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, 2001
[ ] 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 IRS Employer Identification No.
incorporation or organization
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. [x] Yes [ ] 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 31,2001
$1,050,000 approximately
Aggregate market value of non-voting common equity held by non-affiliates
As of December 31,2001
$NIL
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 December 31, 2001: 7,942,009
Outstanding shares of preferred stock as of December 31, 2001: 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 of 1999. The business of
the Company is primarily that of its wholly owned subsidiary, Northstar
Technical Inc. (NTI). A second wholly owned subsidiary, Northstar Network
Ltd. (NN), was incorporated to pursue defense and aerospace contract
manufacturing opportunities. There have been no bankruptcy, receivership or
similar proceedings. 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.
NTI develops, manufactures and sells undersea wireless communications systems
and produces, under contract, defense and aerospace electronic systems. NTI
developed a wireless communications technology with undersea applications.
The technology is used in under water 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.
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 marketplace in late 1996 and
approximately 125 sales have been made in North America, Europe, New Zealand
and Russia to December 31, 2001. 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 raw materials from these suppliers in a timely
fashion to meet production schedules. However, to reduce costs, we have
commenced production of the transducer component in house.
Major Customer Dependency - NETMIND
NTI has sold over 125 NETMIND systems to over 90 different customers and
there is 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 sales continue to grow, we believe the Company is smaller in
size and resources when compared to its competitors. NTI's staff numbers
fifteen 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, France,
Morocco, Iceland and Thailand. 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 is developing new and innovative NETMIND products, which should
help ensure a competitive edge.
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 spent $45,710 in fiscal 2001, $15,298 in fiscal 2000 and $46,430 in
fiscal 1999 on research and development activities. 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)
NTI's second business activity is contract manufacturing where the Company
produces electronic systems under contract to the defense and aerospace
industry (called 'build to print'). In other words, we build according to the
design provided by the customer. CM activities, for our main customer Lockheed
Martin, include production engineering, sourcing and procurement of parts,
assembly of parts into systems, testing and shipping. Project management and
quality control provided by the Company are essential to the success of each
project.
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$2.0 billion Maritime Helicopter Project (MHP) which will require the type
of console displays NTI can manufacture. NTI signed a US$2.0 million contract
with Lockheed Martin, Manassas, Virginia on October 19,1999 to assemble, test
and deliver 11 control consoles for the Canadian Navy's new 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 2002 and 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 2001, we attended 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
For the submarine control console work, NTI obtains parts from a variety of
sources in the United States and Canada. The primary suppliers are as follows:
Advanced Control Technology Inc. - cable, ethernet hub
CandR Systems Inc. - rack assembly
DY4 Systems Inc. - ppc card
Harvard Custom Manufacturing Inc. - displays, touch screens, FCC
Ethernet
Measurement Systems Inc. - desktop
Primagraphic Ltd. - card graphics, video cable
BAE Systems Aerospace Inc.- touch screen display
Targa Electronics Systems Inc. - pcmcia drive
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 other than
with Lockheed Martin in the 2002-2003 timeframe.
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 2001, 2000 or in fiscal 1999 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.
EMPLOYEES
As of December 31, 2001 the Company had a total of 20 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, proxy and information statements, and other
information regarding issuers that do file electronically.
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
The Company maintains a web site address at www.northstarelectronics.com
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 public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operations of the Public
Reference Room by calling 1-800-SEC-0330.
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.
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 year ended December 31, 2001 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:
2001 2000 1999 1998
---- ---- ---- ----
Sales Contract $334,832 $1,594,508 $ 0 $ 0
NETMIND 841,695 706,870 462,659 193,913
--------- ---------- -------- --------
1,176,527 2,301,378 462,659 193,913
--------- ---------- -------- --------
Cost of goods
sold Contract 183,543 1,037,944 0 0
NETMIND 460,514 519,875 206,354 100,276
--------- ---------- -------- --------
644,057 1,557,819 206,354 100,276
--------- ---------- -------- --------
Gross margin Contract 151,289 556,564 0 0
NETMIND 381,181 186,995 256,305 93,637
--------- ---------- -------- --------
532,470 743,559 256,305 93,637
--------- ---------- -------- --------
Expenses net of other
Income 974,394 595,823 623,826 280,676
--------- ---------- -------- --------
Net income (loss) $(441,924) $147,736 $(367,521) $(187,039)
--------- ---------- -------- --------
Net income (loss) per
Share $(0.06) $ 0.02 $ (0.05) $ (0.03)
--------- ---------- -------- --------
The Company's US$2.0 million contract with Lockheed Martin materially
affected the Company's operating results for the year 2000. Contract revenues
declined in the year 2001. 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$2.0 billion Maritime Helicopter program which is now
expected to be awarded in 2003. Sales of the Company's NETMIND system continue
to improve primarily due to increased marketing activities in New England,
Western North America and Atlantic Canada. During 2001, the Company
established marketing and distribution opportunities in France, Morocco,
Iceland and Thailand.
Gross margins decreased from $743,559 (33%) in the prior year to $532,470 (45%)
in the current year. 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.
Operating expenses of $974,394 include $236,932 of expenses incurred in
developing the contract manufacturing business. The Company is actively
pursuing a contract to design the hardware for an anti terrorist surveillance
system and several other contract opportunities in the anti terrorism field.
The Company has signed Memorandums of Interest with several divisions of
Lockheed Martin with respect to the Joint Strike Fighter contract obtained by
Lockheed Martin for the United States government. The Company incurred further
expenses in developing a strong financing proposal for the development of its
underwater wireless communication technology and is optimistic that this
proposal will successfully lead to funding of a major product development
program. The direct result of decreased contract manufacturing revenues has
been the decrease in net income for the year ended December 31, 2001 to a
loss of $(441,924) compared to net income of $147,736 for the year ended
December 31, 2000.
Cash provided by operations was $201,786 during the year ended December 31,
2000 compared to cash used by operations of $(138,931) during the year ended
December 31, 2001. This decrease in cash for the year was due to the Company's
investment in the future growth of its contract manufacturing business.
The Company's working capital and capital requirements will depend on numerous
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 paid down its long-term debt by $83,466 and is committed to expend
working capital to reduce its long-term debt during the current year. The
Company has improved its working capital position by increasing its long-
term debt. The availability of sufficient future funds will depend to a
significant extent on the obtaining of a manufacturing contract 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. At March
31, 2002 and subsequent to December 31, 2001, the Company has issued 883,162
shares of common stock for the receipt of US$228,515.
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, 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
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
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, 2001 and 2000 and the consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the three years in the period
ended December 31, 2001. These consolidated 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, 2001 and 2000 and the consolidated
results of its operations and cash flows for the three years in the period
ended December 31, 2001 in accordance with accounting principles generally
accepted in the United States of America.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 27, 2002
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
December 31
(U.S. Dollars)
ASSETS (note 8) 2001 2000
---- ----
Current
Cash $ 39,699 $125,602
Receivables (note 4) 139,453 442,423
Inventory and work in progress 107,257 135,536
Prepaid expenses 5,398 2,059
-------- --------
Total Current Assets 291,807 705,620
Property and equipment (note 5) 91,903 84,199
-------- --------
Total Assets $383,710 $789,819
-------- --------
LIABILITIES
Current
Accounts payable and accrued liabilities (note 6) $325,075 $512,286
Loans payable (note 7) 6,778 12,074
Current portion of long term debt (note 8) 211,208 41,973
-------- --------
Total Current Liabilities 543,061 566,333
Long term debt (note 8) 364,549 403,434
Deferred revenue 64,259 73,252
Due to Cabot Management Limited (note 9) 56,249 60,020
Due to Director (note 9) 24,401 47,489
--------- ---------
Total Liabilities 1,052,519 1,150,528
--------- ---------
CONTINGENCY (note 10) - COMMITMENT (note 11)
STOCKHOLDERS' EQUITY (DEFICIT)
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
7,942,009 shares of common stock 794 767
(7,668,181 - 2000)
Additional paid in capital 1,146,447 1,015,964
Other comprehensive income 37,308 33,994
Accumulated deficit (1,853,358) (1,411,434)
--------- ---------
Total Stockholders' Equity (Deficit) (668,809) (360,709)
Total Liabilities and Stockholders'
Equity (Deficit) $383,710 $789,819
--------- ---------
See notes to consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Years Ended December 31
(U.S.Dollars)
2001 2000 1999
Sales $1,176,527 $2,301,378 $462,659
Cost of goods sold 644,057 1,557,819 206,354
--------- --------- --------
Gross margin 532,470 743,559 256,305
--------- --------- --------
Expenses
Salaries, wages and benefits 330,316 147,356 145,649
Professional and consulting fees 87,523 144,385 102,187
Marketing 139,758 86,674 20,037
Rent 78,423 65,608 26,804
Business development 76,147 0 0
Office 38,092 49,382 29,031
Interest on long term debt 32,065 33,356 30,194
Travel 27,563 25,938 12,705
Interest and bank charges 4,228 16,480 6,526
Research and development 45,710 15,298 46,430
Telephone, light and heat 26,067 9,001 8,394
Miscellaneous 13,818 11,046 8,989
Bad debts 0 338 90,281
Contract manufacturing 0 0 23,638
Stock based compensation expense 42,900 0 0
Uncompensated services 0 0 30,000
Commissions 0 0 46,300
Depreciation and amortization 31,784 10,433 5,681
--------- --------- --------
974,394 615,295 632,846
--------- --------- --------
Income (loss) before other income (441,924) 128,264 (376,541)
Other income 0 19,472 9,020
--------- --------- --------
Income (loss) before income taxes (441,924) 147,736 (367,521)
--------- --------- --------
Income tax provision - current 0 66,000 0
Reduction of current taxes as a result of
loss application 0 (66,000) 0
--------- --------- --------
0 0 0
--------- --------- --------
Net income (loss) (441,924) 147,736 (367,521)
Other comprehensive income (loss) 3,314 20,440 (40,375)
--------- --------- --------
Total comprehensive income (loss) $(438,610) $168,176 $(407,896)
--------- --------- --------
Basic and diluted
Net income (loss) per share $(0.06) $0.02 $(0.05)
Shares used in:
Basic per share computation 7,820,940 7,616,548 7,146,813
Diluted per share computation 8,772,047 8,446,586 7,146,813
See notes to consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31
(U.S. Dollars)
Other
Additional Stock Compre- Accumu- Total
Paid in Subscr- hensive lated Stockholder
Shares Amount Capital iptions Income Deficit Equity
------ ------ ---------- ------- ------- --------- -----------
Balance,
December 31,
1998 2,140,000 $ 214 $ 414,755 $ - $53,929 $(1,191,649) $(722,751)
Shares issued January, 1999
on acquisition of subsidiary
(note 1) 4,901,481 490 - - - - 490
Liabilities in excess of
identifiable assets
(note 1) - - (35,428) - - - (35,428)
Issuance of common stock
for cash 563,000 56 562,944 - - - 563,000
Stock
subscriptions
received - - - 10,000 - - 10,000
Value of director's uncompensated
Services - - 30,000 - - - 30,000
Other
comprehensive loss - - - - (40,375) - (40,375)
Net loss - - - - - (367,521) (367,521)
--------------------------------------------------------------------------------
Balance,
December 31,
1999 7,604,481 760 972,271 10,000 13,554 (1,559,170) (562,585)
Net income - - - - - 147,736 147,736
Other
comprehensive income - - - - 20,440 - 20,440
Issuance of common stock
for cash 13,700 2 13,698 - - - 13,700
Issuance of common stock
for services 40,000 4 19,996 - - - 20,000
Issuance of common stock
for previous
subscriptions 10,000 1 9,999 10,000) - - -
------ ---- ------- ------- ------- -------- --------
Balance,
December 31,
2000 7,668,181 767 1,015,964 - 33,994 (1,411,434) (360,709)
Issuance of common stock
for services 273,828 27 87,583 - - - 87,610
Value of uncompensated
Services - - 42,900 - - - 42,900
Other comprehensive
Income - - - - 3,314 - 3,314
Net loss - - - - - (441,924) (441,924)
------ ---- ------- ------ -------- --------- --------
Balance,
December 31,
2001 7,942,009 $ 794 $1,146,447 $ - $37,308 $(1,853,358)$(668,809)
--------- ----- --------- ------ -------- ---------- ---------
See notes to consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Cash Flows
Ended December 31
(U.S.Dollars)
2001 2000 1999
Operating Activities
Net income (loss) $(441,924) $147,736 $(367,521)
Adjustments to reconcile net income (loss) to net
Cash provided by (used by) operating activities:
Depreciation and amortization 31,784 10,433 5,681
Stock based and uncompensated
Services 42,900 0 30,000
Services paid with common stock 87,610 20,000 0
Changes in operating assets and liabilities
Receivables 302,970 (336,814) (8,705)
Prepaid expenses (3,339) 4,290 (4,820)
Inventory and work in progress 28,279 (55,598) (42,001)
Accounts payable and accrued
Liabilities (187,211) 411,739 (72,680)
--------- --------- --------
Net cash provided by (used by)
operating activities (138,931) 201,786 (460,046)
--------- --------- --------
Investing Activity
Acquisition of property and
Equipment (24,080) (67,886) (15,222)
--------- --------- --------
Financing Activities
Issuance of common stock for cash 0 13,700 563,000
Proceeds from long term debt 189,415 52,029 78,850
Repayment of long term debt (83,466) (78,760) 0
Repayment to Cabot Management
Limited (3,771) (14,580) (15,623)
Advances from (repayment to)
Director (23,088) (37,359) 6,344
Stock subscriptions received 0 0 10,000
Proceeds from (repayment of)
loans payable (5,296) (3,222) (88,281)
--------- --------- --------
Net cash (used by) provided by
financing activities 73,794 (68,192) 554,290
--------- --------- --------
Effect of foreign currency translation
on cash 3,314 20,440 (40,375)
--------- --------- --------
Inflow (outflow) of cash (85,903) 86,148 38,647
Cash, beginning of year 125,602 39,454 807
--------- --------- --------
Cash, end of year $39,699 $125,602 $39,454
--------- --------- --------
Supplemental information
Interest paid $32,065 $45,196 $36,720
Non-cash investing and financing activities:
Shares issued for acquisition
of subsidiary $0 $0 $490
See notes to consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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. ("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 1999 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, 1999 the Company completed the acquisition of 100% of the
shares of Northstar Technical Inc. NTI develops, produces and sells an
undersea wireless communications system and manufactures, under contract,
defense and aerospace electronic systems. 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 was treated as a
recapitalization and charged to additional paid in capital.
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.
(b) Inventory and work in progress
Inventory and work in progress are valued at the lower of average cost and
net realizable value.
(c) Property and equipment
Property and equipment are recorded at cost less any government assistance
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 the occurrence of 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 Canadian government programs.
Amounts received or receivable under these programs are recorded as a
reduction in the cost of property and equipment or as a reduction of the
applicable research and development costs.
(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 assumptions 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).
(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 and on the number of
shares issued in 1999 in exchange for shares of the subsidiary for the nine
months ended December 31, 1998 comparatives. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. 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:
Income(Loss) Shares Per Share
Numerator Denominator Amount
--------------------------------------------------------------------------
Year ended December 31, 1999
Basic and diluted net loss $(367,521) 7,146,813 $(0.05)
--------------------------------------------------------------------------
Year ended December 31, 2000
Basic net income $147,736 7,616,548 $0.02
Effect of dilutive securities:
Stock options outstanding 830,038
--------------------------------------------------------------------------
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)
--------------------------------------------------------------------------
(j) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and would impact
future results of operations and cash flows.
(k) Financial instruments
The Company's financial instruments consist of cash, receivables, accounts
payable and accrued liabilities, loans payable, long-term debt, due to Cabot
Management Limited and due to director. It is management's opinion that the
Company is not exposed to significant interest, currency or credit risks
arising from these financial instruments. The fair value of these financial
instruments approximates their carrying value.
(l) Recent accounting pronouncements
(i) In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition", which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The Company believes the adoption of SAB 101 does not
have a material impact on the Company's financial position and results of
operations.
(ii) In March 2000 the Financial Accounting Standards Board ("FASB") issued
"Interpretation #44, Accounting for Certain Transactions Involving Stock
Compensation". Among other issues, this interpretation clarifies:
(a) The definition of employee for purposes of applying APB Opinion No.
25.
(b) The criteria for determining whether a plan qualifies as a non
compensatory plan.
(c) The accounting consequence of various modifications of the terms of a
previously fixed stock option award, and
(d) The accounting for an exchange of stock compensation awards in a
business combination.
In relation to (c) the interpretation states, "if the exercise price of a
fixed stock option award is reduced, the award shall be accounted for as a
variable from the date of the modification to the date the award is
exercised, is forfeited, or expired unexercised, the exercise price of an
option award has been reduced if the fair value of the consideration required
to be remitted pursuant to the award's original terms". There is no impact
on the Company for fiscal 2001.
(v) 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.
3. ECONOMIC DEPENDENCE
During the year 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. RECEIVABLES
2001 2000
------- -------
Trade receivables, net of allowance of $0 $ 55,117 $433,837
Government assistance 67,333 5,170
Investment tax credits 17,003 3,416
------- -------
$139,453 $442,423
------- -------
5. PROPERTY AND EQUIPMENT
Accumulated
Depreciation
And 2001
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 30,461 28,282 2,179
------ ------------ ------
$163,960 $72,057 $ 91,903
------ ------------ ------
Accumulated
Depreciation
And 2000
Cost Amortization Net
------ ------------ ------
Computer equipment $7,520 $ 3,426 $ 4,094
Computer software 55,902 8,104 47,798
Furniture and equipment 31,992 16,900 15,092
Manufacturing equipment 17,890 1,577 16,313
Leaseholds improvements 11,168 10,266 902
------ ------------ ------
$124,472 $40,273 $84,199
------ ------------ ------
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000
-------- --------
Trade payables $324,551 $390,360
Payroll and other accrued liabilities 7,302 121,926
-------- --------
$331,853 $512,286
-------- --------
7. LOANS PAYABLE
2001 2000
-------- --------
10% loan payable to Enterprise Newfoundland and
Labrador in monthly interest payments, due on
Demand $6,778 $10,193
Loan payable to Barbara Yaffe, secured by personal
Guarantee of a director 0 1,881
-------- --------
$6,778 $12,074
8. LONG TERM DEBT
2001 2000
-------- --------
Pathfinder Enterprises Inc. 10% loan with monthly
interest payments only, due July 5, 2002, secured by
a floating charge debenture ($240,000 Cdn) $153,846 $160,053
Atlantic Canada Opportunities Agency
Interest free loan with monthly principal
repayments of $3,256 Cdn each commencing
June 01, 2001 ($195,331 Cdn) 107,837 130,264
12% loan with monthly principal repayments of
$1,786 Cdn each ($96,438 Cdn) 60,274 78,594
Interest free loan repayable in 72 monthly consecutive
installments of $3,119 Cdn commencing July 1, 2001. Secured by
postponements on Cabot Management Limited's loan and director's
loan ($205,831 Cdn) 128,644 149,748
Interest free unsecured loan repayable commencing
April, 2004 in monthly payments of
$5,938 Cdn ($309,216 Cdn) 189,415 0
-------- --------
640,016 518,659
Current portion 211,208 41,973
-------- --------
428,808 476,686
Discount on interest free loans payable (64,259) (73,252)
-------- --------
$364,549 $403,434
Pathfinder Enterprises Inc. ("PEI") has agreed to release its debenture in
exchange for an equal amount of 10% redeemable, retractable, cumulative,
nonvoting, participating Class B preference shares of NTI upon receipt of
confirmation that NTI has achieved three consecutive profitable months. PEI
also has the irrevocable option until December 31, 2002 to purchase Class B
preference shares in NTI at $1.00 per share.
Payments of principal due in the next five years are as follows:
2002 $211,208
2003 $58,354
2004 $91,755
2005 $102,889
2006 $96,192
9. RELATED PARTY TRANSACTIONS
(i) Amount due to Cabot Management Limited (Cabot), an associated company
related by a common shareholder and director, bears no interest and has no
set terms of repayment.
(ii) Amount due to director bears no interest and has no set terms of
repayment.
(iii) During the year, compensation paid to directors and officers amounted
to $32,692
(2000 - $20,197).
10. 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. An adverse outcome to the lawsuit could
have an adverse material impact upon the Company.
11. COMMITMENT
The Company is committed to minimum rental payments of $77,000 per year for
the next two years for office space and for operations facilities.
12. STOCK OPTIONS
As at December 31, 2001, the stock options granted to directors,
employees and others are outstanding as follows:
Exercise Number of Options
Expiry Date Price 2001 2002
----------- -------- ---- ----
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 $0.50 344,000 344,000
October 26, 2003 $0.60 160,000
March 31, 2006 $0.0001 41,667
April 24, 2006 $0.50 25,000
May 25, 2006 $0.0001 36,456
September 17, 2006 $0.50 50,000
January 26, 2001 $0.50 75,000
------- -------
1,547,123 1,159,000
The Company has elected to follow APB 25, 'Accounting for Stock Issued
to Employees' and related interpretations in accounting for its stock
options. The exercise prices of all the stock options are normally at or
above the market price of the underlying stock on the date of grant,
therefore, compensation expense recorded under the intrinsic value method
totaled $37,700. Had compensation expense been determined on the basis of
the estimated fair values of the options granted in accordance with SFAS
No. 123 'Accounting for Stock Based Compensation' for employees, net loss
under this method would have been increased by $30,240 or $0.00 per share
in 2001 and net income in 2000 would have decreased by $120,700 or $0.02
per share. The fair value of common share options granted to non employees
is $5,200. The fair value of common share options granted is estimated as
at the grant date using the Black-Scholes option pricing model, using the
following weighted average assumptions:
Dividend yield 0% Risk free interest rate 4%
Expected life 5 years Expected volatility 45%
Weighted average options outstanding 1,240,560
Weighted average exercise price of options $0.49
13. INCOME TAXES
The Canadian subsidiary NTI has 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:
Available to Amount
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:
2001 2000
---- ----
Future income tax assets
Non capital loss carry forwards $1,320,000 $878,000
Appropriate tax rate 45% 45%
--------- -------
594,000 395,100
Less: valuation allowance (594,000) (395,100)
--------- -------
$0 $0
--------- -------
14. SUBSEQUENT EVENT
Subsequent to December 31, 2001 the Company issued 883,162 shares of
Common stock for cash of $228,515
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
There 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 56 President and Principal
Financial Officer
Mr. Frank Power 58 Director
Item 10. Executive compensation
During the year the Company paid $32,692 (2000 - $20,197) to Wilson
Russell for his services.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Class Name and Address Number of Shares Percentage of Shares(1)
Common Frank Power 990,000 12.47%
998 Riverside Drive
Port Coquitlam, B.C.
Canada V3B 7Y4
Common Wilson Russell 964,883 12.15%
4742 Collingwood Street
Vancouver, B.C.
Canada V6S 2B4
Common Ladner Enterprises Ltd(2) 477,900 6.02%
60 Market Square
P.O. Box 364, Belize City
Belize, C.A.
Common Dr. Michel Ghanadian 400,000 5.04%
CH. Didotai 10
1223 Cologny, Switzerland
Common Monaco Ventures Ltd.(2) 1,000,000 12.59%
60 Market Square
P.O. Box 364, Belize City
Belize, C.A.
Common London Enterprises Ltd.(2) 700,000 8.81%
60 Market Square
P.O. Box 364, Belize City
Belize, C.A.
Common All officers and directors
as a group 1,954,883 24.61%
(1) Based on 7,942,009 shares of common stock issued and outstanding
December 31, 2001
(2) The beneficial owners of Ladner Enterprises Ltd., Monaco Ventures Ltd.
and London Enterprises Ltd. are:
LADNER-Mr. Sean Isles, Leslie Lewis Building, Mount Tout, Grand
Anse, St. George's W.I.
MONACO-Ms. Brenda McKay, Suite 71, Grand Anse, St. George's W.I.
LONDON-Ms. Michele Grey, 269 Morne Rouge Road, Grand Anse, St.
George's W.I.
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 2001
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, 2002
/S/ FRANK POWER
By (Signature and Title) Frank Power
Director
Date March 26, 2002
/S/ DAVID BUTTLE
By (Signature and Title) David Buttle, PhD
Director
Date March 26, 2002 Appointed March, 2002