<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, 2000
[ ] 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
November 15, 2000 was 29,074,051 according to the Company's transfer agent.
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Form 10-Q INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1 Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as at September 30, 2000 and June 30, 2000 3
Unaudited Condensed Consolidated Statements of Operations for the three months ended
Unaudited September 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-10
PART II - 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>
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PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
MSU Corporation
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30 June 30
2000 2000
<S> <C> <C>
CURRENT ASSETS $ $
Cash and cash equivalents 1,605,805 1,990,207
Accounts receivable 167,500 345,363
Inventory 1,208,163 1,166,347
Prepaid expenses and other 236,701 468,143
---------- ----------
TOTAL CURRENT ASSETS 3,218,169 3,970,060
EQUIPMENT, net of accumulated depreciation of $237,541 and
$225,645 at September, 2000 and June 30, 2000 respectively 165,988 155,884
INVESTMENTS 218,981 218,981
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TOTAL ASSETS $3,603,138 $4,344,925
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Facility 131,221 18,835
Current portion of debt 825,000 825,000
Accounts payable and accrued liabilities 1,640,522 1,691,095
Related-party notes, advances and payables 221,400 125,140
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TOTAL CURRENT LIABILITIES 2,818,143 2,660,070
LONG TERM DEBT 505,000 505,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY/(DEFICIT)
Common stock, $0.01 par value; 50,000,000 shares authorized
29,074,051 and 29,051,202 shares issued and outstanding as
at September, 2000 and June 30, 2000 respectively 290,740 290,512
Additional paid-in capital 22,112,195 22,076,718
Stock subscriptions receivable (145,000) (145,000)
Accumulated other comprehensive income 580,914 389,207
Accumulated deficit (22,558,854) (21,431,582)
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TOTAL SHAREHOLDERS' EQUITY 279,995 1,179,855
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,603,138 $4,344,925
========== ==========
</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
September
2000 1999
$ $
<S> <C> <C>
REVENUES 821,179 505
EXPENSES
Cost of revenues 764,720 300
Selling, general and
administrative and other 751,591 355,819
Depreciation 17,971 21,211
Interest expense 34,478 44,201
Research and development 380,800 507,984
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TOTAL EXPENSES 1,949,560 929,515
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OPERATING LOSS (1,128,381) (929,010)
NON OPERATING INCOME
Interest income 1,109 20,198
---------- --------
TOTAL NON-OPERATING
INCOME (EXPENSE) 1,109 20,198
---------- --------
NET LOSS $(1,127,272) $(908,812)
========== ========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (0.04) $(0.04)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 29,066,435 25,376,626
</TABLE>
See notes to condensed consolidated financial statements
4
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MSU Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30 September 30
2000 1999
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (1,127,272) (908,812)
Adjustments to reconcile net loss to net
cash used in operating activities 482,975 (157,267)
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NET CASH USED IN OPERATING ACTIVITIES (644,297) (1,066,079)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) 28,073 (52,290)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party borrowings 96,260 -
---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 96,260 -
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES 191,708 58,060
---------- ----------
NET DECREASE IN CASH (384,402) (1,060,309)
CASH AT BEGINNING OF PERIOD 1,990,207 2,604,504
---------- ----------
CASH AT END OF PERIOD $1,605,805 $1,544,195
========== ==========
</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
(Collectively the "Company") as at September 30, 2000, the results of its
operations for the three months ended September 30, 2000 and 1999, and its cash
flows for the three months ended September 30, 2000 and 1999.
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, 2000. The results of the operations for the three months
ended September 30, 2000 are not necessarily indicative of the operating results
that may be expected for the fiscal year ending June 30, 2001.
NOTE 2 - SHAREHOLDERS' EQUITY
During the three months ended September 30, 2000, there was a decrease in
shareholders' equity of approximately $900,000. Net loss for the three-month
period was $1,127,000 and the cumulative translation adjustment increased by
approximately $192,000.
During the three month period ended September 30, 2000, the Company issued
22,849 shares of its common stock in lieu of interest payable.
NOTE 3 - LOSS PER COMMON SHARE
The basic and diluted net loss per common share are computed based upon the
weighted average of the shares outstanding during the period. Dilutive net loss
per common share is the same as basic net loss per common share since the
inclusion of all potentially dilutive common shares that would be issuable upon
the exercise of outstanding stock options and warrants or upon the conversion of
convertible debt would be antidilutive.
6
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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, Web 2 U Limited and MSU Operations (US) Inc. All significant
inter-company accounts and transactions 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 software, 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 focus of the
Company at this moment of time is on the development of the Set Top Internet
Access Device ("herein referred to as IAD") to be used in conjunction with
television and telephones.
During the three month period ended September 30, 2000, significant software and
hardware modifications to the IAD were completed and the Company has commenced
production of Version 3 of the IAD through Flextronics International Limited
("Flextronics") whilst continuing production of Version 2 of the IAD at Thakral.
The Company is continuing to develop improved software, which will provide
enhanced Internet features.
During the quarter the Company made significant progress in pursuing its
partnership strategy in various markets. In July 2000 an agreement was signed
with Millennium Telecom Stores SA of Greece to distribute Web2u's technology
within markets in South East Europe, including Bulgaria and Romania as well as
Greece itself. Also in July 2000 an agreement was reached with Samuelson
Corporation of Spain to exploit the Spanish market. These agreements follow
similar agreements established in India, Australia and Africa.
As mentioned, the Company also announced the launch of Version 3 of its internet
access system. The new version boasts improved download times following the
introduction of the Company's new proprietary chip, ISP3. Additionally the new
version has enhanced performance provided by a doubling of memory capacity, RGB
Video Output and improved software including internet relay chat. The new
product version also benefits from a more compact and attractive design using
injection moulded plastics.
The new version of the box began to be manufactured during the quarter ended
September 30, 2000 by Flextronics of Hamilton, UK. Flextronics is a leading
provider in electronic manufacturing services to OEM's in communication,
networking, computer, medical and consumer markets. The Company believes that
the arrangement with Flextronics provides it with a quality-oriented
manufacturing partner whose global network will facilitate a significant growth
in production
7
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Risks
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, 2000 there was an accumulated deficit of
$22,558,854. Additionally the Company has had recurring negative cash flows from
operations.
The Company expects that it is likely to incur net losses into the second
quarter of fiscal 2001, 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 statements are forward looking statements that involve risks and
uncertainties. The Company is likely to incur net losses beyond the second
quarter of fiscal 2001 if anticipated revenues from license fees, royalties and
conditional and forecasted purchase orders of customised IAD's are not realized.
Such conditional and forecasted purchase orders in respect of the IAD assume,
without limitation, approval of final production samples by potential
purchasers; acceptance by and demand for customised IAD 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 2001. The foregoing factors may obviously raise doubt about the
Company's ability to continue as a going concern without sufficient funds to
meet its cash requirements.
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 has only recently begun to develop, are
rapidly evolving and are highly competitive, with many competitors having
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 guarantees that the Company will be successful in
addressing any of the foregoing risks and that it will be successful in
implementing its strategy.
8
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Results of Operations
Comparison of the three months ended September 30, 2000 to the three months
ended September 30, 1999.
Revenues in the three months ended September 30, 2000 were approximately
$821,000; the Revenues for the three months ended September 30, 1999 were
negligible.
Sales in the three months ended September 30, 2000 were to four customers, based
in Australia, India, Greece and the United Kingdom.
Revenues stated at the end of September relate only to the selling price of the
IAD. The Company expects in future to report on going revenues relating to these
sales. The sales reported in the three months ended September 30, 2000 include
the first sales relating to Version 3 of the IAD.
Research and development expenses generally consist of expenditures related to
the Company's development of its software and prototype products. For the three
months ended September 30, 2000 research and development expenses decreased by
approximately $127,000 from approximately $508,000 in the corresponding period
in 1999. The Company continues to expend considerable resources in research and
development of the IAD and associated software. Generally 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. The Company has been focussed on the development of
`Version 4' of its IAD while continuing to develop `Version 3' software
applications. Version 4 is now in the prototype stage and will begin to be
produced commercially during next year. Additionally, the Company will continue
to develop its proprietary software. The nature of the IAD enables software
downloads to be provided to customers upon release.
Selling, general and administrative and other expenses for the three months
ended September 30, 2000 increased by approximately $356,000 over the same
period of 1999. The increase in the three months ended September 30, 2000 is
primarily due to an increase in personnel, marketing and promotional costs in
this period and the movement in the exchange rates between US Dollars and
Sterling and the effect that this has on the sterling assets and liabilities.
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, occupancy costs and professional fees. In general terms the
Company continues to develop a structured and professional sales and marketing
framework to exploit the current and future products. Investment in this area is
likely to increase during the next year.
Interest expense for the three months ended September 30, 2000 decreased by
approximately $10,000 from $44,000 in the corresponding period in 1999. Interest
expense in the current year represents interest payable on promissory notes
totalling $1,330,000 and the bank overdraft.
9
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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, 2000 cash used in operating
activities was approximately $644,000. Cash flows used in investing activities
of approximately $28,000 during such period related mainly to the acquisition of
computer equipment.
At September 30, 2000 the Company's principal source of liquidity was
approximately $1,606,000 in cash of which $1,500,000 is deposited as collateral
for a standby letter of credit in favour of Flextronics.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 2001 will be insufficient to meet its cash needs
for working capital and capital expenditures for remainder of fiscal 2001. 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.
10
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in securities
For the three-month period ended September 30, 2000 the Company issued 22,849
shares of its common stock in consideration for interest due on certain
promissory notes.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
Commencing in September 1999, holders of the majority of the Company's issued
and outstanding shares of common stock voted by written consent to either amend
the Company's Certificate of Incorporation to change the name of the Company to
Web2u, Inc., or, if this was not possible, to re register the Company with this
name in the State of Delaware
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 November 15, 2000
R H Phillips, Vice President
(Principal Financial and Accounting Officer)
11
