<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 DECEMBER 31, 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
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(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
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(Address of principal executive offices)
011441908232100
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(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
December 31, 1996 was 15,684,723 according to the Company's transfer agent.
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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 December 31, 1996
and June 30, 1996 . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
and six months ended December 31, 1996 and the three and
six months ended December 31, 1995 . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 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
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(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 396,425 $ 54,805
Accounts receivable 312,223 11,529
Prepaid expenses and other 360,247 58,035
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TOTAL CURRENT ASSETS 1,068,895 124,369
EQUIPMENT, net of accumulated depreciation of $67,166 and $47,191
at December 31, 1996 and June 30, 1996, respectively 53,399 39,887
----------- -----------
TOTAL ASSETS $ 1,122,294 $ 164,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Shareholder advances payable $ 1,565,620 $ 1,400,000
Accounts payable 1,134,144 325,514
Related-party payable -- 7,680
Accrued liabilities 249,701 246,780
----------- -----------
TOTAL CURRENT LIABILITIES 2,949,465 1,979,974
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized;
15,709,723 and 15,534,722 shares issued and outstanding at
December 31, 1996 and June 30, 1996, respectively 157,097 155,347
Additional paid-in capital 3,782,332 2,984,081
Cumulative translation adjustments 30,796 70,651
Accumulated deficit (5,797,396) (5,025,797)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT (1,827,171) (1,815,718)
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 1,122,294 $ 164,256
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
(3)
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MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 883,951 $ 12,483 $ 1,010,542 $ 87,463
EXPENSES
Cost of revenues 585,594 12,483 587,787 54,547
Selling, general and
administrative and other 336,488 92,988 432,351 176,332
Research and development 432,798 294,233 764,588 603,303
------------ ------------ ------------ ------------
TOTAL EXPENSES 1,354,880 399,704 1,784,726 834,182
------------ ------------ ------------ ------------
OPERATING LOSS (470,929) (387,221) (774,184) (746,719)
NONOPERATING INCOME
Interest income 2,585 2,771 2,585 2,771
------------ ------------ ------------ ------------
NET LOSS $ (468,344) $ (384,450) $ (771,599) $ (743,948)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.03) $ (0.03) $ (0.05) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,621,000 13,804,000 15,578,000 13,804,000
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
(4)
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MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (771,599) $ (743,948)
Adjustments to reconcile net loss to net
cash used in operating activities 200,715 284,568
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NET CASH USED IN
OPERATING ACTIVITIES (570,884) (459,380)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net (33,487) (6,732)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings, net 165,620 (666,400)
Issuance of common stock 800,000 865,000
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NET CASH PROVIDED
BY FINANCING ACTIVITIES 965,620 198,600
EFFECT OF EXCHANGE RATE CHANGES (19,629) 42,613
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NET INCREASE (DECREASE) IN CASH 341,620 (224,899)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 54,805 227,818
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 396,425 $ 2,919
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
(5)
<PAGE> 6
MSU CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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 December 31,
1996, the results of its operations for the three and six months
ended December 31, 1996 and 1995, and its cash flows for the six
months ended December 31, 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 three and six months ended December 31, 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 six months ended December 31, 1996, shareholders'
deficit increased approximately $10,000. Net loss for the six
month period was $771,599. The cumulative translation
adjustment decreased by approximately $40,000. The Company
issued 175,000 shares of its common stock for $800,000 in cash
during the six month period. Of the 175,000 shares issued,
125,000 were issued in a private transaction and 50,000 were
issued pursuant to the exercise of a warrant. The 50,000 shares
of common stock issued by the Company during the quarter ended
September 30, 1996 for $250,000 have been cancelled pursuant to a
rescission of the transaction. Repayment of the $250,000
received is anticipated to be effected in the next ninety days.
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)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW OF BUSINESS OPERATIONS AND SIGNIFICANT RISKS
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 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 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 December 31, 1996, there was an accumulated deficit
of $5,797,396. Additionally, the Company has had recurring negative cash flows
from operations. The Company may continue to incur net losses at least through
the end of 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 could incur net losses beyond
fiscal 1997 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 fiscal 1997 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 small net profit the Company had anticipated for the quarter ended
December 31, 1996 was not realized primarily due to required software
modifications which resulted in delays in the production of customized Internet
Access Devices. A significant portion of the software modifications were
completed in December 1996 and January 1997 and production has again commenced.
Further modifications are anticipated to be completed in February 1997.
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 operations, at least through the end of
fiscal 1997, and potential expanded operations through private sales of equity
or debt 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
address these concerns presently .
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.
(7)
<PAGE> 8
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1996 TO THE THREE AND
SIX MONTHS ENDED DECEMBER 31, 1995
Revenues for the three and six months ended December 31, 1996 increased over
the same periods of 1995 by $871,468 and $923,079 or approximately 6,980% and
1,055%, primarily due to chip sales, development fees and royalty fees paid(
in connection with the sale of customized Internet Access Devices) during the
quarter ended December 31, 1996. The Company has only limited customers to
date that frequently and systematically purchase its products or retain its
services. The loss of any one customer could have a material adverse effect on
the Company's business.
Cost of revenues for the three and six months ended December 31, 1996
increased over the same periods of 1995 by $573,111 and $533,240. As a
percentage of revenues, cost of revenues were approximately 66% and 100% in the
three months ended December 31, 1996 and 1995 and approximately 58% and 62% in
the six months ended December 31, 1996 and 1995. The cost of revenue
fluctuations are due to variations in gross margins as between chip sales,
support services and development services.
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 and six months
ended December 31, 1996, research and development expenses increased over the
same periods of 1995 by $138,565 and $161,285. As a percentage of revenues,
research and development expenses were approximately 48% and 2,350% in the
three months ended December 31, 1996 and 1995 and approximately 75% and 689% in
the six months ended December 31, 1996 and 1995. 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 for the three and six
months ended December 31, 1996 increased over the same periods of 1995 by
$243,500 and $256,019, primarily due to increased costs associated with sales,
marketing and promotion, including related travel, and professional costs
incurred in the preparation of delinquent Exchange Act periodic reports.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private sales of
equity securities. For the six-month period ended December 31, 1996, cash used
in operating activities of approximately $570,000 was primarily attributable to
the Company's net loss for the period. Cash used in investment activities of
approximately $33,000 during such period related mainly to the acquisition of
electronics equipment. Cash flows from financing activities of approximately
$965,000 during such period were primarily attributable to aggregate net
proceeds of $750,000 from a private sale of common stock.
At December 31, 1996, the Company's principal source of liquidity was
approximately $396,000 in cash. A company has indicated its intent to purchase
shares of common stock for $250,000 in a private transaction, which proceeds
were anticipated to be received in the latter part of November 1996. To date,
such proceeds have not been received. The Company is uncertain as to whether
or not the purchase by such company will be completed.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1997 will be sufficient to meet a significant
portion 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
(8)
<PAGE> 9
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.
Dataflex filed suit in the United Kingdom in December 1996
seeking the return of $65,000 in advanced royalties. The suit
was settled in the current quarter. Pursuant to the settlement,
the Company will pay Dataflex $65,000.
ITEM 2. CHANGES IN SECURITIES.
In October 1996, an investor agreed to purchase up to 166,667
shares of common stock in two rounds. In the subscription
agreement related to such purchase, the investor was granted an
option to acquire an additional 166,667 shares subject to
completion of the closing of the second round (which contemplated
the purchase of the full 166,667 shares). Pursuant to the
subscription agreement, the Company sold an aggregate 125,000
shares of common stock (with 83,334 shares sold on or about
October 18, 1996 in the first round and 41,666 shares sold on or
about November 15, 1996 in the second round) to an accredited
investor, within the meaning of Rule 501 of Regulation D under
the Securities Act of 1933, as amended (the "Act"), for $750,000
in cash. The Company claims that the sale was exempt from the
registration requirements of the Act pursuant to, without
limitation, Section 4(2) under the Act. No placement agent or
underwriter was involved in the sale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Effective January 1, 1997, Keith Hall resigned as president and a
director of the Company (and from all positions held with the
Company's subsidiaries). Mr. Hall also served as the Company's
principal financial and accounting officer. Effective on such
date, the Company's chief executive officer, Wyn Holloway, was
appointed to serve as president and R.H. Phillips was appointed
to serve as vice president (and as principal financial and
accounting officer) and was elected as a director of the Company.
Effective such date, Mr. Phillips was also appointed to serve as
a director of MSU (UK) Limited and MSU Plc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
(10)
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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: February 19, 1997 /s/ R.H. PHILLIPS
--------------------------------------------
R.H. Phillips, Vice President
(Principal Financial and Accounting Officer)
(11)
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 - Financial Data Schedule
</TABLE>
<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 1O-Q FOR THE QUARTER
ENDED DECEMBER 31, 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-END> DEC-31-1996
<CASH> 396,425
<SECURITIES> 0
<RECEIVABLES> 312,223
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,068,895
<PP&E> 120,565
<DEPRECIATION> 67,166
<TOTAL-ASSETS> 1,122,294
<CURRENT-LIABILITIES> 2,949,465
<BONDS> 0
0
0
<COMMON> 157,097
<OTHER-SE> (1,984,268)
<TOTAL-LIABILITY-AND-EQUITY> 1,122,294
<SALES> 1,010,542
<TOTAL-REVENUES> 1,010,542
<CGS> 587,787
<TOTAL-COSTS> 1,784,726
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (771,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (771,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (771,599)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
