UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from n/a to n/a
Commission file number: 333-90031
Exact name of small business issuer as specified in its charter
Northstar Electronics, Inc.
State or other jurisdiction of incorporation IRS Employer
or organization Identification No.
Delaware #33-0803434
Address of principal executive offices
Suite # 1455- 409 Granville Street,
Vancouver, British Columbia,
Canada V6C 1T2
Registrant's telephone number
(604) 685-0364
Securities registered pursuant to section 12(b) of the Act
None
Securities registered pursuant to section 12(g) of the Act
100,000,000 shares of common stock with a par value of $0.0001 each
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
(1) [x] Yes (2)[x] Yes
[ ] No [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (s229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[x]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall
be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a
specified date within 60 days prior to the date of filing. (See definition
of affiliate in Rule 405, 17 CFR 230.405)
Note - If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and
expense, the aggregate market value of the common stock held by
non-affiliates may be calculated on the basis of assumptions reasonable
under the circumstances, provided that the assumptions are set forth in
this Form.
Aggregate market value of voting common equity held by non-affiliates as
of December 31, 2002:
$3,500,000 approximately
Aggregate market value of non-voting common equity held by non-affiliates
as of December 31, 2002:
$NIL
Indicate whether the registrant is an accelerated filer based on the market
value of its public float held by non-affiliates at the end of the most
recent second fiscal quarter:
[ ] Yes
[X] No
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Outstanding shares of common stock as of March 18, 2003: 13,204,631
Outstanding shares of preferred stock as of March 18, 2003: Nil
Documents incorporated by reference:
None
Northstar Electronics, Inc.
Index
Part I
Item 1. Description of Business
Item 2. Description of Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholders Matters
Item 6. Management's Discussion and Analysis or
Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters
and Control Persons;
Compliance with Section 16(a) of the
Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Item 12. Certain Relationships and Related
Transactions
Part IV
Item 13. Exhibits and Reports on form 8-K
Signatures
PART I
Item 1. Description of Business
The Company was incorporated May 11, 1998 as Scientific Technologies, Inc.
under the laws of the State of Delaware. The name of the Company was
changed to Northstar Electronics, Inc. (NEI) in September, 1999. There has
been no material reclassification, merger, consolidation, purchase or sale
of any significant amount of assets other than in the ordinary course of
business.
There have been no bankruptcy, receivership or similar proceedings.
The business of the Company is primarily that of its wholly owned
subsidiaries, Northstar Technical Inc. (NTI) and Northstar Network
Ltd. (NN).
NTI develops, manufactures and sells undersea wireless sonar
Communications systems and produces, under contract, defense and
aerospace electronic systems.
NN was incorporated to pursue defense and aerospace contract manufacturing
opportunities.
Sonar Products and Technologies
NTI developed a wireless communications technology with undersea
applications. The technology is used in underwater sensing devices and can
send information from one place in the ocean to another place. The
electronic sensors take certain measurements that are then transmitted
using underwater sound waves to a receiving unit, which processes the data
and displays it on a computer monitor. The technology has many potential uses
in a variety of industries including offshore oil and gas, defense, marine
transportation, oceanography, environmental and fishing.
Homeland Security and Military Defense
The Company expects that design and manufacture of homeland security and
anti-terrorism systems will grow to become a major component of Northstar's
business over the next five years as the United States' Department of
Homeland Security launches and ramps up its efforts to protect U.S.
waterways and marine borders from ships, submarines and unwanted intruders.
Northstar Electronics has designed and is planning to manufacture sonar
hardware for homeland security and military defense systems. These systems
detect and track combat divers and are intended to protect naval ships,
harbors and ports.
Research and Development - AQUACOMM
AQUACOMM is a $2.5Million fully funded in-house research and development
program at Northstar that has been created specifically to develop new,
leading edge multiple application sonar technologies and products for a
variety of industries, including: defense, offshore oil and gas, commercial
fishing, oceanography, marine environment and marine transportation. The
Company has received funding for this project from the Canadian Federal
Government's Atlantic Innovation Fund and the National Research Council, as
well as from equity investment. Scheduled to last for three years, Northstar
believes that AQUACOMM will result in the development of up to 10 new
technologies during this period.
Northstar intends to use its Venture Technology Business Model to maximize
the success of AQUACOMM technologies. In this model, a technology developed
through AQUACOMM will be partnered with an established company in a specific
industry sector. One example could be the co-development of a military
underwater communications system. Northstar would develop the "wet" end and
a large defense contractor would be responsible for the "dry" end. Since the
defense contractor is well established in the field, it would be the defense
contractor that would undertake the product introduction, marketing and sales
efforts. Another example of the type of technology that could be developed
under AQUACOMM is the development of a mooring line monitoring system for the
offshore oil and gas industry. Northstar expects to have such a system ready
this year and intends to market the system through a strategic alliance with
an international oil field company.
Northstar believes it can build on its strong expertise in sonar technology
and marine engineering to become a Commercial Sonar Center of Excellence
upon the completion of its AQUACOMM program.
The NETMIND System
The first application of NTI's core technology is the NETMIND system. NTI
developed, manufactures and markets this product for the world's commercial
fishing industry.
The NETMIND Market
NETMIND was introduced to the fishing industry in late 1996. To date,
approximately 155 sales have been made in North America, Europe, New Zealand
and Russia. The targeted customers have been strategic in that they are
industry leaders and government agencies. They include the National Oceanic
and Atmospheric Administration (NOAA) in the United States, the United
States Department of the Interior and Fishery Products International in
Canada. Customer feedback has shown that the NETMIND system enhances
efficiency, reduces gear damage and improves catch quality.
Raw Material Sources and Availability
Raw materials for the manufacture of the NETMIND system are available from
various sources.
The principal suppliers are as follows:
Compass Ltd. - stainless steel chamber and end caps for sensors, mounting
flanges for hull mount hydrophone and other miscellaneous stainless steel
parts
MF Composites - polyurethane, resin and hardener
Astroflight - battery chargers
Mercury Wire Products - tow cable for hydrophone
Electrosonic - electronic components
Future Active Inc. - electronic components
Prism - circuit boards
Enerpower - battery packs
To date, NTI has received parts, supplies and materials from these suppliers
in a timely fashion and has met its production schedules. In our efforts to
reduce costs, we now produce transducers and other components in house.
Major Customer Dependency - NETMIND
NTI has sold over 155 NETMIND systems to over 100 different customers with
no dependence on one or a few major customers.
Competition - NETMIND
The system has two main competitors, Furuno in Japan and Scanmar in Norway,
both of which are private companies. Little information is available to the
public on either of these companies; however, we believe that NETMIND has
technical advantages over each. This belief is based on our testing program
from 1996 to 1999, which established our technical specifications, and on
information gleaned from Furuno and from Scanmar. We have no direct access
to any competitor's test data.
The NETMIND, Furuno and Scanmar systems consist of wireless acoustic
sensors used underwater and all three systems operate by illustrating how
the fishing net is behaving while being towed. However, unlike its
competitors, NETMIND sensors are fully serviceable. The electronic circuitry
is contained in stainless steel cylinders within each component and is easily
removed for repair by opening the end cap. We believe that NETMIND components
have a longer battery life and a more effective communication over a longer
distance than its competitors. We believe the rugged design of various NETMIND
components has surpassed competitor's designs in that NETMIND's unique
components require very little maintenance.
While NETMIND continues to expand its market presence, we believe the Company
is smaller in size and resources when compared to its competitors. NTI's
staff numbers eighteen while we believe Scanmar and Furuno each employ many
times that number. As well, we believe the competitors' facilities are
substantially larger than NTI's.
Distribution of the NETMIND System
NETMIND is sold directly to customers by our own sales staff and through
marine electronics dealers. We have dealer representation in Canada, the
United States, Angola, Morocco, Iceland, Ireland, Mozambique, Namibia, New
Zealand, Russia, Scotland and South Africa. We support all sales efforts
with product brochures, pamphlets, and customer testimonials and with booths
at trade shows such as Fish Expo in Seattle. We also advertise in trade
magazines, notably 'The Navigator' and 'Fishing News International'
Technology Protection - NETMIND
Since commercializing NETMIND in 1996, NTI has made many enhancements to
its system. These activities have resulted in an optimum design for which
a patent application may be submitted. The technology is difficult to
replicate because of its sophistication and, regardless of patent protection,
it is expected it would take several years for a new player to catch up to
the present system. The Company has obtained Canadian trademark rights to
the name NETMIND effective for fifteen years from August 24,1999. No other
intellectual property related applications have been filed or prepared. In
the meantime, NTI continues to develop new and innovative NETMIND products.
Need for Government Approvals - NETMIND
There are no Government approvals required for the NETMIND system in the
areas it is currently sold.
Effect of Existing or Probable Government regulations - NETMIND
There is no effect on the Company's sales arising from government
regulations and the Company does not anticipate any change to this in the
future.
Research and Development Expenditures - NETMIND
NTI has carried out research and development activities on NETMIND
enhancements in 2002. None of these costs were borne directly by customers
nor did these costs directly affect NTI's pricing structure.
Costs and Effects of Compliance with Environmental Laws - NETMIND
NTI has incurred no costs nor suffered any effects to maintain compliance
with any environmental laws.
CONTRACT MANUFACTURING (CM)
NEI's second business activity, conducted through both its subsidiary
companies (NTI and NN) is contract manufacturing where the Company
produces electronic systems under contract to the defense and aerospace
industry (called 'build to print'). We build products according to designs
provided by our customers. The Company's main customer is currently
Lockheed Martin, for whom Northstar provides production engineering,
sourcing and procurement of parts, assembly of parts into systems, testing
and shipping. The Company has manufactured submarine control consoles
under several contracts with Lockheed Martin Naval Electronics in Manassas,
Virginia.
The Company markets its services in this area primarily through a network
of contacts in the industry, attendance at trade shows and at conferences
and special missions sponsored by the Department of Defense. In the past
Northstar has attended defense and aerospace exhibitions in the United
States and Canada and has participated in several missions to meet prime
contractors involved in the Joint Strike Fighter Program in the United
States.
The CM Market
NTI has focused attention on the North American military market. The United
States and Canada have many programs where NTI's services could be used.
This includes programs to manufacture control consoles for submarines,
helicopters and fixed wing aircraft. For example, Canada has announced the
US$2Billion Maritime Helicopter Project (MHP) which will require the type
of console displays NTI can manufacture.
NTI signed a US$2Million contract with Lockheed Martin, Manassas, Virginia
on October 19, 1999 to assemble, test and deliver control consoles for the
Canadian Navy's Victoria Class submarines. NTI successfully completed the
contract February, 2001. We received a follow on order during 2001 and we
anticipate receiving additional orders from Lockheed Martin for consoles in
future years.
Competition - CM
For control consoles produced for Lockheed Martin, NTI's competition would
be primarily similar sized companies as NTI in the United States, Canada or
abroad. We are not aware, at this time, of any companies in particular that
are direct competitors. However, we expect that, dependent upon the economic
and political factors influencing Lockheed Martin, there will indeed be
strong competition for future contracts. NTI's main competitive advantages
are price (our labor and overhead rates are low compared to many other
jurisdictions) and quality (we have proven performance) based on the success
to date of the submarine control console contract.
Marketing - CM
With respect to other Lockheed Martin divisions and with other prime
contractors, we expect to use our success on the submarine console contract
to showcase our expertise. The benefits of our marketing efforts are
contacts made through networking in the industry and attendance at trade
shows, conferences and special missions sponsored by the department of
defense. In 2002, we continued to attend defense and aerospace exhibitions
in Canada and the United States and we participated in several missions to
meet prime contractors involved in the Joint Strike Fighter Program in the
United States.
Technology Protection - CM
NTI currently owns no proprietary technology requiring protection with
respect to its CM activities.
Raw Material Sources and Availability - CM
Materials and parts are available on an as needed basis from a variety of
sources in the United States and Canada.
Dependence on One or a Few Major Customers - CM
NTI currently is dependent on Lockheed Martin for its contracts. Lockheed
Martin is comprised of many semi-autonomous divisions, which have many
customers. We are dealing with four divisions regarding contract
opportunities which is similar to dealing with four independent companies.
We are attempting to reduce our dependency on these Lockheed Martin divisions
by contacting other large prime contractors about CM opportunities with them.
We expect this activity will result in NTI developing new business in
addition to business with Lockheed Martin in the future.
Need for Government Approvals - CM
There are no government approvals applicable to our CM activities, except
any required as part of a contract. In that event, the requirement would
be passed down from the prime contractor as a part of the statement of work.
Effect of Existing or Probable Government Regulations - CM
Commerce between the United States and Canada in the defense and aerospace
industry is governed by some general rules and regulations. These typically
require a prime contractor, such as Lockheed Martin, to obtain certain
United States government clearances before providing NTI with potentially
sensitive information. Similarly, a Canadian prime contractor would need
Canadian government clearances to give classified information to a United
States subcontractor.
To date, these clearances have not caused any problems for our CM activities
and we do not anticipate any in the foreseeable future.
Research and Development Expenditures - CM
NTI has incurred no expenditures in fiscal 2002 on CM research and
development activities.
Costs and Effects of Compliance with Environmental Laws - CM
The Company has incurred no costs or adverse effects in its compliance with
any environmental laws.
SYSTEM INTEGRATION
Northstar carries out multifaceted contracts that require several
subcontractors to perform specialized tasks. This ability to integrate the
work of several components to create one complete system is one of
Northstar's main areas of business - system integration.
As a result of its expertise, Northstar has developed its approach to
securing and executing large defense contracts by bringing together a number
of affiliate companies thereby being able to present a unique capability to
prime defense contractors. A major potential project in this area is the
$2Billion Maritime Helicopter Project, the contract for which is expected
to be awarded in the spring of next year. Northstar has signed a Memorandum
of Understanding to be one of Lockheed Martin Canada's partners in pursuit
of this contract.
Northstar has signed a memorandum of interest (MOI) with three separate
Lockheed Martin companies in the United States and with four major
subcontractors of Lockheed Martin, for potential work on the Joint Strike
Fighter (JSF) program.
This program is a $200Billion plus multinational program led by the United
States Government to design and produce the next generation fighter aircraft,
in order to replace existing fleets of F-16, F-18, A-10 and Harrier aircraft
worldwide. Sales are predicted to exceed 3,000 aircraft in the US and UK
alone, with an additional export market of 3,000 aircraft expected.
The JSF contract is the largest defense contract ever awarded and it will
continue for 35 years or longer. Northstar has developed relationships
with Lockheed Martin, Harris Corporation, TRW, BAE Systems and Northrop
Grumman, which the Company expects will lead to contract work on the JSF
program.
EMPLOYEES
As of December 31, 2002 the Company had a total of 22 full time employees.
PUBLIC INFORMATION
The Company electronically files with the Securities and Exchange
Commission (SEC) all its reports, including, but not limited to, its annual
and quarterly reports. The SEC maintains an internet site
(http://www.sec.gov) that contains reports and other information regarding
issuers that do file electronically. The Company maintains a web site address
at www.northstarelectronics.com
Item 2. Description of Properties
The Company leases its corporate offices located at 1455 - 409 Granville
Street, Vancouver, British Columbia, Canada V6C 1T2
Northstar Technical Inc. leases its offices and operations facilities at 1
Duffy Place, Unit #6, St. John's, Newfoundland, Canada A1B 4M6
Northstar Network Ltd. leases its offices and operations facilities at 67
Majors Path, Unit #102, St. John's, Newfoundland, Canada A1A 4Z9
Item 3. Legal Proceedings
No change since previous filing
Item 4. Submission of Matters to a Vote of Security Holders
No change since previous filing.
The Company has filed with the SEC an SB-1 registration statement April 20,
2000, an S-8 registration November 2000 and quarterly reports (form 10QSB)
for June and September 2000 and for March, June and September 2001 and 2002
and annual reports (form 10KSB) for December 31, 2000 and 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
No change since previous filing
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion, comparison and analysis should be read in
conjunction with the Company's accompanying audited consolidated financial
statements for the years ended December 31, 2002, 2001 and 2000 and the
notes related thereto. The discussion of results, causes and trends should
not be construed to infer conclusions that such results, causes or trends
necessarily will continue in the future.
Results of Operations
The following table sets forth for the years indicated items included in
the Company's consolidated statement of operations:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total revenue $ 976,234 $1,176,527 $2,301,378 $462,659 $193,913
--------- ---------- ---------- -------- --------
Cost of goods sold 253,377 472,227 1,370,427 136,955 71,189
Discounts 148,425 171,830 187,392 69,399 29,087
--------- ---------- ---------- -------- --------
401,802 644,057 1,557,819 206,354 100,276
--------- ---------- ---------- -------- --------
Gross margin 574,432 532,470 743,559 256,305 93,637
--------- ---------- ---------- -------- --------
Expenses net of other
Income 1,366,567 974,394 595,823 623,826 80,676
--------- ---------- ---------- -------- --------
Net income (loss) $(792,135) $(441,924) $147,736 $(367,521)$(187,039)
--------- ---------- ---------- -------- --------
Net income (loss)
per share $(0.08) $(0.06) $ 0.02 $ (0.05) $ (0.03)
--------- ---------- ---------- -------- --------
As a result of its design engineering programs and expenditures,
Northstar Electronics, Inc. has built an infrastructure to position itself
for significant growth in 2003. In each of its core areas of business, the
Company has proven itself with an ability to deliver high quality projects
on time and within budget.
DISCUSSION
The Company's revenues were $976,234 in 2002 and we incurred a net loss of
$(792,135) in 2002. This result was anticipated by management and management
is confident that the steps taken this past year can provide the basis for
substantially increased revenues and profitability over the ensuing years.
Sonar Products and Technologies
Most of the loss is attributable to the Company's development projects to
design and develop sonar products, sonar systems and leading edge sonar
technologies. The development program has taken on two complementary
directions, one aimed at defense and Homeland Security, the other aimed at
civilian markets in offshore petroleum, environment and commercial fishing
industries.
In 2002, we carried out work on an underwater sonar system designed to
protect ports, offshore oil platforms and ships from underwater threats,
including combat divers. We designed and built the sonar and mechanical
hardware components of a prototype underwater intruder detection system for
a major defense contractor, which markets the system. We have received a
follow-on order for a second prototype and we expect substantial production
orders after testing is completed by the military. We believe that Homeland
Security will form the largest part of our business over the next five years.
Our second development program is called AQUACOMM for which we are receiving
considerable financial support from the federal government. The program plan
calls for the development of up to ten new products over the next two to
three years. At present we are putting in place the technological
infrastructure including new specialized equipment, laboratory facilities
and engineering personnel. With this infrastructure established, we are able
to draw on the particular capabilities needed for the development of each
product.
One example of the type of system we intend to develop is for the offshore
petroleum industry. Floating production systems, in the shape of ships, are
held in place by a large subsea buoy which is moored to anchoring points on
the ocean floor. It is important prior to the mating of the ship with the
buoy to monitor the motions of the buoy in six degrees of freedom.
Through our AQUACOMM program, we can develop a system which measures these
motions (heading, pitch and roll) along with depth, water temperature,
salinity and water current speed. All of the data would be then transmitted
via our sonar communication link to a receiver on a support ship.
An important part of our AQUACOMM program is enhancements to our NETMIND
trawl monitoring system for the commercial fishing industry. These
enhancements would give NETMIND an advantage over our competitors and,
therefore, we expect to see resulting increased sales and profits.
Netmind
We made significant effort in 2002 opening up new NETMIND markets,
particularly in Europe and southern Africa. We established several new
dealerships and some successes have resulted already. We expect sales for
2003 to be stronger than in 2002. The aforementioned technical enhancements
should start to be introduced by the second quarter of 2003 and we expect
them to have an impact on sales, both new and with existing customers
through system upgrades.
Contract Manufacturing
Northstar remained active pursuing contract manufacturing opportunities
during 2002. We are a member of Lockheed Martin Canada's team for the
$2Billion Maritime Helicopter Project, the contract for which is scheduled
to be awarded in the spring of 2004. We expect to play a strong regional role
in fulfilling the extensive industrial benefit requirements which will be part
of the contract. We also expect to carry out more submarine console contracts
for Lockheed Martin Naval Electronics and Surveillance Systems in Manassas,
Virginia. Although there were no revenues in this business area in 2002, we
are optimistic that there will be in 2003. We are also actively pursuing
business development for contract work on the Joint Strike Fighter (JSF)
program for which Lockheed Martin in Dallas-Fort Worth is the prime contractor.
The areas we have focused on to date have been fiber optics, training and
courseware. It is too early to give an indication of our chances of success.
However, we will continue to pursue opportunities on the JSF in any event
because of the size and duration of potential contracts involved.
Systems Integration
During 2002 we carried out the development of the sonar hardware and
mechanical housing for the intruder detection system, as mentioned above.
We conducted the project as a system integration in that Northstar Network
was the project manager and contracted other companies to perform sub-tasks.
Northstar then brought all the sub-tasks together to make and test the final
system. We foresee carrying out future system integration projects on contract
work we expect on the Maritime Helicopter Project, the JSF and other defense
related projects.
Total revenues were $976,234 in 2002 compared with $1,176,527 in 2001 and
$2,301,378 in 2000. The Company's successful completion of its $2Million
contract with Lockheed Martin materially affected the Company's operating
results for the year 2000. Contract revenues declined over the years 2001
and 2002 from the year 2000. The Company continues to pursue further
contract business and is positively anticipating its next contract. The
Company has signed a Memorandum of Understanding with Lockheed Martin
Canada to be one of their partners on the US$2Billion Maritime Helicopter
program which is now expected to be awarded in 2004 and has signed
Memorandums of Interest with several divisions of Lockheed Martin with
respect to the Joint Strike Fighter project.
Gross margins for 2002 were 69% compared with 53% in 2001 and 35% in 2000.
The percentage increase was created by lower component costs and higher
gross margins associated with NETMIND sales and by a decrease in the lower
margined contract sales volume. A significant cause of the fluctuation in
the gross margin percentages is due to changes in the revenue mix where the
Company is now generating revenue with significantly less direct
costs attached.
In 2002 the Company spent $439,003 on design engineering and spent
$170,296 on prototype development related to the development of underwater
sonar technology. The Company received contract revenues of $179,269 and
government incentives of $218,597 during the current year to offset certain
of these costs.
The Company was successful in funding its $2.5Million AQUACOMM product
development program in 2002 and the Company is actively designing the
sonar hardware for an underwater surveillance system.
The Company expects that design and manufacture of homeland security and
anti-terrorism systems will be a major component of its business over the
next five years. The Company is expecting to receive production contracts
from a major US defense contractor for the sonar hardware portions of
detection systems.
The direct result of extensive spending on design engineering during
the current year has been the increase in loss for 2002 to $(792,135)
compared to a loss of $(441,924) for 2001.
Cash used by operations was $(589,419) during 2002 compared to cash used
by operations of $(85,903) during 2001. This usage of cash during the year
was due mainly to the Company's operating loss. In 2002, the Company was
successful in raising net equity financing of $706,785 through a Regulation
S common share issuance.
The Company's working capital and capital requirements will depend on many
factors, including the ability of the Company to increase sales from
marketing of the NETMIND system in order to generate sufficient funds to
cover the current level of operating expenses. The Company further intends
to create working capital from the business to be generated pursuant to the
Memorandum of Understanding with Lockheed Martin. During the most recent
fiscal year the Company reduced its long-term debt by $156,602 and is
committed to expend working capital to further reduce its long-term debt
during the current year. The availability of sufficient future funds will
depend to an extent on the obtaining of manufacturing contracts on a timely
basis. Accordingly, the Company may be required to issue securities to
finance any working capital requirements. There can be no assurance whether
or not such future financings will be available on satisfactory terms.
Subsequent to December 31, 2002, the Company issued 1,295,655 shares of
common stock for the receipt of $576,030.
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.
Item 7. Financial Statements
NORTHSTAR ELECTRONICS, INC.
Index to Consolidated Financial Statements December 31, 2002, 2001 and 2000
(U.S. Dollars)
Report of Independent Chartered Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF NORTHSTAR ELECTRONICS, INC.
We have audited the consolidated balance sheets of Northstar Electronics,
Inc. as at December 31, 2002 and 2001 and the consolidated statements of
operations, stockholders' deficit and cash flows for each of the three
years ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Northstar
Electronics, Inc., as at December 31, 2002 and 2001 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 in accordance with accounting principles generally accepted
in the United States of America.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 20, 2003
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
December 31
(U.S. Dollars)
-----------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------
Assets
Current
Cash $117,690 $39,699
Accounts receivable (note 4) 345,454 139,453
Inventory 147,846 107,257
Prepaid expenses 4,682 5,398
-----------------------------------------------------------------------------
Total Current Assets 615,672 291,807
-----------------------------------------------------------------------------
Intangible Assets (note 5) 33,613 0
-----------------------------------------------------------------------------
Property and Equipment (note 6) 104,458 91,903
-----------------------------------------------------------------------------
Total Assets $753,743 $383,710
-----------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities
(note 7) $418,555 $325,075
Loans payable (note 8) 72,863 6,778
Current portion of long-term debt (note 9) 62,079 211,208
-----------------------------------------------------------------------------
Total Current Liabilities 553,497 543,061
Long-Term Debt (note 9) 315,932 364,549
Deferred Revenue 113,377 64,259
Due to Cabot Management Limited (note 10) 70,105 56,249
Due to Director (note 10) 140,297 24,401
-----------------------------------------------------------------------------
Total Liabilities 1,193,208 1,052,519
-----------------------------------------------------------------------------
Stockholders' Deficit
Common Stock
Authorized
100,000,000 Common shares with a par value of $0.0001
each
20,000,000 Preferred shares with a par value of $0.0001
each
Issued and outstanding
11,907,976 (7,942,009 - 2001) Common shares 1,191 794
Additional Paid-in Capital 2,179,624 1,146,447
Other Comprehensive Income 25,213 37,308
Accumulated Deficit (2,645,493) (1,853,358)
----------------------------------------------------------------------------
Total Stockholders' Deficit (439,465) (668,809)
----------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $753,743 $383,710
----------------------------------------------------------------------------
Contingency (note 11) Commitment (note 12)
See notes to consolidated financial statements.
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Years Ended December 31
(U.S. Dollars)
2002 2001 2000
----------------------------------------------------------------------------
Revenues $ 976,234 $ 1,176,527 $ 2,301,378
Discounts 148,425 171,830 187,392
----------------------------------------------------------------------------
Revenues net of Discounts 827,809 1,004,697 2,113,986
Cost of Goods Sold 253,377 472,227 1,370,427
----------------------------------------------------------------------------
Gross Margin 574,432 532,470 743,559
----------------------------------------------------------------------------
Expenses
Research and development 439,003 71,852 15,298
Tax credits on research and
Development (55,401) (26,142) 0
Salaries, wages and benefits 248,553 330,316 147,356
Financial consulting 125,473 0 0
Marketing 123,662 139,758 86,674
Rent 95,226 78,423 65,608
Business development 85,491 76,147 0
Office 51,446 38,092 49,720
Interest and bank charges 43,779 4,228 16,480
Professional and consulting fees 63,975 87,523 144,385
Telephone, light and heat 32,671 26,067 9,001
Interest on long-term debt 32,043 32,065 33,356
Travel 21,948 27,563 25,938
Miscellaneous 22,460 13,818 11,046
Consulting 4,402 42,900 0
Depreciation and amortization 31,836 31,784 10,433
----------------------------------------------------------------------------
1,366,567 974,394 615,295
----------------------------------------------------------------------------
Income (Loss) Before Other
Income (792,135) (441,924) 128,264
Other Income 0 0 19,472
Income (Loss) Before Income Taxes(792,135) (441,924) 147,736
Income Tax Provision, current 0 0 66,000
Reduction of Current Taxes as a Result
of Loss Application 0 0 (66,000)
----------------------------------------------------------------------------
0 0 0
----------------------------------------------------------------------------
Net Income (Loss) (792,135) (441,924) 147,736
Other Comprehensive Income (Loss) (12,095) 3,314 20,440
----------------------------------------------------------------------------
Total Comprehensive Income
(Loss) $(804,230) $(438,610) $168,176
----------------------------------------------------------------------------
Net Income (Loss) Per Share $ (0.08) $ (0.06) $ 0.02
----------------------------------------------------------------------------
Shares Used in
Basic per share computation 9,954,597 7,820,940 7,616,548
Diluted per share computation N/A N/A 8,446,586
----------------------------------------------------------------------------
See notes to consolidated financial statements.
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Changes in Stockholders' Deficit
Years Ended December 31
(U.S. Dollars)
Addit- Other Total
ional Stock Compre- Accum- Stock-
Paid-in Subscr- hensive ulated holder
Shares Amount Capital iptions Income Deficit Equity
-----------------------------------------------------------------------------
Balance,
December 31,
1999 7,604,481 $760 $972,271 $10,000 $13,554 $(1,559,170) $(562,585)
Net income 0 0 0 0 147,736 147,736
Other comprehensive
income 0 0 0 0 20,440 0 20,440
Issuance of common stock
for cash 13,700 2 13,698 0 0 0 13,700
Issuance of common stock
for services 40,000 4 19,996 0 0 0 20,000
Issuance of common stock
for previous
subscriptions 10,000 1 9,999 (10,000) 0 0 0
------------------------------------------------------------------------------
Balance,
December 31,
2000 7,668,181 767 1,015,964 0 33,994 (1,411,434) (360,709)
Issuance of common stock
for services 273,828 27 87,583 0 0 0 87,610
Value of uncompensated
Services 0 0 42,900 0 0 0 42,900
Other comprehensive
Income 0 0 0 0 3,314 0 3,314
Net loss 0 0 0 0 0 (441,924) (441,924)
------------------------------------------------------------------------------
Balance,
December 31,
2001 7,942,009 794 1,146,447 0 37,308 (1,853,358) (668,809)
Issuance of common stock
For cash
On private
Placement 3,173,309 318 1,114,448 0 0 0 1,114,766
On exercise
of options 78,123 8 0 0 0 0 8
For services 714,535 71 275,075 0 0 0 275,146
Share issue
Cost 0 0 (407,981) 0 0 0 (407,981)
Valuation of stock
Options 0 0 51,635 0 0 0 51,635
Other comprehensive
Income 0 0 0 0 (12,095) 0 (12,095)
Net loss 0 0 0 0 0 (792,135) (792,135)
------------------------------------------------------------------------------
Balance
December 31,
2002 11,907,976 $1,191 $2,179,624 $0 $25,213 $(2,645,493) $(439,465)
------------------------------------------------------------------------------
See notes to consolidated financial statements.
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(U.S. Dollars)
2002 2001 2000
------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (792,135) $ (441,924) $147,736
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and
Amortization 31,836 31,784 10,433
Stock based and
uncompensated services 51,635 42,900 0
Services paid with
common stock 275,146 87,610 20,000
Changes in operating assets and liabilities
Accounts receivable (206,001) 302,970 (336,814)
Prepaid expenses 716 (3,339) 4,290
Inventory and
work-in-progress (40,589) 28,279 (55,598)
Accounts payable and accrued
Liabilities 89,973 (187,211) 411,739
-----------------------------------------------------------------------------
Cash Provided by (Used in)
Operating Activities (589,419) (138,931) 201,786
-----------------------------------------------------------------------------
Investing Activities
Acquisition of intangible
Assets (33,613) 0 0
Acquisition of property
and equipment (44,391) (24,080) (67,886)
-----------------------------------------------------------------------------
Cash Used in Investing
Activities (78,004) (24,080) (67,886)
-----------------------------------------------------------------------------
Financing Activities
Issuance of common stock
for cash 706,793 0 13,700
Proceeds from long-term debt 30,066 189,415 52,029
Repayment of long-term debt (186,668) (83,466) (78,760)
Advances from (repayment to)
Cabot Management Limited 13,856 (3,771) (14,580)
Advances from (repayment to)
Director 115,896 (23,088) (37,359)
Loans payable 66,085 (5,296) (3,222)
-----------------------------------------------------------------------------
Cash Provided by (Used in)
Financing Activities 746,028 73,794 (68,192)
-----------------------------------------------------------------------------
Effect of Foreign Currency
Translation on Cash (614) 3,314 20,440
-----------------------------------------------------------------------------
Inflow (Outflow) of Cash 77,991 (85,903) 86,148
Cash, Beginning of Year 39,699 125,602 39,454
-----------------------------------------------------------------------------
Cash, End of Year $117,690 $39,699 $125,602
-----------------------------------------------------------------------------
Supplemental Information
Interest paid $32,043 $32,065 $45,196
-----------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATION
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. ("NNL"). All inter-
company balances and transactions are eliminated. The parent company was
incorporated May 11, 1998 in the State of Delaware and had no operations
other than organizational activities prior to the January 2000 merger
described below. The Company's business activities are conducted
principally in Canada and the 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.
On January 26, 2000, the Company completed the acquisition of 100% of the
shares of Northstar Technical Inc. The merger was effected through the
issuance of 4,901,481 shares of treasury stock by the Company with the
former shareholders of the subsidiary receiving a majority of the total
shares then issued and outstanding. 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.
As a result of the reverse takeover described above the liabilities of
the accounting acquiree in excess of its identifiable assets were treated
as a recapitalization and charged to additional paid-in capital.
The Company, through its subsidiaries, develops, produces and sells an
undersea wireless communications system ("Netmind") and manufactures,
under contract, defense and aerospace electronic systems. The Company
also carries out research and development activities for customers on
specific fixed price contract bases.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Revenue recognition
Revenue from the sales of the NETMIND system are recognized on an accrual
basis based on agreed terms with the customers. Sales are recorded when
the systems are delivered and the customer is invoiced at the agreed terms.
Contract manufacturing sales are recorded as each contracted unit is
delivered to the contracting customer.
Research and development contracted for third parties is recognized as
revenue upon completion of the contracted services with billing to the
customer and agreed collection terms in place.
b. Inventory
Inventory and work-in-progress are valued at the lower of average cost
and net realizable value.
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Property and equipment
Property and equipment are recorded at cost less any government
assistance received and are being amortized over their estimated useful
lives or term of lease, whichever is shorter, using the rates and methods
set out below:
Computer equipment - 20% Declining balance
Computer software - 30% Declining balance
Furniture and equipment - 20% Declining balance
Manufacturing equipment - 20% Declining balance
Leasehold improvements - 20% Straight-line
d. Research and development
Research and development costs are expensed to operations as incurred.
e. Investment tax credits
Investment tax credit refunds arising from incurring qualifying research
and development expenditures have been recorded in these financial
statements as a reduction of the applicable research and development
costs.
f. Government assistance
NTI has been awarded assistance under certain Government of Canada
assistance programs. Amounts received or receivable under these programs
are recorded as other revenue at the time the amounts are approved for
payment by the government agency.
g. Foreign currency translation
The Company's operations and activities are conducted principally in
Canada, hence the Canadian dollar is the functional currency, which
is translated into U.S. dollars for reporting purposes as follows:
(i) Monetary assets and liabilities at the rate of exchange in effect
as at the balance sheet date;
(ii) Non-monetary assets and liabilities at the exchange rates prevailing
at the time of the acquisition of the assets or assumption of the
liabilities; and
(iii) Revenues and expenditures at the average rate of exchange for the
year.
Gains and losses arising from this translation of foreign currency are
accounted for as other comprehensive income (loss).
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Other comprehensive income (loss)
The Company has other comprehensive income (loss) arising from foreign
currency translation. Accordingly, other comprehensive income (loss)
is shown as a separate component of stockholders' equity (deficit).
i. Net income (loss) per share
Net income (loss) per share calculations are based on the weighted
average number of common shares outstanding during the year. Diluted net
income per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the year.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income (loss) per share computations for the
periods presented:
Weighted
Average Net
Net Income Number Income (Loss)
(Loss) of Shares Per Share
-------------------------------------------------------------------------------
Year ended December 31, 2000
Basic net income $ 147,736 7,616,548 $ 0.02
Effect of dilutive securities
Stock options outstanding 0 830,038 0.00
-------------------------------------------------------------------------------
Diluted net income $147,736 8,446,586 $ 0.02
-------------------------------------------------------------------------------
Year ended December 31, 2001
Basic net loss $(441,924) 7,820,940 $ (0.06)
-------------------------------------------------------------------------------
Year ended December 31, 2002
Basic net loss $(792,092) 9,954,597 $ (0.08)
-------------------------------------------------------------------------------
j. Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
areas requiring the use of management estimates relate to the determination
of the impairment of assets, useful lives for depreciation and amortization.
Financial results as determined by actual events could differ from those
estimates.
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Financial instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and accrued liabilities, loans payable,
long-term debt, due to Cabot Management Limited and due to director.
The Company is exposed to interest, currency and credit risks arising
from these financial instruments. Management feels the Company has
taken steps necessary to minimize these risks. The fair value of
these financial instruments approximate their carrying value, unless
otherwise noted.
l. Stock-Based Compensation
The Company applies the Intrinsic value method of accounting as
prescribed by APB Opinion No. 25 "Accounting for Stock issued to
Employees" and related interpretations, in accounting for options granted
to employees. As such, compensation expense is recorded on the date of the
grant when the market price of the underlying stock exceeds the exercise
price. SFAS 123 "Accounting for Stock-based Compensation" establishes
accounting and disclosure requirements using the fair value-based method
of accounting for stock-based compensation plans. As allowed by SFAS 123,
the company elected to continue to apply the intrinsic value-based method
of accounting described above and have adopted the disclosure requirements
of FAS 123 (note 13).
m. Recent accounting pronouncements
(i) In July 2001, FASB issued Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets. This statement includes
requirements to test good will and indefinite lived intangible
assets for impairment rather than amortization. This statement
is effective for years beginning December 15, 2001.
(ii) In October 2001, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144
addresses significant issues relating to the implementation of
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of", and develops a
single accounting model, based on the framework established in
SFAS No. 121 for Long-Lived Assets to be disposed of by sales,
whether such assets are or are not deemed to be a business.
SFAS No. 144 also modifies the accounting and disclosure rules
for discontinued operations. The standard was adopted on
January 1, 2002, and does not have a material effect on the
consolidated financial statements.
(iii) In November 2001, the FASB issued EITF Issue No. 01-14, "Income
Statement Characterization of Reimbursements Received for `Out of
Pocket' Expenses Incurred". This guidance requires companies to
recognize the recovery of reimbursable expenses such as travel
costs on service contracts as revenue. These costs are not be
netted as a reduction of cost. This guidance was implemented on
January 1, 2002, and does not have a material effect on the
consolidated financial statements.
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(IV) In September 2000, the EITF reached a final consensus on EITF Issue
00-10, "Accounting for Shipping and Handling Fees and Costs." This
consensus requires that all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent
revenue and should be classified as revenue. Adoption of this
consensus did not change the Company's existing accounting policies
or disclosures.
(v) In December 2002, FASB issued SFAS 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an amendment to SFAS 123".
SFAS 148 provides two additional transition methods for entities that
adopt the preferable method of accounting for stock-based compensation.
Further, the statement requires disclosure of comparable information
for all companies regardless of whether, when, or how an entity
adopts the preferable, fair value method of accounting. These
disclosures are now required for interim periods in addition to the
traditional annual disclosure. The amendment to SFAS 123, which
provides for additional methods, are effective for the periods
beginning after December 15, 2002, although earlier application is
permitted. The amendments to the disclosure requirements are required
for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002.
3. ECONOMIC DEPENDENCE
During 2002 and 2001 one customer accounted for 28% of the Company's sales.
The Company has no further contracts in place with this customer at this
time although additional orders are anticipated from this customer.
4. ACCOUNTS RECEIVABLE
2002 2001
------------------------------------------------------------------------------
Trade receivables $93,066 $55,117
Government assistance -
research and development 197,239 67,333
Investment tax credits receivable 55,149 17,003
------------------------------------------------------------------------------
$345,454 $139,453
------------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
5. INTANGIBLE ASSETS
In 2002 the Company acquired the design rights and tooling for a
significant component of its Netmind system. The asset has an indefinite
life and will be tested for impairment annually.
6. PROPERTY AND EQUIPMENT
2002
Accumulated
Depreciation
And
Cost Amortization Net
----------------------------------------------------------------------------
Computer equipment $28,266 $10,529 $17,737
Computer software 53,616 32,053 21,563
Furniture and equipment 33,792 16,324 17,468
Manufacturing equipment 49,983 8,181 41,802
Leasehold improvements 7,180 1,292 5,888
---------------------------------------------------------------------------
$172,837 $68,379 $104,458
---------------------------------------------------------------------------
2001
Accumulated
Depreciation
And
Cost Amortization Net
----------------------------------------------------------------------------
Computer equipment $ 19,441 $ 4,745 $ 14,696
Computer software 55.902 19,490 36,412
Furniture and equipment 39,846 14,990 24,856
Manufacturing equipment 18,310 4,550 13,760
Leasehold improvements 2,516 337 2,179
---------------------------------------------------------------------------
$ 136,015 $ 44,112 $ 91,903
---------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
----------------------------------------------------------------------------
Trade payables $361,180 $295,848
Payroll and other accrued liabilities 57,375 29,227
----------------------------------------------------------------------------
$418,555 $325,075
----------------------------------------------------------------------------
8. LOANS PAYABLE
2002 2001
----------------------------------------------------------------------------
10% demand loan payable on November 5, 2002.
The loan was repaid in January, 2003 $63,390 $0
10% demand loan payable on June 26, 2003 6,656 0
10% loan payable to Enterprise Newfoundland and
Labrador in monthly interest payments, due
on demand 2,817 6,778
----------------------------------------------------------------------------
$72,863 $6,778
----------------------------------------------------------------------------
9. LONG-TERM DEBT
2002 2001
----------------------------------------------------------------------------
Atlantic Canada Opportunities Agency ("ACOA")
Interest free loan with monthly principal
repayments of $3,256 Cdn each commencing
June 1, 2002 ($133,467 Cdn) $84,605 $107,837
12% loan with monthly principal repayments of
$1,786 Cdn each ($75,006 Cdn) 47,546 60,274
Interest free loan repayable in 72 monthly
consecutive instalments of $3,119 Cdn each
commencing July 1, 2002 ($168,403 Cdn) 106,751 128,644
Interest free unsecured loan repayable in monthly
payments of Cdn $5,938 commencing April, 2004
($350,875 Cdn) 222,420 189,415
Interest free loan payable in monthly payments of
Cdn $867 commencing January 2004 ($47,432
Cdn) 30,066 0
Pathfinder Enterprises Inc.
10% loan with monthly interest payments only, due
July 5, 2002, secured by a floating charge
debenture ($240,000 Cdn) 0 153,846
----------------------------------------------------------------------------
491,388 640,016
Less: Current portion 62,079 211,208
----------------------------------------------------------------------------
429,309 428,808
Discount on interest free loans payable (113,377) (64,259)
----------------------------------------------------------------------------
$315,932 $364,549
----------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
10. RELATED PARTY TRANSACTIONS
(i) The amount due to Cabot Management Limited, an associated company
related by a common shareholder and director, bears no interest,
has no set terms of repayment and is subordinated to amounts due
ACOA.
(ii) The amount due to a director bears no interest and has no set terms
of repayment and is subordinated to amounts due ACOA.
11. CONTINGENT LIABILITY
The Company is a defendant in a lawsuit commenced against them by their
former master distributor. The former distributor has alleged that the
Company has interfered with the ability of the former distributor to sell
products. The Company has filed a counter claim for monies owing by the
former distributor to the Company.
12. COMMITMENT
The Company is committed to minimum rental payments of $77,000 per year
for the next two years for office space and operations facilities.
13. STOCK OPTIONS
The following table summarizes the Company's stock option activity for
the years ended December 31, 2002 and 2001:
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
-----------------------------------------------------------------------------
Balance, December 31, 2000 1,159,000 $ 0.50 $ 0.50
Granted during year 388,123 $ 0.0001 to $ 0.60 $ 0.43
-----------------------------------------------------------------------------
Balance, December 31, 2001 1,547,123 $ 0.0001 to $0.60 $ 0.48
Granted during year 1,755,000 $ 0.50 to $ 1.00 $ 0.56
Cancelled (100,000) $ 0.50 $ 0.50
Exercised (78,123) $ 0.0001 $ 0.0001
-----------------------------------------------------------------------------
Balance, December 31, 2002 3,124,000 $ 0.50 to $ 1.00 $ 0.57
-----------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
13. STOCK OPTIONS (Continued)
As at December 31, 2002 and 2001, the outstanding stock options granted
to directors, employees and others are as follows:
Exercise Number of Shares
Expiry Date Price 2002 2001
----------------------------------------------------------------------------
February 12, 2004 $ 0.50 250,000 250,000
February 12, 2009 $ 0.50 540,000 540,000
October 12, 2009 $ 0.50 25,000 25,000
December 15, 2010 $ 0.50 244,000 344,000
October 26, 2003 $ 0.50 160,000 160,000
March 31, 2006 $ 0.0001 0 41,667
April 24, 2011 $ 0.50 25,000 25,000
May 25, 2006 $ 0.0001 0 36,456
September 17, 2006 $ 0.50 50,000 50,000
January 26, 2006 $ 0.50 75,000 75,000
June 25, 2007 $ 0.50 175,000 0
June 25, 2007 $ 0.75 125,000 0
July 5, 2007 $ 0.50 815,000 0
December 19, 2012 $ 0.50 405,000 0
October 1, 2003 $ 0.50 75,000 0
October 1, 2003 $ 0.75 75,000 0
October 1, 2003 $ 1.00 75,000 0
December 4, 2011 $ 0.50 10,000 0
-----------------------------------------------------------------------------
Total outstanding 3,124,000 1,547,123
-----------------------------------------------------------------------------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options granted to employees, and accordingly,
compensation expense of $24,000 (2001 - $37,240) was recognized as
salaries expense. Had compensation expense been determined as
provided in SFAS 123 using the Black-Scholes option-pricing model, the
pro-forma effect on the Company's net loss and per share amounts would
have been as follows:
2002 2001
-----------------------------------------------------------------------------
Net loss, as reported $(792,135) $(441,924)
Add: stock-based employee compensation expense
under intrinsic value method, included in
reporting net income, net of related
tax effects 24,000 37,240
Deduct: Total stock-based compensation expense
determined under fair value based method
for all Awards, net of related tax
effects (414,054) (67,480)
-----------------------------------------------------------------------------
Net loss, pro-forma $(1,182,189) $(472,164)
-----------------------------------------------------------------------------
Net loss per share, as reported $ (0.08) $ (0.06)
Net loss per share, pro-forma $ (0.12) $ (0.06)
-----------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(U.S. Dollars)
13. STOCK OPTIONS (Continued)
The fair value of each option grant is calculated using the following
weighted average assumptions:
-----------------------------------------------------------------------------
Expected life (years) 7 5
Interest rate 4.38% 4.00%
Volatility 80.86% 45.04%
Dividend yield 0.00% 0.00%
-----------------------------------------------------------------------------
14. INCOME TAXES
The subsidiaries have operating losses which may be carried forward to
apply against future year's Canadian taxable income. The tax effect
has not been recorded in these consolidated financial statements. These
losses expire as follows:
----------------------------------------------------------------------------
2002 $109,000
2003 245,000
2004 344,000
2006 180,000
2009 123,000
----------------------------------------------------------------------------
$1,001,000
----------------------------------------------------------------------------
The components of future income tax assets are as follows:
2002 2001
----------------------------------------------------------------------------
Future income tax assets
Non-capital loss carry forwards $2,112,000 $1,320,000
Approximate tax rate 40% 45%
----------------------------------------------------------------------------
844,800 594,000
Less: Valuation allowance (844,800) (594,000)
----------------------------------------------------------------------------
$0 $0
----------------------------------------------------------------------------
15. SUBSEQUENT EVENT
Subsequent to December 31, 2002 the Company issued 1,295,655 shares of
common stock for cash of $576,030.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial DisclosureThere are no reportable disagreements on
accounting or financial disclosure issues
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Name of Director Age Office
---------------- --- ------
Wilson Russell, PhD 57 President and Principal
Financial Officer
Mr. Frank Power 60 Director
David Buttle, PhD 54 Director
Item 10. Executive compensation
During the year the Company paid $35,227 (2001 - $32,692) to Wilson
Russell for his services.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Name Number Percentage
Class and Address of Shares of Shares*
---------------------------------------------------------------------
Common Frank Power 1,018,200 8.51%
998 Riverside Drive
Port Coquitlam, B.C.
Canada V3B 7Y4
Common Wilson Russell 1,786,716 15.05%
4742 Collingwood Street
Vancouver, B.C.
Canada V6S 2B4
Common David Buttle 44,399 0.37%
The Well House, Burkham
Wokington, Berkshire
United Kingdom RG114P5
Common All officers and directors
as a group 2,849,315 23.93%
*Based on 11,907,976 shares of common stock issued and outstanding
December 31, 2002
Item 12. Certain Relationships and Related Transactions
No change since previous filing
PART IV
Item 13. Exhibits and Reports on Form 8-K
No change in exhibits since previous filing
No Form 8K was filed during the fourth quarter of 2002
Item 14. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Executive and
Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure and control procedures. Based upon that
evaluation, the Chief Executive and Financial Officer concluded that
the Company's disclosure and control procedures are effective. There
were no significant changes in the Company's internal controls or in
other factors that could significantly affect these subsequent to the
date of their evaluation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
(Registrant) Northstar Electronics, Inc.
/S/ WILSON RUSSELL
By (Signature and Title) Wilson Russell, PhD
President, Principal
Financial Officer
Date March 26, 2003
/S/ FRANK POWER
By (Signature and Title) Frank Power
Director
Date March 26, 2003
/S/ DAVID BUTTLE
By (Signature and Title) David Buttle, PhD
Director,
Appointed March, 2002
Date March 26, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 W.S.C. SECTION 1350 as adopted and 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 Annual Report fairly
presents in all material respects the financial condition and results
of operations of the Company as of December 31, 2002 and for the
periods presented in the report; and
(ii) That the Annual 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: March 26, 2003
302 CERTIFICATION
I, Wilson Russell, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB 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 annual 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 annual
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 26, 2003 /s/ Wilson Russell
-------------------
Wilson Russell, Chief Financial
Officer and Director