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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, 1998
[ ] 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)
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FLORIDA 22-274288
(State or other jurisdiction of (I R S Employer I D No)
incorporation or organisation)
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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 [ ] No [X]
The number of shares of common stock of the Registrant outstanding as of
November 11, 1998 was 16,590,237 according to the Company's transfer agent.
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FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
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ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance sheets as of September 30, 1998 and June 30, 1998 3
Condensed Consolidated statements of Operations for the three months ended
September 30, 1998 and the three September 30, 1998 4
Condensed Consolidated statements of Cash Flows for the nine months ended 5
September 30, 1998 and 1997
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-9
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 I - FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MSU CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
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September 30 June 30
1998 1998
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CURRENT ASSETS
Cash and cash equivalents $ 7,970 $ 166,040
Prepaid expenses and other 56,486 79,411
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TOTAL CURRENT ASSETS 64,456 245,451
EQUIPMENT, net of accumulated depreciation of $99,440 and
$84,544 at September 30, 1998 and June 30, 1998 respectively 106,307 108,647
INVESTMENTS 1,843,750 2,218,500
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TOTAL ASSETS $ 2,014,513 $ 2,572,598
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
10% Convertible Notes $ 2,299,750 $ 2,299,750
Shareholders' advances payable 1,609,100 1,570,980
Accounts payable and accrued liabilities 1,083,172 767,711
Related-party payables 71,196 7,681
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TOTAL CURRENT LIABILITIES $ 5,063,218 $ 4,646,122
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized
16,590,237 and 16,590,237 shares issued and outstanding at
September 30, 1998 and June 30, 1998 respectively $ 165,902 $ 165,902
Additional paid-in capital 5,287,790 5,287,790
Cumulative translation adjustments (2,476) 10,046
Net unrealized loss (1,071,250) (696,500)
Accumulated deficit (7,428,671) (6,840,762)
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TOTAL SHAREHOLDERS' DEFICIT (3,048,705) (2,073,524)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 2,014,513 $ 2,572,598
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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
1998 1997
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REVENUES $ 2,558 $ 704
EXPENSES
Cost of revenues 1,680 737
Selling, general and
administrative and other 208,326 306,710
Depreciation 12,708 8,409
Amortisation of deferred financing costs 211,523
Registration expenses 32,533
Interest expense 57,500 57,667
Research and development 278,259 341,770
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TOTAL EXPENSES 591,006 926,816
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OPERATING LOSS (588,448) (926,112)
NON OPERATING INCOME
Interest income 539 4,079
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NET LOSS $ (587,909) $ (922,033)
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LOSS PER COMMON SHARE $ (0.04) $ (0.09)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 16,590,237 16,066,000
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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
1998 1997
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$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (587,909) (922,033)
Adjustments to reconcile net loss to net
cash used in operating activities 414,609 (357,667)
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NET CASH USED IN OPERATING ACTIVITIES (173,300) (1,279,700)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (10,368) (15,860)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (net) 38,120 301,625
Issuance of common stock -- 185,250
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 38,120 486,875
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EFFECT OF EXCHANGE RATE CHANGES (12,522) (3,649)
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NET INCREASE (DECREASE) IN CASH (158,070) (812,334)
CASH AT BEGINNING OF PERIOD 166,040 859,238
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CASH AT END OF PERIOD $ 7,970 $ 46,904
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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, 1998, the results of its operations for three ended September 30,
1998 and 1997, and its cash flows for the three months ended September 30, 1998
and 1997.
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, 1998. The results of the operations for the three months
ended September 30, 1998 are not necessarily indicative of the operating results
that may be expected for the fiscal year ending June 30, 1999.
NOTE 2 - SHAREHOLDERS' EQUITY
During the three months ended September 30, 1998, shareholders' deficit
increased approximately $975,000. Net loss for the three month period was
$588,000; the increase in the unrealized loss on the Company's investment in
American Interactive Media Inc. ('AIM') increased by 'L'375,000 and the
cumulative translation adjustment increased by approximately $12,000.
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.
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, 1998 there was an accumulated deficit of
$7,428,671 and an unrealized loss in respect of its investment in AIM of
'L'1,071,250. Additionally the Company has had recurring negative cash flows
from operations. The Company expects that it will is likely to incur net losses
at least through to the end of the second quarter of fiscal 1999, 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 1999 if anticipated revenues from license fees,
development fees and royalties in respect of sales of the Envoy chip, or
royalties and conditional and forecasted purchase orders of customized Internet
Access Devices are not realized. 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; modem approval from the
local or national telephone company, and the ability of the products to
successfully
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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 1999 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, 1998 further significant
software modifications to the Internet Access Device were completed and the
Company has announced the commencement of production samples of the latest 4
megabyte version of the proprietary Slipstream Internet Access Device for which
orders have now been received by Mitac Inc, our joint venture partner which
manufactures and sells the Internet Access Devices. The Company is continuing to
develop the ISP Chip which will provide enhanced Internet features. 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 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 ended September 30, 1998 to the three months ended
September 30, 1997
Revenues for the three months ended September 30, 1998 increased over the same
periods of 1997 by $1,854. Comparison with the previous periods however is not
meaningful as in these periods, apart from the sales of a small number of
samples, there were no revenues generated as the Company continued to
concentrate its efforts on further software and hardware developments of its
Internet Access Device, and the Envoy chip.
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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 effect on the Company's business.
Costs of revenues for the three months ended September 30, 1998 increased over
the same periods in 1997 by $943. 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, 1998 comparison with 1997 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, 1998 research and
development expenses were $63,511 less than in the corresponding periods in the
previous year. As mentioned above, as the revenues generated in the three months
ended September 30, 1998 were negligible, and comparison of research and
development expenditure as a percentage of revenues for the respective periods
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.
Selling, general and administrative and other expenses for the three months
ended September 30, 1998 decreased over the same period of 1997 by $98,382. The
decrease in the three months ended September 30, 1998 is primarily due to a
reduction in personnel, marketing and promotional costs in this period during
which the company was concentrating its efforts on the development of its
products. 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, 1998 was approximately
the same as for the three months ended September 30, 1997 and represents the
interest payable on the 10% Convertible Notes.
The costs incurred in 1997 associated with the financing of the 10% Convertible
Notes were amortised over the period to June 30, 1998. Consequently there is no
expense in the three months ended September 30, 1998.
The company has received a late invoice for 'L'32,533 in respect of printing
costs incurred in respect of the Registration Statement which was filed in 1997
and then withdrawn in 1998. The Company believes that a retention for
registration expenses which was made in June 1997 by the attorneys acting for
the 10% Note holders, together with other amounts held back in an Escrow
Account, should be sufficient to cover this liability. However as the Company
has not yet been able to ascertain the amount of the funds still held in the
Escrow Account, as a matter of prudence, provision has been made for this amount
in these financial statements.
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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, 1998 cash used in
operating activities of approximately $139,000 was attributable to the Company's
net loss for the period of $588,000 which was funded in part by (i) an increase
in accounts payable and accrued liabilities of $315,000; and (ii) an increase in
the amounts owed by related parties of $64,000 which arose as a result of the
directors not taking salaries owed to them for the period. Cash flows from
investing activities approximately $10,000 during such period related mainly to
the acquisition of computer equipment. Cash flows from financing activities of
approximately $38,000 were mainly attributable to a short term loans from J M
Simpson of $34,000.
At September 30, 1998 the Company's principal source of liquidity was
approximately $8,000 in cash. Since September 30, 1998 additional liquidity has
been provided from the sale of 2,000,000 shares of common stock which realised
$1,000,000.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1999 may not be sufficient to meet its cash
needs for working capital and capital expenditures for remainder of fiscal. 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On December 15, 1997 the Company received a complaint which was filed in New
York State Superior Court, New York County, by Forte Communications, Inc.,
alleging damages in the amount of $112,800 for public relations and consulting
services and expenses rendered by the Plaintiff to the Company. The Company has
filed an answer to the suit on the basis of Forte's failure to fulfil its
contractual obligations and to obtain the necessary authority for alleged
expenses.
ITEM 2 - CHANGES IN SECURITIES
In October and November 1998 the Company sold a total of 2,000,000 shares of its
common stock, at 50 cents per share, to Mark McLaughlin, a principal shareholder
of the Company, and to certain other persons with Mr. McLaughlin. In
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addition to the shares the acquirees have also been granted warrants over a
further 1,000,000 shares of common stock which are exercisable at 50 cents per
share at any time before October 31, 2003
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27
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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 December 31, 1998
R H Phillips, Vice President
(Principal Financial and Accounting Officer)
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as ...................... 'L'
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This schedule contains summary financial information extracted
from the financial statements of MSU Corporation as at and for
the three months ended September 30, 1998 and is qualified in its
entirety by reference to such financial statements.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,970
<SECURITIES> 1,843,750
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,456
<PP&E> 106,307
<DEPRECIATION> 99,440
<TOTAL-ASSETS> 2,014,513
<CURRENT-LIABILITIES> 5,063,218
<BONDS> 1,609,100
<COMMON> 165,902
0
0
<OTHER-SE> 3,214,607
<TOTAL-LIABILITY-AND-EQUITY> 2,014,513
<SALES> 0
<TOTAL-REVENUES> 2,558
<CGS> 0
<TOTAL-COSTS> 1,680
<OTHER-EXPENSES> 531,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,500
<INCOME-PRETAX> (587,909)
<INCOME-TAX> 0
<INCOME-CONTINUING> (587,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (587,909)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
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