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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 MARCH 31, 1997 OR
[ ] 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 organization)
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 outstanding of Registrant's Common Stock, par value $0.01
per share, as of March 31 1997: 15,759,723 shares.
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FORM 10-Q INDEX
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PART I -FINANCIAL INFORMATION PAGE NO.
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30 1996 3
Condensed Consolidated Statements of Operations for the three and nine months ended
March 31, 1997 4
Condensed Consolidated Statement of Cash Flows for the nine months ended
March 31 1997 5
Notes to Condensed 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 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 SHEET
(UNAUDITED)
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<CAPTION>
ASSETS
March 31 June 30
1997 1996
$ $
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 47,306 54,805
Accounts receivable 163,692 11,529
Inventory 7,709 --
Prepaid expenses and other 329,499 58,035
-------- --------
TOTAL CURRENT ASSETS 548,206 124,369
EQUIPMENT, net of accumulated depreciation of $79,580
and $47,191 at March 31, 1997 and June 30 1996
respectively 74,972 39,887
-------- --------
TOTAL ASSETS 623,178 164,256
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Shareholders' advances payable 1,565,620 1,400,000
Short term borrowings (Note 3) 600,000 --
Stock subscription repayable (Note 2) 250,000 --
Accounts payable 406,681 325,514
Related-party payables -- 7,680
Accrued liabilities 202,665 246,780
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TOTAL CURRENT LIABILITIES 3,024,966 1,979,974
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares
authorized 15,759,723 and 15,534,722 shares issued and
outstanding at March 31, 1997 and June 30, 1996
respectively 157,597 155,347
Additional paid-in capital 3,781,832 2,984,081
Cumulative translation adjustments 139,627 70,651
Accumulated deficit (6,480,844) (5,025,797)
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TOTAL SHAREHOLDERS' DEFICIT (2,401,788) (1,815,718)
---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT 623,178 164,256
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See notes to condensed consolidated financial statements
3
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MSU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
Three months ended Nine months ended
March 31 March 31
1997 1996 1997 1996
$ $ $ $
<S> <C> <C> <C> <C>
REVENUES 145,508 77,885 1,156,050 165,348
EXPENSES
Cost of revenues 73,100 2,337 660,887 56,884
Selling, general and
administrative and other 486,846 174,241 919,197 350,572
Research and development 269,010 311,165 1,033,598 914,469
------- ------- --------- ---------
TOTAL EXPENSES 828,956 487,743 2,613,682 1,321,925
------- ------- --------- ---------
OPERATING LOSS (683,448) (409,858) (1,457,632) (1,156,577)
NON OPERATING INCOME
Interest income -- -- 2,585 2,771
------- -------- --------- ---------
NET LOSS (683,448) (409,858) (1,455,047) (1,153,806)
======= ======= ========= =========
LOSS PER COMMON SHARE
$(0.04) $(0.03) $(0.09) $(0.08)
======= ======= ========= =========
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 15,759,723 14,991,000 15,622,000 14,144,000
========== ========== ========== ==========
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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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<CAPTION>
Nine months ended
March 31 March 31
1997 1996
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (1,455,047) (1,153,806)
Adjustments to reconcile net loss to net
cash used in operating activities (119,574) (234,677)
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NET CASH USED IN OPERATING ACTIVITIES (1,574,621) (1,388,483)
CASH PLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (67,474) (13,413)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings, (net) 600,000 (861,938)
Proceeds from related party borrowings 165,620 --
Issuance of common stock 800,000 2,139,500
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,565,620 1,277,562
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EFFECT OF EXCHANGE RATE CHANGES 68,976 74,934
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NET INCREASE (DECREASE) IN CASH (7,499) (49,400)
CASH AT BEGINNING OF PERIOD 54,805 227,818
---------- ----------
CASH AT END OF PERIOD 47,306 178,418
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See notes to condensed consolidated financial statements
5
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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
March 31, 1997, the results of its operations for three and nine months ended
March 31, 1997 and 1996, and its cash flows for the nine months ended March 31,
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 1996. The results of the operations for the three and nine
months ended March 31 1997 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 nine months ended March 31 1991, shareholders deficit increased
approximately $586,000. Net loss for the nine month period was approximately
$1,455,000. The cumulative translation adjustment increased by approximately
$69,000. The Company issued 175,000 shares of its common stock for $800,000 in
cash during the nine 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. 50,000 shares of common stock which were issued by the Company
during the quarter ended September 30 1996 for $250,000 were canceled pursuant
to a recission of the transaction. Repayment of the $250,000 received is
anticipated to be effected in the next 90 days.
NOTE 3 - SHORT TERM BORROWINGS
The short term borrowings represent 12 Promissory Notes ("Notes") each in the
amount of $50,000 and each bearing interest at 8.5% per annum, and which mature
in February 1998. The loan may be extended for an additional year, at the
Company's option, in return for which the interest rate on the Notes will
increase to 15% per annum, amortised on a monthly basis. Attached to each Note
is a three year warrant to purchase 5,000 shares of common stock with an
exercise price equal to the average price paid by investors who subsequently
purchase shares of the common stock in the Company. Security for the borrowings
is the Company's interest in the shares of its subsidiaries together with
235,000 shares of common stock of the Company which are beneficially owned by
Winford P Holloway, the Company's chairman.
NOTE 4 - 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 US Operations Inc. (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 and 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 March 31 1997 there was an accumulated deficit of
$6,480,844. Additionally the Company has had recurring negative cash flows from
operations. The Company may continue to incur net losses at least through to 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 the
end of fiscal 1997 if anticipated revenues 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.
During the three month period ended March 31 1997, significant software
modifications to the Internet Access Device were undertaken as a result of the
increasingly sophisticated requirements of some of the Company's potential
customers. These have now nearly been completed. As a consequence, there have
been delays in the production of customized Internet Access Devices which is now
anticipated to commence shortly. In addition, the development of the Company's
Envoy chip has progressed. The Envoy chip is now a silicon chip, and the Company
believes that commercial sales could commence later in the year.
During the three months ended March 31, 1997, a new wholly owned subsidiary
company, MSU US Operations Inc. was formed, and a sales and marketing office was
opened in North Carolina. In addition, additional space has been taken in the
United Kingdom to accommodate an increase in the Company's chip design team.
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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 to the end of fiscal 1997, and
potentially expand 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 started 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
Comparison of the three and nine months ended March 31, 1997 to the three and
nine months ended March 31, 1996.
Revenues for the three and nine months ended March 31 1997 increased over the
same periods of 1996 by $67,623 and $990,702 respectively, or approximately 87%
and 600%, primarily due to chip sales, licence and development fees, and royalty
fees paid (in connection with the sale of customized Internet Access Devices).
The Company has only limited customers to date that frequently and
systematically purchase its products or retains its services. The loss of one
customer could have a material adverse effect on the Company's business.
Costs of revenues for the three and nine months ended March 31 1997 increased
over the same periods in 1996 by $70,763 and $604,003 respectively. As a
percentage of revenues, costs of revenues were approximately 50% and 3% in the
three months ended March 31 1997 and 1996, and approximately 57% and 34% in the
nine months ended March 31 1997 and 1996. 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 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 months ended March 31, 1997,
research and development expenses decreased over the same period in 1996 by
$42,155 and for the nine months ended March 31, 1997 such expenditure increased
by $119,129. As a percentage of revenues, research and development expenses were
approximately 185% and 400% in the three months ended March 31, 1997 and 1996,
and approximately 89% and 553% in the nine months ended March 31, 1997 and 1996.
The fluctuations from period to period reflect the varying demands for research
and development which are dictated by technological changes and the need for
8
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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 nine
months ended March 31 1997 increased over the same periods of 1996 by $312,605
and $568,625, 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, communications,
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 nine month period ended March 31 1997 cash used in
operating activities of approximately $1,574,000 was primarily attributable to
the Company's net loss for the period. Cash used in investment activities of
approximately $67,000 during such period related mainly to the acquisition of
electronics equipment. Cash flows from financing activities of approximately
$1,565,000 were primarily attributable to aggregate net proceeds of $750,000
from a private sale of common stock and short term borrowings of $600,000.
At March 31, 1997, the Company's principal source of liquidity was approximately
$47,000 in cash. On 7 May 1997 the Company issued 79,000 shares of its common
stock for $163,000 in cash in a private transaction to Jeremy Miles Simpson who
has agreed to join the Board of Directors, effective July 1, 1997, as Deputy
Chairman.
The Company believes that cash flows expected to be generated through the
remainder of fiscal 1997 will not be sufficient to meet its cash needs for
working capital and capital expenditures for the remainder of fiscal 1997. 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.
9
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PART II - OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
None
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 of 125,000 shares of common stock (83,334 shares
were sold on or about October 18, 1996 in the first round and 41,666 shares were
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. The Company claims that the
sale was exempt from the registration requirements of the Act pursuant to,
without limitation, Section 4(2) of the Act.
On 7 May 1997, pursuant to a subscription agreement, the Company, in an exempt
transaction, sold an aggregate of 79,000 shares of common stock to Jeremy Miles
Simpson, for $163,000. Mr Simpson has accepted an offer to join the Board of
Directors as a non-executive Deputy Chairman effective July 1, 1997.
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, Wynford 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
appointed 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
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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, "hereunto duly authorized.
MSU CORPORATION
(Registrant)
Dated: May 14, 1997
By:/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 BALANCE SHEET AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 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> MAR-31-1997
<CASH> 47,306
<SECURITIES> 0
<RECEIVABLES> 163,692
<ALLOWANCES> 0
<INVENTORY> 7,709
<CURRENT-ASSETS> 548,206
<PP&E> 154,552
<DEPRECIATION> 79,580
<TOTAL-ASSETS> 623,178
<CURRENT-LIABILITIES> 3,024,966
<BONDS> 0
0
0
<COMMON> 157,597
<OTHER-SE> (2,559,385)
<TOTAL-LIABILITY-AND-EQUITY> 623,178
<SALES> 1,156,050
<TOTAL-REVENUES> 1,156,050
<CGS> 660,887
<TOTAL-COSTS> 2,613,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,455,047)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,455,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,455,047)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
