract manufacturing and system integration. Underwater Wireless Communications The NETMIND System The Company's first underwater sonar product based on our core technology was the NETMIND system. NETMIND's market is the world's commercial fishing industry and government oceanic research agencies. One of our largest customers is the United States National Oceanic and Atmospheric Administration (NOAA). NETMIND is both a conservation tool as well as an efficiency tool. Electronic sensors attached to a fishing trawl measure the height and width of the net opening, the water temperature, the depth of the net, the amount of fish caught plus other parameters. The sensor information is transmitted via a wireless communications link back to the ship. NETMIND helps prevent over fishing and allows fishermen to catch fewer fish and still make profits. This gives regulators flexibility in reducing quotas when attempting to conserve limited fish stocks. Sales for NETMIND have been somewhat slower than expected during this six months period. However, with expanding sales in Europe, we anticipate an upswing in activity in the second half of the fiscal year. The AQUACOMM Project The AQUACOMM project is the development of new, leading edge multiple application sonar technologies and products for a variety of industries. These include defense, offshore oil and gas, commercial fishing, oceanography, marine environment and marine transportation. The company's funding for AQUACOMM totaling US$2,394,000 includes $2,040,000 from the Canadian federal government comprising $1,420,000 from the Atlantic Innovation Fund (announced July 9, 2002), $230,000 from the National Research Council (announced August 14, 2002) and $390,000 from Scientific Research tax credits (cash refunds made after each fiscal year end based on eligible research and development expenses). The balance is being funded through equity financing. The AQUACOMM development is scheduled to last three years. The Company intends to use its Venture Technology Business Model to maximize the success of the new AQUACOMM technologies. In this model, our core technology is invested in partnerships with established companies in the different industry sectors. One example of our modus operandi would be the co-development of a military underwater communications system. We would develop the 'wet' end and a large defense contractor would develop the 'dry' end. The defense contractor, being well established in the field, would be responsible for product introduction, marketing and sales. Another example is the development of a mooring line monitoring system for the offshore oil and gas industry. We expect to have such a system ready for commercial sale by the second quarter of 2003 and we intend to market it through a strategic alliance with an international oil field company. Should our Venture Technology Business Model prove to be successful, we intend to provide up to ten new products arising from the AQUACOMM project to be sold by these well established companies in their sectors of influence. Electronic Contract Manufacturing In the fall of 1999 we signed a contract with Lockheed Martin, Manassas, Virginia to fabricate and test control consoles for Navy submarines. This contract was successfully completed in early 2001 and a follow-on contract was received from Lockheed Martin which was completed in the fall of 2001. Further console contracts are expected in the future from Lockheed Martin. We are attempting to expand our electronic contract manufacturing business with our current customers, as well as with customers in the offshore oil and gas, transportation and communication industries. System Integration The Company has created a novel approach to securing and executing large defense contracts by bringing together affiliate companies. The overall capability, which is substantial, is presented to the prime contractors. To date, a memorandum of understanding has been signed with Lockheed Martin Canada to jointly pursue the $2.0 billion Maritime Helicopter Project. Subsequent Events Subsequent to June 30, 2002 the Company issued 406,688 shares of common stock for cash of $150,000. Results of Operations Comparison of the three and six months ended June 30, 2002 with the three and six months ended June 30, 2001: Revenue for the three month period ended June 30, 2002 was $167,526 compared to $201,933 of revenue recorded during the same period of the prior year. This comparative decrease is the result of a slow down in the fishing industry world wide, which impacted on the sales of the NETMIND systems. Revenue for the six month period ended June 30, 2002 was $364,778, down from $554,969 in the prior period for the same reason. Gross profits decreased from $424,915 (76%) in the prior period to $156,638 (57%) in the current period. The decrease in dollars was due to the fact that the current period does not include any revenues from contract sales. Therefore, in the absence of a console contract during the first two quarters of 2002, the gross margin is lower than the prior year's comparative quarters. The Company continues to negotiate for subsequent material contracts with Lockheed Martin and others. The net loss for the three month period ended June 30, 2002 was $(181,876) compared to a net loss of $(144,219) for the three months ended June 30, 2001. Over this past quarter, the Company continued to invest considerable resources in seeking out additional and future contract manufacturing opportunities and is confident that the efforts will return positive results to the Company over the ensuing months and years. During the two quarters the Company expended $136,000 on the development of its Network business concept. To date, Network has generated no revenues. Network continues to pursue the $2.0B Maritime Helicopter Project as one of Lockheed Martin Canada's partners. This contract is now expected to be awarded in 2004. Network is also actively attempting to secure a first contract on the Joint Strike Fighter program in the United States, having already signed Memoranda of Interest with Lockheed Martin and four of its partner companies. A large thrust of Network recently has been in the anti- terrorism field. Specifically, Network is working towards projects that utilize its sonar and marine engineering expertise. A highly significant event for the Company was the acquisition of specialized sonar and transducer technology used in the NETMIND system. Northstar is now producing its own sonar transducers at a lower cost to the Company than when they were purchased outside of the Company. This new capability shortens the time it takes to develop enhancements to Company products or new sensors and will positively affect future gross margins. This new technology will also allow the Company to expand its acoustic capabilities into military and anti terrorist applications. We are actively pursuing contracts in these areas and we expect to see results later this year. During the quarter the Company increased expenditures on the marketing and advertising of its NETMIND system and expanded awareness of the NETMIND system through trade shows and a growing distribution network including Ireland and the Scandinavian countries. The new Bottom Contact Sensor was Well received by our fishing industry customers and by government researchers. The Company continued on its program towards extending its underwater wireless communication technology into additional applications and expended further effort in developing proposals for financing of a major product development program. Comparison of Financial Position at June 30, 2002 with June 30, 2001 The Company reduced its working capital deficit at June 30, 2002 to $(202,387) with current liabilities of $485,117 in excess of current assets of $282,730. At December 31, 2001 the Company had a working capital deficit of $251,254. Included in current liabilities is the repayment in full of a $160,000 debenture due July 3, 2002. This debenture was refinanced. The Company intends to finance its working capital shortfall by the issuance of shares of its common stock, increased revenues and the recovery of certain expenses under the AQUACOMM project. Liquidity and Capital Resources The Company has increased its Shareholder's Deficit as a result of its efforts to expand its current markets and to secure future contract work. During the two quarters the Company issued 1,889,950 shares of common stock for gross proceeds of $585,978 pursuant to a Regulation S offering. Subsequent to June 30, 2002 the Company received $150,000 for a total of $735,978 pursuant to that same offering. The Company has outstanding a private placement unit offering pursuant to Regulations D and S for the issuance of up to 700,000 units at $0.35 per unit. Each unit consists of one common share plus two warrants: one A warrant exercisable at $0.50 to acquire one common share and one B warrant exercisable at $0.75 to acquire one common share. PART II - OTHER INFORMATION Item 1. Legal Proceedings. No change since previous filing. Item 2. Changes in Securities. Options Granted Date Exercise Price Expiry Date None - - - Common Stock Issued Date Consideration 21,759 January, 2002 $ 7,949 186,704 February, 2002 $ 56,012 769,400 March, 2002 $259,510 383,514 April, 2002 $131,385 308,278 May, 2002 $ 88,408 496,438 June, 2002 $102,331 Item 3. Defaults Upon Senior Securities. No change since previous filing. Item 4. Submission of Matters to a Vote of Security Holders. No change since previous filing. Item 5. Other Information. No change since previous filing. Item 6. Exhibits and Reports on form 8-K. EXHIBIT 99.01 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Wilson Russel, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Northstar Electronics, Inc. on Form 10-QSB for the quarterly period ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Northstar Electronics, Inc. Date: August 15, 2002 By: /s/ Wilson Russell ------------------- Name: Wilson Russell Title: Chief Executive Officer and Chief Financial Officer SIGNATURES In accordance with the requirements of the Exchange Act, The registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. August 07, 2002 Northstar Electronics, Inc. (Registrant) By: /s/ Wilson Russell Dr. Wilson Russell, PhD President and Principal Financial Officer