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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, 1997
[ ] 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: 33-2822-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 organisation)
ELDER HOUSE, 526-528 ELDER GATE, CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
(Address of principal executive offices)
011 44 1908 232100
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 as 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
November 3, 1997 was 16,148,111 according to the Company's transfer agent.
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FORM 10-Q INDEX
PART 1 -FINANCIAL INFORMATION
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ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance sheets as of September 30 1997 and June 30 1997 3
Condensed Consolidated statements of Operations for the three months ended 4
September 30 1997
Condensed Consolidated statements of Cash Flows for the three months ended 5
September 30 1997
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-9
PART 11 - OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Change 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
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PART 1 - FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MSU CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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ASSETS
September 30 June 30
1997 1997
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CURRENT ASSETS
Cash and cash equivalents $ 46,904 $859,238
Accounts receivable -trade 74,147 105,842
Accounts receivable -other 272,034 77,469
Inventory 11,258 12,325
Prepaid expenses and other 39,023 67,085
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TOTAL CURRENT ASSETS 443,366 1,121,959
EQUIPMENT, net of accumulated depreciation of $48,898 and
$41,764 at September 30 1997 and June 30 1997
respectively 83,754 76,305
OTHER ASSETS
Development costs 112,800 --
Deferred financing costs, net of accumulated amortisation of
$224,724 and $13,201at September 30,1997 and
June 30, 1997 respectively 621,368 803,077
Deferred registration costs 85,000 85,000
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819,168 888,077
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TOTAL ASSETS $1,346,288 $2,086,341
======= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Short term borrowings -- 131,595
Shareholders' advances payable 1,525,892 1,562,680
Note payable -- 250,000
Accounts payable and accrued liabilities 662,776 713,461
Related-party payables 19,678 20,239
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TOTAL CURRENT LIABILITIES 2,208,346 2,677,975
LONG TERM DEBT - 10% Convertible Notes 2,299,750 1,829,742
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized
16,093,791 and 15,986,891 shares issued and
outstanding at September 30, 1997 and June 30 1997
respectively 160,938 159,869
Additional paid-in capital 4,640,741 4,456,560
Cumulative translation adjustments 91,052 94,701
Accumulated deficit (8,054,539) (7,132,506)
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TOTAL SHAREHOLDERS' DEFICIT (3,161,808) (2,421,376)
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TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $1,346,288 $2,086,341
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See notes to condensed consolidated financial statements
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MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended
September 30
1997 1996
$ $
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REVENUES 704 126,591
EXPENSES
Cost of revenues 737 2,193
Selling, general and
administrative and other 306,710 89,124
Depreciation 8,409 5,889
Amortisation of deferred financing costs 211,523 -
Interest expense 57,667 850
Research and development 341,770 331,790
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TOTAL EXPENSES 926,816 429,846
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OPERATING LOSS (926,112) (303,255)
NON OPERATING INCOME
Interest income 4,079 -
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NET LOSS $(922,033) $ (303,255)
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LOSS PER COMMON SHARE $ (0.06) $ (0.02)
==== ====
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 16,066,000 15,549,000
========= =========
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See notes to condensed consolidated financial statements
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MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three months ended
September 30 September 30
1997 1996
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (922,033) (303,255)
Adjustments to reconcile net loss to net
cash used in operating activities (357,667) 112,517
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NET CASH USED IN OPERATING ACTIVITIES (1,279,700) (190,738)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (15,860) (5,491)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (net) 301,625 35,852
Issuance of common stock 185,250 250,000
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 486,875 285,852
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EFFECT OF EXCHANGE RATE CHANGES (3,649) (30,492)
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NET INCREASE (DECREASE) IN CASH (812,334) 59,131
CASH AT BEGINNING OF PERIOD 859,238 54,805
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CASH AT END OF PERIOD $46,904 $113,936
========== ========
</TABLE>
See notes to condensed consolidated financial statements
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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 its subsidiaries at
September 30, 1997, the results of its operations for three months ended
September 30, 1997 and 1996, and its cash flows for the three months ended
September 30, 1997 and 1996.
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, 1997. The results of the operations for the three months
ended September 30, 1997 are not necessarily indicative of the operating results
that may be expected for the fiscal year ending June 30 1998.
NOTE 2 - SHAREHOLDERS' EQUITY
During the three months ended September 30, 1997, shareholders deficit increased
approximately $740,000. Net loss for the three month period was $922,000. The
cumulative translation adjustment decreased by approximately $3,000. The Company
issued 81,900 shares of its common stock for $185,000 during the three month
period. Of the 81,900 shares issued, 26,900 were issued for cash in a private
transaction with J M Simpson, a director; 30,000 were issued pursuant to the
exercise of a warrant; and 25,000 were issued pursuant to an agreement with the
note-holder of the $250,000 non-interest bearing Note which was repaid in July
1997
NOTE 3 - LOSS PER COMMON SHARE
The Loss per common share is computed based upon the weighted average of the
shares outstanding during the period.
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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, MSU (UK) Limited and MSU Operations (US) Inc. (collectively the
`Company'). All significant inter company 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 September 30, 1997 there was an accumulated deficit of
$8,054,539. 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 to the end of the second quarter of fiscal 1998, and possibly through
that year, as it attempts to further develop, upgrade and market its products
and to develop its infrastructure and organisation to support anticipated
operations, including anticipated product demand. 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 second
quarter of fiscal 1998 if anticipated revenues from development fees, and
royalties in respect of sales of the Envoy chip, or royalties and conditional
and forecasted purchase orders of customised Internet Access Devices are not
realised. Such conditional and forecasted purchase orders in respect of the
Internet Access Device assume, without limitation, approval of final production
samples by potential purchasers; acceptance by and demand for customised
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 1998 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.
During the three month period ended September 30, 1997 significant software
modifications to the Internet Access Device were completed and the Company has
announced the commencement of pre-production samples of the latest 4 megabyte
version of the proprietary Slipstream Internet Access Device. The Company is
developing the ISP Chip - version 3 which will provide enhanced Internet
features and capabilities. In addition, the development of the Company's Envoy
chip is continuing and the Company considers that commercial sales could
commence later in the fiscal year.
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 the Envoy chip and on customised
Internet Access
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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 if sales revenues are not generated in
the coming months, it will, at least in the short term, have to continue to fund
a significant portion of its 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 further
develop its infrastructure and organisation to support its anticipated
operations activity, although it has no funds to address these concerns
presently.
The markets for the Company's products has only recently begun to develop, are
rapidly evolving and are 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
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996
Revenues for the three months ended September 30, 1997 decreased over the same
period of 1996 by $125,887 to $704. In this period, apart from the sale of a
small number of samples, there were no revenues generated as the Company
concentrated its efforts on the development of its Internet Access Device, the
ISP Chip -version 3 and the Envoy chip.
The Company has only limited customers to date that frequently and
systematically purchase its products or retain its services. The loss of one
customer could have a material effect on the Company's business.
Costs of revenues for the three months ended September 30, 1997 decreased over
the same period in 1996 by $1,456. The cost of revenues fluctuate due to
variations in gross margins as between chip sales, support services and
development services; however, because of the limited number of sales in the
three months ended September 30, 1997, comparison with 1996 is meaningless.
Research and development expenses generally consist of expenditure related to
the Company's development of its chips and prototype products, such as the ISP
Chip, the Envoy Chip, and the prototype Internet Access Device and specific
research and development performed pursuant to development arrangements with
third parties. For the three months ended September 30 1997 research and
development expenses increased over the same period in 1996 by $9,980. As
mentioned above, as the revenues generated in the three months ended September
30, 1997 were negligible, compared to the revenues generated in the three months
to September 30, 1996, comparison of research and development expenditure as a
percentage of revenues for the respective quarters is not meaningful. 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.
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Selling, general and administrative and other expenses for the three months
ended September 30, 1997 increased over the same period of 1996 by $217,886,
primarily due to increased personnel costs resulting from the development of the
Company's infrastructure, costs associated with marketing and promotion,
including related travel, and professional costs incurred in the preparation of
the Exchange Act annual reports. Selling, general and administrative and other
expenses principally consist of the cost of employees (other than those
dedicated to research and development) advertising and promotional costs, which
are charged to operations as incurred, communication, rent and occupancy costs;
and professional fees.
Interest expense for the three months ended September 30, 1997 increased over
the same period of 1996 by $56,817 due to the interest which is now payable on
the 10% Convertible Notes; there was no similar interest cost in the three
months ended September 30, 1996.
The costs associated with the financing of the 10% Convertible Notes are being
amortised over the period of the Notes; there was no similar expense in the
three months ended September 30, 1996
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private sales of equity and debt
securities. For the three month period ended September 30, 1997 cash used in
operating activities of approximately $1,280,000 was primarily attributable to
the Company's net loss for the period. Cash used in investment activities of
approximately $16,000 during such period related mainly to the acquisition of
computer equipment. Cash flows from financing activities of approximately
$487,000 were attributable to aggregate net proceeds of $185,000 from
private sales of common stock and $301,000 from the issuance of further 10%
Convertible Notes.
At September 30, 1997 the Company's principal source of liquidity was
approximately $47,000 in cash. Since September 30, 1997 additional liquidity has
been provided by the receipt of the balance of the amount due for the 10%
Convertible Notes of $208,000 which is included in the Balance Sheet as part of
`Accounts receivable - other', and $118,300 from a further issuance of 47,320
shares of common stock to J M Simpson, a director of the Company.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1998 may not be sufficient to meet its cash
needs for working capital and capital expenditures for remainder of fiscal 1998.
The Company is actively pursuing negotiations for additional capital to fund its
operations through private sales of equity or debt securities and or borrowings
from third parties. The sale of additional equity or convertible debt securities
will result in an additional dilution to the Company's stockholders. Even
assuming such additional financing, 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.
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PART 11 - OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
In July 1997 the Company repaid the $250,000 non-interest bearing note payable
and issued to the holder thereof 25,000 shares of its restricted common stock.
In July and September 1997 a total of 30,000 shares of the Company's restricted
stock were issued, pursuant to the exercise of a warrant, at $1 per share. In
October 1997, a further 7,000 shares were similarly issued.
On September 3, 1997 Jeremy Simpson acquired from the Company, in a private
transaction, 26,900 shares of the Company's common stock for $79,000 in cash. In
October 1997 Mr Simpson acquired a further 47,320 shares of the Company's common
stock for $118,300 in cash. In all cases the price paid for the shares was the
market price prevailing on the respective dates.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
Effective July 1, 1997 Jeremy Simpson was appointed to serve as a director of
the Company as non-executive Deputy Chairman.
In August 1997, Fred Kashkooli also joined the Board following the appointment
of Capitol Bay Securities as the company's investment bankers.
In September 1997 Keith Peirson was appointed to the Board and he has also been
appointed the Company's managing director.
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
None
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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 authorised.
MSU CORPORATION
(Registrant)
Date November 7, 1997
/s/ R.H. Phillips
R.H. Phillips, Vice President
(Principal Financial and Accounting Officer)
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements dated September 30, 1997, and
is qualified in its entirety by reference thereto.
</LEGEND>
<CIK> 0000798952
<NAME> MSU Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 46,904
<SECURITIES> 0
<RECEIVABLES> 346,181
<ALLOWANCES> 0
<INVENTORY> 11,258
<CURRENT-ASSETS> 443,366
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,346,288
<CURRENT-LIABILITIES> 2,208,346
<BONDS> 0
<COMMON> 160,938
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,346,288
<SALES> 0
<TOTAL-REVENUES> 704
<CGS> 737
<TOTAL-COSTS> 926,816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,667
<INCOME-PRETAX> (922,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (922,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (922,033)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.06)
</TABLE>
