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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 31,1999
[ ] 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
(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
4 May, 1999 was 23,128,377 according to the Company's transfer agent.
1
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Form 10-Q INDEX
<TABLE>
<CAPTION>
PART I -FINANCIAL INFORMATION
Page No.
<S> <C>
Item I Condensed Consolidated Financial Statements
Condensed Consolidated Balance sheets as of March 31, 1999 and June 30, 1998 3
Condensed Consolidated statements of Operations for the three
and nine months ended March 31, 1999 and the three and nine months ended
March 31, 1998 4
Condensed Consolidated statements of Cash Flows for the nine months ended 5
March 31, 1999 and 1998
Notes to Condensed Financial Statements 6-7
Item 2 Management=s Discussion and Analysis of Financial Condition and
Results of Operations 8-11
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Change in Securities 12
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item I Condensed Consolidated Financial Statements
MSU Corporation
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31 June 30
1999 1998
CURRENT ASSETS
<S> <C> <C>
$ $
Cash and cash equivalents 88,395 166,040
Prepaid expenses and other 68,206 79,411
---------- ----------
TOTAL CURRENT ASSETS 156,601 245,451
EQUIPMENT, net of accumulated depreciation of $138,347 and
$84,544 at March 31, 1999 and June 30, 1998 respectively 120,559 108,647
INVESTMENTS
1,125,000 2,218,500
---------- -----------
TOTAL ASSETS $1,402,160 $2,572,598
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
10% Convertible Notes - 2,299,750
Shareholders' advances payable 40,000 1,570,980
Accounts payable and accrued liabilities 1,311,269 767,711
Related-party payables 87,288 7,681
----------- ----------
TOTAL CURRENT LIABILITIES 1,438,556 4,646,122
LONG TERM DEBT (Note 3)
690,000 -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' FUNDS
Common stock, $0.01 par value; 50,000,000 shares
authorized 23,128,377 and
16,590,237 shares issued and outstanding at
March 31, 1999 and June 30 1998 respectively 231,283 165,902
Additional paid-in capital 9,956,995 5,287,790
Cumulative translation adjustments 56,938 10,046
Net unrealized loss (1,790,000) (696,500)
Accumulated deficit (9,181,612) (6,840,762)
------------ -------------
TOTAL SHAREHOLDERS' FUNDS (DEFICIT) (726,396) (2,073,524)
------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' FUNDS $1,402,160 $2,572,598
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
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MSU Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31
1999 1998 1999 1998
$ $ $ $
<S> <C> <C> <C> <C>
REVENUES (479) 1,582 9,329 11,005
EXPENSES
Cost of revenues 2,587 934 6,895 7,245
Selling, general and
administrative and other 545,702 314,731 1,017,169 963,138
Depreciation 19,806 18,578 57,517 37,560
Amortisation of deferred financing costs 239,857 691,236
Registration expenses - - 32,533 -
Interest expense 10,450 57,693 106,283 172,860
Research and development 443,045 306,391 1,132,416 1,078,009
----------- ----------- ---------- ----------
TOTAL EXPENSES 1,021,590 938,184 2,352,813 2,950,049
----------- ----------- ---------- ----------
OPERATING LOSS (1,022,069) (936,602) (2,343,484) (2,939,044)
NON OPERATING INCOME
Interest income (27) - 2634 4,554
----------- ----------- ---------- ----------
NET LOSS
$(1,022,096) $(936,602) $(2,340,850) $(2,934,490)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.04) $(0.06) $(0.12) $(0.18)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 23,105,043 16,226,000 19,374,838 16,146,000
</TABLE>
See notes to condensed consolidated financial statements
4
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MSU Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31 March 31
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss (2,340,850) (2,934,490)
Adjustments to reconcile net loss to net
cash used in operating activities 985,412 1,087,366
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,355,438) (1,847,124)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (69,429) (83,639)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 720,270 662,728
Repayment of promissory notes in cash (373,439)
Issuance of common stock for cash 1,035,075 435,499
Costs directly related to financing activities (81,576)
------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,300,330 1,098,227
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES 46,892 (3,617)
------------- ------------
NET INCREASE (DECREASE) IN CASH (77,645) (836,153)
CASH AT BEGINNING OF PERIOD 166,040 859,238
------------- ------------
CASH AT END OF PERIOD $88,395 $23,085
============= ============
</TABLE>
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, 1998, the results of its operations for three and nine months ended
March 31, 1999 and 1998, and its cash flows for the nine months ended March 31,
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, 1998. The results of the operations for the three and nine
months ended March 31, 1999 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 nine months ended March 31, 1999, the shareholders' deficit reduced
by approximately $1,347,000. There was a net loss for the nine month period of
approximately $2,341,000. The cumulative translation adjustment increased by
approximately $46,000. There was an increase in the unrealized loss on the
Company's investment in American Interactive Media Inc.,('IM') of $1,094,000.
During the period, the Company sold 2,000,000 shares of its common stock in
private transactions for cash of $1,000,000; 95,857 shares were sold to Jeremy
Simpson, a director, for cash of $33,200; 322,500 shares were issued to W P
Holloway, a director, and the MSU Employee Trust, a trust in which Mr Holloway
has an interest as the settler and as a beneficiary, in consideration for their
forgiving loans to the Company of $161,250; 1,400,000 shares were issued to TXC
Corporation in consideration for their forgiving the loan outstanding and due of
$1,400,000; 2,568,418 shares were issued pursuant to conversion of $1,995,176
10% convertible promissory notes and outstanding interest thereon; 55,000 shares
were issued to Forte Communications Inc. in full and final settlement of an
amount claimed as due in respect of public relations and consulting services and
25,000 were issued to a consultant for services. In addition 2,500 shares were
issued at $0.75 upon exercise of a warrant previously granted.
6
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NOTE 3 - NEW CONVERTIBLE PROMISSORY NOTES
Through December 1998 and January 1999 the Company has issued new convertible
secured promissory notes. $605,000 of these notes are convertible at any time at
a conversion price of $3.00 for each $3.00 of promissory notes held. Conversion
to take place on or before December 2001. To the extent that the loan notes are
not converted they will be repayable at par in December 2001. Interest is due on
these loan notes at between 6% an 10% per annum and will be paid up to December
2001 through the immediate issuance of shares of common stock at a price of
between $0.72 and $0.75 per share.
In March 1999 the company issued $85,000 10% two year convertible secured
promissory Notes on which interest for the entire term is to be prepaid by the
issuance of 17,000 shares of common stock. The company has the right to prepay
the Notes in full at any time up to and including June 30, 2001. In the event
that the company makes such an offer, each noteholder will have the option to
convert the Note in whole or in part into a number of shares of common stock, to
be determined by dividing the dollar amount of the Note to be converted by $2.00
per share, with the balance of the Note, if any, to be paid in cash by the
company if the noteholder elects to convert less than the remaining principal
balance on the Note. After June 30, 2001, each noteholder will have the right to
convert, in whole or in part, the then outstanding balance remaining on his Note
into shares of the company's common stock. If at any time during the term of the
Notes the market value of the company's common stock equals or exceeds $4.00 per
share for a period of 20 consecutive days, the Notes will then automatically
convert into shares of the company's common stock at a rate of $4.00 per share.
The Notes will be partially secured by (i) 500,000 shares of common stock of
American Interactive Media Inc. held by the company, (ii) 3,000,000 shares of
the company's common stock owned by Wynford Peter Holloway (the chairman and
chief executive officer of the company) and the MSU Employee Trust; and (iii)
250,000 shares of the company's common stock held by W D Snowdon, a director and
the secretary of the company.
Since March 31 1999 a further $150,000 10% convertible secured promissory notes
have been issued on the same terms as above.
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.
7
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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 principally
for use in high volume 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 March 31, 1999 there was an accumulated deficit of
$9,181,612 and an unrealized loss in respect of its investment in AIM of
$1,790,000. 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 fiscal 1999 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
fiscal 1999 if anticipated revenues from licensing fees and royalties in respect
of sales of the proprietary television set top Internet Access devices,
development fees and royalties in respect of sales of the Envoy chip, or
royalties and conditional and forecasted purchase orders of customised
television set top Internet Access Devices are not realized. Such conditional
and forecasted purchase orders in respect of the television set top Internet
Access Devices assume, without limitation, approval of final production samples
by potential purchasers; acceptance by and demand for customised television set
top 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 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.
8
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During the nine month period ended March 31, 1999 significant software
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 television set top Internet Access
Device (recently renamed 'Web2u'). The Company is continuing to develop the
main component of the television set top Internet Access Device, 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 in fiscal 2000.
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 securities to and/or borrowings from third parties, to the extent that
such sources of capital are available to the company.
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 and nine months ended March 31, 1999 to the three and
nine months ended March 31, 1998
The Company has no customers to date that frequently and systematically purchase
its products or retains its services. Revenues for the three and nine months
ended March 31, 1999 decreased over the same periods of 1998 by $2,061 and
$1,676 respectively. 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
television set top Internet Access Devices, and the Envoy chip.
Costs of revenues for the three months ended March 31, 1999 increased over the
same period in 1998 by $1,653; and for the nine months ended 31 March 1999
decreased over the same period in 1998 by $350. 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 and nine months ended March 31, 1999 comparison with 1998 is not
meaningful.
9
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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, the television set top Internet Access Device and specific
research and development performed pursuant to development arrangements with
third parties. For the three months and nine months ended March 31, 1999
research and development expenses were $136,654 and $54,407 more than in the
corresponding periods in the previous year. As mentioned above, as the revenues
generated in the three and nine months ended March 31, 1999 were negligible,
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 and nine
months ended March 31, 1999 increased over the same period of 1998 by $230,971
and $54,031 respectively. The increase in the three and nine months ended March
31, 1999 is primarily due to the non-recurring costs of an external review of
the company's objectives and strategy, and to the consequent management
re-organisation, of approximately $250,000. 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 and nine months ended March 31, 1999 was
approximately $47,000 and $66,000 lower than in the corresponding periods for
the previous year as a significant proportion of the 10% Convertible Notes were
either repaid or converted in November and December 1998
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 and nine months ended March 31, 1999.
The company has received a late invoice for $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.
Liquidity and Capital resources
The Company has financed its operations through private sales of equity and debt
securities.
For the nine month period ended March 31, 1999 cash used in operating activities
of approximately $1,355,000 was primarily attributable to the Company's net loss
for the period of $2,341,000 which was funded in part by (i) an increase in
accounts payable and accrued liabilities of $542,000; and (ii) an increase in
the amounts owed by related parties of $80,000 which arose as a result of the
directors not taking salaries owed to them for the period. Cash flows from
investing activities of approximately $69,000 during such period related mainly
to the acquisition of computer equipment.
10
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Cash flows from financing activities of approximately $1,300,000 were mainly
attributable to issues of new convertible promissory notes of $690,000;
$1,035,000 from sales of common stock; less $374,000 which was used to repay
outstanding 10% convertible promissory notes and costs directly associated with
financing activities of approximately $82,000.
At March 31, 1999 the Company's principal source of liquidity was approximately
$88,000 in cash. Since March 31, 1999 additional liquidity has been provided
from the sale of a further $150,000 loan notes.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1999 will be insufficient to meet its cash needs
for working capital and capital expenditures for remainder of fiscal 1999. 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, 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.
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 any 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 effect 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 in the process of assessing the status of these entities' Year
2000 compliance.
11
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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 Forte to the Company. The action was
subsequently settled in January 1999 by the company agreeing to issue, to Forte,
55,000 shares of common stock for those services.
Item 2 - Changes in securities
In November 1998 the Company sold, in private transactions, 2,000,000 shares of
its common stock for cash of $1,000,000. In addition the acquirors of the shares
were granted warrants entitling them to subscribe for a further 1,000,000 shares
of common stock at $0.50 per share at any time up to October 2003.
In October 1998 Mr W P Holloway and the MSU Employee Trust (of which Mr Holloway
is the Settler and a beneficiary) acquired 332,500 shares of common stock in
exchange for forgiveness of a loan to the Company of $166,250. The conversion
price of $0.50 was the market price at the date the agreement to the conversion
was made.
In December 1998 Jeremy Simpson, a director, who had made a loan to the Company
of $33,200 in September 1998, exercised his right under the loan agreement to
convert the loan into 95,857 shares of common stock at the market price ruling
on the date of the loan (September 25, 1998). In addition, as further
consideration for the loan, Mr Simpson was granted an option to subscribe for a
further 105,857 shares of common stock at $0.35 per share at any time up to 24
September 2001.
Through the period ended March 31, 1999 $1,926,311 of the 10% convertible notes,
together with outstanding interest thereon, were converted into shares of common
stock at an exercise price of $0.75 each as a result of which a further
2,637,283 shares were issued in the nine month period ended 31 March, 1999.
In December 1998 1,400,000 shares were issued to TXC Corporation in
consideration for their forgiving the loan outstanding and due of $1,400,000.
In January 1999, 55,000 shares of common stock were issued to Forte
Communications Inc., in consideration for the settlement of their claim against
the company which is referred to in Item 1 above.
In January 1999, the company agreed to issue 25,000 to a consultant for services
rendered to the company.
In January 1999 2,500 shares of common stock were issued at $0.75 per share
pursuant to the exercise of a warrant
12
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Item 3- Defaults upon Senior Securities
None
Item 4 -Submission of Matters to a Vote of Security Holders
None
Item 5 -Other information
None
Item 6 -Exhibits and Reports on Form 8-K
None
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: May 14, 1999
/s/ R H Phillips, Vice President
(Principal Financial and Accounting Officer)
13
