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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 33-28622-A
MSU CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 22-274288
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(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
ELDER HOUSE, 526-528 ELDER GATE, CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
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(Address of Principal Executive Offices, Including ZIP Code)
Registrant's Telephone Number, Including Area Code: 011 441 908 232100
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the 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 that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. N/A
As of October 9, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to the average bid and
ask prices for such stock as reported by Bloomberg Financial, Inc. was
$49,491,462 (for purposes of calculating this amount, only directors, officers,
and beneficial owners of 5% or more of the capital stock of the Registrant have
been deemed affiliates).
The number of shares of common stock of the Registrant outstanding as of
October 9, 1996 was 15,509,722 according to the Company's transfer agent. The
Company's internal records indicate that there were 15,534,722 shares of its
common stock outstanding as of October 9, 1996. After significant due
diligence, the Company has been unable to account for the 25,000 share
discrepancy.
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FORM 10-K INDEX
PART I
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 12
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . 19
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . 29
</TABLE>
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
MSU Corporation, formerly Capital Acquisition Company, was
incorporated in Florida in 1986. MSU Corporation conducted no substantive
business until all of the outstanding shares of MSU Public Limited Company
("MSU PLC") were exchanged for Capital Acquisition Company shares in October
1994 (the Exchange"). The Exchange was treated for financial reporting
purposes as a reverse acquisition, as if MSU PLC recapitalized its common stock
and then issued shares of common stock (equal to such number of shares which
represented the then outstanding shares of Capital Acquisition Company) for
costs representing the then capital deficiency of Capital Acquisition Company.
MSU PLC, an England and Wales company formed under the Companies Act of 1985,
in turn owns all of the outstanding shares of MSU (UK) Limited ("MSU Ltd."), an
England and Wales company formed under the Companies Act of 1985. MSU Ltd. was
formed in March 1991 and commenced operations in March 1992. MSU Corporation's
business is based in the United Kingdom and is conducted almost exclusively by
MSU Ltd., its second tier subsidiary. Unless the context otherwise requires,
references in this Annual Report on Form 10-K to the "Company" refer to MSU
Corporation, MSU PLC and MSU Ltd. Historical financial information for periods
prior to the Exchange has been presented as that of MSU Corporation, as if MSU
PLC and MSU Ltd. were owned by MSU Corporation during such periods. Unless
otherwise stated, the information contained in this Annual Report on Form 10-K
is as of November 15, 1996.
EXCHANGE RATES
MSU PLC and MSU Ltd. conduct a significant amount of their operations
in pounds sterling. References to "$" in this Annual Report on Form 10-K are
to U.S. dollars and in many instances represent translations of pounds sterling
into dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such dollar
amounts. Unless otherwise stated, the translations of pounds sterling into
dollars have been made at the average rate for the year indicated. See Notes
to Consolidated Financial Statements for rates used by the Company in the
preparation of its consolidated financial statements included elsewhere herein.
The following table sets forth, for the periods indicated, certain information
concerning the rates of pounds sterling per dollar:
<TABLE>
<CAPTION>
Fiscal Year Ended At End of Average
June 30 Period Rate(1) High(2) Low(2)
- - ---------------------- --------- ------- ------- ------
<S> <C> <C> <C> <C>
1992 .52 .56 .59 .52
1993 .67 .63 .69 .50
1994 .65 .67 .68 .65
1995 .63 .63 .65 .61
1996 .65 .65 .64 .63
1997 (through October 31, 1996) .61 .63 .64 .61
</TABLE>
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(1) Represents the average of the rates on the last day of each month
during the relevant period.
(2) Represents the highest and lowest rates used in the average rate
calculation.
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GENERAL OVERVIEW
The Company designs and develops computer chips and chipsets
principally for use in consumer electronics products. Most of the Company's
chips incorporate multiple functions, eliminating the need for several or more
chips and permitting a more efficient use of printed circuit board design, a
diminished risk of malfunction and error and a lower cost.
The Company also develops prototype electronic products with
particular emphasis on prototype consumer electronic products. The prototype
electronic products developed by the Company are almost exclusively based on
the Company's proprietary chips and chipsets. Such prototype products are used
for demonstration and marketing purposes in connection with presentations
before consumer electronics manufacturers and others with an interest in the
Company's chip technology and products.
The Company has, to date, developed numerous consumer electronic
products pursuant to development contracts or arrangements with manufacturers
based in China, Taiwan, Germany, the United States, Hong Kong and the United
Kingdom. The contracts typically have provided for the payment of development
fees plus royalties based on sales of products utilizing the Company's chips or
chipsets. To date, no products developed pursuant to such development
contracts have been sold and no royalties have been paid. In most instances,
the Company has no control over a third party's manufacturing, marketing or
purchase decisions and, accordingly, there can be no assurance that any
developed products will be manufactured, marketed or sold. In fiscal 1996, the
Company's revenue was derived from product development (87.8% of total revenue)
and support services (12.2% of total revenue).
In October 1993, MSU Ltd. entered into several agreements with IBM
pertaining to the development of software and hardware for consumer multimedia
units using the Slipstream ASIC Chip - version 4.5. See "BUSINESS-Chip
Technology." In April 1995, after all development projects contemplated by the
agreements had been completed, IBM advised the Company that it had determined
not to pursue, at that time, the consumer multimedia product market and that it
would not announce prior to July 1995 a product using the intellectual property
developed by the Company in conjunction with and licensed to IBM. IBM retains
a non-exclusive license to use such intellectual property. Additionally, any
major enhancements to and replacements of such intellectual property as well as
any other technology developed by the Company must be offered first to IBM in
writing. The Company has offered its prototype Internet Access Device and
related ISP Chip technology to IBM and IBM has advised the Company of its
rejection of such offer. The Company has not yet offered the Envoy Chip or the
Wynpeg Chipset to IBM.
CHIP TECHNOLOGY
Slipstream Application Specific Integrated Circuit ("Slipstream ASIC
Chip"). The Slipstream(TM) ASIC Chip is a multi-function chip which provides
graphics capability and high quality sound for multimedia systems. The
Slipstream ASIC Chip incorporates (i) a video generator, that generates the
video signal from digital information; (ii) a graphics accelerator, that
controls memory and access to digital information allowing the manipulation and
control of images; and (iii) digital signal processors, that allow the
compression and decompression of data from CDs permitting the storage of
massive amounts of data necessary for the storage and retrieval of images.
These functions are typically achieved through the use of a group of chips in
series.
Computer image creation begins with the creation of pixels. Pixels
are individual picture elements that make up a video display such as a computer
or television screen. Each pixel contains information that is defined by the
signal or program, such as a movie or video game, that it is displaying. The
more information that may be held in each unit, the sharper and more defined
the image. As computer hardware is able to process the information in a signal
or program with greater speed, the information projected in each pixel may be
changed more quickly, creating an improved illusion of motion, animation and
shading of images on the computer screen.
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The Slipstream ASIC Chip generates and processes the pixel information
necessary for image creation and movement. Because conventional computer discs
and storage devices are unable to store efficiently the additional amount of
data necessary in each pixel and within each time frame to generate images
adequately, the Company's Slipstream ASIC Chip makes use of CD technology and
uses a CD interface and a graphics accelerator for enhanced retrieval. The
Slipstream ASIC Chip further enhances retrieval from the CD using a digital
signal processor that interfaces to a digital-to-analog converter and makes use
of the advanced CD compression techniques. The signals are compressed to allow
for more effective and efficient storage. The Slipstream ASIC Chip also
includes algorithms which eliminate unimportant or redundant data so that
storage space is not wasted.
The Slipstream ASIC Chip-version 4.5 is available in silicon. The
Company's prototype Generic (Video) CD Player is based upon the Slipstream ASIC
Chip. See "BUSINESS-Prototype Products."
Internet Services Processor ("ISP Chip"). The ISP Chip is a version
of the Slipstream ASIC Chip designed for use in Internet products such as the
Company's prototype Consumer Internet Access Device. See "BUSINESS-Prototype
Products." Prior prototype Consumer Internet Access Devices used the
Slipstream ASIC Chip. The ISP Chip provides more Internet related features (at
a lower cost) than the Slipstream ASIC Chip. The ISP Chip is a graphics and
sound processor which also provides interfacing and logic for the CPU and
system memory.
The ISP Chip is available in silicon. The Company is in the late
stages of development of an ISP Chip-version 2 and in the early stages of
development of an ISP Chip-version 3. Such ISP Chips are intended to provide
enhanced Internet features and capabilities.
CD Services Chip ("Envoy Chip"). The Envoy(TM) Chip reduces the
complexity in compact disc drive systems and the cost of interfacing to compact
disc drives in both PC's and consumer CD products. The Envoy Chip replaces six
chips typically used within a CD mechanism. The three principal electronic
components of a compact disc player are the servo processor, signal processor
and micro controller. The Envoy Chip provides the servo, signal and control
functions. The Envoy Chip is also suitable for CD ROM applications as it can
replace principal components along the data path.
The Envoy Chip is available in silicon.
M-PEG Chipset ("Wynpeg Chipset"). The Wynpeg(TM) Chipset incorporates
the Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group. M-PEG is an
international standards body that has defined a worldwide standard for the
compression of video data called Philips White Book Video CD M-PEG Standard.
The Company's Wynpeg Chipset is capable of decompressing digital video signals
in accordance with such standard. The Company intends to develop a version 2
of the Wynpeg Chipset at some unspecified time in the future. There can be no
assurance that the development of such Wynpeg Chipset-version 2 will ever be
commenced or completed.
PROTOTYPE PRODUCTS
Generic (Video) CD Player. The prototype Generic CD Player, based on
the Slipstream ASIC Chip, is a multimedia product capable of use as a video CD
player, audio CD player, and for photo CD and Karaoke. This CD based
multimedia product consists of a conventional CD player equipped with an
internal audio amplifier; a Karaoke function which has the ability to run
stereo soundtrack and produce graphics on the screen with overlaying of text
for lyrics; and a photo CD compatible with standard photo CDs and capable of
supporting Kodak multi-session photo CDs. The prototype Generic CD Player
operates with a standard television set.
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The Company has utilized the prototype Generic CD Player for
demonstration purposes only. Specific products were designed and developed in
connection with development contracts with two manufacturers in Taiwan and
China, respectively. To date, no products have been manufactured for sale.
Consumer Internet Access Device. The Company's prototype Consumer
Internet Access Device (the "Internet Access Device") is a low cost, easy to
use, small box-like device which provides access to the Internet and on-line
services via a telephone connection, standard television set and a hand held
remote control unit. A keyboard is available at an additional cost to the
consumer. Access to the Internet and on-line services is
conventionally via PCs, which represents both a cost and technology barrier to
many consumers. Prior prototype Internet Access Devices were based on the
Company's Slipstream ASIC Chip; however, the most recent prototype Internet
Access Device is based on the ISP Chip. It is anticipated that future
generations of the prototype Internet Access Device will be based on the ISP
Chip-version 2, the ISP Chip-version 3 or future generations and derivations.
The Company has developed and is continuing to modify the software
contained in its prototype Internet Access Device. The software is stored on
memory chips and hard coded in the prototype Internet Access Device. The
software enables users to interact with the Internet via its e-mail and browser
functions. The Company recently made an initial release of its software for
use with production samples of its Internet Access Device. The Company
anticipates a significant release of its software in November 1996 for use in
customized Internet Access Devices anticipated to be manufactured by Mitac,
Inc., a Taiwanese company. There can be no assurance that a significant
release of the Company's software will be made or that the customized Internet
Access Devices will be manufactured by Mitac, Inc. Although there can be no
assurance, it is anticipated that software updates and "bug" fixes to Internet
Access Devices sold and in use will be accomplished by downloading software via
the Internet or from a licensed on-line or Internet service provider. Although
steps will be taken by the Company to protect its software from unauthorized
modifications, there can be no assurance that unauthorized modifications will
not occur.
The Company's ISP Chip prototype Internet Access Device has been
demonstrated internationally to manufacturers and others. The Company has
experienced significant interest in this prototype Internet Access Device and
related technology. The Company has entered into agreements with American
Interactive Media, Inc. and Mitac, Inc. for the development, manufacture and
sale of customized Internet Access Devices. It is anticipated that Mitac, Inc.
will manufacture for sale all customized Internet Access Devices developed
pursuant to both the American Interactive Media, Inc. and Mitac, Inc.
agreements. In late October 1996, American Interactive Media, Inc. placed an
initial order for 5,000 customized Internet Access Devices. The Company
anticipates that shipment of these products will commence in November 1996. In
addition, the Company has received non-binding conditional orders for
customized Internet Access Devices from two companies. Such orders are subject
to the approval of final production samples which were made available on
October 8, 1996. No final production samples have been approved yet; however,
the Company has received no indication of any material problems with such
samples. There can be no assurance that the final production samples will be
approved by these two companies or any other third parties; that orders, once
placed by a third party, will not be cancelled; or that any products will be
manufactured or sold to any third party.
Consumer PC. The Consumer PC is a CD-based consumer product
compatible with most PC software and providing Internet connection capability
but operating via a standard television set. The Consumer PC resembles a VCR
or CD player in both appearance and operation but serves in many capacities
including as a video CD player and a PC CD ROM software disc player. The
Consumer PC is not currently based on chip technology, but is based on system
software designed by the Company. The Company plans to design a custom chip to
incorporate the key features of the Consumer PC in the near future. The
Company has participated in a Consumer PC product development arrangement with
a German manufacturer. Development of the product has been completed, however,
to date, no products have been manufactured for sale.
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SUPPORT SERVICES
The Company has provided and will continue to provide consulting and
other development services pursuant to contracts entered into with consumer
electronics manufacturers and others. Company employees assist in, among other
matters, identifying trends in consumer preferences and generating new product
ideas. The Company is involved in the development of software compatible with
certain of its products and intends to offer technical support to consumers of
its products and hardware and software engineers; however, there can be no
assurance such activities will result in profits to the Company. In fiscal
1996, 12.2% of total revenue was attributable to support services.
SUPPLY AND MANUFACTURING
American Microsystems, Inc., a semiconductor manufacturer, has
historically manufactured the Slip-stream ASIC Chip-version 4.5 and the ISP
Chip. Prior versions of the Slipstream ASIC Chip were manufactured by Toshiba
and Es2. It is anticipated that United Micro Corporation, a Taiwanese chip
manufacturer, will manufacture a majority of the ISP Chip-version 2 to be used
in the customized Internet Access Devices proposed to be manufactured by Mitac,
Inc. The Company has no written agreement with either American Microsystems,
Inc. or United Micro Corporation. See "BUSINESS--Prototype Products--Consumer
Internet Access Device." To date, the Company has not experienced any
significant problems obtaining the requisite number of chips for its operations
although its demands have been relatively small. The Company has commenced
discussions with additional manufacturers for the production of additional
chips and chipsets should the need arise. Should demand for the Company's
chips or chipsets increase significantly, there can be no assurance that the
Company will be able to meet such demand through American Microsystems, Inc.,
United Micro Corporation or other manufacturers, which could have a material
adverse effect on the Company. Arrangements with new manufacturers could
result in substantial delays, engineering charges and additional expense.
Mitac, Inc. is the only present manufacturer of customized Internet
Access Devices using the Company's chips and software. Should Mitac, Inc.
cease to manufacture the customized Internet Access Devices, the Company would
be adversely affected.
RESEARCH AND DEVELOPMENT
Since 1992, the Company has been engaged in developing its own chips
and prototype products. It has done so independently and pursuant to research
and development contracts. Research is conducted at the Company's facility
located in Milton Keynes, England through engineers and programmers employed by
it as well as independent contractors. During the fiscal years ended June 30,
1994, 1995 and 1996, the Company expended approximately $1.7 million, $1.3
million and $1.2 million, respectively, on unreimbursed research and
development (which excludes all overhead costs other than employee, independent
contractor, development tool and prototyping cost), all of which has been
expensed. Approximately 42%, 56% and 28% of the amounts expended on research
and development in the fiscal years ended June 30, 1994, 1995 and 1996,
respectively, were customer sponsored.
EMPLOYEES
The Company has 13 employees, including three executive officers, two
business development personnel, six technical personnel and one administrator.
The Company also uses independent contractors for certain research and
development matters.
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MARKETING
The Company markets its chips and prototype electronic products
through exhibitions at trade shows and direct selling to OEMs and potential
licensees of its technologies. The Company targets corporations in the
consumer electronic, multimedia, computer hardware and software industries.
RISK FACTORS
The following are risk factors in addition to those set forth
elsewhere in this Annual Report on Form 10-K, including those risk factors set
forth elsewhere in this "Business" section and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Significant Operating Losses; Accumulated Deficit; Uncertainty of
Future Operating Results. The Company has achieved only limited revenue,
primarily in connection with development contracts, and has incurred
significant losses each year since the inception of its operations. For the
fiscal years ended June 30, 1994, June 30, 1995, and June 30, 1996, the Company
incurred net losses of approximately $1,365,000, $878,000, and $1,397,000,
respectively, resulting in an accumulated deficit of approximately $5,026,000
and a total shareholders' deficit of approximately $1,816,000 at June 30, 1996.
There is no assurance that the chips or other products developed by the Company
will be marketed or sold, or that, if sold, such products will achieve consumer
acceptance. There can be no assurance that the Company's operations will ever
be profitable or that the Company will be able to continue as a going concern.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
No Sales of Products That Employ Company's Chips; Dependence on Third
Parties; Adequacy of Insurance. Products that incorporate the Company's chips
or chipsets have only been manufactured in pre-production quantities pursuant
to development contracts and arrangements. There can be no assurance that any
of these products will ever be manufactured, marketed and sold to the public.
In connection with the manufacture and sale of any such products, the Company
will be dependent upon the manufacturing, marketing, financial, technological
and other abilities of third parties with which it has established or is
attempting to establish commercial relations to develop, manufacture and market
products using the Company's chips or chipsets. If the Company is unable to
establish the requisite third party commercial relations, products using its
chips or chipsets may never be successfully manufactured, marketed or sold. If
any such third party fails to commit sufficient resources to complete the
proper development, manufacturing or marketing of such products, the Company's
reputation, business relationships, and product acceptance could be adversely
affected. In addition, the Company will have little, if any, control over the
timing or methods employed in the manufacture, marketing or sale of such
products. Accordingly, if any products using the Company's chips or chipsets
perform poorly, are inferior in quality or do not achieve market success, poor
performance may be associated with the Company's chips and chipsets. The
Company is currently reviewing with its insurance representatives the adequacy
of its insurance coverage in light of recent agreements and related anticipated
product purchases and sales. The Company believes its current coverage is
inadequate but feels it will be able to obtain adequate coverage, although
there can be no assurance.
Rapid Technological Changes. The multimedia, consumer electronics,
computer and hardware and software industries are characterized by rapidly
changing technology, evolving industry standards and frequent introductions of
new products. The broad array of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions until one or more
of such technologies gain widespread acceptance. The Company's success will
depend upon its ability to anticipate such technological changes, adapt its
products, introduce competitive products with features that meet changing
customer requirements, and remain competitive in terms of price and product
performance, and there can be no assurance that the Company will be able to
meet any of these demands. Any material failure of the Company to meet any of
these demands would adversely affect the use and acceptance of the Company's
chips and chipsets and the introduction and sale of products using the
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Company's chips or chipsets, and would increase the likelihood that competitive
products will become broadly accepted. There can be no assurance that the
Company will successfully anticipate technological changes or that products
developed by others will not render obsolete or commercially unviable the
Company's chips and chipsets and the products using such chips and chipsets.
Service Provider. The Company has no binding agreement with an
Internet or on-line service provider. If customized Internet Access Devices
using the Company's ISP Chip are ultimately manufactured and sold to consumers,
arrangements with service providers will be required to ensure that a direct
connection between a customized Internet Access Device and the Internet can be
effected. Such arrangements will be between the service provider and either
the Company, the manufacturer or purchasers of the Internet Access Devices.
There can be no assurance that satisfactory arrangements will be entered into
with one or more service providers or that the Company will enter into any
agreement directly with a service provider, which the Company believes would be
preferable. A service provider may agree to use the Company developed
software, as is, or with minimal modifications; to jointly develop new software
with the Company, or to develop its own software. It is possible that a
service provider could elect to use the Company's software and retain the
services of the Company for software, technical and development support. It is
also possible that a service provider will purchase the Internet Access Devices
from the Company, the manufacturer or other party, develop and incorporate its
own software and sell the Internet Access Devices to consumers at a
significantly lower price. Larger service providers will likely prefer to have
less dependence on the Company and others. There can be no assurance that a
service provider will agree to use the Company's software and retain the
Company's services for support which would likely result in greater potential
revenues to the Company.
Dependence on Key Personnel and Attraction of Qualified Personnel.
The Company is highly dependent on the experience of certain key personnel
including certain of its executive officers and computer programmers, designers
and engineers who contribute to the development and production of the Company's
chips, chipsets and other products. If the Company were to lose the services
of one or more of these key employees, before a qualified replacement could be
obtained, its business could be materially adversely affected. The Company has
entered into an employment agreements with Messrs. Holloway and Hall which
restricts certain of their activities for one year after departure from the
Company. See "EXECUTIVE COMPENSATION -- Employment Agreements." The Company
has no "key man" life insurance on any of its key personnel. The multimedia,
consumer electronics and computer industries are characterized by a high level
of employee mobility and aggressive recruiting of skilled personnel. There can
be no assurance that the Company's current employees will continue to work for
the Company or that the Company will be able to obtain the services of
additional personnel, whether for replacement purposes or for new positions,
necessary for the Company's growth and success.
Competition. The market for multimedia, consumer electronics,
computer and Internet products is highly competitive. Numerous competitors
have commercialized, are developing or are expected to introduce hardware,
software and other products that are or may be directly competitive with the
Company's products. Substantially all of these competitors are more
established and have greater financial, marketing and other resources than the
Company. The 3DO Company, C-Qube, and other companies are believed by the
Company to be engaged in research and development of products with multimedia
applications similar to certain of the Company's products. The Company also
believes that Motorola, Inc., Sony Corp. and Cirrus Logic Inc., may be
developing chips competitive with the Company's chips. Additionally, numerous
companies, such as Web TV, ViewCall, Oracle, Sun Microsystems, Microsoft and
IBM are involved in the development, sale and/or provision of Internet access
devices or alternative means of permitting access to the Internet, all of which
do or could compete with the Company's Internet Access Device. Because such
companies have greater financial and marketing resources than the Company, as
well as substantially larger research and development staffs and facilities,
they represent significant potential competition to the Company. Competitive
factors could result in price reductions or increased spending on product
development, marketing and sales that would adversely affect the Company's
ability to compete and to be profitable. Accordingly, there can be no
assurance that the Company will be able to compete successfully against its
present competitors or potential competitors or that such competition will not
have a material adverse
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effect on the Company. In addition, to the extent any of the Company's
competitors are able to develop products similar to the Company's products
which become the industry standard, such competitor will have a competitive
advantage over the Company.
Intellectual Property and Proprietary Rights; Absence of Patent
Protection. The Company's ability to compete successfully depends, in part, on
its ability to protect its intellectual property and proprietary technology in
the United Kingdom, the United States and other countries. The Company has no
issued patents but relies on a combination of trade secret protection,
confidentiality agreements and licensing agreements with strategic partners,
employees, consultants, vendors and licensees. The Company believes that the
two dimensional design representation prepared for each of its chips is
protected under the UK Copyright, Designs and Patent Act of 1988, which
requires no registration with respect to such technology, and that the three
dimensional aspects of each of its chips, including the electronic routes in
the silicon, are protected under the UK Topography Rights. The Company further
believes that its chip technology is entitled to comparable protection under
the US Copyright Act of 1976 and the Semiconductor Chip Protection Act of 1984.
Although the Semiconductor Chip Protection Act does not require registration,
the failure to register results in the loss of benefits after the passage of
two years from the first commercial sale of a chip. The Company has not
registered any of its chips under such Act; however, it intends to do so within
the prescribed period. It is the Company's belief that patents for ASIC chip
technology are rarely granted because of rapid technology changes and the
relative ease of designing around such patents. Despite this, the Company has
filed patent applications in the United Kingdom and the United States directed
to the Slipstream ASIC Chip technology. The Company elected not to continue
with the prosecution of these applications, due in large part to a lack of
working capital, and the applications have been abandoned. No assurance can be
given that any patent will issue from any applications that may be filed or
that, if any patent does issue, the claims will be sufficiently broad to
provide effective legal protection or monopoly. In addition, no assurance can
be given that any patent issued to the Company will not be challenged,
invalidated or avoided by design-around efforts, that the rights granted under
any such patent will provide competitive advantages to the Company or that the
Company's competitors will not independently develop or patent technologies
that are substantially equivalent or superior to the Company's technologies or
that such patents will not be subservient to other dominant patents.
Accordingly, the Company may be unable to protect certain technology relating
to its chips.
The Company's license agreements prohibit unauthorized disclosures of
the Company's technology to third parties. In cases where the Company has
contracted with third parties in foreign countries, these provisions may be
difficult to enforce in such foreign countries despite the existence of any
applicable international treaties or conventions designed to protect rights to
technology. The Company is aware that third parties may attempt to reverse
engineer the Company's technology. There can be no assurance that the
Company's confidentiality agreements will not be breached, or that the Company
would have adequate remedies for any such breach. There can be no assurance
that the Company's technology may not otherwise become known or be
independently discovered by competitors. Under United Kingdom law, copyrights
and mask rights related to technology designed and developed by independent
contractors, while commissioned by the Company for such purpose, remain the
property of the Company unlike in the United States where an assignment of such
rights from the independent contractor would be necessary to attain ownership
of all such rights.
The Company has registered trademarks for the name Wynpeg in the
United Kingdom (Reg. No. 1572811, effective May 21, 1994), Hong Kong (Reg. No.
06937/96, effective December 20, 1994), and Taiwan (Reg. No. 00708445,
effective April 1, 1996). There can be no assurance that the registration will
not be cancelled or invalidated or that the Company's rights will not be
subject to rights of prior users. The Company relies heavily on trademark
protection under common law. There can be no assurance that such common law
rights will not be limited or invalidated by third parties.
10
<PAGE> 11
Significant Customers. The Company has no customers, to date, that
frequently and systematically purchase its products. The Company's revenue for
the fiscal year ended June 30, 1996 was largely attributable to three companies
in connection with product development arrangements. Such three companies were
American Interactive Media, Inc. (64% of total revenue), Tianjin New Star
Electronics Co. Ltd. (23.7% of total revenue) and Peacock AG (12.3% of total
revenue). Fiscal 1996 revenue consisted of development fees and fees for
support services. Unless the products developed or to be developed in
conjunction with these companies are manufactured, marketed and sold, no future
revenue, other than development fees not yet paid, are likely to be received
from any of these companies under existing arrangements. The Company could be
materially adversely affected if no products developed in conjunction with
these companies are ultimately manufactured, marketed and sold.
Variability of Operating Results. If the Company is able to generate
significant revenues, the Company expects that its operating results will
fluctuate as a result of changes in the composition of its revenues, the
occurrence and timing of new product introductions, if any, by third parties
that it develops products with and the Company's expenditures on research and
development. Should the Company derive revenue from sales of its chips and
chipsets to and/or royalties or license fees from third parties, based on the
sale of products utilizing the Company's chips and chipsets, the Company's
revenue will vary with the demand for such products. Any revenue may be
affected by the seasonal nature of the market for consumer electronics,
multimedia and computer products. Such demand may increase or decrease as a
result of a number of factors that cannot be predicted and which are not
within the Company's control, such as consumer preferences and product
announcements by competitors.
International Operations and Changes in Exchange Rates. The Company
has entered into contracts with manufacturers located in the United States,
Taiwan, Hong Kong, Germany and the People's Republic of China. The Company's
international operations will subject it to various government regulations,
export controls, and the normal risks involved in international operations and
sales. A majority of the Company's revenue to date has been received in US
dollars; however, the Company's subsidiaries conduct business in pounds
sterling. Any decline in the value of the pound sterling against the US dollar
will have the effect of decreasing the Company's earnings when stated in US
dollars. The Company currently does not engage in any hedging transactions
that might have the effect of minimizing the consequences of currency exchange
fluctuations and does not intend to do so in the immediate future.
ITEM 2. PROPERTIES
The Company presently leases approximately 2,900 square feet of office
space at Elder House, 526-528 Elder Gate, Central Milton Keynes, MK9 1LR,
England. The lease is for a five year term expiring March 21, 2001 and
provides for annual rental of $44,080. The Company will also be responsible
for taxes, insurance and interim and service charges which should approximate,
in the aggregate, $35,000 annually. Management believes its leased facility is
suitable and adequate for its intended use.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
In September 1994, MSU PLC entered into a placement agent agreement
with Millport Ltd. ("Millport"), believed by the Company to be a Liberian
corporation (with a Channel Island office address), which arrangement was
amended and confirmed by the Company in June 1995 (collectively the "Millport
Agreements"). Under the Millport Agreements, Millport agreed to place 2.2
million shares at $2.50 per share in a Regulation S offering. It is the
Company's belief that Martin Miller, a former officer and director of the
Company and a present stockholder of the Company, is affiliated with and
controls Millport, directly or indirectly. In June and July 1995,
11
<PAGE> 12
the Company issued an aggregate 1,162,500 shares of common stock in connection
with the Regulation S offering (although additional shares were issued in
contemplation of subscriptions which were ultimately not received, which shares
were subsequently cancelled). In June 1995 and as part of such Regulation S
offering, the Company issued 110,000 shares of common stock to two Liberian
corporations in consideration of $275,000. No payment has been received for
these shares. In July 1995 and as part of such Regulation S offering, the
Company issued 950,000 shares of common stock in consideration of three
promissory notes representing an aggregate principal amount of $1,297,500. All
three notes were due on December 31, 1995 and only $852,500 principal amount
has been repaid. The three obligors on the notes are Liberian corporations.
Limited information is obtainable regarding officers, directors and principal
stockholders of Liberian corporations. Due to a lack of working capital, the
Company has been unable to proceed legally against the Liberian corporations
although demands have been made to Martin Miller who has orally offered to pay
various sums provided he is issued additional shares, and subject to additional
conditions. The Company has not accepted any of such offers. Mr. Miller has
also alluded to claims that customers of Millport Ltd. have against the Company
although no specific claims have been made. The Company is unaware of any
claims of merit that any such customers might have. An additional reason for
not proceeding against potential defendants in this matter, to date, has been
the likelihood that it would be unable to collect upon any judgment it might
obtain against any of such potential defendants. The Company intends to
proceed against these potential defendants to the extent prudent and reasonable
as soon as it has sufficient working capital; however, there can be no
assurance that any action will be taken, that such actions will not be barred
by applicable statutes of limitation or that it will be able to collect upon
any judgment it might obtain..
The Company has no access to a significant portion of its corporate
records, other than drafts and copies of certain documents, for the period from
approximately September 1994 through December 1995, making it difficult to
conclude that certain corporate matters were properly effected. The Company
believes matters were effected properly; however, it can not confirm this with
total certainty. The corporate records are currently in the possession of one
of the Company's former New York law firms which has refused, upon demand, to
release such records until amounts allegedly due such law firm are paid. The
Company intends to contest the amount allegedly due this firm based on the
Company's belief that it was billed for many matters that were not authorized
by the Company, some of which matters appear to have been rendered for or at
the request of Martin Miller and/or Millport, Ltd. The Company believes such
law firm also represents Martin Miller and represented Millport Ltd. at the
same time it represented the Company in connection with the Regulation S
offering. Such law firm has never provided the Company with copies of the
subscription agreements governing the acquisition of the shares in
consideration of the three notes, referenced above, in connection with the
Regulation S offering. The Company relied to a significant extent on this
United States law firm in light of the fact that management and United Kingdom
counsel had extremely limited knowledge of United States securities laws.
In November 1994, the Company and certain of its stockholders received
a written demand from Paragon Capital Corporation for $75,000 plus additional
unspecified amounts based upon an alleged breach of contract entered into with
MSU PLC and covering public and private financing for MSU PLC. Paragon claimed
the Company negotiated with a third party in breach of such contract. The
Company's position was that Paragon failed to perform in accordance with the
contract and that the contract was of no further effect. The Company advised
Paragon that it did not believe it had any liability to Paragon. To the
Company's knowledge, Paragon has taken no further action in connection with
this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 13
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Since May 24, 1995, bid and ask quotations of the Company's common
stock have been reported by the National Association of Securities Dealers
("NASD") Electronic Bulletin Board. From November 2, 1994 through May 24, 1995
there was no "established public trading market," although bid quotations were
reported sporadically in the "pink sheets" published by the National Quotation
Bureau and on the NASD Electronic Bulletin Board. The Company's NASDAQ symbol
is MUCP. The following table sets forth the range of high and low bid
quotations, as reported by Bloomberg Financial, Inc. for the periods
indicated. Bid quotations represent interdealer quotations without adjustment
for retail markups, markdowns or commissions and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Range of Bid Information
------------------------
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended June 30, 1996:
Quarter Ended June 30, 1996 . . . . . . $10.75 $ 4.38
Quarter Ended March 30, 1996 . . . . . . $ 5.63 $ 1.00
Quarter Ended December 31, 1995 . . . . $ 5.00 $ 3.03
Quarter Ended September 30, 1995 . . . . $13.75 $ 1.00
Fiscal Year Ended June 30, 1995:
Quarter Ended June 30, 1995
(commencing May 24, 1995) . . . . . . . $10.63 $10.50
</TABLE>
On October 9, 1996, there were approximately 230 stockholders of the
Company's common stock, including holders of record and participants in
security position listings.
The Company has never paid cash dividends on its common stock and does
not anticipate it will do so in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the
financial statements of the Company. The financial statements for each of the
fiscal years in the three-year period ended June 30, 1996 have been audited by
Moore Stephens-Lovelace, P.L., independent certified public accountants. The
financial statements for each of the fiscal years in the two-year period ended
June 30, 1993 are unaudited, however, the financial statements for MSU Ltd.
for such period were audited by Michael R. Hoy FCA. The following selected
financial data should be read in conjunction with and are qualified in their
entirety by the MSU Corporation Consolidated Financial Statements and the notes
thereto included elsewhere in this Report on Form 10-K.
13
<PAGE> 14
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
----------- -----------
(in thousands, except per share data)
-------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenue . . . . . . . . . . . . $ 393 $ 1,596 $ 875 $ 152 $ 498
Loss from operations . . . . . . . . $(1,402) $ (882) $(1,366) $(1,300) $ (56)
Net loss . . . . . . . . . . . . . . $(1,397) $ (878) $(1,365) $(1,296) $ (56)
Primary loss per share . . . . . . . $ (0.10) $ (0.07) $ (0.31) $ (0.38) (1) $(1.74) (1)
Fully diluted loss per share . . . . $ (0.10) $ (0.07) $ (0.31) $ (0.38) (1) $(1.74) (1)
BALANCE SHEET DATA (AT YEAR END):
Working capital . . . . . . . . . . . $(1,856) $(2,662) $(1,841) $(1,290) $ (49)
Total assets . . . . . . . . . . . . $ 164 $ 363 $ 197 $ 229 $ 103
Stockholders' deficit . . . . . . . . $(1,816) $(2,620) $(1,770) $(1,264) $ (48)
- - --------------------------------
</TABLE>
(1) Per share amounts were computed based on the number of shares
outstanding at the end of the fiscal year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On October 3, 1994, MSU Corporation, formerly Capital Acquisition
Company, acquired the outstanding capital stock of MSU PLC, the parent of MSU
Ltd. (MSU PLC and MSU Ltd. referred to as "MSU") through the issuance of
9,422,222 shares of its common stock. This transaction has been accounted for
as a recapitalization of MSU, with MSU as the acquirer (a reverse acquisition)
and accordingly, the historical consolidated financial statements through the
date of the transaction are those of MSU. Shareholders equity reflects the
equivalent number of common shares received in the recapitalization and all
references in the consolidated financial statements with regard to the number
of shares of common stock have been restated to give retroactive effect to the
transaction.
The Company operates primarily through MSU Ltd. which is principally
engaged in the design and development of computer chips and chipsets for use in
consumer electronics products.
The consolidated financial statements include the accounts of MSU
Corporation, MSU PLC and MSU Ltd. (collectively the "Company"). All
significant intercompany accounts have been eliminated in the consolidated
financial statements.
SIGNIFICANT RISKS
The Company's consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. During the years
ended June 30, 1996, 1995 and 1994, the Company incurred net losses of
approximately $1,397,000, $878,000 and $1,365,000, respectively. At June 30,
1996, there was an accumulated deficit of approximately $5,026,000.
Additionally, the Company has had recurring negative cash
14
<PAGE> 15
flow from its operations. The Company expects that it is likely to incur net
losses at least through the end of fiscal 1997 as it attempts to further
develop, upgrade and market its products and to develop its infrastructure and
organization 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 1997 if anticipated revenue from conditional
and forecasted purchase orders of customized Internet Access Devices are not
realized. Such conditional and forecasted purchase orders assume, without
limitation, approval of final production samples by potential purchasers;
acceptance by and demand for the customized Internet Access Devices by
consumers; satisfactory product performance, including chip and software
performance; 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 1997 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.
The Company's strategy is to increase cash flow from operations
through further development, upgrade and marketing of its chips and products
incorporating such technology, with particular emphasis on customized Internet
Access Devices incorporating its ISP Chip-version 2. In order to support this
strategy, the Company anticipates that it will, at least in the short term,
have to continue to fund a significant portion of its operations through
private sales of equity 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 develop its infrastructure and organization to support its
anticipated operations, although it has no funds to presently address these
concerns.
The market for the Company's products has only recently begun to
develop, is rapidly evolving and is 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 any of its recent
agreements with third parties will ever produce revenue for the Company, that
it will ever achieve profitability or that it will be able to continue as a
going concern.
RESULTS OF OPERATIONS
REVENUES
The Company has no customers to date that frequently and
systematically purchase its products or retain its services. Revenues during
the years ended June 30, 1996, 1995 and 1994 were approximately $393,000,
$1,596,000 and $875,000, respectively. These revenues were derived principally
through development arrangements in which the Company performed engineering and
design work for its customers for a development fee and in fiscal 1995, from
chip sales in connection with a development arrangement. Typically, the
Company's development arrangements also provide for royalty and/or license
fees to be paid to the Company if the customer sells products developed in
conjunction with the Company and/or incorporating the Company's proprietary
technology. To date, none of these arrangements have resulted in royalty or
license revenue to the Company. The Company could be materially adversely
effected if its customers fail to manufacture, market and sell products
developed in conjunction with the Company.
During the years ended June 30, 1996, 1995 and 1994 the Company's
revenues were principally derived from three, three and two customers,
respectively. Because of the concentration of its revenues in such a small
number of customers, the loss of any one customer could have a material adverse
effect on the Company's business.
15
<PAGE> 16
The Company's revenues by geographic region during the years ended June
30, 1996, 1995 and 1994 were approximately as follows:
<TABLE>
<CAPTION>
Location 1996($) 1995($) 1994($)
---- ---- ----
<S> <C> <C> <C>
Europe 110,000 440,000 130,000
Far East - 640,000 60,000
North America 280,000 520,000 690,000
</TABLE>
The Company's revenues increased approximately 82% in 1995 compared to
1994. The increase was largely attributable to the sale of chips and chipsets
for approximately $823,000 in connection with development arrangements
completed in fiscal 1994 and fiscal 1993. The approximate 75% decrease in
revenues in 1996 compared to 1995 was largely attributable to the fact that
the Company was devoting its efforts and limited capital on the initial
phases of development arrangements with new customers involving the further
development of certain of its core technologies, including the development of
a new version of its ISP chip and its prototype Internet Access Device.
COST OF REVENUES
Cost of revenues for the years ended June 30, 1996, 1995 and 1994 were
approximately $66,000, $604,000 and $107,000, respectively. As a percentage of
revenues, cost of revenues were approximately 17% in 1996, 38% in 1995 and 12%
in 1994. The cost of revenues fluctuations are due to variations in gross
margins as between chip sales, support services and development services. The
gross margin on development and support services is approximately 90% to 95%
while the gross margin on chip sales is approximately 48% to 54%, depending on
the number and type of chips purchased.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses generally consist of expenditures
related to the Company's independent development of its chips and prototype
products, such as the ISP Chip, the Envoy Chip, the Consumer PC, and the
prototype Internet Access Device and specific research and development
performed pursuant to development arrangements with third parties. For the
years ended June 30, 1996, 1995 and 1994, research and development expenses
were approximately $1,248,000, $1,297,000 and $1,692,000, respectively. As a
percentage of revenues, research and development expenses were approximately
318% in 1996, 81% in 1995 and 193% in 1994. The fluctuations from year to year
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. In order to remain competitive in its business, the Company
anticipates that research and development expenditures in the foreseeable
future will be a minimum of $1,200,000 per year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling general and administrative expenses were approximately
$404,000, $520,000 and $419,000 for the years ended June 30, 1996, 1995 and
1994, respectively. Selling general and administrative expenses principally
consist of advertising and promotion costs, which are charged to operations as
incurred; telephone, rent and occupancy costs; and professional fees. In 1995
this category of expenses was higher than 1996 and 1994 because of costs
associated with the Exchange.
16
<PAGE> 17
DEPRECIATION EXPENSE
Depreciation expense was approximately $32,000, $21,000 and $20,000,
for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Depreciation is calculated using the straight line method over the estimated
useful lives of the Company's depreciable assets which consist principally of
electronics equipment used in the design and testing of the Company's products.
INTEREST EXPENSE
Interest expense was approximately $45,000, $35,000 and $2,000 for the
fiscal years ended June 30, 1996, 1995 and 1994, respectively. The Company has
borrowed funds from time to time for working capital under various secured
credit facilities with its principal bank. These borrowings have generally
provided for interest on outstanding amounts at a rate of 3% above the National
Westminster Bank Plc prime rate. All such borrowings have been subject to the
bank's discretion, secured by a floating debenture on substantially all of the
assets of the Company and payable on demand.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively through
private sales of equity securities. For the fiscal year ended June 30, 1996,
cash used in operating activities of approximately $1,415,000 was primarily
attributable to the Company's net loss for the fiscal year. Cash used in
investment activities of approximately $31,000 in the fiscal year ended June
30, 1996 related primarily to acquisition of electronics equipment. Cash flows
from financing activities of approximately $1,278,000 in the fiscal year ended
June 30, 1996 were primarily attributable to aggregate net proceeds of
approximately $2,140,000 from private sales of common stock offset by
repayments of borrowings of approximately $862,000 under a credit facility.
Capital expenditures were approximately $31,000 for the fiscal year
ended June 30, 1996. The Company has no material commitments other than an
operating lease and three employment agreements. The Company currently
estimates that capital expenditures for fiscal 1997 will be approximately
$40,000 to $50,000.
At June 30, 1996, the Company's principal source of liquidity was
$54,805 in cash and a $76,000 credit facility with its principal bank. The
$76,000 credit facility expired on August 15, 1996. Since June 30, 1996,
additional liquidity has been provided from a $160,000 loan from the Employee
Trust, a principal stockholder of the Company; the issuance of shares of common
stock to an individual for $250,000; and the issuance of shares of common stock
to a company for $500,000 in a private transaction. Such company has agreed to
purchase additional shares of common stock for $500,000 in the latter part of
November 1996.
The Company believes that cash flows expected to be generated by
operations through the remainder of fiscal 1997 will be sufficient to meet a
significant portion of its anticipated cash needs for working capital and
capital expenditures for the remainder of fiscal 1997. The preceding sentence
is a forward-looking statement which assumes the realization of revenue from
conditional and forecasted purchase orders. Such forward-looking statement is
subject to certain risks and uncertainties which could cause actual results to
differ materially from those set forth including but not limited to the
approval of final production samples of customized Internet Access Devices by
potential purchasers; acceptance by and demand for such products by consumers;
satisfactory product performance; and the ability of such products to
successfully compete in an extremely competitive marketplace. To satisfy the
balance of the Company's liquidity requirements, the Company will attempt to
sell additional equity or debt securities and/or obtain additional credit
facilities to the extent the Company is able to do so, for which there can be
no assurance. The sale of additional equity or convertible debt securities
will result in additional dilution to the Company's stockholders. 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.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
annual report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In March 1996, the Board of Directors of the Company approved the
engagement of Moore Stephens-Lovelace, P.L. as auditors of the Company's
consolidated audited financial statements for the fiscal year ended June 30,
1995. Subsequently, such auditors were engaged to undertake the audit of the
Company's consolidated financial statements for the fiscal years ended June
30,1994 and June 30, 1996. The consolidated audited financial statements for
the fiscal years ended June 30, 1994 and June 30, 1995 are for the consolidated
group as if MSU PLC and MSU Ltd. were owned by MSU Corporation during the
fiscal year ended June 30, 1994 and the first portion of the fiscal year ended
June 30, 1995 prior to the Exchange in October 1994.
In February 1996, MSU Corporation's prior auditors, Coopers & Lybrand
LLP (which audited the financial statements of Capital Acquisition Company
prior to the Exchange in October 1994), declined to stand for re-election as
auditors in connection with the preparation of the Company's consolidated
audited financial statements for the fiscal year ended June 30, 1995.
There have been no disagreements between management and Coopers &
Lybrand LLP, or any predecessor firm, for any periods which they audited as set
forth below, in connection with Capital Acquisition Company's audits and any
subsequent interim period preceding the engagement of Moore Stephens-Lovelace,
P.L. on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure of a nature which if not resolved to
the satisfaction of Coopers & Lybrand LLP would have caused it to make
reference in connection with its report to the subject matter of the
disagreements. Coopers & Lybrand LLP's reports on the financial statements of
Capital Acquisition Company for the fiscal years ended February 28, 1993,
February 28, 1994, and June 30, 1994 (a four- month period) have not contained
an adverse opinion or a disclaimer of opinion and none of such reports was
qualified as to uncertainty, audit scope or accounting principles; provided,
however, that the reports of Coopers & Lybrand LLP for each of such periods
express an uncertainty as to Capital Acquisition Company's ability to continue
as a going concern.
The Company has requested Coopers & Lybrand LLP to furnish it with a
letter addressed to the Securities and Exchange Commission stating whether
Coopers & Lybrand LLP agrees with the above statements.
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company (and their
respective positions with MSU PLC and MSU Ltd.) and their respective ages are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Wynford Peter Holloway 47 Chief Executive Officer and
Director of the Company and
Chairman of MSU PLC and MSU Ltd.
Keith Charles Hall 48 President and Director of the
Company and Managing Director of
MSU PLC and MSU Ltd.
William Derek Snowdon 42 Secretary and Director of the
Company and Secretary of MSU PLC
and MSU Ltd.
</TABLE>
Wynford Peter Holloway has served as Chief Executive Officer and a
director of the Company since October 1994, and as Chairman of MSU PLC
and MSU Ltd. since June 1994 and March 1991, respectively. Mr.
Holloway is the founder of MSU Ltd. From 1991 through 1992, Mr.
Holloway was a self-employed design consultant providing professional
design services to clients in the computer peripherals business. From
1985 to 1990, Mr. Holloway was the Chairman and a principal
stockholder of Creative Devices Research, Limited, a company involved
in manufacturing and marketing computer peripheral equipment, such as
joysticks, and in preliminary design activities related to the
Company's products. On October 1, 1990, joint administrative
receivers were appointed for Creative Devices Research, Limited.
Keith Charles Hall has served as President and a director of the
Company since October 1994 and as Managing Director of MSU PLC and MSU
Ltd. since June 1994 and September 1993, respectively. From March
1992 to September 1993, Mr. Hall was a full time consultant to the
Company. From 1984 to 1993, Mr. Hall was Managing Director of
Personal Computer Services Limited providing business/marketing
consultant services and training to the computer industry. Over the
course of his career, Mr. Hall has been involved in a number of
projects in the computer industry. From 1982 through 1984, Mr. Hall
was the sales and marketing director of Apple Computer UK Limited
during which time he was responsible for the launch of the Macintosh
Computer in the UK. From 1979 to 1982, he was sales and marketing
manager of Commodore Business Machines UK Limited.
William Derek Snowdon, LLB, has served as Secretary and a director of
the Company since October 1994 and as secretary of MSU PLC and MSU
Ltd. since June 1994 and March 1991, respectively. Mr. Snowdon is a
solicitor and has been a partner with the firm of Phoenix Walters for
the past 14 years. Mr. Snowdon's practice focuses on commercial
contracts and intellectual property law. From 1989 to 1990, Mr.
Snowdon served as a director of Creative Devices Research, Limited.
On October 1, 1990, joint administrative receivers were appointed for
Creative Devices Research, Limited.
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<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation earned during the Company's last three fiscal years by the
Company's Chief Executive Officer and the Company's one other executive officer
receiving in excess of $100,000 in total annual salary and bonus (collectively
the "named executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------
Annual Compensation
-------------------
Awards Payouts
------ -------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Fiscal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($)(1)(3) ($) ($)(2)(3) ($) (#) ($) ($)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wynford Peter Holloway 1996 112,000 -- $17,052 -- -- -- --
Chief Executive Officer 1995 112,000 -- 24,083 -- -- -- --
1994 112,000 -- 29,267 -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Keith Charles Hall 1996 96,000 -- $18,000 -- -- -- --
President 1995 96,000 -- 14,400 -- -- -- --
1994 96,000 -- 9,600 -- -- -- --
====================================================================================================================================
</TABLE>
(1) All salaries and other annual compensation were paid by MSU Ltd.
(2) Represents personal benefits in addition to salary. Of Mr. Holloway's
personal benefits, 44% and 42% of the 1994 amount were for a Company
car and house rental expense, respectively; 51% of the 1995 amount was
for house rental expense; and 40% and 60% of the 1996 amount were for
a Company car and house rental expense, respectively. Of Mr. Hall's
personal benefits, 100% of each of 1994, 1995 and 1996 amounts was for
a car allowance.
(3) All compensation information for periods prior to the Exchange has
been presented as if MSU Ltd. was owned by the Company during such
periods.
20
<PAGE> 21
EMPLOYMENT AGREEMENTS
Effective September 1, 1994, MSU PLC entered into employment
agreements with each of Wynford Peter Holloway, Keith Hall and William Snowdon
providing for annual base salaries (subject to annual increases within the
discretion of the Board) of $193,404, $128,936, and $32,234, respectively,
which base salary requirement was waived by each of Messrs. Holloway and Hall
for the first two years of the employment term. Subject to earlier termination
as provided in the agreements, the agreements are each for three year periods
ending August 31, 1997. Unless terminated in accordance with the agreements,
each agreement renews for a further period of three years (in place of the then
unexpired period) on each anniversary of the commencement date. The agreements
also provide for a car allowance or use of an automobile, including
reimbursement of any automobile expense, and participation in bonus plans when
and if formulated by MSU PLC. MSU PLC is also obligated to provide private
medical coverage and life insurance. For one year after termination, the
executives are restricted from holding a material interest in any competitor,
seeking or receiving orders for any products or services produced or marketed
by MSU PLC or MSU Ltd., or soliciting or enticing away any person who was a
material employee of MSU PLC or MSU Ltd. six months prior to termination of the
executive.
Prior to the execution of Mr. Snowdon's employment agreement,
Morgannwg Consultants, which is controlled by Mr. Snowdon, was compensated in
the amount of $1,604 per month for providing the services of Mr. Snowdon as
Secretary of the Company. This arrangement was superseded by Mr. Snowdon's
employment agreement.
COMPENSATION OF DIRECTORS
Directors are reimbursed for all reasonable expenses in attending each
Board meeting.
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1996.
21
<PAGE> 22
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Percent of Assumed Annual Rates of Stock
Number of Total Price Appreciation for Option
Securities Options Term(2)
Underlying Granted to Exercise Market -------------------------------
Options Employees or Price on
Granted in Fiscal Base Price Date of Expiration
Name #(1) Year ($/Sh) Grant Date 0%($) 5%($) 0%($)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wynford 100,000 29.4% $5.00 $6.25 6/6/01 $125,000 $172,676 $381,569
Peter
Holloway
Keith 100,000 29.4% $5.00 $6.25 6/6/01 $125,000 $172,676 $381,569
Charles
Hall
=============================================================================================================
</TABLE>
- - -------------------------
(1) All such stock options were granted on June 7, 1996 in consideration
of the benefit derived by the Company from the provision of personal
guarantees by Messrs. Holloway and Hall to secure the then existing
credit facility of the Company. See "EXECUTIVE
COMPENSATION-Compensation Committee Interlocks and Insider
Participation."
(2) As required by rules of the Securities and Exchange Commission,
potential values stated are based on the assumption that the Company's
common stock will appreciate in value from the date of grant to the
end of the option term (five years from the date of grant) at
annualized rates of 5% and 10% (total appreciation of approximately
28% and 61%), respectively, and therefore are not intended to forecast
possible future appreciation, if any, in the price of the common
stock.
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table provides information concerning the value of
unexercised options held by the named executive officers at June 30, 1996. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1996.
22
<PAGE> 23
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
--------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options In-the-Money Options
Name at Fiscal Year End (#) at Fiscal Year End ($)(1)
- - ---------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wynford Peter Holloway - 100,000 - $543,750
Keith Charles Hall - 100,000 - $543,750
=========================================================================================================
- - ---------------------
</TABLE>
(1) Values stated are based on the average bid and ask prices of $10.44
per share of the Company's common stock as reported by Bloomberg
Financial, Inc. on June 28, 1996, the last trading day of the fiscal
year, and equal the aggregate amount by which the market value of the
option shares exceeds the exercise price of such options at the end of
the fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee. During fiscal 1996,
Messrs. Holloway, Hall and Snowdon, collectively representing all of the
Company's directors and executive officers, participated in deliberations of
the Board of Directors concerning executive officer compensation.
Since October 1994, the law firm of Phoenix Walters Solicitors has
regularly rendered legal services as counsel to the Company. W.D. Snowdon, a
director and executive officer of the Company, is a partner of Phoenix Walters
Solicitors.
In November 1992, MSU, Ltd., Mr. Holloway, TXC Corporation and a third
party entered into an agreement relating to the development of a CD based
multisystem. Such agreement contemplated that a new entity, owned 46% by Mr.
Holloway, 46% by TXC Corporation and 5% by the third party, would develop and
own such product; however, MSU Ltd., Mr. Holloway and TXC Corporation
subsequently agreed that MSU, Ltd. would independently develop and own the
product. The third party never performed under the November 1992 agreement
and, accordingly, MSU Ltd's position is that such third party has no rights or
claims under such agreement. TXC Corporation and Mr. Holloway agreed to
indemnify MSU Ltd. in connection with any claim made by such third party.
Pursuant to the November 1992 agreement, TXC Corporation contributed $1,541,910
to MSU Ltd. Pursuant to a June 1993 agreement, restating the 1992 agreement,
TXC Corporation loaned $618,000 to MSU, Ltd. Of the $2,159,910 aggregate
capital contribution, $1,400,000 is represented by an unsecured, interest free
loan payable to TXC Corporation at such time as the Company is reasonably able
to do so without jeopardizing its financial condition and the balance was an
equity contribution. Pursuant to a March 1994 agreement, TXC Corporation
agreed to waive certain rights under the November 1992 and June 1993 agreements
in exchange for 550,000 shares of MSU Ltd. stock and certain additional
consideration. TXC Corporation has waived any claims it may have had to such
additional consideration. The MSU, Ltd. stock issued to TXC Corporation was
exchanged for MSU PLC stock in June 1994, and the MSU PLC stock was exchanged
for Company common stock in October 1994 in connection with the Exchange. TXC
Corporation is a principal stockholder of the Company and holds a nonexclusive
license to use the Wynpeg Chipset technology in connection with the manufacture
of video CD players. Such license was granted to TXC Corporation in connection
with a development contract entered into in July 1994.
23
<PAGE> 24
At October 9, 1996, Mr. Holloway was indebted to Sabre Advanced
Microelectronics Limited, an agent for American Microsystems, Inc. (the
Company's principal chip manufacturer), in the approximate amount of $139,500,
excluding interest. The loan, made in May 1994, is past due, however the
lender has agreed to permit Mr. Holloway to repay the debt at such time as he
is able to sell shares of Company common stock owned by him under Rule 144
under the Securities Act of 1933. The loan is secured by a pledge of all
shares of Company common stock owned by Mr. Holloway and the lender has the
right to direct action in connection with any proposed transaction affecting
all or any part of the pledged shares. Mr. Holloway loaned approximately
$68,000 of the loan proceeds to MSU Ltd. in July 1994 on an unsecured, interest
free basis. At October 9, 1996, approximately $8,000 was outstanding under the
loan.
In June 1996, MSU Ltd. obtained a $76,000 credit facility from
National Westminster Bank Plc. The credit facility was secured by a floating
debenture on all of the Company's assets and the personal guarantees of each of
Messrs. Holloway, Hall and Snowdon. The guarantees of each of Messrs. Hall and
Snowdon were secured by a pledge of the pledgor's shares of Company common
stock. In consideration of the benefit derived by the Company as a result of
the guarantees provided by the Company's directors, each director was granted,
effective June 7, 1996, an option to acquire 100,000 shares of Company common
stock at an exercise price of $5.00. The options are exercisable in full
commencing on June 7, 1997 and expire on June 6, 2001. The credit facility
expired in August 1996 at which time there were no amounts outstanding under
the facility. The debenture and personal guarantees remain in place with the
Bank to serve as collateral for additional credit facilities requested by the
Company and approved by the Bank. The pledged shares have been released but
the Bank is likely to require that such shares be pledged again in connection
with any credit facility.
On October 14, 1994, the Company completed an exchange of all of the
shares of MSU PLC for 9,422,222 shares of the Company's common stock pursuant
to an Exchange Agreement. After the Exchange, the former stockholders of MSU
PLC owned approximately 73.6% of the Company's common stock. Such stockholders
presently own approximately 62.4% of the Company's common stock. Upon
completion of the Exchange, Mr. Holloway, an officer and director of the
Company, TXC Corporation, and the Employee Discretionary Trust became owners of
more than five percent (5%) of the Company's common stock. Additionally, each
of Keith Hall and William Snowdon, officers and directors of the Company,
received 515,277 shares in connection with the Exchange. All of the MSU PLC
shares were acquired in June 1994 in exchange for shares of MSU Ltd.
The Company believes that the abilities of the foregoing members of
the Board of Directors to make fair compensation decisions have not and will
not be compromised by the relationships referred to above.
24
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of October 9, 1996, by:
(i) each person known by the Company to be the beneficial owner of more than 5%
of its common stock, (ii) each named executive officer of the Company, (iii)
each director of the Company, and (iv) all directors and executive officers as
a group. Unless otherwise indicated, each of the stockholders has sole voting
and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
------------------------ -------------------- ----------------
<S> <C> <C>
Wynford Peter Holloway 5,152,777 (1)(2)(3) 33.2%
Keith Charles Hall 515,277 (3)(4) 3.3%
William Derek Snowdon 515,277 (3)(4) 3.3%
Peter Brian Webber and 2,944,444 19.0%
Vivian George Bines as
Trustees for the Employee
Trust(2)
48 The Parade
Cardiff CF2 3AB
United Kingdom
TXC Corporation 2,208,333 14.2%
5F No. 15. SEC. 2
Chung Yang S Road
Peitoi, Taipei
Taiwan
McLaughlin Group LLC 2,164,015 (5) 13.5%
13750 U.S. 281 North #660
San Antonio, Texas 78232
All directors and executive 6,183,331 (1)(3) 39.9%
officers as a group (3 persons)
- - ----------------------
</TABLE>
(1) Mr. Holloway owns 2,208,333 shares of record. Mr. Holloway's shares
have been pledged as security for a loan from Sabre Advanced
Microelectonic Limited. See "EXECUTIVE COMPENSATION - Compensation
Committee Interlocks and Insider Participation." Pursuant to an
unwritten arrangement and understanding, Mr. Holloway shares voting
and dispositive power with respect to the shares held by the Employee
Trust and has been deemed to beneficially own the shares held by the
Employee Trust.
(2) The Employee Trust constituted by a Trust Deed dated May 24, 1994 (of
which Wynford Peter Holloway was the settlor) is in favor of all past,
present and future employees of MSU Ltd. and MSU PLC and any
subsequent companies, and their spouses and children. No allocations
under the trust have been made. Under the Trust Deed and so long as
Mr. Holloway is living, his consent, as settlor, is required for the
appointment of beneficiaries and the appointment of new trustees. The
trustees also have the authority to delegate powers to Mr. Holloway.
Pursuant to an unwritten arrangement and understanding Mr. Holloway
shares voting and dispositive power with respect to the shares held by
the Employee Trust.
25
<PAGE> 26
(3) Excludes in the case of each of Messrs. Holloway, Hall and Snowdon,
100,000 shares issuable pursuant to options which are not currently
exercisable (or exercisable within 60 days).
(4) See "Executive Compensation-Compensation Committee Interlocks and
Insider Participation" regarding a potential pledge arrangement with
National Westminster Bank Plc covering shares held by Messrs. Hall and
Snowdon.
(5) Includes 564,015 shares issuable pursuant to a currently exercisable
warrant to purchase such number of shares of Company common stock as
equals 3.5% of the outstanding shares of common stock on the date the
warrant is exercised (with such determination to be made on a fully
diluted basis). Assumes the warrant had been exercised on October 9,
1996.
26
<PAGE> 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1988, Flare Technology Limited and Creative Devices
Research, Ltd., a company controlled by Mr. Holloway prior to its receivership
in October 1990, entered into an agreement pursuant to which Flare Technology
Limited was to design and develop a custom chip to operate within an
entertainment product developed by Creative Devices Research, Ltd. After an
assignment by Creative Devices Research, Ltd. of its rights under such
agreement to a third party and the subsequent insolvency of such third party,
the rights to the technology developed (known as the Slipstream ASIC Chip,
predecessor to the Company's current versions of the Slipstream ASIC Chip and
ISP Chips) by Flare Technology Limited for Creative Devices Research, Ltd.
vested in Flare Technology Limited. In June 1993, Flare Technology Limited
transferred all right, title and interest in such technology to MSU Ltd. As
partial consideration for the transfer, Flare Technology Limited was to receive
certain royalties. These rights were subsequently waived by Flare Technology
Limited in consideration of $360,000 to be paid by MSU Ltd. As of October 9,
1996, $31,000 remained unpaid.
Martin Miller, a former director and executive officer of the Company,
is believed by the Company to be affiliated with Millport Ltd., a corporation
retained by MSU Ltd. in September 1994 to serve as a placement agent in
connection with a Regulation S offering. The placement agent arrangement was
amended and confirmed by the Company in June 1995 (such agreements collectively
referred to as the "Millport Agreements") and the offering was conducted in
June and July 1995. In connection with the offering and as compensation,
Martin Miller was issued 150,000 shares of Company common stock, Millport, Ltd.
received commissions on shares sold, and Millport Ltd. was to be granted a two
year option to acquire up to 500,000 shares of Company common stock at the time
of completion of the offering. The option was never granted and it is the
Company's position that Millport Ltd. did not perform according to the terms of
the Millport Agreements and is, accordingly, not entitled to the option. It is
the Company's further position that it is not bound by any of the restrictions
under the Millport Agreements. See "Item 3. LEGAL PROCEEDINGS."
The Company and Lawrence Ko, a director and former employee of TXC
Corporation, entered into an agreement in February 1996 pursuant to which Mr.
Ko will represent and promote the Company and its technologies in Taiwan and,
at the Company's request, mainland China and Hong Kong. The Company's
intention is to work through Mr. Ko in most matters relating to such countries
and territories; however the Company has reserved the right to handle
independently all matters relating to existing contacts, negotiations and
contracts. Mr. Ko will receive compensation based upon revenue attained by the
Company (consisting of from 5% to 10% of revenue plus warrants to acquire
75,000 shares for each $1 million of revenue attained, with an exercise price
of 50% of market value at the time the warrant is issued, up to maximum of
300,000 shares) as a result of transactions attributable to Mr. Ko.
In August 1996, Direct International Limited, a Taiwanese company,
loaned $300,000 to the Employee Trust. Such loan is secured by 250,000 shares
of Company common stock owned by the Employee Trust and was due on October 2,
1996. The loan is to be repaid in 37,500 shares of Company common stock owned
by the Employee Trust no later than December 31, 1996. Direct International
Limited will also receive on December 31, 1996, 10,000 shares of Company common
stock owned by the Employee Trust as consideration for the advance of the loan.
The $300,000 proceeds received by the Employee Trust were loaned by it to Wyn
Holloway ($140,000) and the Company ($160,000). Such loans are unsecured,
interest free, due and payable on an as yet undetermined date, and are not
evidenced by written agreements.
Effective January 30, 1996 and February 29, 1996, McLaughlin Group LLC
acquired from the Company, in a private transaction, 800,000 and 800,000
shares, respectively, of the Company's common stock. The common stock
acquisitions were effected pursuant to a common stock purchase agreement, as
amended. Consideration for the common stock was $1.0 million in cash. The
common stock purchase agreement provides McLaughlin Group LLC with the right to
acquire additional shares of capital stock upon the issuance by the Company of
additional capital stock (except in certain specified cases) in order to
maintain the same proportion
27
<PAGE> 28
of voting power of the Company as it owned prior to the issuance. McLaughlin
Group LLC was also granted certain demand and piggyback registration rights.
The Company has agreed to indemnify McLaughlin Group LLC against certain
liabilities in connection with any shares so registered. McLaughlin Group LLC
was also granted a warrant to purchase such number of shares of Company common
stock as equals 3.5% of the outstanding shares of common stock on the date the
warrant is exercised (with such determination to be made on a fully diluted
basis). The warrant is exercisable, in whole only, at an exercise price of
$1.0 million and expires eighteen months after March 1, 1996. McLaughlin Group
LLC was also granted certain demand and piggyback registration rights in
connection with the shares issuable under the warrant. The Company has agreed
to indemnify McLaughlin Group LLC against certain liabilities in connection
with any shares so registered.
Mark McLaughlin, a member of McLaughlin Group LLC, is president and a
principal stockholder of McLaughlin International, Inc. McLaughlin
International, Inc. serves as a consultant to the Company pursuant to two
engagement letters entered into on November 8, 1995 and May 17, 1996,
respectively. The engagement letters provide that McLaughlin International,
Inc. will act as a consultant to the Company in connection with certain
strategic transactions, relating to the marketing and distribution of the
Company's products and technology in Japan and to a select number of companies
located principally in the United States, for a period of six months, subject
to extension by mutual agreement. The November 8, 1995 engagement letter was
extended for an additional six month period. As compensation under the
November 8, 1995 engagement letter, which covers Japan, McLaughlin
International, Inc. will receive for a period of seven years (in the case of
revenue and royalties) or an indefinite period or one time payment (in the case
of fees) a percentage of revenue, royalties and fees (with such percentages
ranging from 5% to 10% dependent upon what and how much is received) received
by the Company as a direct or indirect result of the efforts of McLaughlin
International, Inc. As additional compensation, McLaughlin International, Inc.
will receive warrants to acquire 75,000 shares of common stock per each $1
million in fees received by the Company (not to exceed 750,000 warrant shares)
plus bonus warrants to acquire 250,000 shares in the event the Company receives
$20 million in fees, in each case as a direct or indirect result of the efforts
of McLaughlin International, Inc. Such warrants will be exercisable for a five
year term at a price equal to the lesser of $10 or 50% of the market price of
the Company's common stock on the date of issue. Shares of common stock
issuable upon exercise of the warrants will carry customary registration
rights. As compensation under the May 17, 1996 engagement letter, McLaughlin
International, Inc. will receive for the duration of the relationship (between
the Company and the party introduced by the consultant) a percentage of upfront
research and development fees/payments; equity private placement proceeds;
service provider revenue/fees; and chip sales (with such percentages ranging
from 4% to 8%) received by the Company as a direct or indirect result of the
efforts of McLaughlin International, Inc. To be entitled to percentage
compensation under either engagement letter, the revenue, payments, sales or
fees must commence or be paid during the engagement period or during the twelve
month period immediately following the engagement period. As of October 9,
1996, the Company was indebted to McLaughlin International, Inc. in the amount
of $54,404.
See "Item 11. EXECUTIVE COMPENSATION-Compensation Committee
Interlocks and Insider Participation" for additional relationships and related
transactions.
The Company believes that all transactions with officers, directors or
affiliates to date are on terms no less favorable than those available from
unaffiliated third parties. It is the Company's policy that all future
transactions with officers, directors, or affiliates will be approved by
members of the Company's Board of Directors not having an interest in the
transaction and will be on terms no less favorable than could be obtained from
unaffiliated third parties.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this report:
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets at June 30, 1995 and 1996
Consolidated Statements of Income for the years ended June 30, 1994,
June 30, 1995 and June 30, 1996
Consolidated Statements of Changes in Stockholders' Deficit for the years ended
June 30, 1994,, June 30, 1995 and June 30, 1996
Consolidated Statements of Cash Flows for the years ended June 30, 1994,
June 30, 1995 and June 30, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules
None.
Exhibits
2 Exchange Agreement among Capital Acquisition Company and the
shareholders of MSU PLC(3)
3.1 Articles of Incorporation(1)
3.2 Amendment to Articles of Incorporation(4)
3.3 Bylaws(1)
3.4 Amendment to Bylaws(2)
4.1 Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.2 Amendment to Common Stock Purchase Agreement with McLaughlin Group
LLC(4)
4.3 Warrant issued to McLaughlin Group LLC(4)
10.1 Service Agreement with Wyn Holloway(4)
10.2 Service Agreement with Keith Hall(4)
10.3 Service Agreement with W.D. Snowdon(4)
10.4 Placement Agent Agreement with Millport Ltd. as amended and
confirmed(4)
10.5 Employee Trust(4)
10.6 Office Lease Agreement with Brixton Estate Plc(4)
10.7 Manufacturing, Distribution and Joint Venture Agreement with American
Interactive Media, Inc. Confidential treatment has been requested for
specific portions of the Manufacturing, Distribution and Joint Venture
Agreement(4)
10.8 Engagement Letter, dated November 8, 1995, as amended, with McLaughlin
International, Inc.(4)
10.9 Engagement Letter, dated May 17, 1996, with McLaughlin International,
Inc.(4)
10.10 Form of Director Option granted to each director in consideration of
guarantee of National Westminster Bank Plc credit facility (4)
10.11 Development and Licensing Agreement with TXC Corporation. Confidential
treatment has been requested for specific portions of the License
Agreement(4)
10.12 Agreement with Mitac, Inc. Confidential treatment has been requested
for specific portions of the Agreement(4)
16 Letter re change in certifying accountant from Coopers & Lybrand
LLP(4)
21 Subsidiaries of Registrant(5)
24 Power of attorney. Reference is made to the signature page of this
report.
27 Financial Data Schedule.
29
<PAGE> 30
- - --------------------------
(1) Contained in exhibits to the Registration Statement on Form S-18 (file
no. 33-07861-A), declared effective by the Securities and Exchange
Commission on November 6, 1986.
(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended February 28, 1990, filed with the Securities and Exchange
Commission in May 1990.
(3) Contained in exhibits to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission in October 1994.
(4) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, filed with the Securities and Exchange
Commission on November 27, 1996.
(5) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
30
<PAGE> 31
Index to Financial Statements
--------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Shareholders' Deficit F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MSU Corporation
Central Milton Keynes, England
We have audited the accompanying consolidated balance sheets of MSU Corporation
(formerly Capital Acquisition Company) and subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations, changes in
shareholders' deficit, and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MSU Corporation and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered and continues
to suffer significant losses from its operations, has an accumulated deficit
and revenue and cash flows from its operations have not developed to the point
where the Company can internally fund its operations. These factors, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ MOORE STEPHENS LOVELACE, PL
Certified Public Accountants
Orlando, Florida
September 12, 1996, except for Note 9,
as to which the date is November 11, 1996
F-1
<PAGE> 33
MSU CORPORATION
(FORMERLY CAPITAL ACQUISITION COMPANY) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 54,805 $ 227,818
Accounts receivable 11,529 49,441
Prepaid expenses and other 58,035 44,167
------------ ------------
TOTAL CURRENT ASSETS 124,369 321,426
EQUIPMENT, net of accumulated depreciation of
$47,191 in 1996 and $55,227 in 1995 39,887 41,306
------------ ------------
TOTAL ASSETS (Note 7) $ 164,256 $ 362,732
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Shareholder advance payable (Note 3) $ 1,400,000 $ 1,400,000
Short-term borrowings (Notes 7 and 9) -- 878,513
Accounts payable 325,514 371,160
Related-party payable (Notes 3 and 9) 7,680 13,445
Accrued liabilities 246,780 319,873
------------ ------------
TOTAL CURRENT LIABILITIES 1,979,974 2,982,991
COMMITMENTS AND CONTINGENCIES
(Notes 1, 2, 3, 6, 7, 8 and 9)
SHAREHOLDERS' DEFICIT (Notes 3, 5, 6, 8 and 9)
Common stock, $0.01 par value; 50,000,000 shares
authorized; 15,534,722 and 12,934,722 shares issued
and outstanding at June 30, 1996 and 1995,
respectively 155,347 129,347
Additional paid-in capital 2,984,081 1,074,081
Stock subscriptions receivable -- (225,000)
Cumulative translation adjustments 70,651 30,349
Accumulated deficit
(5,025,797) (3,629,036)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (1,815,718) (2,620,259)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 164,256 $ 362,732
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 34
MSU CORPORATION
(FORMERLY CAPITAL ACQUISITION COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES (Note 8) $ 392,693 $ 1,595,856 $ 875,460
EXPENSES (Notes 3, 7 and 8)
Cost of revenues 65,795 604,058 107,414
Selling, general and administrative 403,636 520,196 418,955
Depreciation 31,545 20,996 20,460
Interest expense 45,491 35,050 2,307
Research and development 1,248,186 1,297,374 1,691,846
------------ ------------ ------------
TOTAL EXPENSES 1,794,653 2,477,674 2,240,982
------------ ------------ ------------
OPERATING LOSS (1,401,960) (881,818) (1,365,522)
NONOPERATING INCOME
Interest income 5,199 3,399 905
------------ ------------ ------------
NET LOSS $ (1,396,761) $ (878,419) $ (1,364,617)
============ ============ ============
LOSS PER COMMON SHARE $ (0.10) $ (0.07) $ (0.31)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,494,000 12,508,000 4,347,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 35
MSU CORPORATION
(FORMERLY CAPITAL ACQUISITION COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
$0.01 PAR VALUE ADDITIONAL STOCK CUMULATIVE TOTAL
------------------------ PAID-IN ACCUMULATED SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE ADJUSTMENTS DEFICIT
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 1993
(NOTES 1 AND 5) 3,524,947 $ 35,249 $ -- $(1,386,000) $ -- $ 65,233 $(1,285,518)
ISSUANCE OF COMMON SHARES
(NOTES 3 AND 5) 6,671,433 66,715 805,492 -- -- -- 872,207
TRANSLATION ADJUSTMENTS -- -- -- -- -- (8,972) (8,972)
NET LOSS -- -- -- (1,364,617) -- -- (1,364,617)
--------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1994 10,196,380 101,964 805,492 (2,750,617) -- 56,261 (1,786,900)
ISSUANCE OF COMMON SHARES
(NOTE 5) 2,738,342 27,383 268,589 -- (225,000) -- 70,972
TRANSLATION ADJUSTMENTS -- -- -- -- -- (25,912) (25,912)
NET LOSS -- -- -- (878,419) -- -- (878,419)
--------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1995 12,934,722 129,347 1,074,081 (3,629,036) (225,000) 30,349 (2,620,259)
ISSUANCE OF COMMON SHARES
(NOTE 5) 2,600,000 26,000 1,888,500 -- -- -- 1,914,500
COLLECTION OF STOCK
SUBSCRIPTIONS RECEIVABLE -- -- -- -- 225,000 -- 225,000
ISSUANCE OF OPTIONS TO PURCHASE
100,000 SHARES OF COMMON STOCK -- -- 21,500 -- -- -- 21,500
(NOTE 6)
TRANSLATION ADJUSTMENTS -- -- -- -- -- 40,302 40,302
NET LOSS -- -- -- (1,396,761) -- -- (1,396,761)
--------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1996 15,534,722 $ 155,347 $ 2,984,081 $(5,025,797) $ -- $ 70,651 $(1,815,718)
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 36
MSU CORPORATION
(FORMERLY CAPITAL ACQUISITION COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,396,761) $ (878,419) $(1,364,617)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 31,545 20,996 20,460
Non-cash expense related to issuance of
stock purchase options 21,500 -- --
Decrease in accounts receivable, net 36,907 15,533 24,018
Decrease in inventories -- 10,205 1,500
Decrease (increase) in prepaid and
other expenses (15,076) 16,918 2,244
Increase (decrease) in accounts payable (36,543) 45,619 130,236
Increase (decrease) in related-party payable (5,462) 13,276 --
Increase (decrease) in accrued liabilities (50,871) 155,508 65,480
----------- ----------- -----------
TOTAL ADJUSTMENTS (18,000) 278,055 243,938
----------- ----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (1,414,761) (600,364) (1,120,679)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net (31,163) (6,693) (47,894)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings, net (861,937) 753,328 252,546
Issuance of common stock 2,139,500 70,972 872,207
----------- ----------- -----------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 1,277,563 824,300 1,124,753
EFFECT OF EXCHANGE RATE CHANGES (4,652) 429 (1,169)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (173,013) 217,672 (44,989)
CASH AT BEGINNING OF YEAR 227,818 10,146 55,135
----------- ----------- -----------
CASH AT END OF YEAR $ 54,805 $ 227,818 $ 10,146
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 37
MSU CORPORATION
(FORMERLY CAPITAL ACQUISITION COMPANY) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS
ORGANIZATION AND BASIS OF PRESENTATION
On October 3, 1994, MSU Corporation, formerly Capital Acquisition
Company, acquired, through the issuance of 9,422,222 shares of its
common stock, the outstanding capital stock of MSU Public Limited
Company (MSU Plc.), a private company organized and based in the
United Kingdom, which owns all of the capital stock of MSU (UK)
Limited (MSU Plc. and MSU (UK) Limited together referred to as
'MSU'). This transaction has been presented in the accompanying
consolidated financial statements as a recapitalization of MSU,
with MSU as the acquirer (a reverse acquisition) and, accordingly,
the historical consolidated financial statements through the date
of the transaction are those of MSU. Shareholders' deficit
reflects the equivalent number of common shares received in the
recapitalization, and all references in the financial statements
with regard to number of shares of common stock have been restated
to give retroactive effect to the transaction.
MSU Corporation 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 consolidated financial statements include the accounts of MSU
Corporation, MSU Plc. and MSU (UK) Limited (the Company). All
significant intercompany accounts have been eliminated in the
consolidated financial statements.
SIGNIFICANT RISKS
The Company's consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.
During the years ended June 30, 1996, 1995 and 1994, the Company
incurred net losses of $1,396,761, $878,419 and $1,364,617,
respectively. At June 30, 1996, the Company had an accumulated
deficit of approximately $5,026,000. Additionally, the Company
has had recurring negative cash flows from operations. These
factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plans with regard to these matters include increased
cash flows from operations through further development, upgrade
and marketing of its chips and products, the issuance of
additional shares of the Company's common stock or debt securities
in exchange for proceeds, which may be used to provide the working
capital needed to commercially exploit the Company's core
technologies. The Company also intends to develop its
infrastructure and organization to support its enhanced operations
as funds become available. At present, contracts have been
concluded with American Interactive Media, Inc. for the
development of customized internet access devices and for the
formation of a joint venture to market the Company's technology in
the United States. Additionally, an agreement has been negotiated
which provides for Mitac, Inc. to manufacture and market
customized internet access devices using the Company's proprietary
technology. However, there can be no assurance that management
will be successful in the implementation of its plans. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
F-6
<PAGE> 38
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an
original maturity of three months or less.
EQUIPMENT
Equipment is stated at cost. Depreciation is provided for using
the straight-line method over the estimated useful lives of the
equipment, generally four years.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax assets
and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse (see Note 4).
REVENUE RECOGNITION
The Company enters into development arrangements with certain
customers to design computer chips and chipsets using existing and
enhanced technology which are suitable for use in the customer's
application. The Company's development arrangements are generally
performed under contractual arrangements which stipulate the
Company's fee as certain performance criteria are met. The
Company recognizes these development fees when its customers
acknowledge that the fee has been earned by accepting the
Company's work product. Development fee and related support
services fees revenue recognized by the Company amounted to
approximately $368,000, $772,000 and $741,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.
Certain arrangements provide for the customer to pay a royalty or
licensing fee. Such fees are to be paid to the Company if the
customer uses the Company's work product in commercial
applications. Through June 30, 1996, none of these arrangements
has resulted in royalty or licensing revenue to the Company.
Revenue from the sale of chipset products to customers is
recognized at the time the products are shipped.
NET LOSS PER SHARE
Net loss per common share is computed based upon the weighted
average number of common shares and common share equivalents
outstanding during each period, as restated for the reverse
acquisition effected in October 1994. Common share equivalents
represent shares issuable upon the assumed exercise of stock
options. The stock options are included in the computation using
the treasury stock method, if they would have a dilutive effect in
years where there are earnings. Common share equivalents are not
considered in calculations of per share data when their inclusion
would be anti-dilutive.
F-7
<PAGE> 39
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCY
For the Company's operations outside of the U. S. that prepare
financial statements in currencies other than the U. S. dollar,
the Company translates statement of operations amounts at the
average exchange rates for the year. Assets and liabilities are
translated at the rate of exchange in effect on the balance sheet
date. Resulting translation adjustments are presented as a
separate component of shareholders' deficit.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash
deposited in a financial institution and accounts receivable.
There are no individually significant receivable balances (see
Note 8).
Financial instruments reflected in the Company's balance sheets at
June 30, 1996 and 1995 include cash and cash equivalents, and
borrowings from shareholders and related parties. The carrying
amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. Because of
the circumstances and the nature of the Company's relationship
with its creditors, it was not practical to estimate the fair
value of the $1,400,000 shareholder advance payable (see Note 3).
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3 - RELATED-PARTY TRANSACTIONS
Prior to June 30, 1994, the Company was advanced a total of
$2,159,910 from a previously unrelated third party, of which
$759,910 was contributed to capital when the Company agreed to
accept this amount as consideration for the issuance of 2,208,333
shares of its common stock pursuant to a March 1994 agreement. As
of June 30, 1996, the $1,400,000 remaining balance of the advance
remains unpaid. The advance is noninterest bearing, unsecured and
is due and payable, under the terms of the borrowing, when the
Company is reasonably able to do so without jeopardizing its
financial condition.
The Company has received services from a law firm in which a
director of the Company is employed. Amounts charged to
operations for these legal services during the years ended June
30, 1996, 1995 and 1994 amounted to approximately $44,000, $33,000
and $35,000, respectively.
In November 1995, the Company entered into a consulting agreement
with a company indirectly controlled by one of its shareholders.
The consulting agreement provides, among other things, for the
consultant to provide services to the Company in connection with
the marketing and distribution of the Company's products and
technology to certain potential customers and markets. As
compensation, the consultant will receive a fee to be calculated
as a percentage of the Company's
F-8
<PAGE> 40
NOTE 3 - RELATED-PARTY TRANSACTIONS (CONTINUED)
revenues, if any, attributable to the consultant's efforts. In
addition, the consultant may receive warrants to acquire up to an
aggregate of 1,000,000 shares of the Company's common stock, if
certain revenue criteria are met. The warrants, if issued, will
be exercisable over a five year period at a price per share equal
to the lesser of $10, or 50% of the market value of the Company's
common stock on the date of issuance of the warrants.
The Company has also entered into a marketing agreement with an
individual who is a director of a principal stockholder of the
Company. The agreement provides for, among other things, the
individual to receive compensation based upon revenue attained by
the Company, as a result of transactions attributable to the
individual's efforts. Compensation under the agreement will
consist of from 5% to 10% of revenue plus warrants to acquire
75,000 shares of the Company's common stock for each $1 million of
revenue attained, with an exercise price of 50% of market value at
the time the warrant is issued, up to a maximum of 300,000 shares.
In July 1994, a director loaned the Company approximately $68,000.
The loan is unsecured, bears no interest and has no defined terms
for repayment. Approximately $6,000 and $54,000 was repaid in the
years ended June 30, 1996 and 1995, respectively.
NOTE 4 - INCOME TAXES
As of June 30, 1996, the Company has a United States net operating
loss carryforward of approximately $60,000 available to offset
future taxable income through the year 2009. Under U. S. federal
tax law, certain changes in ownership of a company may cause a
limitation on future utilization of these loss carryforwards.
As of June 30, 1996, the Company's subsidiaries have a United
Kingdom net operating loss carryforward of approximately $4.7
million, which carries forward indefinitely under United Kingdom
tax laws.
Deferred tax assets resulting from the Company's income tax loss
carryforwards were approximately $1,175,000 and $850,000 at June
30, 1996 and 1995, respectively. The Company has established a
valuation allowance to fully offset these deferred tax assets as
their future realization is doubtful.
NOTE 5 - STOCKHOLDERS' DEFICIT
During the year ended June 30, 1994, the Company issued in private
transactions an aggregate of 6,671,433 shares of its common stock
in exchange for consideration of $872,207. Consideration of
$759,910 was in the form of previously received advances
contributed to capital in exchange for 2,208,333 shares of the
Company's common stock (see Note 3).
F-9
<PAGE> 41
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
During the year ended June 30 1995, the Company issued in private
transactions an aggregate of 2,738,342 shares of its common stock
in exchange for proceeds of $570,972. Of this amount, $500,000 was
received in stock subscriptions, which were originally
recorded as subscriptions receivable reducing shareholders'
equity. As of June 30, 1996, of the $500,000 stock subscriptions
receivable, only $225,000 was subsequently collected. As a
result, the balance of the stock subscriptions receivable has been
charged to additional paid-in capital.
During the year ended June 30, 1996, the Company issued in private
transactions an aggregate of 2,600,000 shares of its common stock
in exchange for proceeds of $2,359,000. Of this amount,
$1,297,500 was received in the form of notes receivable, which
were originally recorded as stock subscriptions receivable,
reducing shareholders' equity. Subsequent collections on the
notes receivable amounted to $852,500. The $445,000 balance of
the notes receivable has not been collected and the notes are in
default. As a result, the balance of the notes representing stock
subscriptions have been charged to additional paid-in capital.
NOTE 6 - STOCK OPTIONS AND WARRANTS
In April 1995, the Company granted options to four of its
employees to acquire an aggregate of 115,000 shares of the
Company's common stock at an exercise price of $2.50 per share.
Approximately 57,500 of these options became exercisable in April
1996 and 57,500 become exercisable in April 1997. All of these
options expire in April 2000.
In January 1996, the Company granted options to four of its
employees to acquire an aggregate of 40,000 shares of the
Company's common stock at an exercise price of $2.50 per share.
Approximately 20,000 of these options become exercisable in
January 1997 and 20,000 become exercisable in January 1998. All
of these options expire in January 2001.
During the year ended June 30, 1996, the Company issued to a
consultant warrants to purchase up to 100,000 shares of the
Company's restricted common stock at an exercise price of $1.00
per share. Compensation charged to operations in the year ended
June 30, 1996 related to these warrants amounted to $21,500, which
represents the difference between the market price of 100,000
shares of the Company's common stock on the date the options were
granted, discounted at 50% for the restrictions, and the $1.00
option exercise price.
Also during 1996, the Company issued options to three of its
directors to purchase an aggregate of 300,000 shares of the
Company's restricted common stock at an exercise price of $5.00
per share. The options become exercisable in June 1997 and expire
in June 2001. No compensation expense was recorded for these
options as management believes the restrictions associated with
any shares received by the option grantees on exercise will
subject those shares to a discount from unrestricted market value.
In connection with the private placement of 1,600,000 shares of
its common stock in 1996, the Company issued a warrant, which is
exercisable through September 1, 1997, to purchase 3.5% of the
then outstanding shares (calculated on a fully diluted basis) of
the Company's common stock for consideration of $1,000,000. The
warrant is subject to certain anti-dilution provisions.
F-10
<PAGE> 42
NOTE 7 - SHORT-TERM BORROWINGS
The Company has borrowed funds from time to time for working
capital under various secured credit facilities with its principal
bank. These borrowings have generally provided for interest on
outstanding amounts at a rate of 3% above the financial
institution's prime rate. All such borrowings have been subject
to the bank's discretion, collateralized by a floating debenture
on substantially all of the assets of the Company and are payable
on demand. As of June 30, 1996, the Company had an arrangement in
place with its bank to borrow up to $76,000 subject to the
foregoing terms through August 1996 (see Note 9).
Cash paid for interest was approximately $45,000, $35,000 and
$2,000 for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under an operating lease entered
into during 1996, which expires in March 2001. Future minimum
rental payments and service charges required under the leases at
June 30, 1996, are approximately as follows:
<TABLE>
<CAPTION>
Year Ending June 30, Amount
-------------------- ------
<S> <C>
1997 $79,000
1998 $79,000
1999 $79,000
2000 $79,000
2001 $58,000
</TABLE>
For the years ended June 30, 1996, 1995 and 1994, rent expense
totaled approximately $26,000, $24,000 and $23,000, respectively.
EMPLOYMENT AGREEMENTS
As of September 1, 1994, the Company entered into employment
agreements with each of its executive officers requiring the
payment of aggregate minimum annual salaries of approximately
$355,000 until August 31, 1997. The agreements are rolling-term
agreements and automatically renew for a further three-year term
at the expiration of each year. The minimum salary requirements
were waived by two of the officers for the first two years of the
employment term.
CONCENTRATIONS
The revenues for years ended June 30, 1996, 1995 and 1994 were
generated from a small number of customers, the loss of any one of
which could have a material adverse effect on the Company's
business.
The Company presently has only one supplier manufacturing
customized internet access devices using its chips and software.
Should the supplier cease production, the Company could be
adversely affected.
F-11
<PAGE> 43
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATIONS (CONTINUED)
The Company's revenue by geographic region during the years ended
June 30, were approximately as follows:
<TABLE>
<CAPTION>
Location 1996 1995 1994
--------------------- ---------- ------------- ----------
<S> <C> <C> <C>
Europe $ 110,000 $ 440,000 $ 130,000
Far East -- 640,000 60,000
North America 280,000 520,000 690,000
---------- ------------- ----------
$ 390,000 $ 1,600,000 $ 880,000
========== ============= ==========
</TABLE>
CONTESTED LIABILITY
In November 1994, the Company received a written demand from a
third party for $75,000, plus additional unspecified amounts based
upon an alleged breach of contract. The Company has advised the
third party that it did not believe it has any liability since the
third party failed to perform in accordance with the contract and
that the contract was of no further effect. The ultimate outcome
of this matter and the amount of damages, if any, that may
ultimately be incurred cannot presently be determined, and no
provision for liability has been made in the accompanying
consolidated financial statements.
EMPLOYEE TRUST
As of June 30, 1996 and 1995, 2,944,444 shares of the Company's
common stock were held by an employee trust (the Trust) whose
beneficiaries are substantially all the employees of the Company.
Contributions to the Trust are at the discretion of the Company's
Board of Directors. During the years ended June 30, 1996 and
1995, the Company made no contributions to the Trust.
OTHER
The Company does not have access to certain of its corporate
records, other than drafts and copies of certain documents, for
the period from approximately September 1994 through December
1995, making it difficult for the Company to conclude that certain
corporate matters were properly effected. Current management
believes that all matters during this period were effected
properly, including approval of the reverse acquisition of Capital
Acquisition Corporation by MSU, Plc. (see Note 1). The corporate
records for the aforementioned period are in the possession of one
of the Company's former law firms, which has refused to release
such records until amounts allegedly due such firm are paid. The
Company is contesting the amount allegedly due that firm based on
the Company's belief that it was billed for services that were not
authorized by the Company. The ultimate outcome of these matters
and the amount of damages, if any, that may ultimately be incurred
cannot presently be determined. The accompanying financial
statements contain no provision or adjustments related to the
ultimate outcome of these uncertainties.
F-12
<PAGE> 44
NOTE 9 - SUBSEQUENT EVENTS
In August 1996, the Company received a loan in the amount of
$160,000 from its employee trust. The loan is unsecured, bears no
interest, and has no defined terms for repayment.
In September 1996, the Company sold in a private transaction,
50,000 shares of its common stock for net proceeds of $250,000.
In October 1996, the Company received $500,000 in connection with
a private sale of 83,334 shares of its common stock. The
purchaser has agreed to purchase an additional 83,333 common
shares for approximately $500,000 in November 1996. The agreement
for the sale of the shares also provided that upon completion of
the aforementioned transactions, the Company will issue to the
purchaser an option to acquire 166,667 shares of the Company's
common stock at an exercise price of $6.00 per share. The option
expires in October 1997.
F-13
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MSU CORPORATION
By: KEITH CHARLES HALL
---------------------------------
Keith Charles Hall
President
Date: November 25, 1996
-------------------
Each person whose signature appears below authorizes Keith Charles
Hall and William Derek Snowdon or either of them, each of whom may act without
joinder of the other, to execute in the name of each such person who is then an
officer or director of the Registrant and to file any amendments to this annual
report on Form 10-K necessary or advisable to enable the Registrant to comply
with the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such changes in such report as such
attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Wynford Peter Holloway Chief Executive Officer November 25, 1996
- - --------------------------- and Director (Principal -----------------
WYNFORD PETER HOLLOWAY Executive Officer)
Keith Charles Hall President and Director November 25, 1996
- - --------------------------- (Principal Financial and -----------------
KEITH CHARLES HALL Accounting Officer)
William Derek Snowdon Secretary and Director November 25, 1996
- - --------------------------- -----------------
WILLIAM DEREK SNOWDON
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- - -------
<S> <C>
2 Exchange Agreement among Capital Acquisition Company and the
shareholders of MSU PLC(3)
3.1 Articles of Incorporation(1)
3.2 Amendment to Articles of Incorporation(4)
3.3 Bylaws(1)
3.4 Amendment to Bylaws(2)
4.1 Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.2 Amendment to Common Stock Purchase Agreement with McLaughlin Group
LLC(4)
4.3 Warrant issued to McLaughlin Group LLC(4)
10.1 Service Agreement with Wyn Holloway(4)
10.2 Service Agreement with Keith Hall(4)
10.3 Service Agreement with W.D. Snowdon(4)
10.4 Placement Agent Agreement with Millport Ltd. as amended and
confirmed(4)
10.5 Employee Trust(4)
10.6 Office Lease Agreement with Brixton Estate Plc(4)
10.7 Manufacturing, Distribution and Joint Venture Agreement with American
Interactive Media, Inc. Confidential treatment has been requested for
specific portions of the Manufacturing, Distribution and Joint Venture
Agreement(4)
10.8 Engagement Letter, dated November 8, 1995, as amended, with McLaughlin
International, Inc.(4)
10.9 Engagement Letter, dated May 17, 1996, with McLaughlin International,
Inc.(4)
10.10 Form of Director Option granted to each director in consideration of
guarantee of National Westminster Bank Plc credit facility (4)
10.11 Development and Licensing Agreement with TXC Corporation.
Confidential treatment has been requested for specific portions of
the License Agreement(4)
10.12 Agreement with Mitac, Inc. Confidential treatment has been requested
for specific portions of the Agreement(4)
16 Letter re change in certifying accountant from Coopers & Lybrand
LLP(4)
21 Subsidiaries of Registrant(5)
24 Power of attorney. Reference is made to the signature page of this
report.
27 Financial Data Schedule.
</TABLE>
- - ----------------------------
(1) Contained in exhibits to the Registration Statement on Form S-18 (file
no. 33-07861-A), declared effective by the Securities and Exchange
Commission on November 6, 1986.
(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended February 28, 1990, filed with the Securities and Exchange
Commission in May 1990.
(3) Contained in exhibits to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission in October 1994.
(4) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, filed with the Securities and Exchange
Commission on November 27, 1996.
(5) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
MSU Public Limited Company
MSU (UK) Limited
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 54,805
<SECURITIES> 0
<RECEIVABLES> 11,529
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 124,369
<PP&E> 87,078
<DEPRECIATION> 47,191
<TOTAL-ASSETS> 164,256
<CURRENT-LIABILITIES> 1,979,974
<BONDS> 0
0
0
<COMMON> 155,347
<OTHER-SE> (1,971,065)
<TOTAL-LIABILITY-AND-EQUITY> 164,256
<SALES> 392,693
<TOTAL-REVENUES> 397,892
<CGS> 65,795
<TOTAL-COSTS> 1,794,653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,491
<INCOME-PRETAX> (1,396,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,396,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,396,761)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
