U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM _________ TO __________ COMMISSION FILE NUMBER NORSTAR GROUP, INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) UTAH 59-1643698 ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 6365 NW 6th WAY, SUITE 160, FORT LAUDERDALE, FLORIDA 33309 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 772-0240 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months (or 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. Yes [X] No [ ] At October 31, 2001 there were issued and outstanding 18,743,825 shares of Common Stock. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] NorStar Group, Inc. and Subsidiaries Index to Unaudited Condensed Consolidated Financial Statements PAGE ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheet at September 30, 2001 (Unaudited) F-2 Condensed Consolidated Statements of Operations Nine and Three Months Ended September 30, 2001 and 2000 (Unaudited) F-3 Condensed Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 2001 (Unaudited) F-4 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 (Unaudited) F-5 Notes to Condensed Consolidated Financial Statements F-6/8 F-1 NorStar Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheet September 30, 2001 (Unaudited) Assets Current assets - cash $ 4,783 Equipment, net of accumulated depreciation of $1,749 2,445 Capitalized web site and development costs 238,391 Mineral rights, at estimated net realizable value -- ----------- Total $ 245,619 =========== Liabilities and Stockholders' Equity Current liabilities: Noninterest bearing demand notes payable to stockholders $ 98,809 Accounts payable and accrued expenses 68,491 ----------- Total liabilities 167,300 ----------- Commitments and contingencies Stockholders' equity: Class A convertible preferred stock, par value $10 per share; 1,000,000 shares authorized; none issued -- Class B preferred stock, par value $10 per share; 1,000,000 shares authorized; none issued -- Common stock, par value $.01 per share; 150,000,000 shares authorized; 18,743,825 shares issued and outstanding 187,438 Additional paid-in capital 6,162,590 Accumulated deficit (6,271,709) ----------- Total stockholders' equity 78,319 ----------- Total $ 245,619 =========== See Notes to Condensed Consolidated Financial Statements. F-2 NorStar Group, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Nine and Three Months Ended September 30, 2001 and 2000 (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, --------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues $ -- $ -- $ -- $ -- ---------- ---------- ---------- ---------- Operating expenses: Selling 142,375 10,623 1,000 3,138 General and administrative 66,622 126,502 16,420 33,688 Research and development 47,799 15,000 ---------- ---------- ---------- ---------- Totals 256,796 137,125 32,420 36,826 ---------- ---------- ---------- ---------- Net loss $ (256,796) $ (137,125) $ (32,420) $ (36,826) ========== ========== ========== ========== Basic net loss per common share $ (.01) $ (.01) $ ( -- ) $ ( -- ) ========== ========== ========== ========== Basic weighted average common shares outstanding 18,743,825 15,493,825 18,743,825 15,493,825 ========== ========== ========== ========== See Notes to Condensed Consolidated Financial Statements. F-3 NorStar Group, Inc. and Subsidiaries Condensed Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 2001 (Unaudited) Common Stock -------------------------- Additional Number of Paid-in Accumulated Unearned Shares Amount Capital Deficit Compensation Total ---------- ----------- ----------- -------------- ------------ ----------- Balance, January 1, 2001 18,743,825 $ 187,438 $ 6,162,590 $ (6,014,913) $ (141,375) $ 193,740 ---------- ----------- ----------- -------------- ----------- ----------- Amortization of unearned compensation 141,375 141,375 Net loss (256,796) (256,796) ---------- ----------- ----------- -------------- ----------- ----------- Balance, September 30, 2001 18,743,825 $ 187,438 $ 6,162,590 $(6,271,709) $ -- $ 78,319 =========== =========== =========== ============== =========== =========== See Notes to Condensed Consolidated Financial Statements. F-4 NorStar Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 (Unaudited) 2001 2000 --------- --------- Operating activities: Net loss $(256,796) $(137,125) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of unearned compensation 141,375 Depreciation 1,050 450 Changes in operating assets and liabilities - accounts payable and accrued expenses 2,862 13,674 --------- --------- Net cash used in operating activities (111,509) (123,001) --------- Investing activities: Web site and development costs capitalized (25,279) Purchases of equipment (4,194) --------- Net cash used in investing activities (29,473) --------- Financing activities - proceeds from issuance (repayments) of notes payable to stockholders 98,809 (9,500) --------- --------- Net decrease in cash (12,700) (161,974) Cash, beginning of period 17,483 179,176 --------- --------- Cash, end of period $ 4,783 $ 17,202 ========= ========= See Notes to Condensed Consolidated Financial Statements. F-5 NorStar Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Business and basis of presentation: In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of NorStar Group, Inc. and its subsidiaries (the "Company") as of September 30, 2001, and the Company's results of operations for the nine and three months ended September 30, 2001 and 2000, changes in stockholders' equity for the nine months ended September 30, 2001 and cash flows for the nine months ended September 30, 2001 and 2000. Pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"), certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed in or omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2000 and for the years ended December 31, 2000 and 1999 and the notes thereto (the "Audited Financial Statements") and the other information included in the Company's Annual Report on Form 10-KSB (the "Form 10-KSB") for the year ended December 31, 2000. The results of operations for the nine and three months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year ending December 31, 2001. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has not generated any significant revenues on a sustained basis from its current operations. Management estimates that the Company will not begin to generate revenues from sales of memberships to subscribers until the first quarter of the year ending December 31, 2002. As shown in the accompanying condensed consolidated financial statements, the Company incurred net losses of approximately $257,000 and $137,000 for the nine months ended September 30, 2001 and 2000, respectively, although a substantial portion of the loss in 2001 was attributable to noncash charges for the fair value of shares and stock options issued for services, compensation and other expenses. As of September 30, 2001, the Company had a cash balance of only $4,800, a working capital deficiency of approximately $163,000 and an accumulated deficit of $6,272,000. Management believes that the Company will continue to incur net losses through at least September 30, 2002 and that it will need additional equity and/or debt financing of at least $2,000,000 to enable it to fully develop its web services and its proprietary virtual reality products as initially planned and sustain its operations until it can achieve profitability and generate cash flows from its operating activities on a recurring basis. These matters raise substantial doubt about the Company's ability to continue as a going concern. F-6 NorStar Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Business and basis of presentation (concluded): Management is attempting to obtain additional financing for the Company through the issuance of equity securities, loans from financial institutions and/or agreements with strategic partners. However, management cannot assure that the Company will be able to sell equity securities, obtain loans from financial institutions and/or form strategic alliances that will generate financing on acceptable terms. If the Company is not able to obtain adequate financing, it may have to curtail or terminate some or all of its operations. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue its operations as a going concern. Note 2 - Earnings (loss) per common share: As further explained in Note 2 of the notes to the Audited Financial Statements, the Company presents basic earnings (loss) and, if appropriate, diluted earnings per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share". Diluted per share amounts have not been presented in the accompanying unaudited condensed consolidated statements of operations because the Company had net losses for the nine and three months ended September 30, 2001 and 2000 and, accordingly, the assumed effects of the exercise of outstanding stock options (see Note 5 herein) would have been anti-dilutive. Note 3 - Income taxes: As of September 30, 2001, the Company had net operating loss carryforwards of approximately $6,272,000 available to reduce future Federal taxable income which, if not used, will expire at various dates through 2021. The Company had no other material temporary differences as of that date. Due to the uncertainties related to, among other things, the changes in the ownership of the Company, which could subject those loss carryforwards to substantial annual limitations, and the extent and timing of its future taxable income, the Company offset the deferred tax assets attributable to the potential benefits of approximately $2,509,000 from the utilization of those net operating loss carryforwards by an equivalent valuation allowance as of September 30, 2001. The Company had also offset the potential benefits from net operating loss carryforwards by equivalent valuation allowances during 2000. As a result of the increases in the valuation allowance of $103,000 and $54,000 during the nine months ended September 30, 2001 and 2000, respectively, and $14,000 during the three months ended September 30, 2001 and 2000, respectively, the Company did not recognize any credits for income taxes in the accompanying condensed consolidated statements of operations to offset its pre-tax losses in any of those periods. F-7 NorStar Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 4 - Stock option plan: On April 17, 2000, the Board of Directors approved a Stock Option Plan (the "Plan") whereby up to 2,000,000 shares of the Company's common stock may be granted to key personnel in the form of incentive stock options and nonstatutory stock options, as defined under the Internal Revenue Code. Key personnel eligible for these awards may include all present and future employees of the Company and individuals who are consultants to the Company as well as nonemployee directors of the Company. Under the Plan, the exercise price of options must be at least 100% of the fair market value of the common stock on the date of grant (the exercise price of an incentive stock option for an optionee that holds more than 10% of the combined voting power of all classes of stock of the Company must be at least 110% of the fair market value on the date of grant). The maximum term of any stock option granted may not exceed ten years (or five years for an optionee that holds 10% or more of the Company's stock) from the date of grant. As of October 25, 2001, no stock options had been awarded under the Plan. Note 5 - Consulting agreements On April 17, 2000, the Company entered into agreements with three consultants that expired on April 17, 2001. Under these agreements, the consultants were, among other things, assisting the Company in finding businesses located primarily in England, other European countries and the Northeastern section of the United States that would advertise in and/or link to the Company's online community. As of October 25, 2001, management of the Company and the consultants were negotiating, but had not consummated, extensions of these agreements. As consideration for their services, the three consultants received options to purchase a total of 1,300,000 shares of the Company's common stock that were exercisable at $.40 per share at any time during the terms of the consulting agreements. The options expired on April 17, 2001. As further explained in Note 2 of the notes to the Audited Financial Statements, the aggregate fair value of the options granted to the consultants as of the date of grant was $377,000. The Company recorded the aggregate fair value as unearned compensation which it amortized to expense over the period from April 17, 2000 to April 17, 2001. * * * F-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ON PLAN OF OPERATION The following discussion regarding NorStar and its business and operations contains "forward-looking statements" within the meaning of Private Securities Litigation Reform Act 1995. Such statements consists of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof of other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. NorStar does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by management of NorStar over time means that actual events are bearing out as estimated in such forward-looking statements. OVERVIEW NorStar Group, Inc. was originally incorporated in the State of Utah in March 1961 as Florist Accounting Services, Inc., a finance company that was primarily engaged in factoring accounts receivables for florists in Utah. The Company was unable to develop a profitable operation and became inactive until April 1992. During the period from April 1992 through September 30, 2001 the Company acquired and/or began to develop and dispose of, several businesses and certain other investments. In 1998, the company began the development of its Internet business which involves the creation of a portal to a cyber-city, an on-line community of "One Stop Shopping" for products, entertainment, education and business services. The on-line community is being developed through VeeAreCity and the Burbs. The portal is designed to provide subscriber/member with access to several web browsers, a directory to thousands of stores, three dimensional virtual reality ("VR") chat rooms, forums and game rooms, a VR dating service, VR business conference room, specialty advertising rooms with VR activities and global e-mails. The Company is developing and expanding its Internet portal services. Norstar is also continuing with ongoing research and development of its proprietary virtual reality products. The Company also holds mineral rights attributable to 17 claims that were acquired for gold mines located in the Gold Mountain mining district of Esmeralda County Nevada. However, management does not expect mining operations to become one of the Company's core businesses. RESULTS OF OPERATIONS: Nine and Three months ended September 30, 2001 as compared to the Nine and Three months ended September 30, 2000. During the nine months ended September 30, 2001, the Company's operating expenses increased by approximately $120,000 to approximately $257,000 from approximately $137,000 for the nine months ended September 30, 2000. The primary cause of the increase was non-cash charges of approximately $141,000 relating to amortization of unearned compensation which resulted from the issuance of stock options to consultants relating to the agreements described below. This increase was offset by a slight reduction in corporate overhead. On April 17, 2000, the Company entered into agreements with three consultants. Under these agreements, the consultants will, among other things, assist the Company in finding businesses located primarily in England, other European countries and the Northeastern section of the United States of America that will advertise in and/or link to 2 the Company's on-line community. The three consultants received options to purchase a total of 1,300,000 shares of the Company's common stock that will be exercisable at $.40 per share at any time during the term of the consulting agreements as consideration for their services. The aggregate fair value of the options granted to the consultants of $377,000 as of the date of grant, as determined based on the Black-Scholes option-pricing model, was recorded as unearned compensation, which will be amortized to expense over the periods in which the related services are rendered, as required by generally accepted accounting principles in the United States of America. During the Three months ended September 30, 2001, the Company's operating expenses decreased by approximately $5,000 to approximately $32,000 from approximately $37,000 for the three months ended September 30, 2000. This decrease was primarily a result of the company reducing its corporate spending until which time its financing is in place. As a result of the above, the Company incurred a loss of approximately $257,000 and $32,000 for the nine and three months ended September 30, 2001, respectively, as compared to approximately $137,000 and $37,000 for the comparable period ended September 30, 2000. (a) Liquidity and Capital Resources NorStar's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has not generated any significant revenues on a sustained basis from its current operations. As shown in the condensed consolidated financial statements, the Company has continued to incur net losses, although a substantial portion of the losses was attributable to noncash charges for the fair value of shares and stock options issued for services, compensation and other expenses. As of September 30, 2001, the Company had a cash balance of only $5,000, a working capital deficiency of approximately $163,000 and an accumulated deficit of $6,272,000. Management believes that the Company will continue to incur net losses through at least September 30, 2002 and that it will need additional equity and/or debt financing of at least $2,000,000 to enable it to fully develop its web services and development of its proprietary virtual reality products as initially planned and sustain its operations until it can achieve profitability and generate cash flows from its operating activities on a recurring basis. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management is attempting to obtain additional financing for the Company through the issuance of equity securities, loans from financial institutions and/or agreements with strategic partners. However, management cannot assure that the Company will be able to sell equity securities, obtain loans from financial institutions and/or form strategic alliances that will generate financing on acceptable terms. If the Company is not able to obtain adequate financing, it may have to curtail or terminate some or all of its operations. We do not believe that our business is subject to seasonal trends or inflation. On an ongoing basis we will attempt to minimize any effect of inflation on our operating results by controlling operating costs and whenever possible, seeking to insure that subscription rates and usage fees reflect increases in costs due to inflation. 3 The Company believes the following trends, events and uncertainties could have a material impact on their short-term and/or long-term liquidity. The market for Internet discount services and product programs is relatively new and is evolving rapidly. NorStar's future growth is dependent upon its ability to create, develop and distribute programs that are accepted by its clients as an integral part of their business model for communicating with their targeted audiences. Demand and market acceptance of discount products and service programs is dependent upon a number of factors, including the growth in consumer access to and acceptance of these programs, the willingness of service and product providers to offer their services and products to customers of NorStar at a discount, and NorStar's ability to develop and maintain distribution channels to sell memberships to consumers. The failure of providers or consumers to participate in NorStar's programs or substantial increases in the adequacy or availability of other programs could have a material and adverse impact on NorStar's business, operating results and financial condition. In addition, NorStar does not have long-term contracts and needs to establish relationships with new vendors. As a result, providers of discounted services or products to NorStar's members may unilaterally reduce the scope of, or terminate their relationships with NorStar. The termination of NorStar's business relationship or a material reduction in the availability of services or products from any of NorStar's significant providers or networks thereof or NorStar's failure to develop significant new provider relationships would materially and adversely affect its business, operating results and financial condition. NorStar believes that within the market niche it seeks to develop, the following known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on their net sales or revenues or income from their continuing operations will include the following: (i) The market for discounted products and services is characterized by rapid changes in participating companies, consumers and service provider requirements and preferences, new service and product introductions and evolving industry standards that could render NorStar's existing service practices and methodologies obsolete; (ii) NorStar's success will depend, in large part, on its ability to improve its existing services, develop new services and solutions that address the increasingly sophisticated and varied needs of NorStar's clients, and respond to technological advances, emerging industry standards and practices, and competitive service offerings; and (iii) NorStar may not be successful in responding quickly, cost-effectively and sufficiently to these developments. If NorStar is unable, for technical, financial or other reasons, to adapt in a timely manner in response to changing market conditions or these requirements, its business, results of operations and financial condition would be materially adversely affected. 4 PART II - OTHER INFORMATION Item 1. Legal proceedings None. Item 2. Changes in Securities None. Item 3. Default in Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) There were no Current Reports on Form 8-K filed by the registrant during the quarter ended SEPTEMBER 30, 2001. 5 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Company duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORSTAR GROUP, INC. By: /s/ Harry DiFrancesco ------------------------------------- Harry DiFrancesco President Date: NOVEMBER 6, 2001 In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Company in the capacities set forth and on the dates indicated. Signature Position Date --------- -------- ---- By: /s/ Harry DiFrancesco President and Chairman Date: September 30, 2001 ------------------------------- of the Board Harry DiFrancesco By: /s/ Andrew S. Peck Vice President of Finance Date: September 30, 2001 ------------------------------- Secretary and Director Andrew S. Peck By: /s/ Maynard Neil Abogov Vice President of Sales Date: September 30, 2001 ------------------------------- and Management and Director Maynard Neil Abogov By:/s/ Jay Sanet Vice President of Date: September 30,2001 --------------------------------- Corporate Development and Director Jay Sanet 6