<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- -------------------
Commission File Number: 33-28622-A
MSU CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 22-274288
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
ELDER HOUSE, 526-528 ELDER GATE, CENTRAL MILTON KEYNES, MK91LR, ENGLAND
- --------------------------------------------------------------------------------
(Address of principal executive offices)
011441908232100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock of the Registrant outstanding as of
October 9, 1996 was 15,509,722 according to the Company's transfer agent. The
Company's internal records indicate that there were 15,534,722 shares of its
common stock outstanding as of October 9, 1996. After significant due
diligence, the Company has been unable to account for the 25,000 share
discrepancy.
<PAGE> 2
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION....................................................................................3
Item 1. Condensed Consolidated Financial Statements.....................................................3
Condensed Consolidated Balance Sheets as of September 30, 1996 and June 30, 1996................3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995......................................................4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995......................................................5
Notes to Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................10
Item 2. Changes in Securities...........................................................................10
Item 3. Defaults Upon Senior Securities.................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.............................................10
Item 5. Other Information...............................................................................10
Item 6. Exhibits and Reports on Form 8-K................................................................10
</TABLE>
(2)
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MSU CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1996 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 113,936 $ 54,805
Accounts receivable 43,182 11,529
Prepaid expenses and other 146,887 58,035
----------- -----------
TOTAL CURRENT ASSETS 304,005 124,369
EQUIPMENT, net of accumulated depreciation of $53,385 and $47,191
at September 30, 1996 and June 30, 1996, respectively 39,744 39,887
----------- -----------
TOTAL ASSETS $ 343,749 $ 164,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Shareholder advance payable $ 1,400,000 $ 1,400,000
Short-term borrowings 35,852 325,514
Accounts payable 426,783 7,680
Accrued and other liabilities 397,622 246,780
----------- -----------
TOTAL CURRENT LIABILITIES 2,260,257 1,979,974
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized; 15,584,722 and
15,534,722 shares issued and outstanding at
September 30, 1996 and June 30, 1996, respectively 160,347 155,347
Additional paid-in capital 3,229,081 2,984,081
Cumulative translation adjustments 23,116 70,651
Accumulated deficit (5,329,052) (5,025,797)
TOTAL SHAREHOLDERS' DEFICIT (1,916,508) (1,815,718)
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 343,749 $ 164,256
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
(3)
<PAGE> 4
MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
REVENUES $ 126,591 $ 74,980
EXPENSES
Cost of revenues 2,193 42,064
Selling, general and administrative and other 95,863 83,344
Research and development 331,790 309,070
TOTAL EXPENSES 429,846 434,478
------------ ------------
OPERATING LOSS (303,255) (359,498)
NONOPERATING INCOME -- --
------------ ------------
NET LOSS $ (303,255) $ (359,498)
============ ============
LOSS PER COMMON SHARE $ (0.02) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,549,000 13,565,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
(4)
<PAGE> 5
MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(303,255) $(359,498)
Adjustments to reconcile net loss to net
cash used in operating activities 112,517 (207,171)
--------- ---------
NET CASH USED IN
OPERATING ACTIVITIES (190,738) (566,669)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net (5,491) (2,463)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings, net 35,852 (521,134)
issuance of common stock 250,000 865,000
--------- ---------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 285,852 343,866
EFFECT OF EXCHANGE RATE CHANGES (30,492) (2,367)
--------- ---------
NET INCREASE (DECREASE) IN CASH 59,131 (227,633)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 54,805 227,818
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 113,936 $ 185
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
(5)
<PAGE> 6
MSU CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position of MSU
Corporation and Subsidiaries at September 30, 1996, and the results
of its operations and cash flows for the three month periods ended
September 30, 1996 and 1995.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
financial statements should be read in conjunction with the Company's
annual report on Form 10-K for the fiscal year ended June 30, 1996.
The results of operations for the period ended September 30, 1996 are
not necessarily indicative of the operating results that may be
expected for the fiscal year ending June 30, 1997.
NOTE 2 - SHAREHOLDERS' EQUITY
During the three months ended September 30, 1996, shareholders'
deficit decreased approximately $101,000. Net loss for the period was
$303,255. The cumulative translation adjustment decreased by
approximately $48,000. During the quarter ended September 30, 1996,
the Company issued 50,000 shares of its common stock for cash in the
amount of $250,000.
NOTE 3 - LOSS PER COMMON SHARE
Loss per common share is computed based upon the weighted average
number of shares outstanding during the period.
(6)
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW OF BUSINESS OPERATIONS AND SIGNIFICANT RISKS
On October 3, 1994, MSU Corporation, formerly Capital Acquisition Company,
acquired the outstanding capital stock of MSU Plc., a private company based in
the United Kingdom, which owns all of the capital stock of MSU (UK) Limited
(MSU PLC and MSU (UK) Limited together referred to as 'MSU') through the
issuance of 9,422,222 shares of its common stock. This transaction has been
accounted for as a recapitalization of MSU, with MSU as the acquirer (a reverse
acquisition) and, accordingly, the historical consolidated financial statements
through the date of the transaction are those of MSU. Shareholders' equity
reflects the equivalent number of common shares received in the
recapitalization and all references in the financial statements with regard to
number of shares of common stock have been restated to give retroactive effect
to the transaction.
The Company operates primarily through MSU (UK) Limited, which is principally
engaged in the design and development of computer chips and chipsets for use
in consumer electronic products.
The consolidated financial statements include the accounts of MSU Corporation,
MSU Plc. and MSU (UK) Limited (collectively the "Company"). All significant
intercompany accounts have been eliminated in the consolidated financial
statements.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception. At September 30, 1996, there was an accumulated deficit
of approximately $5,329,000. Additionally, the Company has had recurring
negative cash flows from operations. The Company expects that it is likely to
incur net losses at least through the end of the six month period ended
December 31, 1996 (although it anticipates a small net profit for the quarter
ended December 31, 1996 and a net profit for fiscal 1997) as it attempts to
further develop, upgrade and market its products and to develop its
infrastructure and organization to support the current and anticipated increase
in operational activity. The foregoing statement is a forward-looking statement
that involves risks and uncertainties. The reader should be aware that the
Company is likely to incur net losses beyond the six month period ended
December 31, 1996 if anticipated revenue from conditional and forecasted
purchase orders of customized Internet Access Devices are not realized. Such
conditional and forecasted purchase orders assume, without limitation, approval
of final production samples by potential purchasers; acceptance by and demand
for customized Internet Access Devices by consumers; satisfactory product
performance, including chip and software performance; and the ability of the
products to successfully compete in an extremely competitive marketplace. The
Company believes such assumptions are reasonable, however, should any one of
such assumptions prove to be unfounded, the Company could incur net losses
beyond the six month period ended December 31, 1996 and/or be unable to
continue as a going concern. The foregoing factors raise substantial doubt
about the Company's ability to continue as a going concern without sufficient
funds to meet its cash requirements. There can be no assurance that the Company
will be able to obtain sufficient funds to enable it to continue as a going
concern.
The Company's strategy is to increase cash flows from operations through
further development, upgrade and marketing of its chips and products
incorporating such technology, with particular emphasis on customized Internet
Access Devices incorporating its ISP Chip-version 2, and potential expansion of
its operations in the United States and elsewhere. In order to support this
strategy, the Company anticipates that it will have to continue to fund a
significant portion of its current, at least in the short term, and potential
expanded operations through private sales of equity securities to and/or
borrowings from third parties, to the extent such sources of capital are
available to the Company. The Company also intends to develop its
infrastructure and organization to support the current and anticipated increase
in operational activity, although it has no funds to presently address these
concerns.
(7)
<PAGE> 8
The market for the Company's products has only recently begun to develop, is
rapidly evolving and is highly competitive, with substantially all competitors
having significantly greater resources than the Company. The Company and its
prospects must be considered in light of the substantial risks, expenses and
difficulties facing the Company. There can be no assurance that the Company
will be successful in addressing any of the foregoing risks, that it will be
successful in implementing its strategy, that it will ever achieve
profitability or that it will be able to continue as a going concern.
RESULTS OF OPERATIONS
REVENUES
The Company has no customers to date that frequently and systematically
purchase its products or retain its services. Revenues during the three month
periods ended September 30, 1996 and 1995 were approximately $127,000 and
$75,000, respectively. These revenues were derived principally through
development arrangements in which the Company performed engineering and design
work for its customers for a development fee. Typically, the Company's
development arrangements provide for royalty and/or license fees to be paid to
the Company if the customer sells products developed in conjunction with the
Company and/or incorporating the Company's proprietary technology. As of
September 30, 1996, none of these arrangements have resulted in royalty or
license fee revenue to the Company. The Company could be materially adversely
affected if its customers fail to manufacture, market and sell products
developed in conjunction with the Company.
During the quarter ended September 30, 1996, the Company's revenues were
concentrated in a small number of customers. The loss of any one customer could
have a material adverse effect on the Company's business.
The Company's revenues for the three month period ended September 30, 1996
increased approximately 69% compared to the same period in 1995. This increase
was largely attributable to increased development fees resulting from
development arrangements with third parties.
COST OF REVENUES
Cost of revenues for the three month periods ended September 30, 1996 and 1995
were approximately $2,000 and $42,000, respectively. As a percentage of
revenues, cost of revenues were approximately 2% and 56% in the three month
periods ended September 30, 1996 and 1995, respectively. The cost of revenues
was higher in the three month period ended September 30, 1995 due to reduced
margins in connection with a development arrangement requiring the acquisition
of equipment and the use of subcontractors, all of which were invoiced to the
customer.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses generally consist of expenditures related to
the Company's independent development of its chips and prototype products, such
as the ISP Chip, the Envoy Chip, the Consumer PC and the prototype Internet
Access Device and specific research and development performed pursuant to
development arrangements with third parties. For the three month periods ended
September 30, 1996 and 1995, research and development expenses were
approximately $332,000 and $309,000, respectively. As a percentage of revenues,
research and development expenses were approximately 261% and 410% in the three
(8)
<PAGE> 9
month periods ended September 30, 1996 and 1995, respectively. The fluctuations
from period to period reflect the varying demands for research and development
which are dictated by technological changes and the need for the Company's
products to remain competitive and commercially viable, and the requirements of
the Company's customers.
SELLING, GENERAL AND ADMINISTRATIVE AND OTHER EXPENSES
Selling, general and administrative and other expenses were approximately
$96,000 and $83,000 for the three month periods ended September 30, 1996 and
1995, respectively. Selling, general and administrative and other expenses
principally consist of advertising and promotional costs, which are charged to
operations as incurred; telephone, rent and occupancy costs; professional fees;
interest; and depreciation. This category of expenses was approximately 14%
higher in the three-month period ended September 30, 1996 than the same period
ended in 1995 because of increased costs associated with sales and promotion,
including related travel, and costs incurred in the preparation of delinquent
Exchange Act periodic reports.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively through private
sales of equity securities. For the three-month periods ended September 30,
1996, cash used in operating activities of approximately $191,000 was primarily
attributable to the Company's net loss for the period. Cash used in investment
activities of approximately $5,500 during such period related to the
acquisition of electronics equipment. Cash flows from financing activities of
approximately $286,000 during such period were primarily attributable to
aggregate net proceeds of $250,000 from private sales of common stock offset by
net borrowings of approximately $36,000.
At September 30, 1996, the Company's principal source of liquidity was
approximately $114,000 in cash. Since September 30, 1996, additional liquidity
has been provided from the issuance of shares of common stock to a company for
$750,000 in a private transaction. Such company has agreed to purchase
additional shares of common stock for $250,000 in the latter part of November
1996.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1997 will be sufficient to meet a substantial
portion, if not all, of its anticipated cash needs for working capital and
capital expenditures for the remainder of fiscal 1997, excluding anticipated
cash needs for a potential expansion of operations. The preceding sentence
is a forward-looking statement which assumes the realization of revenue from
conditional and forecasted purchase orders. Such forward-looking statement is
subject to certain risks and uncertainties which could cause actual results to
differ materially from those set forth including but not limited to the
approval of final production samples of customized Internet Access Devices by
potential purchasers; acceptance by and demand for such products by consumers;
satisfactory product performance; and the ability of such products to
successfully compete in an extremely competitive marketplace. To satisfy the
balance of the Company's liquidity requirements, including with respect to a
potential expansion of operations, the Company will attempt to sell additional
equity or debt securities and/or obtain additional credit facilities to the
extent the Company is able to do so, for which there can be no assurance. The
sale of additional equity or convertible debt securities will result in
additional dilution to the Company's stockholders. There can be no assurance
that the Company's liquidity requirements will be met or that the Company will
be able to continue as a going concern.
(9)
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON 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.
27.1 Financial Data Schedule
(10)
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MSU CORPORATION
(Registrant)
Date: November 27, 1996 /s/ Keith Hall
------------------ ----------------------------------
KEITH HALL, President
(Principal Financial and
Accounting Officer)
(11)
<PAGE> 12
EXHIBITS
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT
ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 113,936
<SECURITIES> 0
<RECEIVABLES> 43,182
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 304,005
<PP&E> 93,129
<DEPRECIATION> 53,385
<TOTAL-ASSETS> 343,749
<CURRENT-LIABILITIES> 2,260,257
<BONDS> 0
0
0
<COMMON> 160,347
<OTHER-SE> (2,076,855)
<TOTAL-LIABILITY-AND-EQUITY> 343,749
<SALES> 126,591
<TOTAL-REVENUES> 126,591
<CGS> 2,193
<TOTAL-COSTS> 429,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (303,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> (303,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (303,255)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
