[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended September 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 Employer 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
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Financial Statements
Nine Months Ended September 30, 2002
U.S. Dollars
Unaudited
Prepared by management
Consolidated Balance Sheets at September 30, 2002 and at December 31, 2001
Consolidated Statements of Operations for the Three and Nine Month Periods
Ended September 30, 2002
Consolidated Statement of Changes in Stockholders' Equity for the Nine Months
Ended September 30, 2002
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
Unaudited
U.S. Dollars
September 30 December 31
ASSETS 2002 2001
Current
Cash $87,568 $39,699
Receivables 149,188 139,453
Recoverable expense and tax credits 158,200 -
Inventory and work in progress 200,223 107,257
Prepaid expenses 22,784 5,398
Total Current Assets 617,963 291,807
Due from a Director 1,510 -
Property and Equipment 85,820 91,903
Total Assets $705,293 $383,710
LIABILITIES
Current
Accounts payable and accrued liabilities $301,538 $325,075
Loans payable - 6,778
Current portion of long term debt 199,320 211,208
Total Current Liabilities 500,858 543,061
Long Term Debt 492,524 364,549
Deferred Revenue - 64,259
Due to Cabot Management Limited 57,600 56,249
Due to Director - 24,401
Total Liabilities 1,050,982 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
10,930,807 shares of common stock 1,093 794
(7,942,009 - 2001)
Additional Paid in Capital 1,837,623 1,146,447
Other Comprehensive Income 15,492 37,308
Deficit (2,199,897) (1,853,358)
Total Stockholders' Equity (Deficit) (345,689) (668,809)
Total Liabilities and Stockholders' Equity $705,293 $383,710
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30
Unaudited
U.S. Dollars
Three Months Nine Months
2002 2001 2002 2001
Sales $274,347 $285,546 $639,125 $840,515
Cost of goods sold 63,551 89,985 271,691 220,039
Gross margin 210,796 195,561 367,434 620,476
Other income (53) 946 45 15,661
210,743 196,507 367,479 636,137
Operating Expenses
Salaries (14,765) 128,199 205,260 387,723
Consulting 43,761 0 98,284 0
Professional fees 48,252 81,172 61,538 149,063
Investor relations 14,518 0 47,885 0
Value of Director's
uncompensated services 0 0 0 37,700
Advertising and marketing (750) 22,523 34,798 54,727
Rent 19,086 9,558 59,209 53,009
Research and development 140,157 6,858 203,857 42,376
Office 23,996 27,471 45,745 52,360
Travel and business development 34,638 16,158 46,581 47,065
Interest on debt 8,215 6,945 28,087 23,220
Heat, light and telephone 7,237 4,383 21,490 14,769
Amortization 2,493 1,760 5,254 4,719
Repairs and maintenance 1,215 0 4,980 0
Transfer agent 1,301 0 2,079 0
Proposal costs 151 0 7,171 0
Total operating expenses 329,505 305,027 872,218 866,731
Net income (loss) from operations $(118,762)$(108,520) $(504,739)$(230,594)
Due from AQUACOMM 122,100 0 122,100 0
Research tax credits receivable 36,100 0 36,100 0
Net income (loss) for the period $ 39,438 $(108,520) $(346,539)$(230,594)
Net income (loss) per share $ 0.004 $(0.014) $(0.035) $(0.030)
Weighted average number of shares
Outstanding 10,222,397 7,871,409 9,886,360 7,770,782
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2002
Unaudited
U.S. Dollars
Other
Additional Compre- Accumu- Total
Paid in hensive lated Stockholder
Shares Amount Capital Income Deficit Equity Deficit)
Balance
Dec. 31,
2001 7,942,009 $ 794 $1,146,447 $37,308 $(1,853,358) $(668,809)
Net loss
for
nine months - - - - (346,539) (346,539)
Fair value of
options granted - - 10,186 - - 10,186
Other
comprehensive
credits (debits) - - - (21,816) - (21,816)
Issuance of
common stock
for services 580,272 58 213,442 - - 213,500
Issuance of
common stock
for cash 2,330,403 233 780,765 - - 780,998
Share issuance
Cost - - (313,217) - - (313,217)
Exercise of
stock option 78,123 8 - - - 8
---------------------------------------------------------------------------
Balance
September 30,
2002 10,930,807 $1,093 $1,837,623 $15,492 $(2,199,897) $(345,689)
---------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2002
Unaudited
U.S. Dollars
September 30
2002 2001
Operating Activities
Net income (loss) $(346,539) $(230,594)
Adjustments to reconcile net income (loss)
to net cash used by operating activities
Amortization 5,254 4,719
Issuance of common stock for services 213,500 67,341
Value of options granted 10,186 0
Uncompensated services 0 37,700
Changes in operating assets and liabilities (368,579) 33,535
Net cash provided by (used by) operating activities (486,178) (87,299)
Investing Activity
Acquisition of property and equipment (3,220) (22,606)
Financing Activities
Issuance of common stock for cash - net 467,556 0
Increase (repayment) of long term debt 116,087 74,029
Due to Cabot Management Limited 1,351 (3,320)
Advances from (repayment to) director (25,911) (15,528)
Net cash (used by) provided by financing activities 559,083 55,181
Effect of foreign currency translation on cash (21,816) 3,284
Inflow (outflow) of cash 47,869 (51,440)
Cash, beginning of period 39,699 125,602
Cash, end of period $87,568 $74,162
Supplemental information
Interest paid $28,087 $23,220
Shares issued for services 580,272 205,203
Corporate income taxes paid $0 $0
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2002
Unaudited
U.S. Dollars
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 balances
and transactions are eliminated. The Company was incorporated May 11, 1998
under the laws of the State of Delaware and acquired NTI January 26,1999
in a reverse takeover for the issuance of 4,901,481 shares of common stock
from treasury. The Company's business activities are conducted principally
in Canada but these financial statements are prepared with all figures
translated into United States dollars.
These unaudited consolidated financial statements have been prepared 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, prepared by management without audit, reflect all adjustments
necessary to present fairly the Company's consolidated financial position
at September 30, 2002 and the consolidated results of operations and the
consolidated statement of cash flows for the nine months then ended. The
results of operations for the nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
2. COMMON STOCK
During the nine months ended September 30, 2002, the following shares of
common stock were issued:
For services 580,272 shares valued at $213,500
For cash 2,330,403 shares valued at $780,998
Exercise of stock option 78,123 shares valued at $8
Total 2,988,798
The above common shares issued for services received represent value to
the Company at the market value of those services.
During the three month period, 315,000 stock options were granted to
consultants, lawyers and employees, the valuation of which resulted in
additional legal fees of $5,784, consulting fees of $4,402. Had
compensation expense been determined for 800,000 options to acquire
shares as provided in SFAS 123 using the Black-Scholes option pricing
model, the pro forma effect on the Company's net loss would be to
increase the net loss for the nine months ended September 30, 2002 by
$(234,800) to $(581,339) and to increase the net loss per share to
$(0.059)
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 nine month periods ended September 30, 2002 and
September 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 at September 30, 2002,
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 provisionally approved for the AQUACOMM sonar
technology development program by the Canadian federal government. The
AQUACOMM project funding will be received over a period of three years.
The first progress payment is now expected to be received in December,
which will include partial 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, through its subsidiaries, 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.
Underwater Sonar Products and Technologies
a - 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 has been 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 and 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
Nine months period. Sales have not expanded in Europe as we had
anticipated. However, an upswing in activity over the next six months is
expected.
b - The AQUACOMM Project
The AQUACOMM project involves 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.
At September 30, 2002, the company recorded $122,100 in expenses and
$36,100 in tax credits recoverable pursuant to the AQUACOMM project.
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 established companies in their sectors of influence.
c - Defense Sonar System
During this quarter the Company secured a contract to design and construct
prototype sonar hardware for a defense protection system. It is designed for
the protection of navy ships, ports and harbors.
We expect that Homeland Security and Anti Terrorism will become a major part
of our business over the next five years with production of these and other
systems.
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. A follow-on contract was
received and completed in the fall of 2001. Further console contracts are
expected in the future.
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.
Systems Integration
The Company is developing its 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.
The aforementioned defense sonar system is an example of how Systems
Integration will work for us. In this project, we have four subcontractors
who carry out various tasks, with Northstar bringing all the component
parts together for final assembly, testing, quality control and delivery
to the customer.
Subsequent Events
Subsequent to September 30, 2002 the Company issued 109,930 shares of
common stock for cash of $40,735.
Results of Operations
Comparison of the three and nine months ended September 30, 2002 with the
three and nine months ended September 30, 2001.
Revenue for the three months ended September 30, 2002 was $274,347
compared to $285,546 of revenue recorded during the same period of the
prior year. Revenue for the nine months ended September 30, 2002 was
$639,125 compared to $840,515 of revenue during the same period of the
prior year. The decrease between the two nine month periods was created
by the absence of the Lockheed Martin contract, which was completed
during the first quarter of 2001. Gross profits decreased from $620,476
(74%) in the prior period to $367,434 (57%) in the current period. The
percentage decrease was created by a higher percentage of sales being
attributable to NETMIND, which lost some profit margin to competitive
pricing and to increased dealer discounts. The Company continues to
negotiate for subsequent material contracts with Lockheed Martin and
others.
The Company experienced a net loss from operations for the three and nine
month periods ended September 30, 2002 of $(118,762) and $(504,739) compared
to a net loss from operations for the three and nine month periods ended
September 30, 2001 of $(108,520) and $(230,594)], respectively. This loss
resulted from increased costs of salaries, professional fees, and expenses
incurred in developing the Company's Northstar Network business plan. To
date, Northstar Network has expended $265,000 in business development. The
company also increased its NETMIND marketing efforts through advertising,
trade shows and by offering a more attractive commission structure to its
dealers. The Company increased its loss position by investing further into
the development and promotion of a broader market for its core underwater
communications technology.
During the quarter, the Company categorized $203,857 as research and
development costs, reclassifying $179,535 from salaries, $12,800 from rent,
$4,545 from heat light and telephone and $6,977 from office expenses,
reducing each category by the respective amount, to more properly reflect
the expenditures as research and development. At September 30, 2002, the
company recorded $122,100 in expenses recoverable and $36,100 in tax
credits recoverable pursuant to the AQUACOMM project, resulting in net
income for the three month period ended September 30, 2002 of $39,438
after taking into account the recoveries, and reduced the nine months
loss from operations of $(504,739) to a net loss of $(346,539).
Comparison of Financial Position at September 30, 2002 with September 30,
2001
The Company's working capital position remained positive at September 30,
2002 with current assets of $617,963 in excess of current liabilities of
$500,858 by $117,105. At December 31, 2001 the Company had a working
capital deficiency of $(251,254).
Liquidity and Capital Resources
For the Company to continue its expenditures at the current rate it must
increase sales, increase its debt or raise equity.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
No change since previous filing.
Item 2. Changes in Securities.(during period)
Options Granted Date Exercise Price Expiry Date
175,000 June 25, 2002 $0.50 June 25, 2007
125,000 June 25, 2002 $0.75 June 25, 2007
815,000 July 05, 2002 $0.50 July 05, 2007
Total options outstanding at September 30, 2002: 2,719,000
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
280,000 July, 2002 $ 87,888
80,910 July, 2002 services
85,800 August, 2002 $ 26,930
86,430 August, 2002 services
254,900 September, 2002 $ 80,008
34,665 September, 2002 services
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.
No change since previous filing.
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.
November 12, 2002 Northstar Electronics, Inc.
(Registrant)
By: /s/ Wilson Russell
Wilson Russell, PhD
President
Principal Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 W.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,
the undersigned Chief Executive Officer and chief Financial Officer,
or persons fulfilling similar functions, each certify:
(i) That the financial information included in this Quarterly Report
fairly presents in all material respects the financial condition and
results of operations of the Company as of September 30, 2002 and for
the periods presented in the report; and
(ii) That the Quarterly Report fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities exchange Act of 1934
By: /s/ Wilson Russell
Title: Chief Executive Officer
And Chief Financial Officer
Date: November 12, 2002
And Chief Financial Officer
Date: November 12, 2002