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, 2003
[ ] 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
incorporation 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 [ ] No (2) [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, 2003: $4,500,000 approximately
Aggregate market value of non-voting common equity held by non-
affiliates as of December 31, 2003: $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 February 28, 2004:
15,841,256
Outstanding shares of preferred stock as of February 28, 2004:
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
Item 8A. Controls and Procedures
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
Item 14. Principal Accountants Fees and Services
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. Subsequently, 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. (NNL).
NTI develops, manufactures and sells undersea wireless sonar
communications systems and produces, under contract, defense and
aerospace electronic systems.
NNL 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 manufacturing sonar
hardware for homeland security and military defense systems. These
systems are designed to 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. To date, Northstar has expended $1,783,039Cdn on this
development program and has recovered $1,105,484Cdn.
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 Subsea wireless communications 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 communications
company.
Northstar believes it can build on its 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 180 systems have been sold 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 mounted 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 approximately 180 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, 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 twenty one 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, Iceland, Ireland, New Zealand,
Scotland, Spain, Denmark 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'. Articles on the
NETMIND have appeared recently in 'National Fisherman', Alaskan
Fisherman's Journal' and 'SEA Technology'.
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 2003. 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 NNL) 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 award in 2004 of
a contract for the US$2Billion Maritime Helicopter Project (MHP)
that 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. Since
NTI successfully completed the project to the satisfaction of both
Lockheed Martin and the Navy, Lockheed Martin has awarded follow-on
contracts to NTI. In 2003, Lockheed Martin and NTI signed a
Manufacturing License Agreement approved by the US State Department.
The Agreement allows for NTI to manufacture command and control
consoles for Lockheed Martin on projects they have anywhere in
the world. As well, NTI is permitted to offer Lockheed Martin's
console technology directly to the Canadian Armed Forces.
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 2003, 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 depends to a great extent 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 2003 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
NNL 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, NNL 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 $3Billion Maritime Helicopter Project,
the contract for which is expected to be awarded in 2004. Because
NNL offers 'one stop shopping' to twenty five companies with a wide
range of relevant expertise, it is anticipated that some contract
work for the Maritime Helicopter Project will flow to NNL,
regardless of which consortia wins the bid.
NNL 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.
In 2003, NNL as prime contractor, with TYCO International, submitted
a bid to provide the dual mode fiber optic assemblies for the JSF.
Prototype test assemblies were provided to the customer and extensive
testing was carried out on them as well as on assemblies of competing
companies. The project is expected to continue for the lifetime of
the JSF program with the first contract award expected in 2004.
EMPLOYEES
As of December 31, 2003 the Company had a total of 31 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, 2002 and 2003 and annual reports (form
10KSB) for December 31, 2000, 2001 and 2002.
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,
2003 and 2002 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:
2003 2002 2001 2000 1999 1998
Total
revenue $1,641,960 $976,234 $1,176,527 $2,301,378 $462,659 $193,913
Cost of
goods
sold 230,213 253,377 472,227 1,370,427 136,955 71,189
Discounts 198,950 148,425 171,830 187,392 69,399 29,087
-------------------------------------------------------------------
429,163 401,802 644,057 1,557,819 206,354 100,276
-------------------------------------------------------------------
Gross
margin 1,212,797 574,432 532,470 743,559 256,305 93,637
-------------------------------------------------------------------
Expenses 1,905,942 1,366,567 974,394 595,823 623,826 80,676
-------------------------------------------------------------------
Net income
(loss) $(693,145) $(792,135) $(441,924) $147,736 $(367,521) $(187,039)
-------------------------------------------------------------------
Net income (loss)
per share $(0.05) $(0.08) $(0.06) $0.02 $(0.05) $(0.03)
-------------------------------------------------------------------
As a result of its design engineering programs and expenditures,
Northstar Electronics, Inc. is building an infrastructure to
position itself for significant growth. 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 $1,641,960 for 2003 ($976,234 in 2002)
and we incurred a net loss of $(693,145) for 2003 [$(792,135) in
2002]. 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 and 2003, 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. In 2003 we received a follow-on order
for additional intruder detection systems 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
of Canada. 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 that 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 that 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. Several AQUACOMM sonar products are expected to
be introduced to the marketplace in 2004.
Netmind
Sales of NETMIND systems increased in 2003 over 2002 primarily
because of new markets opened up in Europe. In particular, the new
dealership in Spain is exceeding sales expectations for that area.
Previously mentioned technical enhancements are being introduced
and will continue to be introduced throughout 2004. These
enhancements combined with an aggressive national and international
marketing campaign should lead to a further growth in NETMIND
sales revenues for 2004.
Contract Manufacturing
Northstar remained active pursuing contract manufacturing
opportunities during 2003. We expect to play a strong regional
role in fulfilling the extensive industrial benefit requirements
of the $3billion Maritime Helicopter Project that 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, having signed a Manufacturing
License Agreement with them 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. In
particular, we have bid to provide the dual mode fiber optic
assemblies for the JSF.
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. During 2003, we continued
systems integration work on the intruder detection system.
Total revenues were $1,641,960 for 2003 compared with $976,234 in
2002 and $1,176,527 in 2001. Contract revenues declined over the
years 2001 and 2002. The Company continues to pursue further
contract business and is anticipating several substantial
contracts in 2004.
Gross margins were 74% for 2003 compared with 59% in 2002 and 44%
in 2001. The percentage increase was created by lower component
costs and higher gross margins associated with NETMIND sales, a
decrease in the lower margined contract sales volume and the
inclusion of Aquacomm grants totaling $633,731 in revenue (2002 -
$218,597). 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.
As mentioned previously, in 2002, the Company was successful in
funding its $2.5Million AQUACOMM product development program. In
2003 the Company spent $848,277 on design engineering and prototype
development related to the development of underwater sonar technology
($609,299 in 2002). The Company received contract revenues of
$325,000 (2002 -$179,269) and government incentives of $626,496
(2002 -$218,597) during the current year to offset certain of these
costs. The direct result of extensive spending on design engineering
and prototype development during the current year has been a loss
of $(693,145) for 2003 compared to losses of $(792,135) in 2002
and $(441,924) in 2001.
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.
Liquidity and Capital Resources
The Company used cash in operations of $(368,708) in 2003 compared
to cash used by operations of $(589,419) during 2002 and cash used
by operations of $(138,931) during 2001. Cash used in operations
was offset by the Company's raising of capital by the issuance of
its common shares. In 2003, the Company was successful in raising
net equity financing of $1,096,040 ($706,793 in 2002) through a
Regulation S common share issuance and private placements.
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 Manufacturing License
Agreement with Lockheed Martin. During the most recent fiscal year
the Company increased its long-term debt by $106,331. 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.
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, 2003 and
2002 (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, 2003 and 2002 and the
consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years ended December 31, 2003.
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, 2003
and 2002 and the results of its operations and its cash flows for
each of the three years ended December 31, 2003 in accordance with
accounting principles generally accepted in the United States of
America.
\S\
Chartered Accountants
Vancouver, Canada
March 26, 2004
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
December 31
(U.S. Dollars)
2003 2002
-------------------------------------------------------------
Assets
Current
Cash $613,040 $117,690
Accounts receivable (note 5) 227,444 345,454
Inventory 161,602 147,846
Prepaid expenses 11,148 4,682
-------------------------------------------------------------
Total Current Assets 1,013,234 615,672
Intangible asset (note 6) 37,285 33,613
Property and equipment (note 6) 118,956 104,458
-------------------------------------------------------------
Total Assets $1,169,475 $753,743
-------------------------------------------------------------
Liabilities
Current
Accounts payable and
accrued liabilities $236,255 $418,555
Loans payable (note 7) 58,905 72,863
Deferred revenue (note 5) 143,309 0
Current portion of
long-term debt (note 8) 83,527 62,079
-------------------------------------------------------------
Total Current Liabilities 521,996 553,497
Long term debt (note 8) 376,282 315,932
Discount on long term
debt (note 8) 137,910 113,377
Due to Cabot Management
Limited (note 9) 85,268 70,105
Due to Director (note 9) 44,255 140,297
-------------------------------------------------------------
Total Liabilities 1,165,711 1,193,208
-------------------------------------------------------------
Contingencies and Commitment (notes 10 and 11)
Stockholders' Equity (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
15,838,074 (11,907,976 - 2002)
Common shares 1,584 1,191
Additional Paid-in Capital 3,423,191 2,179,624
Other Comprehensive
Income (loss) (82,373) 25,213
Accumulated Deficit (3,338,638) (2,645,493)
-------------------------------------------------------------
Total Stockholders'
Equity (Deficit) 3,764 (439,465)
-------------------------------------------------------------
Total Liabilities and Stockholders'
Equity (Deficit) $1,169,475 $753,743
-------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Years Ended December 31
(U.S. Dollars)
2003 2002 2001
-------------------------------------------------------------
Revenues $ 1,641,960 $ 976,234 $ 1,176,527
Discounts 198,950 148,425 171,830
-------------------------------------------------------------
Revenues net of Discounts 1,443,010 827,809 1,004,697
Cost of Goods Sold 230,213 253,377 472,227
-------------------------------------------------------------
Gross Margin 1,212,797 574,432 532,470
-------------------------------------------------------------
Expenses
Research and development 848,277 439,003 71,852
Tax credits on research
and development (138,810) (55,401) (26,142)
Salaries, wages
and benefits 358,970 248,553 330,316
Consulting 219,161 129,875 42,900
Travel and marketing 163,143 145,610 167,321
Rent 108,623 95,226 78,423
Business development 82,221 85,491 76,147
Office 45,387 51,446 38,092
Interest and bank charges 9,917 43,779 4,228
Professional fees 91,440 63,975 87,523
Telephone, light and heat 48,820 32,671 26,067
Interest on long-term debt 18,574 32,043 32,065
Miscellaneous 12,404 22,460 13,818
Amortization 37,815 31,836 31,784
-------------------------------------------------------------
1,905,942 1,366,567 974,394
-------------------------------------------------------------
Net Loss (693,145) (792,135) (441,924)
Other Comprehensive
Income (Loss) (107,586) (12,095) 3,314
-------------------------------------------------------------
Total Comprehensive Loss $(800,731) $(804,230) $(438,610)
-------------------------------------------------------------
Net Loss Per Share $(0.05) $(0.08) $(0.06)
-------------------------------------------------------------
Weighted Average Number of Shares
Outstanding 14,446,986 9,954,597 7,820,940
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Changes in Stockholders'
Equity (Deficit)
Years Ended December 31
(U.S. Dollars)
Additional Other Accumu Total
Number Par Paid-in Compre lated Stock
of Value Capital hensive Deficit holder
Shares Income Equity
(Deficit)
--------------------------------------------------------------------
Balance,
December
31, 2001 7,942,009 $794 $1,146,447 $ 37,308 $(1,853,358) $(668,809)
Issuance of common stock
For cash
On private
Place-
ment 3,173,309 318 1,114,448 0 0 1,114,766
On exercise of
Options 78,123 8 0 0 0 8
For serv-
Ices 714,535 71 275,075 0 0 275,146
Share issue
Costs 0 0 (407,981) 0 0 (407,981)
Valuation of stock
Options 0 0 51,635 0 0 51,635
Other comprehensive income
(loss) 0 0 0 (12,095) 0 (12,095)
Net loss 0 0 0 0 (792,135) (792,135)
--------------------------------------------------------------------
Balance December 31,
2002 11,907,976 $1,191 $2,179,624 $25,213 $(2,645,493) $(439,465)
Issuance of common stock
For cash
On private
Place-
Ments 1,782,405 178 798,967 0 0 799,145
On unit offe-
Rings 1,720,235 172 587,328 0 0 587,500
On exercise of
Options 25,000 3 12,497 0 0 12,500
For serv-
Ices 152,361 15 72,261 0 0 72,276
For fees 250,097 25 103,881 0 0 103,906
Share issue
costs
- for cash 0 0 (303,105) 0 0 (303,105)
- for shares 0 0 (103,906) 0 0 (103,906)
Valuation of stock
Options 0 0 75,644 0 0 75,644
Other compre-
hensive (loss) 0 0 0 (107,586) 0 (107,586)
Net loss 0 0 0 0 (693,145) (693,145)
--------------------------------------------------------------------
Balance, December 31,
2003 15,838,074 $1,584 $3,423,191 $(82,373) $(3,338,638) $ 3,764
--------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(U.S. Dollars)
2003 2002 2001
---------------------------------------------------------------------
Operating Activities
Net loss $(693,145) $(792,135) $(441,924)
Adjustments to reconcile net loss to net cash
Used in operating activities
Amortization 37,815 31,836 31,784
Stock based and
uncompensated services 75,644 51,635 42,900
Services paid with
common stock 72,276 275,146 87,610
Changes in operating assets and liabilities
Accounts receivable 162,195 (206,001) 302,970
Prepaid expenses (5,543) 716 (3,339)
Inventory 15,039 (40,589) 28,279
Accounts payable and
accrued liabilities (165,703) 89,973 (187,211)
Deferred revenue 132,714 0 0
----------------------------------------------------------------------
Cash Used in Operating
Activities (368,708) (589,419) (138,931)
----------------------------------------------------------------------
Investing Activities
Acquisition of equipment (45,810) (78,004) (24,080)
Proceeds on disposal of
Equipment 9,415 0 0
----------------------------------------------------------------------
Cash Used in Investing
Activities (36,395) (78,004) (24,080)
----------------------------------------------------------------------
Financing Activities
Issuance of common stock
for cash 1,096,040 706,793 0
Loans payable (repayment) (73,823) 79,941 (9,067)
Proceeds from long-term
Financing 69,972 30,066 189,415
Repayment of long-term debt (69,923) (186,668) (83,466)
Advances from (repayment to)
Director (132,030) 115,896 (23,088)
----------------------------------------------------------------------
Cash Provided by Financing
Activities 890,236 746,028 73,794
----------------------------------------------------------------------
Effect of Foreign Currency Translation
on Cash 10,217 (614) 3,314
----------------------------------------------------------------------
Inflow (Outflow) of Cash 495,350 77,991 (85,903)
Cash, Beginning of Year 117,690 39,699 125,602
----------------------------------------------------------------------
Cash, End of Year $613,040 $117,690 $39,699
----------------------------------------------------------------------
Supplemental Information
Interest paid $18,574 $32,043 $32,065
----------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
(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 Company effected the
merger through the issuance of 4,901,481 shares of treasury stock
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, defence 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.
Revenue from fixed price research and development contracts is
recognized using the percentage of completion method whereby
revenue is recognized at the same percentage that contract costs
to date is of total costs at contract completion.
(b) Inventory
Inventories are valued at the lower of average cost and net
realizable value.
(c) Research and development
Research and development costs are expensed to operations
as incurred.
(d) Investment tax credits
Investment tax credit refunds arising from the incurrence of
qualifying research and development expenditures are not recognized
until the applicable project is approved as a qualifying research
and development project by Canada Revenue Agency. The refunds are
recorded as a reduction in the applicable research and development
expense.
(e) 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
following rates:
Computer equipment - 30% Declining balance
Computer software - 30% Declining balance
Furniture and equipment - 20% Declining balance
Manufacturing equipment - 20% Declining balance
Leasehold improvements - 20% Straight-line
(f) Long-lived assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" establishes a single accounting model for long-lived
assets to be disposed of by sale including discontinued operations.
SFAS 144 requires that these long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued
operations.
As such, these long-lived assets of the Company are reviewed when
changes in circumstances require as to whether their carrying
value has become impaired, pursuant to SFAS 144. Management
considers assets to be impaired if the carrying value exceeds
the future projected cash flows from related operations
(undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value
less cost to sell.
(g) Government assistance
The Company's subsidiaries have been awarded assistance under
certain Government of Canada assistance programs. Amounts
received or receivable under these programs are recorded as revenue
at the time the amounts are approved for payment by the government
agency.
(h) Foreign currency translation
The Company's operations and activities are conducted principally
in Canada; hence the Canadian dollar is the functional currency.
Amounts incurred in U.S. dollars are translated 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 rates approximating the average
rate of exchange for the year.
For reporting purposes, assets and liabilities of non - U.S.
subsidiaries that operate in a local currency environment are
translated to U.S. dollars at year end exchange rates.
Translation adjustments are recorded as other Comprehensive income
or (loss) not affecting deficit within stockholders' equity.
(i) Other comprehensive income (loss)
The Company has other comprehensive income (loss) arising from
foreign currency translation of the subsidiary companies financial
statements to US funds. Accordingly, other comprehensive income
(loss) is shown as a separate component of stockholders' equity
(deficit).
(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.
(k) Net loss per share
Net 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 loss per share computations
for the periods presented:
Weighted
Average Net
Net Number Loss
Loss of Shares Per Share
----------------------------------------------------------------
Year ended December 31, 2001
Basic net loss $(441,924) 7,820,940 $ (0.06)
Year ended December 31, 2002
Basic net loss $(792,135) 9,954,597 $ (0.08)
Year ended December 31, 2003
Basic net loss $(693,145) 14,446,986 $(0.05)
----------------------------------------------------------------
Diluted loss per share is not shown as it is anti-dilutive
(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 has adopted the disclosure requirements of
SFAS 123.
Compensation expense of $nil (2002-$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:
2003 2002 2001
------------------------------------------------------------------
Net loss, as reported $(693,145) $(792,135) $(441,924)
Deduct: stock-based employee compensation
expense under intrinsic
value method 0 24,000 37,240
Add: total stock-based compensation expense
determined under fair
value based method (54,560) (414,054) (67,480)
------------------------------------------------------------------
Net loss, pro-forma $(747,705) $(1,182,189) $(472,164)
------------------------------------------------------------------
Net loss per share,
as reported $(0.05) $(0.08) $(0.06)
Deduct: stock-based employee compensation
expense under intrinsic
value method 0 0 0
Add: total stock-based compensation expense
determined under fair
value based method (0.01) (0.04) (0.01)
------------------------------------------------------------------
Net loss per share, pro-forma $(0.06) $ (0.12) $ (0.07)
------------------------------------------------------------------
The fair value of each option grant is calculated using the
following weighted average assumptions:
Expected life (years) 5 7 5
Risk free interest rate 2.75% 4.38% 4.00%
Expected volatility 93.93% 80.86% 45.04%
Expected dividend yield 0.00% 0.00% 0.00%
------------------------------------------------------------------
During the year the Company granted stock options to consultants
and accounted for the options using the Black-Scholes option
pricing model resulting in consulting expense of $58,610 recorded
by the Company. In addition, $17,034 (2002 - $23,136) relating to
stock options granted in a prior year, and vested in 2003, for
legal services has been expensed as professional fees.
(l) Recent accounting pronouncements
i. In January 2003 the FASB issued interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51, Consolidated Financial
Statements. Interpretation 46 establishes accounting guidance
for consolidation of variable interest entities that function to
support the activities of the primary beneficiary. Interpretation
46 applies to any business enterprise both private and public
that has a controlling interest, contractual relationship or other
business relationship with a variable interest entity. The Company
has no investment in or contractual relationship or other business
relationship with a variable interest entity and
therefore the adoption did not have any impact on the Company's
consolidated financial position, results of operations or cash
flows.
ii. On April 30, 2003 the FASB issued Statement No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities.
Statement 149 is intended to result in more consistent reporting of
contracts as either freestanding derivative instruments subject to
Statement 133 in its entirety, or as hybrid instruments with debt
host contracts and embedded derivative features. In addition,
Statement 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to
derivatives. Statement 149 is effective for contracts entered
into or modified after June 30, 2003. The adoption of Statement 149
did not have any effect on its consolidated financial position,
results of operations or cash flows.
iii. On May 15, 2003 the FASB issued Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement 150 establishes standards for
classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150
represents a significant change in practice in the accounting for
a number of financial instruments, including mandatory redeemable
equity instruments and certain equity derivatives that frequently
are used in connection with share repurchase programs. Statement
150 is effective for all financial instruments created or modified
after May 31, 2003 and to other instruments as of September 1, 2003.
The adoption of Statement 150 on July 1, 2003 did not have any
impact on its consolidated financial position, results of operations
or cash flows.
iv. 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. FINANCIAL INSTRUMENTS
i. Fair values
The carrying value of cash, accounts receivable, accounts payable
and accrued liabilities and loans payable approximate their fair
value because of the short maturity of these financial instruments.
The fair value of long term debt net of discount for interest free
loans, the significant portion of long term debt being interest free
or with fixed interest rates, and amounts due to related parties all
approximate their fair values.
ii. Interest rate risk
The Company is not exposed to significant interest rate risk due
to the short term maturity of its monetary current assets and
current liabilities.
iii. Credit risk
The Company is exposed to credit risk with respect to its accounts
receivable. The Company follows a program of credit evaluations of
customers and limits the amount of credit extended when deemed
necessary. The Company maintains provisions for potential credit
losses and any such losses to date have been within management's
expectations.
iv. Foreign exchange risk
The Company translates the results of foreign operations into US
currency using rates approximating the weighted average exchange
rate for the year. The exchange rate may vary from time to time.
4. ECONOMIC DEPENDENCE
During 2003 one customer accounted for 35% of the Company's sales
(28% 2002 and 2001). The Company has no further contracts in place
with this customer at this time although additional orders are
anticipated from this customer.
5. ACCOUNTS RECEIVABLE
2003 2002
--------------------------------------------------------------
Trade receivables $125,886 $93,066
Government assistance -
research and Development 0 197,239
Investment tax credits
Receivable 101,558 55,149
--------------------------------------------------------------
$227,444 $345,454
During 2002 the Company received approval for government assistance
to a maximum amount of $2,200,000Cdn based on 60.2% of eligible
project costs estimated at $3,658,765Cdn.
The project, 'Aquacomm', is a research and development project to
develop new products. Qualifying costs must be incurred prior to
March 31, 2005. During 2003 the Company received advances in excess
of costs incurred and shown as deferred revenue at December 31, 2003.
During 2002 the Company incurred qualifying costs on which the
applicable government assistance of $197,239 was not received until
2003 and was shown as a receivable at the 2002 year end. Assistance
received is contingently repayable as disclosed in Note 10 (ii).
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
(U.S. Dollars)
6. PROPERTY AND EQUIPMENT
---------------------------------------------------------------------
2003
Accumulated
Depreciation
And
Cost Amortization Net
---------------------------------------------------------------------
Computer equipment $34,944 $14,782 $20,162
Computer software 59,098 38,831 20,267
Furniture and equipment 49,439 18,740 30,699
Manufacturing equipment 73,940 31,280 42,660
Leasehold improvements 7,729 2,561 5,168
---------------------------------------------------------------------
$225,150 $106,194 $118,956
During the 2003 year the Company reduced the cost of property and
equipment additions by $42,040 in government assistance received.
---------------------------------------------------------------------
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
-----------------------------------------------------------------------
Intangible Asset
The Company acquired the design rights and tooling for a
significant component of its Netmind system at a cost of $37,285.
The asset has an indefinite life and will be tested for impairment
annually.
7. LOANS PAYABLE
-----------------------------------------------------------------------
2003 2002
10% term loan with monthly interest payments only, due
July 3, 2006. $50,000 $0
10% demand loan payable on
June 26, 2004 8,905 6,656
10% loan payable to Enterprise Newfoundland and Labrador in
monthly interest payments,
due on demand 0 2,817
10% demand loan payable on November 5, 2002. The
loan was repaid in January, 2003 0 63,390
------------------------------------------------------------------------
$58,905 $72,863
------------------------------------------------------------------------
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
(U.S. Dollars)
8. LONG-TERM DEBT
------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------
Atlantic Canada Opportunities Agency ("ACOA")
Interest free loan with monthly principal
repayments of $3,256 Cdn ($94,395 Cdn: 2002 -
$133,467 Cdn) $72,778 $84,605
12% loan with monthly principal repayments of
$1,786 Cdn plus interest ($53,574Cdn: 2002 -
$75,006 Cdn) 41,306 47,546
Interest free loan repayable in 72 monthly
consecutive instalments of $3,119 Cdn ($130,975
Cdn: 2002 - $168,403 Cdn) 100,982 106,751
Interest free unsecured loan repayable in monthly
payments of Cdn $5,938 commencing April, 2005
($448,875 Cdn: 2002 - $350,875 Cdn) 346,083 222,420
Interest free loan payable $867Cdn monthly
commencing January 2004 ($47,432 Cdn) 36,570 30,066
------------------------------------------------------------------------
597,719 491,388
Less: Current portion 83,527 62,079
------------------------------------------------------------------------
514,192 429,309
Discount on interest free loans payable (137,910) (113,377)
------------------------------------------------------------------------
$376,282 $315,932
------------------------------------------------------------------------
Principal repayment terms are approximately: 2004 $83,527
2005 $124,730
2006 $112,604
2007 $77,370
2008 $59,422
Thereafter $140,066
--------
$597,719
--------
9. RELATED PARTY TRANSACTIONS
(i) The amount due to Cabot Management Limited, an associated
private company related by a common shareholder and director, bears
no interest, has no set terms of repayment and is subordinated to
amounts due to ACOA.
(ii) The amount due to a director bears no interest and has no set
terms of repayment and is subordinated to amounts due to ACOA.
10. CONTINGENT LIABILITIES
(i) The Company is a defendant in a lawsuit commenced against them
in 1999 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.
(ii) The Company is contingently liable to repay $852,328
($1,105,484Cdn) in assistance received under the Atlantic
Innovation Fund. The assistance is repayable annually commencing
August 1, 2005 at the rate of 5% of gross revenues from sales of
products resulting from the Aquacomm research and development
project. Gross revenues are to be calculated for the fiscal year
immediately preceding the due date of the respective payment.
Repayment is to continue until the assistance is repaid in full.
11. 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.
12. STOCK OPTIONS
The following table summarizes the Company's stock option activity
for the years ended December 31, 2003 and 2002:
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
----------------------------------------------------------------
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 or
Expired (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
Granted during
year 522,500 $0.50 to $1.50 $0.81
Cancelled or
Expired (485,000) $0.50 to $1.00 $0.62
Exercised (25,000) $0.50 $0.50
-----------------------------------------------------------------
Balance, December
31, 2003 3,136,500 $0.50 to $1.50 $0.57
-----------------------------------------------------------------
As at December 31, 2003 and 2002 the outstanding stock options
granted to directors, employees and others are as follows:
--------------------------------------------------------------------
Exercise Number of Shares
Expiry Date Price 2003 2002
--------------------------------------------------------------------
February 12, 2004 $ 0.50 425,000 525,000
February 12, 2009 $ 0.50 265,000 265,000
October 12, 2009 $ 0.50 25,000 25,000
December 15, 2010 $ 0.50 244,000 244,000
October 26, 2003 $ 0.50 0 160,000
March 31, 2006 $ 0.0001 0 0
April 24, 2011 $ 0.50 25,000 25,000
May 25, 2006 $ 0.0001 0 0
September 17, 2006 $ 0.50 50,000 50,000
January 26, 2006 $ 0.50 75,000 75,000
June 25, 2007 $ 0.50 125,000 125,000
June 25, 2007 $ 0.75 175,000 175,000
July 5, 2007 $ 0.50 815,000 815,000
December 19, 2012 $ 0.50 405,000 405,000
October 1, 2003 $ 0.50 0 75,000
October 1, 2003 $ 0.75 0 75,000
October 1, 2003 $ 1.00 0 75,000
December 4, 2011 $ 0.50 10,000 10,000
May 31, 2008 $0.50 50,000 0
May 31, 2008 $0.75 75,000 0
May 31, 2008 $1.00 75,000 0
May 31, 2008 $1.25 75,000 0
May 31, 2008 $1.50 50,000 0
July 8, 2008 $0.50 22,500 0
April 30, 2008 $0.50 150,000 0
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Total outstanding and exercisable 3,136,500 3,124,000
--------------------------------------------------------------------
Subsequent to December 31, 2003 options expiring February 12, 2004
were extended to February 12, 2009 by the Company.
Warrants
The Company has issued 1,428,570 warrants exercisable at $0.50 per
share. The warrants provide for a cashless exercise and expire in
July, 2010.
During the year ended December 31, 2003 the Company issued 291,665
warrants exercisable at $0.35 to $0.50. These warrants expired
unexercised during the year.
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
(U.S. Dollars)
13. 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:
2004 $367,978
2005 194
2006 211,391
Thereafter 832,478
---------------------------
$1,412,041
---------------------------
The components of future income tax assets are as follows:
2003 2002
------------------------------------------------------------------
Future income tax assets
Non-capital loss carry forwards $1,412,041 $1,001,000
Approximate tax rate 40% 40%
------------------------------------------------------------------
564,817 400,400
Less: Valuation allowance (564,817) (400,400)
------------------------------------------------------------------
$0 $0
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Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Item 8A. 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.
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 58 President and
Principal Financial
Officer
Mr. Robert Blair 72 Director
David Buttle, PhD 55 Director
Item 10. Executive compensation
During the year the Company paid $53,550 (2002 - $35,227) to
Wilson Russell for his services.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Class Name and Address Number of Percentage of
Shares Shares*
--------------------------------------------------------------------
Common Frank Power 1,018,200 6.43%
998 Riverside Drive
Port Coquitlam, B.C.
Canada V3B 7Y4
Common Wilson Russell 2,540,743 16.04%
4742 Collingwood Street
Vancouver, B.C.
Canada V6S 2B4
Common David Buttle 44,399 0.28%
The Well House, Burkham
Wokington, Berkshire
United Kingdom RG114P5
Common All officers and directors
as a group 2,585,142 16.32%
*Based on 15,838,074 shares of common stock issued and outstanding
December 31, 2003
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 2003
Item 14. Principal Accountants Fees and Services
During the year the company's auditors and principal accountants
received approximately $34,695 in remuneration for audit and
related (quarterly reviews) services. No other services were
provided to the Company by its auditors and principal accountants.
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.
By (Signature and Title) /S/ WILSON RUSSELL
Date March 16, 2004 Wilson Russell, PhD, President,
Principal Financial Officer
By (Signature and Title) /S/ ROBERT BLAIR
Date March 16, 2004 Robert Blair, Director
By (Signature and Title) /S/ DAVID BUTTLE
Date March 16, 2004 David Buttle, PhD, Director
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, 2003
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 16, 2004
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 16, 2004 /s/ Wilson Russell
Wilson Russell, CEO and Chief Financial
Officer and Director