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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 December 31, 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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<S> <C>
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 [X] No [ ]
The number of shares of common stock of the Registrant outstanding as of
January 29, 1999 was 21,764,929 according to the Company's transfer agent.
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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 December 31, 1998 and June 30, 1998 3
Condensed Consolidated statements of Operations for the three and
six months ended December 31, 1998 and the three and six months ended
December 31, 1997 4
Condensed Consolidated statements of Cash Flows for the six months ended
December 31, 1998 and 1997 5
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)
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<CAPTION>
ASSETS
December 31 June 30
1998 1998
<S> <C> <C>
CURRENT ASSETS $ $
Cash and cash equivalents 56,516 166,040
Prepaid expenses and other 57,089 79,411
--------- ----------
TOTAL CURRENT ASSETS 113,605 245,451
EQUIPMENT, net of accumulated depreciation of $99,440 and $84,544
at December 31, 1998 and June 30, 1998 respectively 84,835 108,647
INVESTMENTS 2,187,500 2,218,500
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TOTAL ASSETS $ 2,385,940 $ 2,572,598
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
10% Convertible Notes 617,061 2,299,750
Shareholders' advances payable 55,378 1,570,980
Accounts payable and accrued liabilities 1,063,201 767,711
Related-party payables 76,172 7,681
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TOTAL CURRENT LIABILITIES 1,811,812 4,646,122
LONG TERM DEBT (Note 3) 150,000 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' FUNDS
Common stock, $0.01 par value; 50,000,000 shares authorized
22,154,261 and 16,590,237 shares issued and outstanding at
December 31, 1998 and June 30 1998 respectively 221,543 165,902
Additional paid-in capital 9,058,349 5,287,790
Cumulative translation adjustments 31,252 10,046
Net unrealized loss (727,500) 696,500)
Accumulated deficit (8,159,516) (6,840,762)
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TOTAL SHAREHOLDERS' FUNDS (DEFICIT) 424,128 (2,073,524)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' FUNDS $2,385,940 $ 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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<CAPTION>
Three months ended Six months ended
December 31 December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
$ $ $ $
REVENUES 7,250 8,719 9,808 9,423
EXPENSES
Cost of revenues 2,628 5,574 4,308 6,311
Selling, general and
administrative and other 263,141 341,700 471,467 648,408
Depreciation 25,003 10,571 37,711 18,982
Amortisation of deferred financing costs 239,856 451,379
Registration expenses -- -- 32,533 --
Interest expense 38,333 57,500 95,833 115,167
Research and development 411,112 429,848 689,371 771,618
------------ ------------ ------------ ------------
TOTAL EXPENSES 740,217 1,085,049 1,331,223 2,011,865
------------ ------------ ------------ ------------
OPERATING LOSS (732,967) (1,076,330) (1,321,415) (2,002,442)
NON OPERATING INCOME
Interest income 2,122 475 2,661 4,554
------------ ------------ ------------ ------------
NET LOSS $ (730,845) $ (1,075,855) $(1,318,754) $ (1,997,888)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.03) $ (0.09) $ (0.08) $ (0.12)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 18,429,233 16,131,000 17,509,735 16,078,000
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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>
Six months ended
December 31 December 31
1998 1997
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (1,318,754) (1,997,888)
Adjustments to reconcile net loss to net
cash used in operating activities 424,014 388,257
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NET CASH USED IN OPERATING ACTIVITIES (894,740) (1,609,631)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (13,899) (33,287)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 195,648 429,653
Repayment of promissory notes in cash (373,439)
Issuance of common stock for cash 1,033,200 361,250
Costs directly related to financing activities (77,500)
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 777,909 790,903
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EFFECT OF EXCHANGE RATE CHANGES 21,206 7,793
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NET INCREASE (DECREASE) IN CASH (109,524) (884,222)
CASH AT BEGINNING OF PERIOD 166,040 859,238
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CASH AT END OF PERIOD $56,516 $15,016
=========== ==========
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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
December 31, 1998, the results of its operations for three and six months ended
December 31, 1998 and 1997, and its cash flows for the six months ended December
31, 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 and six
months ended December 31, 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 six months ended December 31, 1998, there was an increase in
shareholders' funds of approximately $2,489,000 which had the effect of
eliminating the shareholders' deficit brought forward at June 30, 1998 of
approximately $2,074,000 and resulted in net shareholders' funds at December 31,
1998 of approximately $424,000.
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; and 1,745,667 shares were issued pursuant to conversion of
$1,309,250 10% convertible promissory notes.
There was a net loss for the six month period of approximately $1,318,000. The
cumulative translation adjustment increased by approximately $21,000. There was
an increase in the unrealized loss on the Company's investment in American
Interactive Media Inc.,(`AIM') of $31,000.
NOTE 3 -- NEW CONVERTIBLE PROMISSORY NOTES
Through December 1998 the Company has issued new 10% convertible promissory
notes. The 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 10%
per annum and will be paid up to December 2001 through the immediate issuance of
shares of common stock at a price of $0.75 per share. At December 31, 1998
$150,000 of such promissory notes were sold for cash.
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 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 December 31, 1998 there was an accumulated deficit of
$8,159,516 and an unrealized loss in respect of its investment in AIM of
$727,500. 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 third 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 third quarter of fiscal
1999 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 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
customized 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.
During the six month period ended December 31, 1998 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. 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 or in fiscal 2000.
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 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 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 organization to support its
anticipated operations activity, although it has no funds to address these
concerns presently.
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. 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.
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Results of Operations
Comparison of the three and six months ended December 31, 1998 to the three and
six months ended December 31, 1997
Revenues for the three months ended December 31, 1998 increased over the same
period of 1997 by $1,469, and for the six months ended December 31, 1998
decreased by $385. 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.
The Company has only limited customers to date that frequently and
systematically purchase its products or retains its services. The loss of any
one customer could have a material adverse effect on the Company's business.
Costs of revenues for the three and six months ended December 31, 1998 decreased
over the same periods in 1997 by $2,946 and $2,003 respectively. 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 six months ended December 31, 1998 a comparison
with 1997 is not meaningful.
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, and the Internet Access Device and specific research
and development performed pursuant to development arrangements with third
parties. For the three months and six months ended December 31, 1998
research and development expenses were $18,736 and $82,247 less than in the
corresponding periods in the previous year. As mentioned above, as the revenues
generated in the three and six months ended December 31, 1998 were negligible,
a 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 six
months ended December 31, 1998 decreased over the same period of 1997 by $78,559
and $176,941 respectively. The decrease in the three and six months ended
December 31, 1998 is primarily due to a reduction in personnel, marketing and
promotional costs in these periods 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 both the three and six months ended December 31, 1998 was
approximately $20,000 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
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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 six months ended December 31, 1998.
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 six month period ended December 31, 1998 cash used in operating
activities of approximately $895,000 was attributable to the Company's net loss
for the period of $1,319,000 which was funded in part by (i) an increase in
accounts payable and accrued liabilities of $295,000; and (ii) an increase in
the amounts owed by related parties of $69,000 which arose as a result of the
directors not taking salaries owed to them for the period. Cash flows from
investing activities approximately $14,000 during such period related mainly to
the acquisition of computer equipment.
Cash flows from financing activities of approximately $777,000 were attributable
to an issue of new convertible notes of $150,000; $1,033,200 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
$77,500.
At December 31, 1998 the Company's principal source of liquidity was
approximately $56,000 in cash.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1999 may 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 properly
utilize 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 utilize 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 a material 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.
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
On December 15, 1997 an action was commenced in New York State Supreme Court,
New York County, by Forte Communications, Inc., ("Forte") alleging
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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, 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 December 31, 1998 $1,309,250 of the 10% convertible
notes were converted into shares of common stock at an exercise price of $0.75
each as a result of which a further 1,745,667 shares were issued in the period
ended 31 December 1998.
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.
Item 3 -- Defaults upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other information
Through December 1998 and January 1999 the Company has issued new 10%
convertible promissory notes. The 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 10% per annum and will be paid up to December 2001
through the immediate issuance of shares of common stock at a price of $0.75
per share. At December 31, 1999 $150,000 of such promissory notes were sold
for cash.
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Item 6 -- Exhibits and Reports on Form 8-K
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 February 1, 1999
/s/ R.H. Phillips
R H Phillips, Vice President
(Principal Financial and Accounting Officer)
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<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> 3-MOS
<FISCAL-YEAR-END> JUN-06-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 56,516
<SECURITIES> 2,187,500
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,606
<PP&E> 84,835
<DEPRECIATION> 99,440
<TOTAL-ASSETS> 2,385,940
<CURRENT-LIABILITIES> 1,811,812
<BONDS> 150,000
<COMMON> 221,543
0
0
<OTHER-SE> (8,855,764)
<TOTAL-LIABILITY-AND-EQUITY> 2,385,940
<SALES> 0
<TOTAL-REVENUES> 7,250
<CGS> 0
<TOTAL-COSTS> 290,772
<OTHER-EXPENSES> 411,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,333
<INCOME-PRETAX> (730,845)
<INCOME-TAX> 0
<INCOME-CONTINUING> (730,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (730,845)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
