more 10Q
MSU Corporation
Notes to Unaudited 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 of March 31, 2001, the results of its operations
for the three and nine months ended March 31, 2001 and 2000, and its cash flows
for the nine months ended March 31, 2001 and 2000.
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. 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 and nine months ended March 31, 2001 are not necessarily
indicative of the operating results that may be expected for the fiscal year
ending June 30, 2001.
NOTE 2 - SHAREHOLDERS' EQUITY/(DEFICIT)
During the nine months ended March 31, 2001, there was a decrease in
shareholders' equity of approximately $4,415,000. Net loss for the nine-month
period was approximately $5,979,000. The cumulative translation adjustment
increased by approximately $1,028,000 due to the change in the foreign exchange
rates. In addition a provision for inventory obsolescence was recorded in the
amount of $1.5 million during the third quarter.
NOTE 3 - LOSS PER COMMON SHARE
The basic and diluted net losses 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 anti-dilutive.
NOTE 4 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has continued to suffer recurring losses from operations that to date total
approximately $27,410,000. This factor, among others, may indicate the Company
will be unable to continue as a going concern for a reasonable period of time.
The accompanying consolidated financial statements do not include any
adjustments relating to the outcome of this uncertainty.
NOTE 5 - CONVERTIBLE NOTES
The Company has been advanced $2,034,764 under a Bridge Loan Convertible Note
Purchase Agreement (the "Agreement"), which is intended to fund approximately
$4.225 million in borrowings. The terms of the Agreement call for interest at
10% per annum with principal due, with respect to each individual investor, one
year from the effective date of the funding by such investor (the "Maturity
Date"). The Notes are convertible into Common Stock of the Company
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at the earlier of (i) the Company's next equity offering or (ii) the Maturity
Date, at a conversion price of $0.20 per share, subject to adjustment in certain
events. The Company has incurred approximately $718,000 of deferred financing
costs associated with this transaction.
NOTE 6 - RESTRUCTURING CHARGE
A restructuring charge of approximately $241,000 was recorded in the third
quarter for the restructuring of the UK operations, which is comprised of
involuntary termination benefits and legal fees associated with the
restructuring. In addition to the restructuring charges, inventory was stated at
approximately $357,500, net of a provision for obsolescence of $1,555,000 at
March 31, 2001.
NOTE 7 - OTHER INFORMATION
A winding up petition was filed against Web 2 U Limited pursuant to the
Insolvency Act of 1986 on April 3, 2001 by Eurodis HB Electronics Limited in the
High Court of Justice in the United Kingdom. A notice of support by another
creditor was filed in April 2001. Web 2 U Limited voluntarily petitioned the
High Court in London for an administration order in order to settle its current
outstanding liabilities with all creditors on an equitable basis. The order was
granted on May 15, 2001. No adjustments or accruals have been reflected in the
accompanying condensed consolidated financial statements related to the ultimate
outcome of this uncertainty.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of Business Operations
Forward Looking Statements
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO
THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE COMPANY'S BUSINESS, MANAGEMENT'S BELIEFS AND ASSUMPTIONS
MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," "LIKELY" AND VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS
EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE THOSE SET FORTH IN THIS SECTION UNDER "FACTORS AFFECTING
OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS
REPORT AS WELL AS THOSE NOTED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED JUNE 30, 2000 AND OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
The Company is principally engaged in the design and development of software and
hardware for Internet access devices. The focus of the Company during this
quarter was on the following:
1. The Company is in transition as its technology was lagging that of its
competition, and a new technology development effort was required.
2. A new management team was put in place to restructure the operations
and to manage the finances and technology development.
3. The Company is developing a new Internet access device to be used in
conjunction with a television, a monitor or a LCD.
4. Management is establishing strategic relationships for the design,
development and manufacturing of the new product.
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5. The Company is attempting to establish long-term partnerships with
companies in various markets who can leverage the technology developed
by the Company to improve their marketing performance and reach a
wider audience than they otherwise could.
During the three-month period ending March 31, 2001, sales of approximately
$150,000 were generated in Italy and India. In addition, the Company recognized
revenue of $150,000, which related to a deposit received in a prior period. It
is management's opinion that the amount is now considered earned revenue.
Throughout the quarter ended March 31, 2001, the Company continued the pursuit
of its partnership strategy and maintained its pursuit of commercial
opportunities, especially in the United States and Europe. As part of its
marketing strategy, the Company exhibited at CeBit 2001 in Hanover, Germany
during March. This exposure should support existing and future relationships
within the marketplace.
During the quarter ended March 31, 2001, the development of the Version 4
upgrade was discontinued in order to focus on the next generation product,
Version 5. In addition, management determined that the Version 2 and Version 3
inventories were obsolete. It is the opinion of management that the Version 2
and Version 3 product cannot be sold above cost due to performance issues. As a
result, a provision for obsolescence of approximately $1,555,000, 80% of the
value of the inventory, was recorded in cost of sales during the three-month
period ended March 31, 2001.
During the third quarter significant progress was made on the Company's next
version of its Internet access device, Version 5, which will be programmable and
easier to use. The Company believes the increase in processing speed and ease of
use should enhance the breadth of appeal of the product in more technically
developed markets.
In January 2001, the Board moved to establish an executive team presence in the
United States to re-focus the Company strategy and exploit technology. During
the quarter ended March 31, 2001, a number of management changes were approved.
Following the resignation of Darran Evans, effective April 1, 2001, as CEO of
Web 2 U Limited, Chris Green was made Managing Director of the Web 2 U Limited
subsidiary in March 2001. The following executives joined MSU in the third
quarter to successfully form the US management team:
D. Bruce Walter President and Chief Executive Officer
Raymond R. Dittrich Vice President, Sales & Marketing
Pritesh M. Patel Vice President and Chief Technology Officer
Patti J. Brown Vice President and Chief Financial Officer
These executives are located in Plano, Texas - the new worldwide headquarters
for MSU Corporation.
The new product strategy and an executive presence in the United States are
actions designed to improve the financial strength of the Company, enhance its
competitive position in the marketplace and position the Company for future
growth.
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