<PAGE>
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, 1999
[ ] 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
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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 organisation)
Elder House, 526-528 Elder Gate, Central Milton Keynes, MK9 1LR, England
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(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 10, 1999 was 25,380,452 according to the Company's transfer agent.
<PAGE>
Form 10-Q INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION
Page No.
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 1999
and June 30, 1999 3
Condensed Consolidated Statements of Operations (Unaudited) for the three months
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-10
PART 11 - OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Change in Securities 11
Item 3 Defaults upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
MSU Corporation
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30 June 30
1999 1999
------------ ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,544,195 $2,604,504
Accounts receivable -- 566
Inventory 55,087 39,500
Prepaid expenses and other 261,368 170,457
---------- ----------
TOTAL CURRENT ASSETS 1,860,650 2,815,027
EQUIPMENT, net of accumulated depreciation of $180,690 and
$152,279 at September 30, 1999 and June 30, 1999 respectively 166,037 134,959
INVESTMENTS 390,625 390,625
---------- ----------
TOTAL ASSETS $2,417,312 $3,340,611
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of debt 75,000 75,000
Related party notes and advances 183,388 185,811
Accounts payable and accrued liabilities 930,823 1,032,947
---------- ----------
TOTAL CURRENT LIABILITIES 1,189,211 1,293,758
LONG TERM DEBT 505,000 505,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized
25,380,452 and 25,364,262 shares issued and outstanding at
September 30, 1999 and June 30 1999 respectively 253,804 253,642
Additional paid-in capital 17,886,013 17,854,174
Stock subscriptions receivable (148,750) (148,750)
Accumulated other comprehensive income 166,879 108,820
Accumulated deficit (17,434,845) (16,526,033)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 723,101 1,541,853
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $2,417,312 $3,340,611
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
MSU Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
September
------------------------------
1999 1998
---------- ----------
(Unaudited)
REVENUES $ 505 $ 2,558
EXPENSES
Cost of revenues 300 1,680
Selling, general and
administrative and other 355,819 240,859
Depreciation 21,211 12,708
Interest expense 44,201 57,500
Research and development 507,983 278,259
---------- ----------
TOTAL EXPENSES 929,515 591,006
---------- ----------
OPERATING LOSS (929,010) (588,448)
NON OPERATING INCOME
Interest income 20,198 539
---------- ----------
NET LOSS $ (908,812) $ (587,909)
========== ==========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE $ (0.04) $(0.04)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 25,376,626 16,590,237
See notes to condensed consolidated financial statements
4
<PAGE>
MSU Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30 June 30
1999 1999
------------ ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(908,812) (587,909)
Adjustments to reconcile net loss to net
cash used in operating activities (157,267) 414,609
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (1,066,079) (173,300)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (52,290) (10,368)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (net) -- 38,120
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- 38,120
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES 58,059 (12,522)
---------- ----------
NET INCREASE (DECREASE) IN CASH (1,060,309) (158,070)
CASH AT BEGINNING OF PERIOD 2,604,504 166,040
---------- ----------
CASH AT END OF PERIOD $1,544,195 $7,970
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
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, 1999, the results of its operations for three months ended
September 30 1999 and 1998, and its cash flows for the three months ended
September 30, 1999 and 1998.
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, 1999. The results of the operations for the three months
ended September 30, 1999 are not necessarily indicative of the operating results
that may be expected for the fiscal year ending June 30, 2000.
NOTE 2 - SHAREHOLDERS' EQUITY
During the three months ended September 30, 1999, shareholders' equity decreased
approximately $819,000. Net loss for the three month period was $909,000 and the
cumulative translation adjustment increased by approximately $58,000.
During the period the Company issued 16,000 shares of common stock in settlement
of outstanding interest on certain promissory notes.
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.
6
<PAGE>
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, Web 2 U 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 Web 2 U Limited which is principally
engaged in the design and development of computer chips and chipsets principally
for use in high volume consumer electronic products. Most of the Company's chips
incorporate multiple functions, thereby eliminating the need for multiple chips
and permitting a more efficient printed circuit board design and a diminished
risk of malfunction and error at a lower cost.
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, 1999 there was an accumulated deficit of
$17,434,845. 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 second quarter of fiscal 2000 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 in fiscal 2000 if anticipated revenues from license fees, development
fees, and royalties in respect of sales of the Envoy chip, or license fees,
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; modem approval from the
local or national telephone company, 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 2000 and/or be unable to continue as a going concern. The foregoing
factors raise 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, 1999 significant software
hardware modifications to the television set top 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 (recently renamed 'Web2u'). The Company is continuing to develop the main
component of the television set top Internet Access Device, ISP Chip, which will
provide enhanced Internet features.
7
<PAGE>
In addition, the development of the Company's Envoy chip is continuing and the
Company considers that commercial sales could commence in fiscal 2000. The
Company cannot be certain that any such sales will occur.
The Company's strategy can be segmented into three specific areas: people,
processes and products. The Company anticipates that this three fold focus will
enable it to attack aggressively the Internet related products market.
In order to support this strategy, the company anticipates that if revenues from
trading operations are not generated in the coming months, it will, at least in
the short term, have to continue to fund 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 markets for the Company's products have 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. The Company may not be successful in addressing
any of the foregoing risks or in implementing its strategy. Moreover, the
Company may never achieve profitability and may be unable to continue as a going
concern.
Results of Operations
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998
Revenues for the three months ended September 30, 1999 decreased over the same
period of 1998 by approximately $2,000. Comparison with the previous period
however is not meaningful as in that period, 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.
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, 1999 decreased over
the same period in 1998 by $1,380. 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, 1999, comparison with 1998 is not meaningful.
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 television set top Internet Access Device and
specific research and development performed pursuant to development arrangements
with third parties. For the three months ended September 30, 1999 research and
development expenses were approximately $230,000 more than in the corresponding
period in the previous year which reflects the significant increase in resources
which the Company has been able to deploy in this area following the successful
raising of additional capital in the fourth
8
<PAGE>
quarter of fiscal 1999. The fluctuations from period to period also 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. As
mentioned above, as the revenues generated in the three months ended September
30, 1999 were negligible, comparison of research and development expenditure as
a percentage of revenues for the respective periods is not meaningful.
Selling, general and administrative and other expenses for the three months
ended September 30, 1999 increased over the same period of 1998 by approximately
$115,000. The increase in the three months ended September 30, 1999 is primarily
due to an increase in personnel, marketing and promotional costs in this period.
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, 1999 was approximately
$13,000 less than in the three months ended September 30, 1998 and represents
interest paid on promissory notes.
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, 1999 cash used in operating
activities of approximately $1,066,000 was mainly attributable to the Company's
net loss for the period of $909,000. Cash flows from investing activities of
approximately $52,000 during such period related mainly to the acquisition of
computer equipment.
At September 30, 1999 the Company's principal source of liquidity was
approximately $1,540,000 in cash of which approximately $500,000 has been
committed to the production of the Company's proprietary television top Internet
Access Devices. Since September 30, 1999 additional liquidity of $150,000 has
been provided from the sale of a further 10% convertible note.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 2000 will be insufficient to meet its cash needs
for working capital and capital expenditures for the remainder of fiscal 2000.
The Company is however 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, the Company may not be able to meet its
liquidity requirements or to continue as a going concern.
9
<PAGE>
Year 2000 Compliance Issues
The Year 2000 computer problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Management of
the Company does not anticipate that any significant modification or replacement
of the Company's software will be necessary for its computer systems to utilise
properly dates beyond December 31, 1999 or that the Company will incur
significant operating expenses to make any such computer system improvements.
Also, none of the products designed by the Company, which are currently in
manufacture, utilise date sensitive chips. The Company is not able to determine
however whether all of its suppliers, lenders, customers or service providers
will need to make any such modifications or replacements or whether the failure
to make such software corrections will have an adverse effect on the Company's
operations or financial condition. Although it is management's belief that the
failure by such entities to make required software corrections could have a
material adverse on the Company's operations or financial condition, management
is not able to estimate the amount of such adverse effects, if any. The Company
is continuing with the process of assessing the status of these entities' 'Year
2000' compliance.
10
<PAGE>
PART 11 - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in securities
In July 1999 the Company issued 16,000 shares of its common stock in
consideration for the forgiveness of interest due on certain promissory notes,
the principle of which was converted into shares of common stock in June 1999.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
Commencing in the period reported, management solicited the Company's
stockholders to vote by written consent to change the name of the
Company to Web2u, Inc.
Item 5 - Other information
None
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 27. Financial Data Schedule
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 12, 1999 /s/ R H Phillips
-------------------------------------------
R H Phillips, Vice President
(Principal Financial and Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of MSU Corporation and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,544,195
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 55,087
<CURRENT-ASSETS> 1,860,650
<PP&E> 166,037
<DEPRECIATION> 180,690
<TOTAL-ASSETS> 2,417,312
<CURRENT-LIABILITIES> 1,189,211
<BONDS> 0
0
0
<COMMON> 253,804
<OTHER-SE> 469,297
<TOTAL-LIABILITY-AND-EQUITY> 2,417,312
<SALES> 0
<TOTAL-REVENUES> 505
<CGS> 0
<TOTAL-COSTS> 300
<OTHER-EXPENSES> 929,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,201
<INCOME-PRETAX> (908,812)
<INCOME-TAX> 0
<INCOME-CONTINUING> (908,812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (908,812)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
