[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 [ ] 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 Interim Financial Information, Unaudited Nine Months Ended September 30, 2003, U.S. Dollars Prepared by management Consolidated Balance Sheets at September 30, 2003 and at December 31, 2002 Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2003 Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2003 Consolidated Statement of Cash Flows for the Nine Months Ended September 30,2003 Notes to Consolidated Financial Information Item 2. Management's Discussion and Analysis or Plan of Operation Item 3. Controls and Procedures 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 2003 2002 Current Cash $744,613 $117,690 Receivables 167,492 345,454 Inventory and work in progress 175,002 147,846 Prepaid expenses 9,658 4,682 Total Current Assets 1,096,765 615,672 Property and Equipment, net 148,350 138,071 Total Assets $1,245,115 $753,743 LIABILITIES Current Accounts payable and accrued liabilities $227,507 $418,555 Loans payable - 72,863 Current portion of long term debt 66,594 62,079 Total Current Liabilities 294,101 553,497 Long Term Debt 527,742 429,309 Due to Cabot Management Limited 81,618 70,105 Due to Director - 140,297 Total Liabilities 903,461 1,193,208 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 15,691,199 shares of common stock 1,570 1,191 (11,907,976 December 2002) Additional Paid in Capital 3,398,402 2,179,624 Other Comprehensive Income (25,887) 25,213 Deficit (3,032,431) (2,645,493) Total Stockholders' Equity (Deficit) 341,654 (439,465) Total Liabilities and Stockholders' Equity $1,245,115 $753,743 NORTHSTAR ELECTRONICS, INC. Consolidated Statements of Operations Three Months and Nine Months Ended September 30 Unaudited U.S. Dollars Three Months Nine Months 2003 2002 2003 2002 Sales $267,858 $332,433 $856,755 $774,444 Discounts 64,099 58,086 161,213 135,319 Sales net of discounts 203,759 274,347 695,542 639,125 Cost of goods sold 125,849 63,551 294,145 271,691 Gross margin 77,910 210,796 401,397 367,434 Other income 4,545 (53) 9,196 45 Recovery of research and development 135,267 158,200 460,648 158,200 217,722 368,943 871,241 525,679 Operating Expenses Salaries 216,059 (14,765) 584,379 205,260 Consulting 13,753 43,761 116,442 98,284 Professional fees 3,026 48,252 26,117 61,538 Investor relations 37,935 14,518 94,171 47,885 Advertising and marketing 10,545 (750) 65,968 34,798 Rent 26,584 19,086 76,344 59,209 Research and development 31,127 140,157 76,939 203,857 Office 33,584 23,996 81,808 45,745 Travel and business development 31,565 34,638 57,324 46,581 Interest on debt 4,904 8,215 21,610 28,087 Heat, light and telephone 10,585 7,237 34,373 21,490 Amortization 4,314 2,493 12,412 5,254 Repairs and maintenance 2,655 1,215 5,920 4,980 Transfer agent 218 1,301 2,026 2,079 Proposal costs - 151 2,346 7,171 Total operating expenses 426,854 329,505 1,258,179 872,218 Net income (loss) for the period $(209,132) $39,438 $(386,938)$(346,539) Net income (loss) per share $(0.016) $0.004 $(0.029) $(0.035) Weighted average number of shares outstanding 12,981,996 10,222,397 13,339,324 9,886,360 NORTHSTAR ELECTRONICS, INC. Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 2003 Unaudited U.S. Dollars Total Other Stock Additional Compre- Accumu- holder Paid in hensive lated Equity Shares Amount Capital Income Deficit (Deficit) Balance December 31, 2002 11,907,976 $1,191 $2,179,624 $25,213 $(2,645,493) $(439,465) Net loss for nine months - - - - (386,938) (386,938) Fair value of options granted - - - - - - Other comprehensive credits (debits) - - - (51,100) - (51,100) Issuance of common stock for services 305,480 31 133,179 - - 133,210 Issuance of common stock for cash 3,477,743 348 1,385,943 - - 1,386,291 Share issuance cost - - (300,344) - - (300,344) ----------------------------------------------------------------------------- Balance September 30, 2003 15,691,199 $1,570 $3,398,402 $(25,887) $(3,032,431) $ 341,654 ----------------------------------------------------------------------------- NORTHSTAR ELECTRONICS, INC. Consolidated Statement of Cash Flows Nine Months Ended September 30, 2003 Unaudited U.S. Dollars September 30 2003 2002 Operating Activities Net income (loss) $(386,938) $(346,539) Adjustments to reconcile net income (loss) to net cash used by operating activities Amortization 12,412 5,254 Issuance of common stock for services 133,210 213,500 Value of options granted 0 10,186 Changes in operating assets and liabilities (167,981) (368,579) Net cash provided by (used by) operating activities (409,297) (486,178) Investing Activity Acquisition of property and equipment (22,691) (3,220) Financing Activities Issuance of common stock for cash - net 1,085,947 467,556 Increase (repayment) of long term debt 102,948 116,087 Due to Cabot Management Limited 11,513 1,351 Advances from (repayment to) director (140,297) (25,911) Net cash (used by) provided by financing activities 1,060,111 559,083 Effect of foreign currency translation on cash (1,200) (21,816) Inflow (outflow) of cash 626,923 47,869 Cash, beginning of period 117,690 39,699 Cash, end of period $744,613 $87,568 Supplemental information Interest paid $21,610 $28,087 Shares issued for services 305,480 580,272 Corporate income taxes paid $0 $0 NORTHSTAR ELECTRONICS, INC. Notes to Consolidated Financial Information Nine Months Ended September 30, 2003 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 in the State of Delaware and had no operations otherthan organizational activities prior to the January 1999 merger with NTI described as follows: 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. 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 of America with all figures translated into United States dollars for reporting purposes. These unaudited consolidated interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America 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, 2002 Form 10-KSB. In the opinion of the Company's management, this consolidated interim financial information reflects all adjustments necessary to present fairly the Company's consolidated financial position at September 30, 2003 and the consolidated results of operations and the consolidated cash flows for the nine months then ended. At September 30, 2003, 30% of the Company's revenues were generated from one contract, which was completed June, 2003 (At September 30, 2002 the Company recorded nil revenues from contract work) - the Company is continually marketing its services for follow on contracts. The results of operations for the nine months ended September 30, 2003 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, 2003, the following shares of common stock were issued: For services 305,480 shares valued at $133,210 For cash 3,477,743 shares for $1,386,291 before share issuance costs of $300,344 Total 3,783,223 The above common shares issued for services received represent value to the Company 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 nine month periods ended September 30, 2003 and September 30, 2002 and the audited consolidated financial statements for the twelve months ended December 31, 2002 as presented in the Company's Form 10KSB. Although the Company has experienced a net loss this quarter, it continues to expend considerable effort in developing new business in new markets for NETMIND and for new design and contract manufacturing work in an effort to materially benefit the future business of the Company. 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, press releases, presentations of the company by 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 "will", "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, 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 anticipated 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. Underwater Sonar Products and Technologies 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 increases efficiency and promotes conservation in the fishing industry. 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 sonar communications link back to the ship. NETMIND helps prevent over fishing and allows fishermen to operate profitably at lower yields. This could give regulators flexibility in reducing quotas when attempting to conserve limited fish stocks. Sales for NETMIND were slower than expected during the first half of the fiscal year. However, with expanding sales in North America and Europe, we are experiencing an upswing in activity and expect an improvement in the fourth quarter of the fiscal year. 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 another two years. To date, the Company has recovered $679,245 in expenses from this funding. 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 would be the development of a sonar communication system, obstacle avoidance sonar, and long lasting battery technology for an Autonomous Underwater Vehicle (AUV) manufacturer. Northstar intends to become an Original Equipment Manufacturer (OEM) for the AUV 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. Homeland Security Northstar has successfully developed the sonar hardware and mechanical housing for a large defense contractor's anti-terrorism system. The system is designed to protect naval ships, ports and harbors. Electronic Contract Manufacturing In the fall of 1999 we signed a contract with Lockheed Martin, Manassas, Virginia to fabricate and test command and control consoles for Navy submarines. This contract was successfully completed in early 2001 and a follow-on contract was received and completed in the fall of 2001. Lockheed Martin recently received United States Department of State approval for a Manufacturing License Agreement (MLA) with Northstar that will permit Northstar to manufacture command and control consoles for Lockheed Martin's foreign customers and to offer Lockheed Martin's console technology directly to the Canadian Department of National Defense. Systems Integration The Company has created a novel approach to securing and executing large defense contracts by bringing together affiliate companies. The overall capability of the affiliated companies, 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 $3.0 billion Maritime Helicopter Project. Results of Operations Comparison of the three and nine months ended September 30, 2003 with the three and nine months ended September 30, 2002: Revenue for the three month period ended September 30, 2003 was $267,858 compared to $332,433 of revenue recorded during the same period of the prior year. This decrease is the result of a slow down in the fishing industry world wide, which impacted on the sales of the NETMIND systems. Gross revenue for the nine month period ended September 30, 2003 was $856,755, up from $774,444 in the prior period due to the contract work completed in the second quarter of this year. Gross margins increased from $367,434 (57%) in the prior period to $401,397 (58%) in the current period. The increase is due to increased efficiency in the manufacture of the NETMIND systems and to a higher gross profit earned in the contract sale. The comparative prior period does not include any revenues from contract sales. The Company continues to negotiate for subsequent material contracts with Lockheed Martin and others. The net loss for the three month period ended September 30, 2003 was $(209,132) compared to a net loss of $(118,762) for the three months ended September 30, 2002. Over this past quarter, the Company continued to invest considerable resources in seeking out new contract manufacturing opportunities and is confident that the efforts will return positive results to the Company over the ensuing months and years. The Company has continued 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. The Company is also actively attempting to secure a first contract on the Joint Strike Fighter program in the United States to supply fiber optic assemblies. The Company continues to pursue contracts in the anti-terrorism field, specifically working towards Homeland security and defense 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 has shortened the time it takes to develop enhancements to Company products or new sensors and has positively affected the Company's 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 anticipate positive results. During the quarter the Company continued 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, Spain and the Scandinavian countries. The Company continued on its program towards extending its underwater wireless communication technology into additional applications. During this quarter the Company recovered $91,253 in expenses pursuant to its AQUACOMM project , for a total recovery over the past nine months to September 30, 2003 of $460,648. Comparison of Financial Position at September 30, 2003 with December 31, 2002 The Company's working capital position increased from December 31, 2002. At September 30, 2003 net working capital was $869,258 compared with net working capital of $62,175 at December 31, 2002. This improvement is reflected in cash reserves of $744,613. Liquidity and Capital Resources During the quarter the Company issued 1,428,570 shares of common stock for proceeds of $500,000.00 to the Company. Each share has a share purchase warrant attached for the purchase of one additional share of the Company at $0.50 each, exercisable at any time and expiring August 21, 2010. During the period the Company has increased its Stockholders' Equity as a result of its efforts pursuant to a Regulation S offering whereby 2,097,070 shares of common stock have been issued during the past nine months for gross proceeds of $886,081. In a prior quarter the Company issued 541,664 A warrants exercisable at $0.35 to acquire one common share and issued 541,664 B warrants exercisable at $0.50 to acquire one common share. The A warrants expired June 30, 2003 and the B warrants will expire December 31, 2003 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. (b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. 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 291,665 January 15, 2003 $87,500 1,643,905 Jan/Feb/March, 2003 $740,147 8,834 January, 2003 services valued at $3,975 4,991 January, 2003 salary valued at $2,200 5,906 February, 2003 services valued at $5,906 188,665 Jan/Feb/March, 2003 services valued at $84,899 14,900 April/May/June, 2003 services valued at $6,856 30,868 May, 2003 services valued at $12,848 161,500 April, 2003 $58,837 25,000 July 10, 2003 services valued at $7,500 1,428,570 August 28, 2003 $500,000 26,316 September 2, 2003 services valued at $15,000 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 4, 2003 Northstar Electronics, Inc. (Registrant) By: /s/ Wilson Russell Wilson Russell, PhD President and Chief 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, 2003 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 4, 2003 302 CERTIFICATION I, Wilson Russell, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Northstar Electronics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2003 /s/ Wilson Russell Wilson Russell, Chief Financial Officer and Director