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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________ to _______________
Commission File Number 33-28622-A
MSU Corporation
(Exact name of registrant as specified in its charter)
Florida 22-274288
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elder House, 526-528 Elder Gate,
Central Milton Keynes, MK9 1LR, England
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 441908232100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or l5(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 [X] No [ ].
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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 25, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, by reference to the closing price for such
stock as reported by Bloomberg Financial, Inc., was $21,997,925.
As of September 25, 1997, the registrant had issued and outstanding 16,093,791
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or indicated portions thereof, have been
incorporated herein by reference:
(1) Specifically identified information in the registrant's definitive
proxy material for its 1997 annual meeting of stockholders is incorporated by
reference as Part III hereof, which definitive proxy material shall be filed not
later than 120 days after the registrant's fiscal year ended June 30, 1997.
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FORM 10-K INDEX
PART I
ITEM 1. BUSINESS
ITEM 2 PROPERTIES
ITEM 3 LEGAL PROCEEDINGS
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
MSU Corporation, formerly Capital Acquisition Company ("Capital
Acquisition"), was incorporated in Florida in 1986. MSU Corporation conducted no
substantive business until October 1994 when all of the outstanding shares of
MSU Public Limited Company, an England and Wales company formed under the
Companies Act of 1985 ("MSU PLC") were exchanged for Capital Acquisition shares
(the "Exchange"). The Exchange was treated for financial reporting purposes as a
reverse acquisition or purchase of Capital Acquisition by MSU PLC. MSU PLC, in
turn owns all of the outstanding shares of MSU (UK) Limited ("MSU Limited"), an
England and Wales company formed under the Companies Act of 1985. MSU Limited
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 Limited, its second tier subsidiary. In February 1997 MSU US
Operations Inc., a North Carolina corporation and a wholly owned subsidiary of
MSU Corporation ("MSU US") was formed to act as a sales company, in the United
States, marketing and selling products developed by MSU Corporation.
Unless the context otherwise requires, references in this Annual Report on
Form 10-K to the "Company" refer to MSU Corporation, MSU PLC, MSU Limited and
MSU US. Historical financial information for periods prior to the Exchange has
been presented as that of MSU Corporation as if MSU PLC and MSU Limited 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 September 22,
1997.
EXCHANGE RATES
MSU PLC and MSU Limited conduct a significant amount of their operations in
pounds sterling. References to dollars in this Annual Report on Form 10-K are to
US 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. The following
table sets forth, for the periods indicated, certain information concerning
the rates of pounds sterling per dollar:
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<TABLE>
<CAPTION>
Fiscal year ended At end of Average
June 30 period Rate(1) High(2) Low(2)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 .67 .63 .69 .50
1994 .65 .67 .68 .65
1995 .63 .63 .65 .61
1996 .65 .65 .64 .61
1997 .60 .61 .64 .59
</TABLE>
(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.
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 permit a more efficient 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 electronic manufacturers and others with an interest in the Company's
chip technology and products.
The Company has, to date, developed numerous consumer electronic products
on its own behalf and on behalf of manufacturers pursuant to development
contracts or arrangements with manufacturers based in China, Taiwan, Germany,
the United States, Hong Kong and the United Kingdom. These contracts have
Typically provided for the payment of development and/or license fees plus
royalties based on sales of products utilizing the Company's chips or chipsets.
During the year ending June 30, 1997, sales by Mitac, Inc., a Taiwanese
corporation, ("Mitac") of Internet Access Devices utilizing the Company's
software and manufactured by Mitac, commenced, but to date only a limited number
of sales have been made. To facilitate the manufacture of the Internet Access
Devices, the Company arranged for the sourcing and purchase of chips used in
the Internet Access Devices which were sold to Mitac at cost. In the future it
is expected that Mitac will purchase all such chips directly from United Micro
Corporation or such other companies as agreed upon by the Company and Mitac.
Other than as described above, no products developed pursuant to
development contracts have been sold and no royalties have been received. In
most instances, the Company has no control over a third party's manufacturing,
marketing or purchasing decisions, and accordingly there can be no assurance
that any developed products will
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be manufactured, marketed or sold. In fiscal 1997, the Company's revenues were
derived from product development and license fees (37% of total revenue), chip
sales (41% of total revenue) and other revenues (22% of total revenue).
In October 1993, MSU Limited 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. IBM retains
a non-exclusive license to use such intellectual property. Additionally any
major enhancements to and replacement of such intellectual property as well as
other technology developed by the Company must be offered first to IBM. The
Company has offered its prototype Internet Access Device and related ISP Chip
technology to IBM which offers were not accepted. The Company has not yet
offered the Envoy Chip or the Wynpeg Chipset to IBM.
CHIP TECHNOLOGY
Slipstream Application Specified Integrated Circuit ("Slipstream ASIC
Chip"). The Slipstream 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 the 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. 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 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.
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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 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 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 Chipsets ("Wynpeg Chipsets"). The Wynpeg Chipset incorporates the
Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group (M-PEG"). M-PEG is an
international standards body that defined a world-wide standard for the
compression of video data called Philips White Book Video M-PEG Standard. The
Company's Wynpeg chipset is capable of decompressing video signals in accordance
with such standard. The Company intends to develop version 2 of the Wynpeg
Chipset 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 multi media product capable of use as a video CD
player, audio CD player, and for a photo CD and Karaoke. This CD based multi
media product consists of a conventional CD player equipped with an internal
audio amplifier; a karaoke function which has the ability to run stereo sound
track and produce graphics on the screen with overlaying 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
set top 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 represent
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-version 2.
It is anticipated that future generations of the prototype Internet Access
Device will be based on 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. During the year ended June 30, 1997 the Company made releases of its
software for use with production samples of its Internet Access Device. A
significant release of the software was made in August 1997 for use in its
customised Internet Access Devices which are now being manufactured by Mitac.
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 contracts with American
Interactive Media, Inc. a US corporation ("AIM") and Mitac for the development,
manufacture and sale of customized Internet Access Devices. It is anticipated
that Mitac will manufacture for sale all customized Internet Access Devices
developed pursuant to both the AIM and Mitac agreements. During fiscal 1997
approximately 9,000 devices were manufactured and either sold by Mitac to one of
its commercial customers or were purchased from Mitac by the Company and sold as
production samples to other potential customers. No production samples have been
approved yet pending final software release; 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 either of 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.
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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.
SUPPORT SERVICES
The Company has provided and will continue to provide consulting and other
development services pursuant to contracts entered into with consumer electronic
manufacturers and others. Company employees assist in, among other matters,
identifying trends in consumer preference 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 that
such activities will result in profits to the Company.
SUPPLY AND MANUFACTURING
American Microsystems, Inc., a semiconductor manufacturer, has historically
manufactured the Slipstream 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 the majority of the ISP Chip-version 2, to be used in the customized
Internet Access Device proposed to be manufactured by Mitac, and the Envoy chip.
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 limited. The Company has commenced discussions with other
manufacturers for the production of other chips and chipsets should the need
arise. Should demand for the Company's chips and chipsets increase
significantly, there can be no assurance that the Company will be able to meet
such demand, which could have a material adverse effect on the Company's
business, financial conditions or results of operations. Furthermore,
arrangements with new manufacturers could result in substantial delays,
engineering charges and additional expenses.
Mitac is the only present manufacturer of customized Internet Access
Devices using the Company's chips and software. Should Mitac cease to
manufacture the customized Internet Access Devices, the Company's business,
financial conditions or results of operations would be adversely
affected.
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RESEARCH AND DEVELOPMENT
Since 1992 the Company has been engaged in developing its own chips and
prototype products. It has done so independently, pursuant to research and
development contracts. Research is conducted at the Company's facilities located
in Central Milton Keynes and Newmarket, England, through engineers and
programmers employed by it as well as independent contractors. During the fiscal
years ended June 30, 1995, 1996 and 1997, the Company expended approximately
$1.3 million, $1.2 million and $1.4 million, respectively on unreimbursed
research and development (which exclude all overhead costs other than employee,
independent contractor, development tool and prototyping cost), all of which has
been expensed. Approximately 56%, 28% and 40% of the amounts expended on
research and development in the fiscal years ended June 30, 1995, 1996 and 1997,
respectively, were customer sponsored.
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 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. 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 Company's chips or chipsets, and would increase the
likelihood that competitive products would 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.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
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, other than its pending patent with respect to its Envoy CD Controller
(see below), 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 believes that its chip
technology is entitled to comparable protection under the US Copyright Act of
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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 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.
A UK Patent application ( No.9706198.0 ) in respect of the Envoy CD
Controller was filed on March 25, 1997 and will remain pending for twelve months
from that date. It is the Company's intention to complete the filing of the
necessary information to support this application within this period.
No assurance can be given that any patent will issue from any application
that may be filed, or that if a 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,
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.
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The Company has registered trademarks for the names:
(i) Wynpeg in the United Kingdom (Reg. No. 1572811, effective May 21 1994),
Hong Kong (Reg. No. 06937/96, effective December 20, 1994), Taiwan (Reg. No.
00708445, effective April 1 1996) and the United States (Reg No. 74/718836,
effective 25 March 1997).
(ii) Slipstream in the United Kingdom (Reg No. 2114009) which is currently
being advertised. The Certificate of Registration is expected in December 1997.
In addition, applications have been filed for the registration of the Envoy
trademark in the United Kingdom (Application No.217809 which the Company is
informed by its Patent Attorneys is proceeding to acceptance), China
(Application No. 970055064) and Hong Kong (Application No. 97/07465).
Applications have also recently been filed to register the Envoy trademark in
the European Community (Application No. 586107), the United States of America
(Application No. 75/304,571), Japan (Application No. 124075/97), Taiwan
(Application No. 86027777) and Singapore (Application No. s/6442/97).
There can be no assurance that any of these trademark registrations will be
accepted or, if accepted, will later 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.
EMPLOYEES
The Company has 16 employees, including four executive officers, two
business development personnel, nine technical personnel and one administrator.
The Company uses independent contractors for certain research and development
matters.
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 employment contracts with Messrs. Holloway, Snowdon, Phillips,
Capaci and Peirson which restricts certain of their activities for one year
after departure from the Company. See "EXECUTIVE COMPENSATION - Employment
Agreements". The Company plans to obtain key-man life insurance on Wynford Peter
Holloway, the Company's Chief Executive Officer, for $5 million for one year.
The Company has no plans to obtain key-man insurance on any other 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
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services of additional personnel, whether for replacement purposes or for new
positions, necessary for the Company's growth and success.
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.
No Sales of Products that Employ the 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 other 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 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 such distractions may be associated
with the Company's chips and chipsets. The Company continues to review the
adequacy of its insurance coverage. Presently, the Company believes that its
insurance coverage may be inadequate in light of current and prospective
agreements. However it continues to endeavour to obtain adequate coverage,
although no assurance can be given that adequate insurance will be obtained.
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 Device. 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's developed software, as is, or
with
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minimal modifications; jointly to 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 Device from the Company, the manufacturer or
other party, develop and incorporate its own software and sell the Internet
Access Device to consumers at a significantly lower price. Large service
providers will likely prefer to have less dependence on the Company. 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, if agreed, which would likely
result in greater potential revenues to the Company.
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. Many of the
Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than the Company as well as substantially larger research and development staffs
and facilities. These companies also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than the Company. The 3DO Company, C-Cube, 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 Mircosystems, 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. 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 with its present
competitors or potential competitors or that such competition will not have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, to the extent that 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.
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,
1997 was largely attributable to 4 customers. Such 4 companies were Mitac
(Internet Access
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Device royalties and chip sales), Zilog (product development), AIM (product
development), and C-Cube (Envoy - product development). The Company has
entered into written agreements with each of these customers. Unless the
products developed or to be developed in conjunction with the above 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
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 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.
Modification of Auditors' Opinion; Going Concern. The Company's independent
accountants have included an explanatory paragraph in their report on the
Company's financial statements as of June 30, 1997, 1996, and 1995, which states
"the Company has suffered and continues to suffer significant losses from its
operations, has an accumulated deficit and revenue and cash flow 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." See "FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT ACCOUNTANTS.
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 Peoples 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 main operating subsidiary conducts business in
pounds sterling. Any decline in the value of 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
fluctuations and does not intend to do so in the immediate future.
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ITEM 2. PROPERTIES
The Company presently leases:
(i) Approximately 2,900 square feet of office space at Elder House, 526-528
Eldergate, Central Milton Keynes, MK9 1LR, England. The lease is for a five year
term expiring March 21, 2001 and provides for an annual rental of $45,700. The
Company is also responsible for taxes, insurance and service charges which
should approximate, in the aggregate, $36,000 annually. Management believes
that this leased facility is suitable and adequate for its intended use,
although as the Company grows, additional facilities will be sought.
(ii) Approximately 435 square feet of office and laboratory space at 8 Kings
Court, Willie Snaith Road, Newmarket, England. The lease is for a three year
term expiring February 9, 2000 and provides for an annual rent of $7,470. The
Company is also responsible for taxes, insurance and services charges which
should approximate, in the aggregate, $4,150 annually.
(iii) The Company also uses offices for its MSU US operations, located at the
home of Gerald Capaci, in Raleigh, North Carolina. The Company has no lease and
pays no rent for this facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings.
In September 1994, MSU PLC entered into a placement agent agreement with
Millport Limited ("Millport"), believed by the Company to be a Liberian
corporation (with a Channel Islands 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 of the Company's common stock 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, 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, 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, which payment was never received.
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 of the 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 these Liberian corporations. Due to a lack of working capital,
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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 may have against the Company
although no specific claims have been made. The Company is unaware of any
meritorious 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 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 action will not be barred by applicable statutes
of limitation or that if successful, the Company will be able to collect upon
any judgement 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 cannot 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 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 Limited. The Company believes such law
firm also represents Martin Miller and represented Millport 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 relative to public and private financing for MSU PLC. Paragon claims
that 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.
15
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
16
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<PAGE>
PART II
ITEM 5. MARKET FOR 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 without
adjustment for retail mark-ups, mark-downs or commissions which do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Range of Bid Information
High Low
---- ----
<S> <C> <C>
Fiscal Year ended June 30, 1997:
Quarter ended June 30, 1997 $ 4.19 $1.75
Quarter ended March 31, 1997 $ 6.87 $2.25
Quarter ended December 31, 1996 $10.50 $4.50
Quarter ended September 30, 1996 $11.31 $7.87
Fiscal Year ended June 30, 1996
Quarter ended June 30, 1996 $10.75 $4.38
Quarter ended March 31, 1996 $ 5.63 $1.00
Quarter ended December 31, 1995 $ 5.00 $3.03
Quarter ended September 30, 1995 $13.75 $1.00
</TABLE>
On June 30, 1997 there were approximately 148 stockholders of record of the
Company's common stock, including holders of record and participants in security
position listings, but excluding those shares of common stock held in street
name.
The Company has never paid cash dividends on its common stock and does not
anticipate it will do so in the foreseeable future. The Company currently
intends to retain future earnings, if any, to fund the development and growth of
its business. The payment of future cash dividends by the Company on its common
stock will be at the discretion of the Board of Directors and will depend on the
Company's earnings (if any), financial condition, cash flows, capital
requirements, and contractual prohibitions with respect to the payment of
dividends and other considerations as the Board of Directors may consider
relevant.
17
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the financial
statements of the Company. The financial statements for each of the fiscal years
in the four-year period ended June 30, 1997 have been audited by Moore
Stephen Lovelace, P.L., independent certified public accountants. The financial
statements for the fiscal year ended June 30, 1993 are unaudited, however the
financial statements for MSU Limited for such period were audited by Michael 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.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
(in thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total Revenue 1,480 393 1,596 875 152
Loss from operations (2,113) (1,402) (882) (1,366) (1,300)
Net Loss (2,107) (1,397) (878) (1,365) (1,296)
Primary loss per share (0.13) (0.10) (0.07) (0.31) (0.38)
Fully diluted loss per share (0.13) (0.10) (0.07) (0.31) (0.38)
BALANCE SHEET DATA (AT YEAR END):
Working Capital (deficiency) (1,556) (1,856) (2,662) (1,841) (1,290)
Total assets 2,086 164 363 197 229
Stockholders' deficit (2,421) (1,816) (2,620) (1,770) (1,264)
</TABLE>
Per share amounts were computed for 1993 on the number of shares outstanding at
the end of the fiscal year
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-K contains forward looking statements that involve
risks and uncertainties. The statements contained in this report on Form 10-K
that are not purely historical are forward-looking statements within the meaning
of Sections 27A of the Securities Act of 1933, as amended (the "Securities Act")
and 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report on Form 10-K are based on information available to the
Company at the date of this report on Form 10-K, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Business" and elsewhere in this report on Form 10-K. The following discussion
and analysis should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report on Form 10-K.
OVERVIEW
On October 3, 1994 MSU Corporation, formerly Capital Acquisition Company,
acquired the outstanding capital stock of MSU PLC, the parent of MSU Limited
(MSU PLC and MSU Limited 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 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, MSU Limited and MSU US (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 1997, 1996 and 1995, the Company incurred net losses of approximately
$2,107,000, $1,397,000 and $878,000, respectively. At June 30, 1997 there was an
accumulated
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deficit of approximately $7,133,000. Additionally, the Company has had recurring
negative cash flows from operations. The Company expects that it is likely to
incur net losses at least through the end of the first quarter of fiscal 1998
and possibly through that year 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 the first quarter of fiscal 1998 if anticipated revenues from
development fees and royalties in respect of sales of the Envoy chip, or
royalties and conditional and forecasted purchase orders of customized Internet
Access Devices, are not realized. Such conditional and forecasted purchase
orders in respect of the Internet Access Devices assume, without limitation,
approval of final production samples by potential purchasers; acceptance by and
demand for the customised Internet Access Devices by consumers; satisfactory
product performance, including chip and software performance; and the ability of
the products to compete successfully 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 the first quarter of fiscal 1998 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 the Envoy chip and on
customised Internet Access Devices incorporating its ISP Chip-version 2. In
order to support this strategy, the Company anticipates that if sales revenues
are not generated in the coming months, it will, at least in the short term,
have to continue to fund a significant portion of its operations through private
sales of equity securities to and/or borrowings from third parties, to the
extent such sources of capital are available to the Company. The Company also
intends to further develop its infrastructure and organization to support its
anticipated operations, although it has no funds to presently address these
concerns.
The markets for the Company's products have only recently begun to develop,
are rapidly evolving and are highly competitive, with substantially all
competitors having significantly greater resources than the Company. The Company
and its prospects must be considered in light of the substantial risks, expenses
and difficulties facing the Company. There can be no assurance that the Company
will be successful in addressing any of the foregoing risks, that it will be
successful in implementing its strategy, that any of its current 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.
See Report of Independent Auditors and Company's financial statements appearing
elsewhere in this Annual Report on Form 10-K.
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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, 1997, 1996 and 1995 were approximately $1,480,000, $393,000 and
$1,596,000 respectively. In fiscal 1997 the revenues were derived principally
from chip sales, license and development fees, and royalty fees paid in
connection with the sale of customized Internet Access Devices. In fiscal 1996,
revenues were derived principally through development arrangements in which
the Company performed engineering and design work for its customers for a
development fee and, in fiscal 1995, from chip sales in connection with
a development arrangement. Typically, the Company's development arrangements
also provide for royalties and/or license fees to be paid to the Company if the
customer sells products developed in conjunction with the Company and/or
incorporating the Company's proprietary technology. To date, apart from the
royalties received in 1997 in connection with the sale of the Internet Access
Devices, none of these development arrangements have resulted in royalty or
continuing license revenue to the Company. The Company would be materially
adversely affected if customers fail to manufacture, market or sell products
developed in conjunction with the Company.
During the years ended June 30, 1997, 1996 and 1995 the Company's revenues
were principally derived from four, three and two customers, respectively.
Because of the concentration of its revenues in such a small number of
customers, the loss of one customer could have a material adverse effect on the
Company's business.
The Company's revenues by geographic region during the years ended June 30
1997, 1996 and 1995 were approximately as follows:
Location 1997($) 1996($) 1995($)
- ---------------------------------------------------------
Europe -- 110,000 440,000
Far East 730,000 -- 640,000
North America 750,000 280,000 520,000
The Company's revenues decreased approximately 75% in 1996 compared to
1995. The decrease was largely attributable to the fact that the Company was
devoting its efforts and limited capital to the initial phases of its
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. The approximate 280%
increase in revenue in 1997 compared to 1996 is primarily a reflection of the
low revenue in 1996, but it does include royalties in respect of product sales
and fees from development contracts which the Company anticipates will provide
continuing revenue streams into 1998 and subsequent years. It
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should be noted however that the Company's revenues in 1997 are lower than
previously forecasted because of increased lead time to market for the Internet
Access Device resulting from the incorporation of enhanced technology features.
COST OF REVENUES
The cost of revenues for the years ended June 30, 1997, 1996 and 1995 were
approximately $651,000, $66,000 and $604,000 respectively. As a percentage of
revenues, cost of revenues were approximately 44% in 1997, 17% in 1996 and 38%
in 1995. The cost of revenue 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 until 1997 was usually approximately 48% to 54%
depending on the number and type of chips purchased. However, in fiscal 1997
most of the chip sales (approximately $600,000) were to Mitac and were sold at
cost.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses generally consist of expenditures,
relating 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, 1997, 1996 and 1995 research and development costs were approximately
$1,386,000, $1,248,000 and $1,297,000, respectively. As a percentage of
revenues, research and development expenses were approximately 94% in 1997, 318%
in 1996 and 81% in 1995. 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 $1,486,000,
$404,000 and $520,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. Selling general and administrative expenses consist of advertising
and promotion costs, communication, rent and occupancy costs, and professional
fees. In 1997 this category of expense is higher than in 1996 primarily due to
significantly increased costs associated with sales, marketing and promotion
which are charged to operations as incurred (the Company exhibited at two
consumer electronics shows in the year in Las Vegas), and professional costs
incurred in the preparation of prior years delinquent Exchange Act periodic
reports. In 1995 this category of expense was higher than 1996 because of the
costs associated with the Exchange.
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DEPRECIATION EXPENSE
Depreciation expense was approximately $44,000, $32,000 and $21,000 for the
fiscal years ended June 30, 1997, 1996 and 1995, 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 $26,000, $45,000 and $35,000 for the
fiscal years ended June 30, 1997, 1996 and 1995. The interest expense in 1997 is
principally due to the interest of $17,600 paid in respect of certain bridge
financing. In the event the Company's note holders do not convert their notes
into equity, interest expenses will continue to rise until such notes are paid.
In addition, 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, collateralized 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 and debt securities. For the fiscal year ended June 30, 1997,
cash used in operating activities of approximately $2,911,000 was primarily
attributable to the Company's net loss for the fiscal year and to the costs
associated with the issuance of its 10% Convertible Notes. Cash used in
investment activities of approximately $77,000 for the fiscal year ended June
30, 1997 related primarily to the acquisition of electronics equipment. Cash
flows from financing activities of approximately $3,851,000 in the fiscal year
ended June 30, 1997 were primarily attributable to the issuance of shares of
common stock of the Company ($1,477,001) and to the issuance of its 10%
Convertible Notes ($1,829,742).
Capital expenditures were approximately $77,000 for the fiscal year ended
June 30, 1997. The Company currently estimates that capital expenditures for
fiscal 1998 will be approximately $150,000 to $200,000. The Company has no
material commitments, other than operating leases and four employment
agreements.
As at June 30, 1997 the Company's principal source of liquidity was
approximately $859,000 in cash. Since June 30, 1997 additional liquidity has
been provided from a further issuance of 10% Convertible Notes ($470,000) and
$79,000 from the sale of additional equity in the Company.
The Company believes that the cash flows expected to be generated by
operations
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through the remainder of fiscal 1998 will be sufficient to meet a
significant portion of its cash needs for working capital and capital
expenditures for the remainder of fiscal 1998. The preceding statement 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, approval
of final production samples of the Envoy chip and customized Internet Access
Devices by potential customers; acceptance by and demand for such product by
consumers; satisfactory product performance; and the ability of such products to
successfully compete in an extremely competitive market place. 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, of 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.
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,
1996 and 1997. The consolidated audited financial statements for the fiscal year
ended June 30, 1995 are for the consolidated group as if MSU PLC and MSU Limited
were owned by MSU Corporation during the first portion of the fiscal year ended
June 30, 1995 prior to the Exchange in October 1994.
In February 1996, MSU'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
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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
report 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; except, however, that the reports of Coopers & Lybrand LLP for
such periods express an uncertainty as to Capital Acquisition Company's ability
to continue as a going concern.
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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 within MSU PLC, MSU Limited and MSU US Operations Inc.) and their
respective ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Wynford Peter Holloway 48 President, Chairman, Chief Executive Officer
and Director of the Company, Chairman of MSU
PLC and MSU Limited, and President of MSU US
Operations Inc.
Jeremy Miles Simpson 63 Deputy Chairman of the Board of Directors of
the Company
William Derek Snowdon 43 Secretary and Director of the Company,
Secretary of MSU PLC and MSU Limited, and a
Director and Secretary of MSU US Operations
Inc.
Richard Horby Phillips 51 Principal Financial Officer and Director of
the Company, Director of MSU PLC and MSU
Limited and a Director and Treasurer of MSU
US Operations Inc.
Gerald J. Capaci 40 Vice President of Marketing and Business
Development, Director of the Company and Vice
President of MSU US Operations Inc.
Appointed since June 30, 1997
Keith Peirson 55 Managing Director of the Company
Fred Kashkooli 57 Director of the Company
</TABLE>
26
<PAGE>
<PAGE>
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 Limited since
June 1994 and March 1991,respectively. He has been president of MSU US
Operations Inc. since its incorporation in February 1997. Mr. Holloway is the
founder of MSU Limited. From 1991 through 1992, Mr. Holloway was a self-employed
design consultant providing professional design services to clients in the
computer peripherals business.
Jeremy Miles Simpson MA (Cantab) was appointed a director and Deputy Chairman of
the Company effective July 1, 1997. Mr. Simpson, who is a Freeman of the City of
London, was executive chairman of Gordon Russell Plc., a UK publicly quoted
company, from 1986 to 1989, prior to the sale of the company. Since that date
Mr. Simpson has held a number of non-executive directorships with smaller
growing and developing companies in the UK and Europe.
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 Limited since June 1994
and March 1991, respectively. He was appointed a director and secretary of MSU
US Operations Inc. on its incorporation in February 1997. Mr. Snowdon is a
solicitor and has been a partner with the firm of Phoenix Walters for the past
15 years. Mr. Snowdon's practice focuses on commercial contracts and
intellectual property law. In addition Mr. Snowdon is a non-executive director
of two Regional Enterprise Agencies in the United Kingdom.
Richard Horby Phillips FCA has served as principal financial officer and a
director of the Company since January 2, 1997 and also as a director of MSU PLC
and MSU Limited since that date. He was appointed Treasurer and a director of
MSU US Operations Inc. on its incorporation in February 1997. Mr. Phillips is a
chartered accountant who was with Coopers & Lybrand for 25 years. Mr. Phillips
was a partner in their London office from April 1983, providing advisory and
audit services to both public and private companies until August 1994 when he
formed his own firm to continue providing financial advice to emerging growth
companies in the US and UK. Mr. Phillips also currently serves on the Board of
five other UK companies.
Gerald J. Capaci has served as a director of the Company since February 1997. He
has also served as a director and vice president (business development and
marketing) of MSU US since its incorporation in February 1997. Prior to February
1997, Mr. Capaci spent over 10 years with IBM where he was most recently
Strategic Relationship Manager of their Internet Division where he was
responsible for assessing the technical, business and strategic value of
contracting with other software companies with special emphasis on internet
companies.
Keith Peirson has served as a director of the Company since September 1997 and
has been appointed the group's managing director. From 1995 to 1997, Mr. Peirson
acted as an independent consultant to various companies involved with the
distribution of computer products, construction of building facades and
automotive security. Mr. Peirson
27
<PAGE>
<PAGE>
has previously served as managing director of other companies in the electronics
field, including Farnell Electronic Services, where he spent 24 years, and Arrow
Electronics (UK) Limited from 1991 to 1994.
Fred Kashkooli has served as a director of the Company since August 1997. Mr.
Kashkooli has been an independent management consultant since 1991 and has over
twenty eight years of experience in the areas of microprocessors, memory, logic,
analog design, manufacturing, CAD design packaging, testing and marketing. from
1984 to 1991, Mr. Kashkooli was Senior Vice President of Research and
Development at GE Intersil, responsible for design, manufacturing and strategic
marketing for analog and digital products. Additionally, Mr. Kashkooli managed
design centers in Singapore, New Jersey, North Carolina and Florida. From 1980
to 1984, Mr. Kashkooli was a director of the microprocessor and memory division
of GE Intersil. Prior to this he worked ten years at Sygenetics, a corporation
engaged in the manufacture of semi-conductor chips. Mr. Kashkooli holds a BS in
Electrical Engineering from California State University.
28
<PAGE>
<PAGE>
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 other executive officers
receiving in excess of $100,000 in total annual salary and bonus (collectively
the 'named executive officers'):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other
Annual
Name Fiscal Salary Bonus Compensation
Year ($)(1) ($) ($)(2)
<S> <C> <C> <C> <C>
Wynford Peter
Holloway 1997 112,000 - 29,000
1996 112,000 - 17,072
1995 112,000 - 24,083
Keith Charles Hall 1997 48,000* - 9,000*
1996 96,000 - 8,000
1995 96,000 - 4,400
Richard Horby Phillips 1997 41,500* - 7,470*
Gerald J Capaci 1997 47,000* - 3,500*
</TABLE>
* Part of the year; to or from date of resignation/appointment
(1) All salaries and other annual compensation were paid by MSU Limited or MSU
US Operations Inc.
(2) Represents personal benefits in addition to salary. Of Mr. Holloway's
personal benefits, 51% of the 1995 amount was for house rental expense; 40% and
60% of the 1996 amount were for a company car and house rental expense,
respectively. The 1997 amount is in respect of a car allowance. Of Mr. Hall's
personal benefits, 100% of each of 1995, 1996 and 1997 amounts were for a car
allowance. All of Mr. Phillips benefits were in respect of a car allowance and
all Mr. Capaci's personal benefits are in respect of contributions to a personal
retirement plan.
29
<PAGE>
<PAGE>
LONG TERM COMPENSATION
Other than in respect of the stock options, details of which are set out on
pages 31 to 32, there were no long term compensation awards or payouts in any
of the years ended June 30, 1997, 1996 or 1995.
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 Directors) of $206,670, $132,800 and $33,200 respectively (as
adjusted), which base salary requirement was waived by each of Messrs. Holloway
and Hall for the first three years of the employment term. Subject to earlier
termination as provided in the agreements, the agreements are each for a three
year period ending August 31, 1997. Unless terminated in accordance with the
agreements, each agreement renews for a further period of three years on each
anniversary of the commencement date.
On January 6, 1997 the employment contract with Mr. Hall was terminated, by
mutual consent, effective December 31, 1996.
Effective January 2, 1997 MSU Limited entered into an employment agreement
with Richard Horby Phillips providing for an annual base salary of $107,900,
subject to annual increases within the discretion of the Board of Directors.
During an initial period, which is still continuing, Mr. Phillips is to receive
a lower base salary at the annual rate of $83,000 as he is unable to devote all
of his time to the Company's affairs due to other commitments. At present Mr.
Phillips is devoting approximately 4 days a week to the Company's affairs.
In September 1997 MSU Limited entered into an employment agreement with
Keith Peirson providing for an annual base salary of $160,000, subject to annual
increases within the discretion of the Board of Directors.
All of the above agreements with Messrs. Holloway, Snowdon, Phillips and
Peirson, also provide for a car allowance or use of an automobile, including
reimbursement of any automobile expenses, and participation in bonus plans when
and if formulated by MSU PLC or MSU Limited. MSU 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 Limited six months prior to termination of the executive.
Effective January 29 1997, MSU Limited entered into an employment agreement
with Gerald J Capaci providing for an annual base salary of $125,000, subject to
annual increases within the discretion of the Board of Directors. In addition,
the Company will make an annual nondiscretionary contribution to a retirement
plan for Mr. Capaci at a
30
<PAGE>
<PAGE>
rate of 7.5% of his annual salary and will establish and maintain a medical
benefits plan for Mr. Capaci, his spouse and dependent children.
COMPENSATION OF DIRECTORS
Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options granted to
the named executive officers during the Company's fiscal year ended June 30,
1997
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
Percent of Potential Realizable Value
Number of Total at Assumed Annual Rate of
Securities Options Stock Price Appreciation
Underlying Granted to Market for Option Term
Options Employees Exercise or Price on ---------------
Granted in Fiscal Base Price Date of Expiration
Year ($ per share) Grant Date 0%($) 5%($) 10%($)
Name
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wynford 150,000 23.0% $2.12 $2.12 4/18/02 - 87,858 194,142
Peter (Note 1)
Holloway 20,000 3.1% $3.25 $3.25 6/24/02 - 17,958 39,683
(Note 2)
William 20,000 3.1% $3.25 $3.25 6/24/02 - 17,958 39,683
Derek (Note 2)
Snowdon
Richard 100,000 15.3% $2.12 $2.12 5/11/02 - 58,572 129,428
Horby (Note 3)
Phillips
Gerald J 300,000 46.0% $2.12 $2.12 5/11/02 - 58,572 129,428
Capaci (Note 3)
Jeremy 62,500 9.5% $2.12 (50,000) $2.12 5/11/02 - 29,286 64,714
Miles (Note 4) $2.37 (12,500) $2.37 6/30/02 - 8,785 18,086
Simpson
</TABLE>
(1) The stock options granted to Mr. Holloway (50,000) and to the Employee Trust
(100,000), in which Mr. Holloway has an interest as the Settler and as a
potential beneficiary, on May 12, 1997 were in consideration of the benefits
derived by the Company from the provision of personal guarantees by Mr. Holloway
and security given by the Trust to secure a loan facility for the Company.
(2) The stock options granted to Mr. Holloway and Mr. Snowdon were in
consideration for the benefits derived by the Company from their agreeing to
certain additional restrictions on their disposing of their existing holdings of
shares of common stock in the Company; this being one of the conditions
attaching to the issuance of the 10% Convertible Loan Notes on June 25 1997.
(3) The stock options granted to Messrs. Phillips and Capaci are in accordance
with the provisions of their employment contracts with the Company. Mr. Phillips
has been granted options in respect of 100,000 shares of common stock
exercisable between November
31
<PAGE>
<PAGE>
11, 1997 and May 11, 2002. Mr. Capaci has been granted options in respect of
300,000 shares of common stock of which 100,000 are exercisable between November
11, 1997 and May 11, 2002; the options in respect of the other 200,000 shares of
common stock vest as to 100,000 after January 1998 provided that the Company's
share price has been quoted at $15.00, and 100,000 after January 1999 provided
that the Company's share price has been quoted at $20.00.
(4) The stock options granted to Mr. Simpson were in consideration of his
agreeing to subscribe for 79,012 shares of common stock of the Company on May
12, 1997 and 48,012 shares on June 4, 1997.
(4) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the assumption that the Company's common
stock will appreciate in value from the date of the grant to the end of the
option term (five years from the date of the grant) at annualized rates of 5%
and 10% (total appreciation of approximately 28% and 61%), respectively, and
therefore are not intended to forecast possible future appreciation, if any, in
the price of the common stock.
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30, 1997. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1997
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options In-the-Money Options
Name at Fiscal Year End (#) at Fiscal Year End ($)(1)
- ------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Wynford Peter
Holloway 100,000 170,000(2) - 78,375
William Derek
Snowdon 100,000 20,000 - 6,250
Richard Horby
Phillips 100,000 144,250
Gerald J Capaci 300,000 144,250
Jeremy Miles
Simpson 62,500 87,031
</TABLE>
In September 1997 Keith Peirson was granted options to purchase 300,000 shares
of the Company's common stock at the closing price at the date of the grant. The
options are exercisable as to 100,000 from July 1, 1998, 100,000 from July 1,
1999, and 100,000 from July 1, 2000. The options expire in September 2002.
(1) Values stated are based on the average bid and ask prices of $3.56 per share
of the Company's common stock as reported by Bloomberg Financial Inc. on June
30, 1997, the last trading day of the fiscal year, and equal the aggregate
amount by which the
32
<PAGE>
<PAGE>
market value of the option shares exceeds the exercise price of such options at
the end of the fiscal year. No value is attributed to option shares where the
option price is higher than the market value.
(2) The Stock options above attributed to Mr. Holloway include 100,000 granted
during the year ended June 30, 1997 to a Trust in which Mr. Holloway has an
interest.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee. During fiscal 1997, Messrs.
Holloway, Snowdon, Hall (to December 31, 1996) and Phillips (from January 2,
1997) 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.
Between September 1994 and March 1995, Mr. Phillips provided consultancy
services to the Company for which he rendered invoices for $16,500. As of
September 1997, the amount remained unpaid.
In November 1992, MSU Limited, 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 project, however, MSU Limited, Mr. Holloway and TXC Corporation
subsequently agreed that MSU Limited would independently develop and own the
product. The third party never performed under the November 1992 agreement and,
accordingly MSU Limited's position is that such third party has no rights or
claims under such agreement. TXC Corporation and Mr. Holloway agreed to
indemnify MSU Limited in connection with any claim made by such third party.
Pursuant to the November 1992 agreement, TXC Corporation contributed $1,541,910
to MSU Limited. Pursuant to a June 1993 agreement, restating the 1992 agreement,
TXC Corporation loaned $618,000 to MSU Limited. 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 Limited stock and certain additional
consideration. TXC Corporation has waived any claims it may have had to such
additional consideration. The MSU Limited 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 non-exclusive
license
33
<PAGE>
<PAGE>
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.
In August 1997, Mr. Holloway agreed to the terms of settlement of a loan
made in May 1994 by Sabre Advanced Micro Electronics Ltd., an agent for Americn
Micro Systems Inc. (which until 1996 was the Company's principal chip
manufacturer) in the approximate amount of $231,000. Settlement was effected by
the transfer of 70,000 shares of common stock of the Company owned by Mr.
Holloway. The pledge of all of the shares of common stock of Mr. Holloway given
as security for the loan was released as part of the settlement terms. Mr.
Holloway loaned approximately $68,000 of the loan proceeds to MSU Ltd. in July
1994 on an unsecured interest free basis. At September 1997, approximately
$3,000 was outstanding under that loan.
In June 1996, MSU Limited 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 Messrs. Hall and Snowdon were
secured by a pledge of the shares of Company common stock. In consideration of
the benefit derived by the Company as a result of the guarantees provided by
these directors, each of the directors concerned 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. A security interest
remains 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.
On October 14, 1994 the Company completed an exchange of all 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 51.5% 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 the 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 MSU PLC shares were acquired in June 1994
in exchange for shares in MSU Limited.
In September 1996, approximately $163,000 was loaned to the Company
by the Employee Trust. This loan was unsecured, interest free with no date
fixed for repayment. In July 1997, approximately $33,000 was repaid and the
balance remains outstanding.
34
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<PAGE>
In consideration of the benefit derived by the Company as a result of the
above interest free loan of $160,000 and the guarantee provided by the Employee
Trust, the Trust was granted an option to acquire 100,000 shares of the
Company's common stock at an exercise price of $2.12 the market price of the
Company's common stock on the date of grant. The options are exercisable in full
commencing on November 11, 1997 and expire on May 11, 2002.
In February, 1997 the Company sold 12 Promissory Notes each in the amount
of $50,000 and each bearing interest at 8.5% per annum and which were due to
mature in February 1998. Security for the borrowings was the Company's shares of
its subsidiaries together with 235,000 shares of common stock of the Company
which are owned by the Employee Trust. The Promissory Notes were repaid in June
1997 and no amount is now outstanding.
In September 1996 the Company sold 50,000 shares of common stock for
$250,000. This transaction was subsequently rescinded and the Company was
indebted to the purchaser for $250,000. Payment was guaranteed personally by Mr.
Holloway and was paid in full in July 1997. In consideration of the benefit
derived by the Company as a result of the above guarantee, Mr. Holloway was
granted an option to acquire 50,000 shares of the Company's common stock at an
exercise price of $2.12, being the market price of the shares of common stock in
the Company at the date of grant. The options are exercisable in full commencing
on November 11, 1997 and expire on May 11, 2002.
On June 25, 1997, as part of the Placement Agent Agreement with Capitol Bay
Securities in connection with the issuance of the Company's 10% Convertible
Notes, Messrs. Holloway and Snowdon agreed to restrictions on their rights to
sell, or otherwise dispose of, the Company's shares of common stock registered
in their respective names. In consideration for the benefit derived by the
Company for their agreeing to these restrictions, Messrs. Holloway and Snowdon
were each granted options to acquire 20,000 shares of the Company's common stock
at $3.25 per share, the market price of the shares on the date of agreement. The
options are exercisable in full commencing on December 25, 1997 and expire on
June 24, 2002.
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.
35
<PAGE>
<PAGE>
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 the date of this report
on Form 10-K, 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 Percentage of Class
Name of Beneficial Owner Owned (See Note 3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Wynford Peter Holloway 5,057,777(1)(2)(3)(4)(5) 31.5%
*William Derek Snowdon 522,277(3)(4)(5) 3.3%
*Jeremy Miles Simpson 307,068(3)(4) 1.9%
*Richard Horby Phillips 100,000(3) 0.6%
*Gerald J. Capaci 100,000(3) 0.6%
*Keith Peirson (4)
*Fred Kashkooli (7)
Peter Brian Weber and 2,769,444(2)(3) 17.2%
Vivian George Bines as
Trustees for the Employee Trust
48 The Parade, Cardiff CF2 3AB
England
TXC Corporation 2,208,333 13.7%
5F No. 15 SEC 2
Chung Yang S Road
Peitoi, Taipei, Taiwan
McLaughlin Group LLC
13750 US 281 North #660
San Antonio Texas 78232 2,250,000(6) 14.0%
*All Directors and Executive
Officers as a group (7 persons) 6,102,122 37.9%
</TABLE>
36
<PAGE>
<PAGE>
(1) Mr.Holloway owns 2,138,333 shares of record. Mr. Holloway's shares have been
pledge as security for a loan from Sabre Advanced Microelectronic Limited. See
'EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider
Participation' Pursuant to an unwritten agreement and understanding, Mr.
Holloway shares voting and dispositive power with respect to 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 favour of all past, present and
future employees of MSU Limited 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 agreement and understanding, Mr. Holloway
shares voting and dispositive powers with respect to the shares held by the
Employee Trust.
(3) For the purpose of the above table, a person or group of persons is deemed
to have 'beneficial ownership' of any shares which such person has the right to
acquire within 60 days. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above, any security which
such person or group of such persons has the rights to acquire within 60 days
after such date is deemed to be outstanding for the purpose of computing
ownership for such person or persons, but is not deemed to be outstanding for
the purpose of computing the percentage of ownership of any other person.
Accordingly the above table includes the following shares issuable pursuant to
options which are now exercisable, or are exercisable within 60 days hereof.
Name No. of Shares
- -------------------------------------------
Wynford Peter Holloway 150,000
William Derek Snowdon 100,000
Jeremy Miles Simpson 50,000
Peter Brian Weber and 100,000
Vivian George Bines
Richard Horby Phillips 100,000
Gerald J Capaci 100,000
(4) Excludes the following shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
37
<PAGE>
<PAGE>
Name No. of Shares
- -------------------------------------------
Wynford Peter Holloway 20,000
William Derek Snowdon 20,000
Jeremy Miles Simpson 12,500
Gerald J Capaci 200,000
Keith Peirson 300,000
(5) See 'Executive Compensation-Compensation Committee Interlocks and Insider
Participation' regarding a potential pledge arrangement with National
Westminster Bank Plc. covering shares held by Mr. Holloway and Mr. Snowdon.
(6) Includes 650,000 shares issuable pursuant to a currently execisable warrant
to purchase 650,000 shares of Company common stock at $1 each
(7) Mr. Kashkooli is the beneficial holder of $24,000 10% Convertible Notes
which are convertible into 8,000 shares of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Martin Miller, a former director and executive officer of the Company, is
believed by the Company to be affiliated with Millport Limited ("Millport"), a
corporation retained by MSU Limited 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,
Martin Miller was issued 150,000 shares of the Company's common stock and
Millport received commissions on shares sold in addition to being granted a two
year option to acquire up to 500,000 shares of the Company's common stock. The
option was never granted because the Company believes that Millport did not
perform in accordance with the terms of the Millport Agreements. The Company
believes that it is not bound to 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
38
<PAGE>
<PAGE>
warrants to acquire 75,000 shares of common stock for each $1 million of revenue
attained, with an exercise price of 50% of the market value at the time the
warrant is issued, up to a 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 the
Company's common stock owned by the Employee Trust and was originally due on
October 21, 1996. The loan was then to be repaid in 37,500 shares of the
Company's common stock owned by the Employee Trust no later than December 31
1996 with Direct International Limited also receiving on December 31, 1996,
10,000 shares of the Company's common stock owned by The Employee Trust as
consideration for the advance of the loan. On June 4, 1997 it was agreed that
the loan would be repaid with 88,000 shares of the Company's common stock owned
by the Employee Trust and this transfer was effected in September 1997. The
$300,000 received by the Employee Trust was loaned by it to Mr. Holloway
($140,000) and the Company ($160,000). Such loans are unsecured, interest free,
due and payable on an as yet to be determined date, and are not evidenced by
written agreements. In July 1997, $33,200 of the amount loaned to the Company
was repaid to the Employee Trust.
Effective January 30, 1996 and February 29, 1996, pursuant to a stock
purchase agreement, McLaughlin Group LLC acquired from the Company, in private
transactions, 800,000 and 800,000 shares, respectively, of the Company's common
stock for an aggregate purchaseprice of $1 million. 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.
On July 21, 1997 McLaughlin Group LLC was granted a warrant to purchase
650,000 shares of the Company's common stock at an exercise price of $1.00 per
share, such right to expire on 20 July, 2002. In consideration for the granting
of this warrant McLaughlin Group LLC agreed to waive its rights under the stock
purchase agreement of January 30, 1996 whereby it had been granted (i) a warrant
to purchase such number of shares of the Company's common stock as equals 3.5%
of the outstanding shares of the common stock on the date the warrant was
exercised (with such determination to be made on a fully diluted basis). This
original warrant was exercisable, in whole only, at an exercise price of $1.0
million and was due to expire eighteen months after March 1, 1996; and (ii) the
right to acquire additional shares of capital stock upon issuance by the Company
of additional capital stock (except in certain specified cases) in order to
maintain the same proportion of voting power of the Company as was owned prior
to the issuance.
McLaughlin Group LLC has also been granted certain demand and piggyback
registration rights in connection with the shares issuable under the July 21,
1997 warrant. The Company has agreed to indemnify McLaughlin Group LLC against
certain liabilities in connection with any shares so registered.
39
<PAGE>
<PAGE>
Mark McLaughlin, a member of McLaughlin Group LLC, is president and a
principal stockholder of McLaughlin International, Inc. ("MII"). MII serves as a
consultant to the Company pursuant to two engagement letters entered into on
November 8, 1995 and May 17, 1996. The engagement letters provide that MII 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 a further six month period. As compensation under the November 8,
1995 engagement letter, which covers Japan, MII, Inc. will receive for a period
of seven years (in the case of revenues and royalties) or an indefinite period
or one time payment (in the case of fees) a percentage of revenues, 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 MII. As additional compensation, MII 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 MII. 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 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,
MII 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 MII. To
be entitled to a 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. In November 1996 McLaughlin International Inc. declined to renew the
engagement letters dated November 8, 1995 and May 17, 1996. As of September 1997
no business has been procured from any companies that are the subject of the
engagement letters and no compensation payments are yet due.
Effective May 7, 1997, June 4, 1997 and September 5, 1997 Jeremy Miles
Simpson acquired from the Company, in private transactions, 79,126, 48,042 and
26,900 shares respectively of the Company's common stock. Consideration for the
common stock was, approximately respectively, $162,000, $114,000 and $79,000 in
cash. The price paid for the shares of common stock in each case was the market
price prevailing on the respective dates. In addition, Mr. Simpson was granted
options to acquire 50,000 shares of common stock at a price of $2.12 per share
in respect of the May 7, 1997 transaction and 12,500 shares of common stock at a
price of $2.37 per share in respect of the June 4, 1997 transaction. In both
cases the options are exercisable at any time after six months from the date of
the respective grants. The end of the option term in each case is five years
from the date of the grant.
40
<PAGE>
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Keith Hall, Wynford Holloway, William Snowdon, R.H. Phillips, Jeremy
Simpson, MSU Employees Discretionary Trust have failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year and prior fiscal years. None of the aforesaid individuals and/or
entities have filed Form 3s. In addition, Mr. Holloway did not report 1
transaction; Mr. Snowdon did not report 3 transactions; and the MSU Employees
Discretionary Trust did not report 5 transactions on Form 4. The Company also
believes that Mr. Hall and McLaughlin Group LLC are delinquent in their
Form 4 filings.The aforesaid parites are also delinquent in filing Form 5s.
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 favourable 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 favourable than could be obtained from unaffiliated
third parties.
41
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORMS 8-K
(a) The following documents are filed as part of this report
FINANCIAL STATEMENTS
Independent Auditors' report
Consolidated balance Sheets at June 30, 1996 and 1997
Consolidated Statements of Income for the years ended June 30, 1995,
June 30, 1996 and June 30, 1997
Consolidated Statements of Changes in Stockholders' Deficit for the years ended
June 30, 1995. June 30, 1996 and June 30, 1997.
Consolidated Statements of Cash Flows for the years ended June 30, 1995
June 30, 1996 and June, 30 1997
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 Wynford Peter Holloway (4)
10.2 Service Agreement with Keith Charles Hall (4)
10.3 Service Agreement with William Derek Snowdon (4)
10.4 Placement Agreement with Millport Limited as amended and confirmed (4)
10.5 Employee Trust (4)
10.6 Office Lease Agreement with Brixton Estates Plc. (4)
10.7 Manufacturing, Distribution and Joint Venture Agreement with
AmericanInteractive Media, Inc. Confidential treatment has been requested
for specific portions of the Manufacturing, Distribution and Joint
venture Agreement (4)
42
<PAGE>
<PAGE>
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 the
Guarantee to 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)
10.13 Letter Agreement, dated February 15, 1997, with Forte Communications,
Inc., as public relations consultants to the Company, together with
letter amending such Letter Agreement (5)
10.14 License Agreement, dated January 29, 1997, with Zilog Inc. a California
corporation. Confidential treatment has been requested for specific
portions of the License Agreement.(5)
10.15 License Agreement, dated August 18, 1997, with C-Cube Microsystems Inc.,
a Delaware corporation. Confidential treatment has been requested for
specific portions of the License Agreement.(5)
10.16 Service Agreement with Keith Edward Peirson(5)
10.17 Service Agreement with Richard Horby Phillips
10.18 Service Agreement with Gerald J. Capaci(5)
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
(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 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, 29 1996.
(5) Filed herewith
(b) Reports on Forms 8-K
On May 7, 1997, the Company filed a report on Form 8-K with respect to the
subscription for 79,126 shares by Jeremy M. Simpson.
43
<PAGE>
<PAGE>
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, thereto duly authorised.
MSU CORPORATION
By: /s/ Richard Horby Phillips
...................................
Richard Horby Phillips, Director
Financial and Accounting Officer
Date: September 25, 1997
Each person whose signature appears below authorizes Richard Horby Phillips
or William Derek Snowdon or either of them, each who may act without joinder of
the other, to execute in the name of such person who is 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ Wynford Peter Holloway Chief Executive Officer and Director September 25, 1997
......................................... (Principal Executive Officer
WYNFORD PETER HOLLOWAY
/s/ William Derek Snowdon Secretary and Director September 25, 1997
.........................................
WILLIAM DEREK SNOWDON
/s/ Richard Horby Phillips Director (Principal Financial and September 25, 1997
......................................... Accounting Officer
RICHARD HORBY PHILLIPS
/s/ Jeremy Miles Simpson Director September 25, 1997
.........................................
JEREMY MILES SIMPSON
Director September , 1997
.........................................
FRED KASHKOOLI
Director September , 1997
.........................................
KEITH PEIRSON
Director September , 1997
.........................................
GERALD J. CAPACI
</TABLE>
44
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
<PAGE>
<PAGE>
C O N T E N T S
--------
Page
Number
------
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
<PAGE>
<PAGE>
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
and subsidiaries as of June 30, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 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.
Moore Stephens
Lovelace, P.L.
Certified Public Accountants
Orlando, Florida
August 28, 1997
F-1
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 859,238 $ 54,805
Accounts receivable 105,842 11,529
Inventory 12,325 --
Prepaid expenses and other 144,554 58,035
-------------- --------------
TOTAL CURRENT ASSETS 1,121,959 124,369
EQUIPMENT, net of accumulated depreciation of
$41,764 in 1997 and $47,191 in 1996 76,305 39,887
OTHER ASSETS
Deferred financing costs, net of accumulated
amortization of $13,201 803,077 --
Deferred registration costs 85,000 --
-------------- --------------
888,077 --
-------------- --------------
TOTAL ASSETS $ 2,086,341 $ 164,256
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ 131,595 $ --
Current portion of long-term debt 162,680 --
Shareholder advance payable 1,400,000 1,400,000
Note payable 250,000 --
Accounts payable and accrued liabilities 713,461 572,294
Related-party payable 20,239 7,680
-------------- ---------------
TOTAL CURRENT LIABILITIES 2,677,975 1,979,974
LONG-TERM DEBT 1,829,742 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares
authorized; 15,986,891 and 15,534,722 shares issued
and outstanding at June 30, 1997 and 1996,
respectively 159,869 155,347
Additional paid-in capital 4,456,560 2,984,081
Cumulative translation adjustments 94,701 70,651
Accumulated deficit (7,132,506) (5,025,797)
-------------- ---------------
TOTAL SHAREHOLDERS' DEFICIT (2,421,376) (1,815,718)
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $2,086,341 $ 164,256
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
REVENUES $ 1,479,911 $ 392,693 $ 1,595,856
EXPENSES
Cost of revenues 650,790 65,795 604,058
Selling, general and administrative 1,485,577 403,636 520,196
Depreciation 43,709 31,545 20,996
Interest expense 26,380 45,491 35,050
Research and development 1,386,340 1,248,186 1,297,374
-------------- -------------- --------------
TOTAL EXPENSES 3,592,796 1,794,653 2,477,674
-------------- -------------- --------------
OPERATING LOSS (2,112,885) (1,401,960) (881,818)
NONOPERATING INCOME
Interest income 6,176 5,199 3,399
-------------- -------------- --------------
NET LOSS $ (2,106,709) $ (1,396,761) $ (878,419)
============== ============== ==============
LOSS PER COMMON SHARE $ (0.13) $ (0.10) $ (0.07)
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,700,000 14,494,000 12,508,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' DEFICIT
Years Ended June 30, 1997, 1996 and 1995
<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 - JUNE 30, 1994 10,196,380 $ 101,964 $ 805,492 $(2,750,617) $ -- $ 56,261 $(1,786,900)
ISSUANCE OF COMMON SHARES 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 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
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)
ISSUANCE OF COMMON SHARES 452,169 4,522 1,472,479 -- -- -- 1,477,001
TRANSLATION ADJUSTMENTS -- -- -- -- -- 24,050 24,050
NET LOSS -- -- -- (2,106,709) -- -- (2,106,709)
------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1997 15,986,891 $ 159,869 $ 4,456,560 $(7,132,506) $ -- $ 94,701 $(2,421,376)
================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,106,709) $(1,396,761) $ (878,419)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 43,709 31,545 20,996
Non-cash expense related to issuance of
stock purchase options -- 21,500 --
(Increase) decrease in accounts
receivable, net (93,495) 36,907 15,533
(Increase) decrease in inventories (12,325) -- 10,205
Decrease (increase) in prepaid expenses (82,401) (15,076) 16,918
Increase in other assets (888,077) -- --
Increase (decrease) in accounts payable
and accrued liabilities 216,329 (87,414) 201,127
Increase (decrease) in related-party payable 12,013 (5,462) 13,276
---------------- ---------------- --------------
TOTAL ADJUSTMENTS (804,247) (18,000) 278,055
---------------- ---------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (2,910,956) (1,414,761) (600,364)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net (77,299) (31,163) (6,693)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings, net 2,374,017 (861,937) 753,328
Issuance of common stock 1,477,001 2,139,500 70,972
---------------- ---------------- --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 3,851,018 1,277,563 824,300
EFFECT OF EXCHANGE RATE CHANGES (58,330) (4,652) 429
---------------- ---------------- --------------
NET INCREASE (DECREASE) IN CASH 804,433 (173,013) 217,672
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 54,805 227,818 10,146
---------------- ---------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 859,238 $ 54,805 $ 227,818
================ ================ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS
Organization and Basis of Presentation
In October 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.
In February 1997, MSU US Operations, Inc. was incorporated in North
Carolina to act as a sales company marketing and selling products
developed by MSU. All of the outstanding common stock of this company
is owned by MSU Corporation.
The consolidated financial statements include the accounts of MSU
Corporation, MSU Plc., MSU (UK) Limited and MSU US Operations, Inc.
(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, 1997, 1996 and 1995, the Company incurred
net losses of $2,106,709, $1,396,761 and $878,419, respectively. At
June 30, 1997, the Company had an accumulated deficit of
approximately $7,133,000. 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.
In 1996, contracts were concluded with American Interactive
Media, Inc. for the development of customized Internet Access
F-6
<PAGE>
<PAGE>
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS
(Continued)
Significant Risks (Continued)
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents include all highly liquid investments convertible
into known amounts of cash with an original maturity when purchased
of three months or less.
Equipment
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the
equipment, generally four years.
Inventory
Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory is
comprised of Internet Access Devices, which are available for sale as
production samples.
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 fees and related support services fees revenue recognized
by the Company amounted to approximately $544,000, $368,000 and
$772,000 for the years ended June 30, 1997, 1996 and 1995,
respectively.
F-7
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
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.
Such royalties and fees earned by the Company in the year ended June
30, 1997, amounted to approximately $139,000. In the years ended June
30, 1996 and 1995, none of the arrangements 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.
Deferred Financing Costs
The costs attributable to the issuance of convertible promissory
notes have been deferred and are being amortized over the term of the
notes. The unamortized costs at June 30, 1997 are included in other
assets. Any unamortized costs at the date of conversion of the
securities will be charged against additional paid-in capital (see
Note 8).
Deferred Registration Costs
Legal, accounting and other costs related to the Company's proposed
registration of shares (see Note 10) are capitalized as deferred
registration costs. These costs will be offset against the
anticipated conversion of the Company's 10% convertible promissory
notes.
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 or conversion of
convertible debt. Common share equivalents are not considered in
calculations of per share data when their inclusion would be
anti-dilutive.
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 statements 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. The Company
primarily maintains its cash in bank deposit accounts in the United
Kingdom, which are not insured. The Company has not experienced any
losses in such account and believes that it is not exposed to any
significant credit risk on cash and cash equivalents.
F-8
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Credit Risk and Fair Value of Financial Instruments (Continued)
Financial instruments reflected in the Company's balance sheets at
June 30, 1997 and 1996 include cash and cash equivalents, notes
payable, and other borrowings. The carrying amount of cash and cash
equivalents, notes payable and other short-term borrowings
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, 1997,
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, 1997, 1996 and 1995,
approximated $117,000, $44,000 and $33,000, 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
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. During the years ended
June 30, 1997 and 1996, no fees were incurred under this agreement.
F-9
<PAGE>
<PAGE>
NOTE 3 - RELATED-PARTY TRANSACTIONS (Continued)
The Company has also entered into a marketing agreement with an
individual who is a director of a principal shareholder of the
Company. The agreement provides, among other things, for 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 such 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 warrants are
issued, up to a maximum of 300,000 shares. No expense has been
incurred under this agreement through June 30, 1997.
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.
In September 1996, a trust in which a director has an interest loaned
the Company approximately $163,000 (see Note 8). The loan is
unsecured, bears no interest, and has no defined terms for repayment.
As consideration for this, the Company has granted to the trustees an
option over a five-year period to subscribe for 100,000 shares of the
Company's common stock with an exercise price of $2.12, being the
market value of the Company's common stock at the date of grant of
the options.
NOTE 4 - INCOME TAXES
As of June 30, 1997, the Company has a U. S. net operating loss
carryforward of approximately $5,000 available to offset future
taxable income. The net operating loss carryforward expires ratably
through the year 2010. 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, 1997, the Company's subsidiaries have a United Kingdom
net operating loss carryforward of approximately $6 million, which
carries forward indefinitely under United Kingdom tax laws.
Deferred tax assets resulting from the Company's United Kingdom
income tax loss carryforwards were approximately $1.8 million and
$1.2 million at June 30, 1997 and 1996, respectively. The Company has
established a valuation allowance to fully offset these deferred tax
assets, as their future realization is uncertain.
NOTE 5 - STOCKHOLDERS' DEFICIT
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, $70,972 was
received in cash at the time of the transactions and $500,000 was
received in the form of notes receivable, 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 was 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.
F-10
<PAGE>
<PAGE>
NOTE 5 - STOCKHOLDERS' DEFICIT (Continued)
During the year ended June 30, 1997, the Company issued, in private
transactions, an aggregate of 452,169 shares of common stock in
exchange for net proceeds of approximately $1,477,000. Gross proceeds
of approximately $1,527,000 were offset by $50,000 of legal fees
relating to the stock issuances. Of this amount, approximately
$1,027,000 was received in cash at the time of the transactions,
approximately $50,000 was received in the form of consulting
services, and $450,000 of stock was issued to the placement agent
as partial compensation for the issuance of the 10% convertible
notes (see Note 8).
In July 1997, warrants to purchase 20,000 shares of the Company's
common stock were exercised (see Note 6).
NOTE 6 - STOCK OPTIONS AND WARRANTS
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. In December 1996, 50,000 shares subject to these warrants were
purchased.
F-11
<PAGE>
<PAGE>
NOTE 6 - STOCK OPTIONS AND WARRANTS (Continued)
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
was subject to certain anti-dilution provisions (see Note 10).
In February 1997, the Company entered into a "Placement Agent
Agreement and a Bridging Loan Agreement," which provided for the
issuance to the Company of a bridging loan of $600,000 in advance of
the offering of approximately $2,000,000 of convertible notes (see
Note 8). In accordance with these agreements, the Company has issued
warrants to the placement agent for 10,000 shares of the Company's
common stock, exercisable from May 1997 to May 2000 at a price of
$3.00 per share and to the bridge loan noteholders for 60,000 shares
of the Company's common stock exercisable at $3.00 per share through
January 2000.
In May 1997, the Company issued to a consultant a warrant to purchase
up to 150,000 shares of the Company's restricted stock at an exercise
price of $2.00 per share. 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.
F-12
<PAGE>
<PAGE>
NOTE 6 - STOCK OPTIONS AND WARRANTS (Continued)
In July 1997, in consideration for the cancellation of the warrant
and anti-dilutive provisions relating to the private placement of
1,600,000 shares of the Company's common stock (see Note 6), the
Company issued a new warrant to purchase 650,000 shares of the
Company's common stock for $650,000. This warrant is exercisable
through July 2002.
In July 1997, the Company granted options to nine of its employees to
acquire an aggregate of 50,000 shares of the Company's common stock
at an exercise price of $3.56 per share. The option term is as
follows: options relating to 25,000 shares are exercisable on June
30, 1998; options relating to 25,000 shares are exercisable on June
30, 1999. The options expire in June 2002.
Activity related to the Company's stock options during the years
ended June 30, 1994, 1995, 1996 and 1997, was as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------
Weighted
Number of Average
Shares Exercise Price
---------------- ------------------
<S> <C> <C>
June 30, 1994 - -
Grants 115,000 $2.50
Exercises - -
Cancellations (65,000) $2.50
----------------
June 30, 1995 50,000 $2.50
Grants 340,000 $4.77
Exercises - -
Cancellations (10,000) $2.50
----------------
June 30, 1996 380,000 $4.47
Grants 1,622,500 $1.70
Exercises - -
Cancellations - -
----------------
June 30, 1997 2,002,500 $2.22
================
Options Exercisable at:
June 30, 1997 1,332,000 $2.23
================ ==================
</TABLE>
F-13
<PAGE>
<PAGE>
NOTE 6 - STOCK OPTIONS AND WARRANTS (Continued)
The range of exercise prices for options outstanding at June 30,
1997 was $1.00 to $5.00. The following table summarizes information
about options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------
Weighted
Average Weighted
Number of Contractual Average
Range of Exercise Prices Shares Life (in years) Exercise Price
----------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
$1.00 to $2.50 1,592,500 4.6 $1.48
$3.00 to $5.00 410,000 4.1 $4.52
================
2,002,500 4.5 $2.22
================
<CAPTION>
Exercisable Options
----------------------------------------------------
Weighted
Number of Average
Range of Exercise Prices Shares Exercise Price
----------------------------- ----------------- -----------------
<S> <C> <C>
$1.00 to $2.50 962,000 $1.21
$3.00 to $5.00 370,000 $4.54
-----------------
1,332,000 $2.23
=================
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123)
was issued during 1995 and is effective for the year ended June 30,
1997. This pronouncement establishes financial accounting and
reporting standards for stock-based employee compensation plans. It
encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules.
Companies that choose not to adopt the new fair value accounting
rules are required to disclose net income and earnings per share
under the new method on a pro forma basis. The Company has adopted
the disclosure provisions of SFAS 123. The fair value of the options
granted during the fiscal years ended June 30, 1997 and 1996
reported below has been estimated at the dates of grant using the
Black-Scholes option-pricing model with the following assumptions:
1997 1996
--------------- ------------
Expected life (in years) 5 5
Risk-free interest rate 6.0% 6.0%
Volatility 135 % 171 %
Dividend yield 0.0% 0.0%
F-14
<PAGE>
<PAGE>
NOTE 6 - STOCK OPTIONS AND WARRANTS (Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
options have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide
a reliable single measure of the fair value of its options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
1997 1996
--------------- --------------
Pro forma net loss $(3,430,000) $(1,406,000)
Pro forma loss per share $(0.22) $(0.10)
The effects on pro forma disclosures of applying SFAS 123 are not
necessarily indicative of the effects on pro forma disclosures of
future years.
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 and bank overdrafts are subject to the bank's
discretion and are collateralized by a floating debenture on
substantially all of the assets of the Company and are payable on
demand.
In July 1997, the Company repaid the $250,000 noninterest-bearing
note payable and issued to the holder thereof 25,000 shares of its
restricted common stock.
NOTE 8 - LONG-TERM DEBT
During the year ended June 30, 1997, the Company issued approximately
$1,830,000 of 10% convertible promissory notes (the Notes). Interest
is payable quarterly and the Notes mature July 1, 1998. The Notes are
collateralized by the assets of the Company and are convertible into
shares of the Company's common stock at a rate of one share of common
stock for each $3.00 of Note principal converted. Proceeds received
by the Company, net of offering costs, approximated $1,524,000.
Subsequent to June 30, 1997, the Company issued an additional
$470,000 of the Notes. The Company used approximately $600,000 of the
proceeds to repay certain bridge financing that it incurred during
the year ended June 30, 1997 (see Note 6).
In August 1996, the Company received a loan in the amount of
approximately $163,000 from its employee trust (see Note 9). The loan
is unsecured, bears no interest, and has no defined terms for
repayment.
F-15
<PAGE>
<PAGE>
NOTE 8 - LONG-TERM DEBT (Continued)
Long-term debt consists of the following at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Convertible 10% promissory notes, interest
payable quarterly, maturing July 1, 1998,
collateralized by assets of the Company,
convertible into shares of the Company's
common stock at a rate of one share for each
$3.00 of note principal converted $ 1,829,742 $ -
Unsecured, noninterest-bearing note payable, no
specified date for repayment 162,680 -
-------------- ---------------
1,992,422 -
Less: current portion (162,680) -
-------------- ---------------
Total long-term debt $ 1,829,742 $ -
============== ===============
</TABLE>
Maturities of long-term debt subsequent to June 30, 1997, are
approximately as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
---------------- ---------------
<S> <C>
1998 $ 160,000
1999 1,830,000
2000 -
2001 -
2002 -
Thereafter -
---------------
Total $ 1,990,000
===============
</TABLE>
Cash paid for interest was approximately $26,000, $45,000 and $35,000
for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under operating leases entered into
during 1996 and 1997, which expire through March 2001. Future minimum
rental payments and service charges required under the leases at June
30, 1997, are approximately as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
-------------- -------------
<S> <C>
1998 $ 93,000
1999 $ 93,000
2000 $ 88,000
2001 $ 61,000
</TABLE>
For the years ended June 30, 1997, 1996 and 1995, rent expense
totaled approximately $54,000, $26,000 and $24,000, respectively.
F-16
<PAGE>
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
In 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. A portion of
the minimum salary requirements were waived by two of the officers
for the first three years of the employment term.
In January 1997, the Company entered into an employment agreement
with one of its executive officers requiring payment of an aggregate
minimum annual salary of approximately $108,000 until June 30, 1997.
As part of the employment agreement the executive officer was issued
stock options to purchase 100,000 shares of the Company's common
stock at a price per share equal to the market value of the stock as
of the date of grant. This agreement requires a six-month notice to
terminate by either party. A portion of the minimum salary
requirement was waived by the officer for the first six months of
the employment term. In addition, in January 1997, the Company
entered into an employment agreement with another one of its
executive officers requiring payment of an aggregate minimum annual
salary of approximately $125,000. This agreement requires a
six-month notice to terminate by either party. As part of the
employment agreement, the executive officer was issued stock options
to purchase 100,000 shares of the Company's common stock at a price
per share equal to the market value of the stock as of the date of
grant. The executive officer shall also receive up to an additional
200,000 stock options under this agreement, if certain stock prices
are achieved and maintained by the Company.
Concentrations
Revenues for years ended June 30, 1997, 1996 and 1995 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.
The Company's revenue, by geographic region, during the years ended
June 30, were approximately as follows:
<TABLE>
<CAPTION>
Location 1997 1996 1995
-------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Europe $ - $ 110,000 $ 440,000
Far East 730,000 - 640,000
North America 750,000 280,000 520,000
--------------- --------------- ---------------
$1,480,000 $ 390,000 $ 1,600,000
=============== =============== ===============
</TABLE>
F-17
<PAGE>
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
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, 1997 and 1996, 2,914,444 and 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, 1997
and 1996, 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.
The Company continues to review the adequacy of its insurance
coverage. Presently, the Company believes that its insurance coverage
may be inadequate in light of current and prospective agreements.
However, management continues to endeavor to obtain adequate
coverage, although no assurance can be given that adequate insurance
will be obtained.
NOTE 10 - REGISTRATION OF SHARES
The Company intends to file a registration statement on Form S-1
under the Securities Act of 1933, as amended, for the purpose of
registering shares of common stock that are issuable upon the
conversion of the Company's 10% convertible promissory notes (see
Note 8) and to register 218,000 shares of common stock to be sold by
certain selling shareholders.
F-18
<PAGE>
<PAGE>
FORTE COMMUNICATIONS, INC.
TODAY'S INVESTOR
50 Broadway Suite 2300
New York, NY 10004
(212) 785-6300 Fax: (212) 785-6205
CompuServe 76702.2130
todaysinvestor.com
facsimile: 011 44 1 222 480-479
Mr. William D. Snowdon
Phoenix Walters
48 The Parade
Cardiff CF2 3AB
Dear Bill:
RE: Consulting Agreement
Dear Bill:
This letter is to confirm my conversations with Wyn Holloway regarding the
renewal of Forte Communications Inc.'s consulting agreement with MSU Corporation
effective February 15, 1997.
As per our verbal agreement, Forte Communications, Inc. agrees to accrue its
monthly consulting fee from February 15, 1997 forward until such time as MSU
Corporation ("MSU" or the "Company") achieves any of the following: revenues
through sales or financing of over $1 million.
MSU Corporation also agrees to accrue the monthly consulting fee due to Forte
and to reimburse all cash advances made on behalf of the Company as they are
incurred. These expenses include such items as electronic, telephonic, and email
transmittal of press releases to requesters, media and the financial community.
Mailing of media packages to current and prospective investors and members of
the financial community will be done only upon the written approval of one of
the Company's designees.
If the above is acceptable to you as corporate counsel and as a member of the
Board, please so indicate by signing in the place below and faxing it back to us
and mailing the original to us at your earliest convenience.
Sincerely,
CHARLES W. MCLAUGHLIN
Charles W. McLaughlin
Managing Director
CWM:ct
<PAGE>
<PAGE>
FORTE COMMUNICATIONS, INC.
50 Broadway, Suite 2300
New York, NY 10004
212-786-6300
Fax: 212-785-6205
CompuServe'r' 76702,2130
February 15, 1997
Wyn Holloway
Chairman & President
MSU Corporation
526-528 Elder Gate
Central Milton Keynes
MK9 1LR
UK
RE: Letter of Understanding
Dear Mr. Holloway:
As discussed, I am submitting the following proposal for Public Relations to
be performed by Forte Communications, Inc. on behalf of MSU Corporation
(the "Company") effective February 15, 1997.
The parties agree that Forte Communications, Inc. shall act as a consultant to
the Company.
1. Forte Communications, Inc. will consult with the Company as its public
relations advisor. Both Charles McLaughlin and Patricia Meding will act as
consultants for the Company on all public relations matters.
2. The parties agree that the consulting arrangement shall extend for a period
of one year (1) from February 15, 1997 and that it is automatically renewable
for an additional year upon the mutual consent of both parties. Neither party
shall have the right or option to terminate this agreement without mutual
consent during a period of activity.
3. The consulting activities shall continue from February 15, 1997.
4. The Company shall pay a non-cancelable retainer of five thousand dollars
($5000.00) which will be paid at the beginning of every month plus
reimbursement of out-of-pocket expenses including but not limited to
telephone, facsimile, secretarial and other services provided on behalf of
the Company. The Company agrees to pay upon presentation of documentation
any approved out-of-pocket expense provided Forte Communications, Inc. seeks
and secures approval of a budget figure prior to the expenditure.
<PAGE>
<PAGE>
In addition, options representing 50,000 shares of common stock exerciseable
at two dollars and no cents ($2.00) per share. These options shall be issued
in compliance with Regulation S-8.
5. Forte Communications, Inc. will use its best efforts to:
arrange Due Diligence meetings;
organize institutional investor meetings;
originate and disseminate information about the company including press
releases;
arrange for articles to appear in periodicals, tabloids, newsletters and
other media, as appropriate;
arrange for direct mail, broadcast, electronic, on-line and other media
services as desired by The Company to keep shareholders, investors, and the
brokerage community informed of the Company's activities.
6. The Company agrees that any controversy or claim arising from this Letter of
Understanding will be settled under the laws of New York State.
As we have discussed, monthly fee wil begin effective February 15. The options
outlined above will also be issued upon the signing of this Letter of
Understanding. Out-of-pocket expenses incurred in the normal course of
performing our services will be reimbursed upon presentation of receipts and, as
stated above, for any additional out-of-pocket expenses anticipated we will seek
prior approval from you.
If this Letter of Understanding properly outlines our agreement, please indicate
your acceptance by signing in the space provided below and returning it to me
via facsimile with the original being sent to me via first class mail at Forte
Communications, Inc., 50 Broadway, Suite 2300, New York, NY 10004.
For MSU Corporation Forte Communications, Inc.
CHARLES W. MCLAUGHLIN
W.D. SNOWDON Charles W. McLaughlin
President
- -------------------
Dated:_____________ Dated:______________
<PAGE>
<PAGE>
THIS AGREEMENT is made the 29th day of January 1997
BETWEEN:
1. MSU (UK) Limited a Company registered in the United Kingdom, having its
principal place of business at Elder House, 526 to 528 Elder Gate, Central
Milton Keynes, MK9 1LR, United Kingdom ('MSU').
2. Zilog Inc, a California registered Company, having its principal place of
business at 210 East Hacienda Avenue, Campbell, California, 95008-6600
('Zilog').
WHEREAS:
(a) MSU is a Company with expertise in the design and development of inter alia
video chips and support software and reference hardware system for use in
televisions and TV set top boxes. MSU is the licenser of its technology to
OEM's and semi conductor manufacturers.
(b) Zilog Inc is a Company that designs, manufactures and sells integrated
circuits to many consumer OEM's who manufacture and sell televisions,
VCR's and TV Set Top Boxes.
(c) MSU wishes to grant and Zilog wishes to acquire the licence and rights to,
subject to the terms and conditions of this agreement, the MSU products
defined below.
IT IS AGREED AS FOLLOWS:
1. Definitions.
'Alternate Product Manufacturer' means an alternative manufacturer of the
Product to
<PAGE>
<PAGE>
whom MSU may grant a licence to manufacture, market and sell the Product
pursuant to Clause 2.1.1 or where any milestones agreed pursuant to Clause 2.2.1
are not met to develop, manufacture market and sell or to whom the saving
conditions reserved by Clause 2.2.2 apply.
'Application Development Kit' ('ADK') means a set of API Libraries for the
Netbox hardware reference design platform. The ADK may be used by Zilog
customers to produce additional application software to the binaries supplied.
The ADK may be used to develop alternative HTML browsers and E-Mail Clients.
'Application Software Suite' ('ASS') means the Netbox binary run time code for:
(a) The Netbox Operating System Environment;
(b) Flash Filing System;
(c) HTML Browser Client and associated MIME Clients (JPEG, GIF, AU, WAV);
(d) E-Mail Client.
The Application Software binaries are only designed to operate within the
parameters of the Netbox hardware reference design platform.
'Derivative products' are MSU or Zilog developed integrated circuits that may
cost reduce the MSU Netbox design and/or add functionality to the Product in the
MSU Netbox Market which are not pin compatible plug in replacements for the
Product.
'Family Products' means integrated super set or sub set versions of the Product
and which are built utilising part of the Product architecture but which are not
intended for use in MSU Netbox or to utilise MSU Netbox Software.
'Full Capability Units' means part number Z9060X addressing 16 megabytes of
memory and running MSU Netbox software, including Browser, E-mail and software
stack.
'ISP Chip Set' means the proprietary Internet Services Processor that provide
Internet Video and Audio output from a modem Internet input for display on
televisions.
'The Licence Fee' means
(a) the sum of [*] payable as to:
(a)(1) [*] which had been paid to MSU in stock and receipt of which MSU
acknowledges.
(a)(ii) [*] upon execution of this Agreement.
(b) The sum of [*] representing NRE payment to MSU payable as to:
(b)(i) [*] upon completion of silicon design. Completion of silicon design
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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shall be deemed to have occurred when Zilog successfully complete pattern
generation (P6).
(b)(ii) [*] upon initial demonstration of functional silicon. Initial
demonstration of functional silicon shall be deemed to occur when
the MSU Netbox operates with the Product in an identical manner to
an MSU Netbox using MSU Silicon without evidence of material
glitches or bugs.
The NRE payment shall be treated as a repayment of Royalties to be returned to
Zilog by the reduced royalty on the first [*] units of product as set out in
clause 4.1.1(a) hereof.
'MSU Netbox' means an Internet Access Device based upon an MSU schematic
reference design attached hereto as Exhibit 1 which incorporates the proprietary
operating software programmes and routines together with application software
all developed by MSU.
'Netbox Software' shall mean collectively the Application Software Suite, the
Application Development Kit and the OEM Development Kit.
'Net Selling Price' Shall be Zilog's gross sales price invoiced to its
customers, less deductions made for cash and trade discounts, allowances and
returns in the ordinary course of business. Taxes, freight and other shipping
charges that are invoiced by separate line item on the invoice shall also be
excluded from the Net Selling Price.
'OEM Adaptation Kit' ('OAK') means the suite of tools to allow the Application
Software Suite to undergo a defined amount of customisation. This includes user
interface graphics and associated positioning dialler and connection parameters
and scripted log on procedures.
'Partial Capability Units' means part number Z9060Y which may:
(i) not be using MSU Netbox software;
(ii) be limited to 1 megabyte of memory address by omitting to bond 4 address
pins;
(iii) be such partial specification as should from time to time be agreed.
'the Product' means the discrete ISP Chipset revision 2 and future discrete pin
compatible plug in replacements intended for use in the MSU Netbox designs and
which do not require major MSU Netbox Software changes or hardware changes to be
used.
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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'Source Code Licence' shall mean a licence to perform modification of the ASS by
modifying the 'C' based source code and by utilising functions provided by the
ADK and add to the original source code of the current release of the
Application Software Suite and Application Development Kit.
2. Grant of Licence
2.1 In consideration of the Licence Fee and the premises herein MSU hereby
grants to Zilog the licences set out below:
2.1.1 A worldwide perpetual (except as set forth in Section 10 non
exclusive licence to manufacture market and sell the Product. MSU
agrees that during the term of this agreement it will not grant a
licence in similar terms to this clause 2.1.1 to more than one
Alternate Product Manufacturer to manufacture market and sell the
Product.
2.1.2 A worldwide perpetual (except as set forth in Section 10 below)
non exclusive licence to develop manufacture market and sell
Derivative Products and Family Products.
2.1.3 Subject only to agreement as to commercially acceptable terms as
to price volume and delivery:
(a) a non exclusive licence to foundry the Products.
(b) a first opportunity/option to negotiate with MSU or MSU
customers (other than any Alternate Product Manufacturer) who
have foundry requirements (but not further or otherwise) for
the foundry on their behalf of either proprietary or non
proprietary Derivative Products and Family Products.
2.2 MSU will not grant a licence to an Alternate Product Developer in
similar terms to clause 2.1.2 for so long as Zilog is successful in:
2.2.1 meeting commercial milestones for the development marketing and
sale of Derivative Products and Family Products as may be agreed
upon between the parties in a subsequent written agreement.
2.2.2 maintian technological and innovation supports as an Alternate
Product Developer of Derivative Products and Family Products.
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SAVE that MSU may at any time licence an Alternate Product
Developer who may also develop market manufacture and sell
products which do not compete directly with the Product,
Derivative Products or Family Products or where the Alternate
Product Developer has new technology or core licences which the
parties are not otherwise able to obtain in their own right.
2.3 For the purposes of clarification development manufacturing marketing
or sale by MSU per se of the Products, that are the subject of this
agreement, shall not be deemed to be development manufacture marketing
or sale by an Alternate Manufacturer or Alternate Product Developer
referred to in clauses 2.1.1 and 2.1.2 above. At all times MSU shall be
free to commercially exploit its technology in its own right.
3. Derivative Products and Family Products
3.1 Prior to the commencement of work upon Derivative Products Zilog will
obtain from MSU prior approval of the proposed product specification
and project goals for development. No such approval shall be required
to be given by MSU for Family Products.
3.2 Notwithstanding clause 3.1 above, Zilog shall be required to notify MSU
in writing of its plans for the development of Family Products.
Notification shall be provided in advance of completion of the
Engineering Objective Specification ('EOS') for the family Product.
3.3 Where Derivative Products and Family Products are developed
independently by the parties and which are not customer proprietary
licences shall be granted upon an exchange basis on terms to be agreed
upon at the time that the licence is requested to manufacture, develop,
market and sell.
3.4 Where licence back of Zilog Derivative Products and Family Products are
granted to MSU as provided in clause 3.3 above MSU will foundry such
products at Zilog subject to most favoured customer terms.
3.5 The parties will co-operate with a view to defining future integrated
versions of the Product and development plans to the mutual
understanding of the parties.
3.6 MSU agrees that where it has developed Derivative Products or Family
Products
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it will not grant a Licence to more than one Alternate Product
Manufacture to manufacture, market and sell such Derivate Products or
Family Products.
4. Royalties
4.1 MSU shall be paid by Zilog a royalty for each unit of the Product,
Derivative Product or Family Product manufactured and shipped by Zilog.
Such royalties shall be calculated as follows:
4.1.1 For Full Capability units sold as an embedded application using
MSU Netbox software;
(a) for the first [*] units [*] per unit;
(b) for the next [*] units [*] per unit;
(c) thereafter, [*]% of the net selling price.
4.2 For Partial Capability Units:
4.2.1 Not using MSU Netbox software [*] to be agreed when final
specification agreed of net selling price of discreet versions of
the ISP Chipset. There shall be no minimum price for this
Product.
4.2.2 Where a super-set or sub-set of the ISP Chipset is integrated
with other functions or cores into a Derivative Product a royalty
shall be calculated as to a percentage of the fractional ratio of
the ISP Chipset net selling price to the total Chipset selling
price where the ratio is the same as the area ratio of the ISP
Chipset to the entire Derivative Product developed. In the
calculation of this formula, bonding pad area and repetitive
design areas such as ROM and RAM shall be excluded.
4.2.3 This agreement contemplates that Derivative Products shall have a
royalty which reflects:
(a) The added value from the use of MSU Netbox software at the
rate referred to in clause 4.1 above (discrete versions) or;
(b) subject to the area ratio calculation in 4.2.2 above.
4.3 A minimum ISP published selling price of [*] per unit is initially
required to conform with MSU contractual arrangements in place at the
date of this agreement. MSU has a commitment to customers that requires
Zilog not to sell Full Capability Units with MSU Netbox software at
prices below (US)
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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[*] in any volume. In the event that MSU grants prices below this
minimum MSU will notify Zilog of the new minimum price Zilog shall be
permitted to sell at or above the new minimum price. Zilog and MSU
agree to negotiate prices below this level if the MSU ISP Chipset
becomes unprofitable or uncompetitive when sold at any agreed price.
4.4 Where a new product is redesigned to obtain a significantly increased
performance version of the ISP Chipset function new royalty terms shall
be renegotiated.
4.5 MSU agrees that in the event of:
(a) Other Chipset solutions and software being available in volume to
end use customers at a lower price, or;
(b) MSU or Zilog introduce more integrated ISP versions of the Product
that displace the need for the discrete Product:
renegotiation of the price of the ISP Chipset to under [*] and the
royalties to under [*] of the net selling price may be allowed.
4.6 Zilog agrees to keep true and accurate records and books of account for
two (2) years past their date of creation containing all the data
necessary for the determination of the royalties payable under this
clause which records and books of account shall upon reasonable notice
of MSU be open at all reasonable times during business hours for
inspection by MSU or an independent accountant selected by MSU and
acceptable to Zilog (which acceptance shaould not be unreasonably
withheld) for the purpose of verifying the accuracy of Zilog's report
hereunder. All such requests by MSU must be made within two (2) years
of the date of receipt of the report at issue or such claims or actions
shall be forever waived by MSU. MSU shall be solely responsible for the
costs of the account unless the accountant certifies that any reports
are inaccurate in any material respect in which event Zilog shall
reimburse MSU for its reasonable costs.
4.7 Zilog shall submit to MSU within thirty days of the end of each
calender month a statement setting forth with a respect to its
operations hereunder during that period setting out in particular:
(a) The quantity of the products manufactured;
(b) the quantity of the products shipped;
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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4.8 MSU agrees to maintain confidential all financial information received
that document or relate to Zilog's operations pursuant to this
agreement.
5. MARKS
5.1 It is anticipated that from time to time the product will carry a
distinctive mark or logo together with an acknowledgement of MSU design
and ownership of rights. Zilog will ensure that such marks are carried
on the topmark or shipping cartons for the Product.
5.2 Zilog shall leave in position and will not cover or erase any notice or
other marks (including without limitation details of patents or
trademarks or copyright relating to the Product or its ownership by MSU
which MSU may reasonably insist are placed or fixed to the Products or
their casing or packaging.
5.3 Zilog shall be permitted to place marks on Product, Derivative Products
or Family Products that protect any intellectual property or other
rights that Zilog may claim in the Product, Derivative Products or
Family Products.
6. MSU OBLIGATIONS
6.1 TO GRANT SOFTWARE LICENSES.
6.1.1 MSU shall grant licenses to Zilog customers of the Netbox
software in substantially the form of MSU's Application Software
Suite Licence or Source Code Licence as shall be current from
time to time (individually called a Licence Agreement). Such
licences shall only be granted to Zilog customers who:
(a) Have completed Product evaluation and have placed irrevocable
chip orders for the ISP Chipset;
(b) Who have signed a Licence Agreement providing for the payment
to MSU of a royalty of [*] for each unit of ISP Chipset
shipped incorporating any part of the ADK executable code;
(c) In the case of a Source Code Licence pay an up front licence
fee of [*]. This may at MSU's discretion be waived and
modified where appropriate with individual customer;
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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(d) Such Licence Agreements shall also provide for registration
with MSU prior to market release, and for MSU to have the
first right of refusal to licence back such code for use with
the ISP Chipset.
6.1.2 Zilog shall have the right to supply evaluation copies of the ADK
and OAK to approved Zilog customers who have entered into
obligations of confidentiality satisfactory to MSU.
6.2 TO PROVIDE A DEVELOPMENT KIT
6.2.1 MSU will supply to approved Zilog customers a Development Kit
consisting of a Netbox Appliance, connecting cables to a PC
Computer, Schematics, the ASS and OAK.
6.2.2 The list price of the Development Kit shall be [*]. This may
at MSU discretion be waived or modified where appropriate with
individual customers.
6.3 TO PROVIDE SOFTWARE SUPPORT
6.3.1 At all times during the term of this agreement MSU will support
the Netbox Software on the X86 CPU platform of the Netbox
reference design licenced pursuant to the terms of this agreement
to the extent provided for in Exhibit 2 hereto.
6.4 TO FULFILL DEVELOPMENT CONTRACTS
6.4.1 Where Zilog customers do not have the necessary resources subject
to agreement as to terms, MSU will offer Zilog customers a
software development service to modify/or customise Netbox
software.
6.4.2 MSU shall charge normal MSU rates for such activities.
6.5 TO PROVIDE A CUSTOMER TELEPHONE SUPPORT SERVICE
6.5.1 Subject to demand, MSU shall offer Zilog customers of ISP
hardware or software a limited availability of telephone support.
6.5.2 MSU reserves the right to limit the extent of free support
services according to the capability and competence of the
customer and magnitude of the business with MSU.
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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7. ZILOG OBLIGATIONS
7.1 MSU has agreements with Internet Service Providers ("ISPs") that
provide MSU customers with optional use of ISP's services when using
the MSU Netbox Reference Design Browser software. Customers developed
by MSU for ISPs provide MSU with a finders fee in compensation for
developing such customers. Zilog is willing to pass through to
customers the software that offers such services in the form of the
Browser and will negotiate compensation for the benefit of MSU from
ISPs.
8. INDEMNITIES
8.1 MSU shall fully indemnify and hold harmless Zilog against claims costs
and expenses that Zilog or its OEM customers may incur in connection
with any claim of infringement of the third party intellectual property
rights caused by or arising out of the manufacture or sale or use of
the Product or Netbox software. This indemnity shall include all costs
and expenses of refuting defending or settling any claim as well as any
damages or compensation ordered to be paid to any third party by any
Court.
8.2 Zilog shall fully indemnify and hold harmless MSU against any claims or
actions brought by third parties against MSU due to manufacturing
defects in the Product or design defects of any Derivative Products or
Family Products developed by Zilog. This indemnity shall include all
costs and expenses of refuting defending or settling any claim as well
as any damage or compensation ordered to any third party by any Court.
8.3 Zilog shall not be responsible for any changes requested or required by
MSU or third parties to any Product, Derivative Product, or Family
Product. Zilog shall not be responsible for flaws or defects created by
MSU or third parties because of alterations to the Products, Derivative
Products, or Family Products, or because of damages that arise as a
result of combination of the Product, Derivative Products, or Family
Products in systems designed, engineered or developed by MSU or third
parties.
8.4 NEITHER ZILOG NOR MSU SHALL BE LIABLE TO THE OTHER OR TO ANY OTHER
PERSON (TO THE MAXIMUM EXTENT THAT EITHER PARTY CAN DISCLAIM SUCH
LIABILITY) FOR ANY CLAIM FOR
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<PAGE>
INCIDENTAL, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES, INCLUDING LOSS
OF PROFIT, LOSS OF PLANT OR EQUIPMENT OR PRODUCING ARISING FROM THE
SALE OR SUBSEQUENT USE OF PRODUCTS, DERIVATIVE PRODUCTS OR FAMILY
PRODUCTS.
9. INTEREST
9.1 All sums due from either of the parties to the other which are not paid
on the due date shall bear interest from day to day at the annual rate
of 3% over the current National Westminster Bank Plc daily base rate
with a minimum of 10% per annum.
10. TERMINATION
10.1 Either party may by notice in writing to the other terminate this
agreement immediately upon the happening of any one of the following
events:
(a) Either party shall become bankrupt or be wound up or make any
arrangement or composition with its creditors;
(b) If either party is in material breach of any term of this Agreement
and fails to cure the breach within 45 days, (21 days for non
payment of monetary sums owed) after written notice of that breach
and of the first party's intention to terminate;
(c) On either party for any reason of whatsoever nature being
substantially prevented from performing or becoming unable to
perform its obligations hereunder;
(d) On Zilog or MSU assigning or attempting to assign this Agreement
without the prior written consent of the other;
(e) If control of Zilog or MSU shall pass from the present shareholders
or owners or controllers to other persons whom the other party
shall in its absolute discretion regard as unsuitable.
10.2 The indemnities and obligations of confidentiality contained in this
Agreement and the provision for payment of an account in respect of
continuing royalties and other sums due to either party under this
Agreement shall survive the termination or expiry of this Agreement.
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11. GENERAL
11.1 Force Majeure. Neither party shall be liable to the other for any
failure to perform or delay in performance of its obligations
hereunder (other than an obligation to pay monies) caused by:
(a) Act of God;
(b) outbreak of hostilities, riots, civil disturbance, acts of
terrorism;
(c) the act of any government or authority (including revocation
of any licence or consent);
(d) fire, explosion, flood, fog or bad weather;
(e) theft or malicious damage, strike, lockout or industrial
action of any kind;
(f) any cause or circumstances whatsoever beyond its reasonable
control.
11.2 The parties agree to submit to the exclusive jurisdiction of the
courts of England and Wales.
11.3 Waiver. The failure of a party to insist in any one or more
instances upon the performance of any provisions of this agreement
shall not be construed as a waiver or relinquishment of that
party's rights to future performance of such provision and the
other party's obligation in respect of such future performance
shall continue in full force and effect.
11.4 Severability. In the event that any one or more of the provisions
contained in this agreement shall for any reason be held to be
unenforceable, illegal or otherwise invalid in any respect under
the law governing this agreement or its performance such
unenforceability, illegality or invalidity shall not effect any
other provision of this agreement and this agreement shall then be
construed as if such unenforceable illegal or invalid provisions
had never been contained herein.
11.5 Compliance with Laws. In the performance of this agreement both
parties should comply with all laws, rules, regulations, decrees
and other ordinances issued by any governmental or other state
authority relating to the subject matter of this agreement and the
performance by the parties hereto or their obligations hereunder.
11.6 Whole Agreement. This Agreement sets forth and shall constitute the
entire agreement between both the parties with respect to any of
the subject matter hereof and shall supersede any and all promises,
representations, warranties or
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other statements whether written or oral, made by or on behalf of
one party to the other of any nature whatsoever or contained in any
leaflet brochure or other document given by one party to the other
concerning such subject matter.
11.7 This Agreement may not be released, discharged, supplemented,
interpreted, amended, varied, or modified in any manner except by
an instrument in writing signed by a duly authorised officer or
representative of each of the parties hereto.
12. NO JOINT VENTURE OR PARTNERSHIP
Nothing in this Agreement should create a partnership or joint venture
between the parties hereto and save that expressly provided in this
Agreement, neither party shall enter into or have authority to enter into
any engagement or make any representation of warranty on behalf of or
pledge to credit or otherwise bind or oblige the other party hereto.
13. CONFIDENTIALITY
13.1 Each party shall enter into a trust and confidence agreement in the
form set out in Schedule 1 - regulating to the fullest extent
allowed by the law in respect of responsibilities and duties of
confidentiality governing the ISP Chipset, the software,
intellectual property rights, know how and technical information,
the subject of this Agreement.
13.2 Zilog undertakes to ensure that all employees, suppliers, sub
contractors, sub licensees, and any other persons or organisations
who it is reasonable to contemplate having access to the
intellectual property rights know how or technical information will
covenant directly with MSU in the same terms as the trust and
confidence agreement.
14. NOTICES
14.1 Unless otherwise specified herein all notices or reports permitted
or required under this Agreement shall be in writing and shall be
delivered in person, mailed by first class postage prepaid or sent
by telex, telegram or telecopier to the designated person at the
address set forth below or as amended in writing and provided to
the other party at their last designated address.
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14.2 Notices and payments to MSU shall be sent to the following:
Elder House
526 to 528 Elder Gate
CENTRAL MILTON KEYNES
United Kingdom MK9 1LR For the attention of Mr R H Phillips
14.3 Notice to Zilog shall be sent to the following address:
210 East Hacienda Avenue
Campbell
CALIFORNIA 95008
USA
For the Attention of the Legal Department
Signed on behalf )
of MSU ) /s/ William Snowden
in the presence of ) ____________________________________
Secretary
AUTHORISED SIGNATORY
[signature]
_________________________
WITNESS
Signed on behalf ) [signature]
of MSU ) ___________________________________
in the presence of ) AUTHORISED SIGNATORY
_________________________
WITNESS
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AGREEMENT
This agreement ("Agreement") is made and entered into as of August 18, 1997 (the
"Effective Date") by and between C-Cube Microsystems Inc., a Delaware USA
corporation with its principal place of business at 1778 McCarthy Blvd.,
Milpitas, California, 95035 ("C-Cube"), and MSU U.K. Limited, a British
corporation, with offices at 526-528 Elder Gate, Central Milton Keynes, MK9 1LR,
England ("MSU").
RECITALS
Whereas: C-Cube is a leader in chips for video compression and decompression of
MPEG-1 and MPEG-2;
Whereas: MSU has developed technology for a standalone ASIC chip which
integrates a CD-DSP, an RF amplifier, motor drivers, a servo control and an
audio DAC ("Envoy Technology") and C-Cube desires to manufacture and sell the
standalone Envoy chip; and
Whereas: C-Cube and MSU desire to cooperate to allow C-Cube to integrate Envoy
Technology into C-Cube's MPEG-1 Video CD decoder chips ("Envoy VCD") and later
into C-Cube's MPEG-2 DVD decoder chips ("Envoy DVD").
Now, therefore, in consideration of the promises and mutual convenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
DEFINITIONS.
MSU I.P. means intellectual property owned or controlled by MSU,
including patents, patent applications, trade secrets, maskworks and
copyrights, but not including trademarks.
C-Cube I.P. means intellectual property owned or controlled by C-Cube,
including patents, patent applications, trade secrets, maskworks and
copyrights, but not including trademarks.
Production Release means, with respect to a product developed under
this Agreement, that the Product (1) has fully satisfied C-Cube's
production validation and requirements described in Appendix A; and (2)
at least three C-Cube OEM customers each have ordered at least 10,000
units of the Product for production use.
Net Selling Price means the selling price actually obtained by C-Cube
for a product excluding cost of packing, insurance and transportation,
import, export, excise, sales, and value-added taxes, and customs
duties.
Average Selling Price ("ASP") means the average Net Selling Price for a
Product during a defined period.
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Net Product Revenue means the number of units sold of a Product (net of
any returned shipments, RMA's, etc.) during a defined period multiplied
by the ASP of that Product during the same period.
Gross Margin means the difference between C-Cube's ASP of a Product
and C-Cube's full cost of manufacturing such Product (including direct
costs and allocated engineering, manufacturing and marketing overhead)
in accordance with generally accepted accounting principles in the
United States.
Products means any C-Cube product developed under this Agreement
incorporating the Envoy Technology.
II. THE COMMERCIAL DEVELOPMENT OF A STANDALONE ENVOY CHIP
A. Promptly following the execution of this Agreement, C-Cube will make
diligent efforts to complete the development of the standalone Envoy chip
("Standalone Envoy") in standard cell technology and to bring it to volume
production for loaders manufactured by Sony, Sanyo and Philips with error
correction quality equal to or better than the Philips CD7 solution. MSU will
make available to C-Cube all Envoy Technology required by C-Cube to develop the
Standalone Envoy and bring it to Production Release. Standalone Envoy will
incorporate servo control hardware.
B. C-Cube will send two engineers to MSU in the UK, together with sufficient
VideoCD system software support to enable the milestones of Section
VIII.B. 1-5 to be met.
C. Within 2 weeks after the Effective Date, MSU will disclose in writing (or
other appropriate media) all necessary information relating to Envoy
Technology for the following:
1. A detailed description of the DSP instruction set; and
2. Source code for the internal CPU and DSP code, meeting the quality
requirements for all of the loaders set forth in Section VIII.B.2.;
and
3. A detailed datasheet and architecture specification; and
4. A Verilog gate level netlist (with documentation) for the device
including information on critical timing paths.
D. Simultaneously with the completion of the milestone of Section VIII.B.3.
and simultaneously with the payment by C-Cube to MSU of [*] for completion of
such milestone, MSU will disclose in writing (or other appropriate media) all
necessary information relating to Envoy Technology required for C-Cube to
develop the Standalone Envoy for Production Release, including the complete
architecture, algorithms, micro-architecture, microcode structure and any other
technology relevant to Envoy, including but not limited to the following items:
1. Functional and timing simulation vectors as well as a set of
manufacturing test vectors achieving better than 95% fault coverage
(not including the memory sections) using a single stuck at 0 or 1
fault model; and
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
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2. All necessary developments tools (e.g., assembler, emulator, etc.)
to aid in firmware development for Envoy; and
3. Necessary information to port the production of Standalone Envoy to
additional foundries and sell the Standalone Envoy chips through
C-Cube's sales channels.
E. MSU will continue to provide to C-Cube all available feature and/or
functionality enhancements for the Envoy Technology during the period in which
royalties are payable under this Agreement.
F. C-Cube will have sole discretion in determining the selling price of its
VCD products and Standalone Envoy products. However, subject to market
conditions, C-Cube will not unreasonably price either product in relation to the
other product.
III. INTEGRATION OF THE ENVOY TECHNOLOGY INTO AN ENVOY VCD
Until the Production Release date of the Standalone Envoy, C-Cube agrees
to evaluate the Envoy Technology to determine its suitability for integration
into an Envoy VCD ("Envoy VCD"). If C-Cube determines that the Envoy Technology
is suitable for such integration, then (i) MSU agrees to enter into an exclusive
arrangement with C-Cube for development of an Envoy VCD according to the terms
set forth herein, (ii) C-Cube will not develop, modify, make, have made, market
or sell a product of comparable functionality to the Envoy VCD during the term
of this Agreement, and (iii) MSU will fully support C-Cube's integration
efforts. Any such arrangement shall include the provisions set forth below in
this Article III.
A. The resulting Envoy VCD chip will be equal to or better than the
Standalone Envoy with respect to features and quality.
B. MSU will work closely with C-Cube to expedite the Envoy VCD Product to
market in time for the 1998 VCD holiday selling season.
C. Within 30 days after the close of each fiscal quarter during the term in
which royalties are payable, C-Cube will pay royalties to MSU for C-Cube's Envoy
VCD Product according to the following table:
<TABLE>
<CAPTION>
Royalty Rate (as a % of C-Cube's Net Product Revenue)
Production Release Date 2H98-1H99 2H99-1H2000 >IH2000
----------------------- --------- ----------- -------
<S> <C> <C> <C>
- -If on or before Aug. 31, 1998 [*] [*] [*]
- -If on or before Oct. 31, 1998 [*] [*] [*]
-If after Oct. 31, 1998 [*] [*] [*]
</TABLE>
In the event the parties agree that a delay in the Production Release date
is attributable solely to C-Cube's inability to perform and MSU has completed
all of its responsibilities and deliverables on schedule, then the above royalty
reduction attributable to such delay shall not be implemented.
D. MSU will continue to provide to C-Cube all available feature and/or
functionality enhancements for the Envoy Technology during the period in which
royalties are payable under this Agreement.
E. Should C-Cube decide before the Production Release date of the Standalone
Envoy not to pursue an Envoy VCD solution, then MSU will have the right to
negotiate with other parties
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
Page 3
<PAGE>
<PAGE>
the licensing of Envoy Technology for the VCD market with an integrated (but
not standalone) solution.
F. If C-Cube elects to pursue the Envoy VCD, C-Cube and MSU anticipate
that a minimum of six (6) million units incorporating Envoy Technology
(including both Standalone Envoy and Envoy VCD) will be sold during the eighteen
(18) month period beginning on the Production Release Date of Standalone Envoy.
If at the end of this period such unit sales are not achieved and C-Cube has not
made reasonable efforts to achieve such sales levels, then C-Cube's license for
Envoy Technology for the VideoCD market shall no longer be exclusive. All other
terms and conditions shall remain in effect as if this release were not invoked.
IV. INTEGRATION OF ENVOY TECHNOLOGY INTO AN ENVOY DVD
Until September 20, 1997 MSU will not formally or informally discuss
with any third parties the licensing of Envoy Technology for the DVD market.
Provided C-Cube and MSU reach agreement to integrate the Envoy Technology into a
C-Cube Envoy DVD decoder, MSU will fully support C-Cube's integration efforts.
The up-front fees shall be no less favorable than those set forth in this
Agreement for the Envoy VCD.
V. LICENSE
A. MSU grants to C-Cube an exclusive world-wide irrevocable right and
license under MSU I.P. to develop, modify, make, have made, use, sell, export
and import Standalone Envoy Products for the VideoCD market.
B. C-Cube will not develop, modify, make, have made, market or sell a
standalone product of comparable functionality to the Standalone Envoy for the
VideoCD market during the term of this Agreement.
C. Until the Production Release date of Standalone Envoy, MSU will
not participate in any formal or informal discussions with parties other than
C-Cube regarding licensing of integrated Envoy Technology for the VideoCD
market.
VI. INTELLECTUAL PROPERTY
A. C-Cube shall own all intellectual property rights arising from
the work performed solely by C-Cube.
B. MSU shall own all intellectual property rights arising from the
work performed solely by MSU.
C. C-Cube and MSU shall jointly own the intellectual property
rights arising from the work performed jointly by MSU and C-Cube
("Joint I.P.").
D. MSU shall not assert against C-Cube any of its L.P. with respect
to the design, manufacture, use or sale by C-Cube of any products
incorporating Envoy Technology licensed under this Agreement.
E. MSU represents and warrants that it has full legal right to
license to C-Cube the Envoy Technology worldwide, and that the
Envoy Technology does not violate any third party intellectual
property rights, with the exception of the Sony/Philips generic CD
controller and associated patents. Except with respect to such
RB/RF Page 4 August 18, 1997
<PAGE>
<PAGE>
Sony/Philips patents, MSU agrees to indemnify and hold C-Cube
harmless in the event that, now or in the future, any third party
asserts claims of intellectual property infringement against C-Cube
related to Envoy Technology.
VII. CONFIDENTIAL INFORMATION
"Confidential Information" means any information disclosed by either
party to the other party, either directly or indirectly, in writing, orally or
by inspection, which is designated as "Confidential," "Proprietary" or some
similar designation. Information communicated orally shall be considered
Confidential Information if such Information is confirmed in writing as being
Confidential Information within a reasonable time after the initial disclosure.
Confidential Information shall not, however, include any information which (i)
was publicly known and made generally available prior to the time of disclosure
by the disclosing party; (ii) becomes publicly known and made generally
available after disclosure by the disclosing party to the receiving party
through no action or inaction of the receiving party; (iii) is already in the
possession of the receiving party at the time of disclosure by the disclosing
party as shown by the receiving party's files and records immediately prior to
the time of disclosure; (iv) is obtained by the receiving party from a third
party without a breach of such third party's obligations of confidentiality;
(iv) is independently developed by the receiving party without use of or
reference to the disclosing party's Confidential Information, as shown by
reasonable evidence in the receiving party's possession; or (vi) is required by
law to be disclosed by the receiving party, provided that the receiving party
gives the disclosing party prompt written notice of such requirement prior to
such disclosure and assistance in obtaining an order protecting the information
from public disclosure.
Neither party will disclose the other's Confidential Information to any
third party without the other's prior written consent. Moreover, neither party
will disclose such Confidential Information to its own employees except those
with a need to know as necessary in the performance of this Agreement. Neither
party will use the other's Confidential Information for any purpose other than
for the performance of this Agreement. The period of confidentiality will be the
term of this Agreement or three years from the date of disclosure, whichever is
later.
VIII. PAYMENTS
A. C-Cube already has paid [*] to MSU. If, in C-Cube's sole opinion
prior to the date of completion of milestone VIII B.3. below, the project
cannot be completed on a reasonable schedule then C-Cube many terminate this
Agreement and MSU shall refund to C-Cube any payments that have been made
to MSU prior to such termination except for [*] of the [*] already paid to
MSU prior to the execution of this Agreement. In the event of such
termination, C-Cube's license to Envoy Technology shall be terminated.
B. C-Cube shall pay MSU the following fixed amounts promptly following
the completion of the milestones indicated:
<TABLE>
<CAPTION>
Milestone Payment
---------- -------
<S> <C>
1. MSU's successful demonstration of the Standalone
Envoy product working properly in a single loader
with error correction quality equal to or better than
the Philips CD7 solution. [*]
2. MSU's successful demonstration of the Standalone
Envoy product working in Sony and Sanyo loaders
in a VCD solution with error correction quality equal
</TABLE>
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
RB/RF Page 5 August 18, 1997
<PAGE>
<PAGE>
<TABLE>
<S> <C>
to or better than the Philips CD7 solution. [*]
3. Receipt by C-Cube of both (i) Standalone Envoy
functional samples successfully working in a
C-Cube bring-up board and (ii) deliverables of Envoy
Technology as specified in Section 11(D) items 1-3. [*]
4. Full validation of Standalone Envoy functionality
in accordance with the requirements set forth
in Appendix A. [*]
5. The Production Release of the Standalone
Envoy, as a prepaid royalty, one of the following amounts:
</TABLE>
<TABLE>
<CAPTION>
Production Release date Prepaid Royalty
---------------------- ---------------
<S> <C>
- If on or before Oct. 5, 1997
- If on or before Nov. 5, 1997
- If on or before Dec. 5, 1997 [*]
- If on or before Jan. 5, 1997
- If after Jan. 5, 1998
</TABLE>
C. In addition to the above fixed amounts, within 30 days after the close
of each C-Cube fiscal quarter during the term in which royalties are payable,
C-Cube shall pay MSU running royalties for the Standalone Envoy (less the
prepaid amounts set forth in Section VIII.B.5., above) calculated for the
periods and at the rate determined according to the table below:
<TABLE>
<CAPTION>
Royalty Rate (% of Gross Margin)
--------------------------------
Production Release date 4Q97 1998 1999
---------------------- ---- ---- ----
<S> <C> <C> <C>
- If on or before Oct. 5, 1997 [*] [*] [*]
- If on or before Nov. 5, 1997 [*] [*] [*]
- If on or before Dec. 5, 1997 [*] [*] [*]
- If on or before Jan. 5, 1998 [*] [*] [*]
- If after Jan. 5, 1998 [*] [*] [*]
</TABLE>
D. MSU shall have the right to inspect, at its expense and through an
independent certified accounting firm, C-Cube's records as they relate to the
calculation of ASP and gross margin. Such inspection will be with reasonable
advance notice, during normal business hours, and no more than once per year
during the term of this agreement and for one year thereafter. In the event of a
disparity in excess of 7.5% of royalties payable in any audit period, then
C-Cube shall reimburse MSU for reasonable audit fees.
XI. REPRESENTATIONS AND WARRANTIES
Each party hereby represents and warrants to the other that as of the
Effective Date:
A. It has the full corporate right, power and authority to enter into
this Agreement and perform the acts required of it pursuant to this
Agreement.
B. The execution of this Agreement and the performance of its obligations
and duties under this Agreement will not violate any agreement to
which either party is a party or the rights of any third party; and
each party makes no representations, warranties or agreements not
expressly provided for in this Agreement.
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
RB/RF Page 6 August 18, 1997
<PAGE>
<PAGE>
X. TERM AND TERMINATION
A. Term. The term of this Agreement will begin on the Effective Date and will
continue as long as running royalties are payable hereunder unless earlier
terminated as set forth below.
B. Termination. Either party will have the right to terminate this Agreement
if:
1. The other party breaches any material term of this Agreement and fails to
cure such breach within 60 days after receiving written notice;
2. The other party becomes the subject of a voluntary petition in bankruptcy
or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors; or
3. The other party becomes the subject of an involuntary petition in
bankruptcy or any involuntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, if
such petition or proceeding is not dismissed within 60 days of filing.
4. In the event C-Cube terminates this Agreement because MSU falls within
subparagraphs 2 or 3 above, C-Cube shall still have the obligation to pay
running royalties provided that MSU is not in breach of any provisions of
this agreement.
5. In the event C-Cube terminates this Agreement because MSU falls within
subparagraph 1 above, MSU shall refund to C-Cube all payments made with
the exception of the initial [*] payment. In the event of such
termination, C-Cube's license to Envoy Technology shall be terminated and
Confidential Information of each of the parties shall be returned to its
owners and no further use shall be made of the Confidential Information by
the receiving party.
XI. GENERAL
A. Assignment. Except for an assignment in connection with the sale or transfer
of the entire business of a party pertaining to this Agreement, neither party
may assign this Agreement, in whole or in part, without the other party's
prior written consent which will not unreasonably be withheld.
B. Export Compliance. This Agreement is subject to and conditioned upon
compliance with the United States Export Administration Act and the applicable
regulations thereunder (collectively, the 'U.S. Export Laws'), as well as any
other laws of the United States and Japan provided each party notifies the
other, in writing, of any affecting the export of technology. Each party will
fully comply with the U.S. Export Laws and provide the other party with such
documentation, assurances and access to records as may be required to obtain
licenses under the U.S. Export Laws.
C. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of California applicable to agreements entered into,
and to be performed entirely, within California between California residents.
Any suit hereunder will
* The omitted information is confidential and has been filed separately with the
Securities and Exchange Commission.
RB/RF Page 7 August 18, 1997
<PAGE>
<PAGE>
be brought solely in the federal or state courts in the Northern District of
California and MSU hereby submits to the personal jurisdiction thereof.
D. Severability. If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in force.
E. Nonexclusive Remedy. The exercise by either party of any remedy under this
Agreement will be without prejudice to its other remedies under this Agreement
or otherwise.
F. Force Majeure. Neither party will be responsible for any failure to perform
due to causes beyond its reasonable control (each a 'Force Majeure'), including
acts of God, war, riot, embargoes, acts of civil or military authorities, denial
of or delays in processing of export license applications, fire, floods,
earthquakes, accidents, strikes, or fuel crises, provided that such party gives
prompt written notice thereof to the other party. The time for performance will
be extended for a period equal to the duration of the Force Majeure, but in no
event longer than 60 days.
G. Notices. All notices under this Agreement will be deemed given when
delivered personally, sent by confirmed facsimile transmission, or sent by
certified U.S. mail or nationally-recognized express courier, return receipt
requested, to the address shown below or as may otherwise be specified by either
party.
To C-Cube To MSU
- ------------------------- -------------------------------
Rick Foreman Wyn Holloway
Vice President Chairman
C-Cube Microsystems, Inc. MSU Corporation
1778 McCarthy Blvd. 526-528 Elder Gate
Milpitas, CA 95035 Central Milton Keynes, MK9 1LR
United States England
H. Independent Contractors. The parties are independent contractors. There is
no relationship of partnership, joint venture, employment, franchise, or agency
between the parties. Neither party will have the power to bind the other or
incur obligations on the other's behalf without the other's prior written
consent.
I. Waiver. No failure of either party to exercise or enforce any of its rights
under this Agreement will act as a waiver of such rights.
J. Arbitration. If any disagreement arises relating to this Agreement, the
senior management of both parties will meet to attempt to resolve such
disagreements. If the disagreements cannot be resolved by senior management, an
informal binding will be held. The parties will agree on the rules of the
informal arbitration in the San Francisco Bay Area prior to the arbitration,
based upon the nature of the disagreement. To the extent that the parties cannot
agree on the rules of the informal arbitrations, the rules of the American
Arbitration Association will apply. As a minimum set of rules in the informal
arbitration, the parties agree as follows:
RB/RF Page 8 August 18, 1997
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<PAGE>
1. The arbitration will be held by a single arbitrator acceptable to
both parties. If the parties cannot agree on a single arbitrator, each
party will select one independent individual who will meet to appoint a
single arbitrator.
2. The decision of the arbitrator will be considered as a final and
binding resolution of the disagreement which may be entered as judgment
by any court of competent jurisdiction; and
3. No court of law will have jurisdiction over this Agreement or this
arbitration except to enforce the result, and neither party will sue
the other where the basis of the suit arises under or involves the
interpretation of this Agreement, except for enforcement of the
arbitrator's decision if a party is not performing in accordance
therewith.
4. The parties will split the arbitrator's fee and each party shall pay
its own costs and attorneys fees.
K. Confidentiality of this Agreement. Neither party may disclose the existence
or the terms of this Agreement publicly or otherwise except as agreed upon in
advance, and except as required by law. The parties will not release any press
release without first agreeing with the other party on the contents thereof.
L. Amendments. Any supplement, modification or waiver of any provision of this
Agreement must be in writing and executed by an authorized representative of
both parties.
M. Entire Agreement. This Agreement and its Attachments are the complete and
exclusive agreement between the parties with respect to the subject matter
hereof, superseding and replacing the Interim Agreement and all prior
agreements, communications, and understandings (both written and oral) regarding
such subject matter. This Agreement may only be modified, or any rights under it
waived, by a written document executed by both parties.
The parties have caused this Agreement to be executed by their
duly-authorized representatives as of the Effective Date.
MSU U.K. Limited C-Cube Microsystems Inc.
By: /s/ W.P. Holloway By: /s/ Alexandre Balkaaski
-------------------------- -----------------------------
Name: W.P. Holloway Name: Alexandre Balkaaski
------------------------ ---------------------------
Title: Chairman Title: President & CEO
----------------------- --------------------------
RB/RF Page 9 August 18, 1997
<PAGE>
<PAGE>
APPENDIX A
VALIDATION & PRODUCTION REQUIREMENTS
I. For the Standalone Envoy product:
A. VALIDATION REQUIREMENTS
1. Must pass the Philips VCD quality test on a C-Cube bring-up board; and
2. Must pass C-Cube's 7-day reliability testing procedures.
B. PRODUCTION REQUIREMENTS
1. Must be brought up functionally in the VideoCD systems of three OEM
customers selected by C-Cube, and must pass each OEM customer's 7-day
reliability tests; and
2. Must demonstrate suitable functionality and reliability so as to be
taken to 1,000 unit pre-production volume at three of C-Cube's OEM
customers.
II. For the Integrated C-Cube VCD + Envoy product:
A. PRODUCTION REQUIREMENTS
1. must fully satisfy C-Cube's validation and production requirements, as
described in 1(a) and 1(b) above.
RB/RF Page 10 August 18, 1997
<PAGE>
<PAGE>
SERVICE AGREEMENT
Date: day of September 1997
PARTIES
1. "The Company": MSU (UK) LIMITED having it's place of business
at Elder House, 526 to 528 Elder Gate, Central Milton
Keynes, Bucks, MK9 1LR
2. "The Executive" KEITH EDWARD PEIRSON of 4 Chantry Drive,
Ingatestone, Essex, CM4 9HR
OPERATIVE PROVISIONS:
1. INTERPRETATION
1.1. The headings and marginal headings to the clauses in this agreement
are for convenience only and have no legal effect.
1.2. Any reference in this agreement to any Act or delegated legislation
includes any statutory modification or re-enactment thereof or the
provisions referred to.
1.3. In this agreement:
'THE BOARD' means the board of directors of the Company and
includes any committee of the Board duly appointed by it.
'GROUP COMPANY' means any company which for the time being is a
company having an ordinary share capital (as defined in s.832 Income
and Corporation Taxes Act 1988) of which not less than 25 per cent
is owned directly or indirectly by the Company or it's holding
company applying the provisions of s.838 Income and Corporation
Taxes Act 1988 in the determination of ownership.
'MANAGING DIRECTOR' means any person holding such office of the
Company from time to time and includes any person(s) exercising
substantially the functions of a managing director or chief
executive officer of the Company.
'RECOGNISED INVESTMENT EXCHANGE' means any body of persons which is
for the time being a Recognised Investment Exchange for the purposes
of the Financial Services Act 1986.
2. APPOINTMENT AND DURATION
2.1. The Company appoints the Executive and the Executive agrees to serve
as the Managing Director. The Executive accepts that the Company may
reasonably require him to perform other duties or tasks,
commensurate with his position, not within the scope of his normal
duties and the Executive agrees to perform those duties or undertake
those tasks as if they were specifically required under this
Agreement.
2.2. The appointment commenced on the 1st of July 1997.
2.2.1 The appointment shall continue (subject to earlier
termination as provided in this agreement) for a period of 12
months from the date of this agreement.
1
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<PAGE>
2.2.2 The appointment shall continue until terminated by either
party giving one month's prior notice in writing if given in
the first six months of the date of this agreement and
thereafter not less than twelve months calendar prior notice
in writing.
2.3. The Executive warrants that by virtue of entering into this
Agreement he will not be in breach of any express or implied terms
of any contract with or of any other obligation to any third party
binding on him.
3. DUTIES OF THE EXECUTIVE
3.1. The Executive shall at all times during the term of this Agreement;
3.1.1. unless otherwise agreed devote substantially the whole of his
time attention and ability to the duties of his appointment;
3.1.2. faithfully and diligently perform those duties and exercise
such powers consistent with them which are from time to time
assigned to or vested in him;
3.1.3. obey all lawful and reasonable directions of the Board;
3.1.4. keep the Board promptly and fully informed (in writing if so
requested) of his conduct of the business or affairs of the
Company, it's Group and subsidiary companies in which he is
involved in it's management and provide such explanations as
the Board may require;
3.1.5. not at any time to make any untrue or misleading statement to
the Company or any Group Company.
3.2. Without prejudice to his duties to the Company the Executive shall
if and for so long as the Company reasonably require during the
period of this Agreement:
3.2.1. carry out duties on behalf of any Group Company.
3.2.2. act as an officer of any Group Company or hold any other
appointment or office as nominee or representative of the
Company or any Group Company.
4. PLACE OF WORK
4.1. The Executive shall perform his duties at the Head Office of the
Company from time to time and/or such other places of business as
the Company requires, including occasional visits outside the United
Kingdom in the ordinary course of his duties.
5. PAY
5.1. During his appointment the Company shall pay to the Executive:
5.1.1. a basic salary of 'L'96,000 per year which shall accrue day
to day and be payable by equal monthly instalments in arrears
on or about the 26th day of each month;
5.1.2. a bonus in each year of this Agreement in accordance with the
Company's executive bonus scheme as determined from time to
time by the Board. (which the Company shall use it's best
endeavours to implement by 30th November 1997)
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5.2. The Executive's salary shall be reviewed by the Board on 30th June
in each year and the rate of salary may be increased by the Company
with effect from that date by such amount if any as it shall think
fit.
5.3. The Company shall cover the cost of membership for the Executive and
his immediate family of an approved private patients medical plan
with a reputable medical expenses insurance company.
5.4. The Executive will be a member of the Company's proposed life
assurance scheme designed to give benefits equal to four times his
annual salary from time to time and the Company will pay promptly
all contributions due in respect of his membership of the scheme.
(which the Company shall use it's best endeavours to implement by
30th November 1997)
5.5. The executive will be a member of the Company's contributory Pension
Scheme and shall be required to contribute 2.5% and the company
shall contribute 6.5% (which the Company shall use it's best
endeavours to implement by 30th November 1997)
6. CAR ALLOWANCE
6.1. The Company shall provide the Executive with:
6.1.1. a car use allowance of 'L'1,000.00 per month which is subject
to review on an upward only basis by the Board.
6.2. After commencement of this agreement the executive may request that
the Company considers providing him with a car for his sole business
and private use of model and specification selected by the Company
which in the reasonable opinion of the Board is commensurable with
the status of the executive and image of the Company in place of the
car use allowance.
6.3. In such latter case the Company shall bear all running costs and
expenses of the car and shall replace the car with the same or an
equivalent model when it has travelled 45,000 miles or on the third
anniversary of the date of it's purchase by the Company.
6.4. The Executive shall always comply with all reasonable regulations
laid down by the Company from time to time with respect to company
cars (where appropriate) and shall forthwith notify the Company of
any accidents involving his Company car and of any charges of
driving offences which are brought against him and on the
termination of his employment for any reason whether lawful or not
shall forthwith return his company car to the Company at it's Head
Office.
3
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7. EXPENSES
7.1. The Company shall pay the Executive an overnight accommodation
allowance of up to 'L'30.00 per night to contribute towards hotel
expenses reasonably incurred by him in
7.2. The company will also reimburse all expenditure reasonably incurred in
the proper performance of his duties subject to the Executive
complying with such guidelines or regulations issued by the Company
from time to time in this respect and to the production to the Company
of such vouchers or receipts or other evidence of payment as it shall
reasonably require.
7.3. Where the Company issues a Company sponsored credit or charge card to
the Executive he shall use such credit or charge card only for
expenses reimbursable under clauses 7.1 and 7.2 above and shall return
it to the Company forthwith on the termination of his employment.
8. OPTIONS
8.1. The Company will grant to the Executive at a date to be agreed options
to purchase up to 300,000 shares of ordinary common stock in the
Company at the market price on the 8th day of August 1997. The options
will be capable of being exercised as to 100,000 on each of the 1st
July 1998, 1st July 1999 and 1st July 2000 (each complete year being
referred to as an Option Year) provided the Executive remains a
director on these dates. The option period will expire on 1st July
2002.
8.2. In the event of termination of the Executives appointment part of the
way through an Option Year (other than for reasons set out in 12.3 he
shall then be entitled to exercise the options falling in that Option
Year on a pro rata basis.
9. HOLIDAY
9.1. In addition to public holidays the Executive is entitled to 25 working
days paid holiday in each year from January 1 to December 31 to be
taken at such time or times as are agreed with the Board. The
Executive shall not without the consent of the Board carry forward any
unused part of his holiday entitlement to a subsequent year.
9.2. On the termination of his employment for whatever reason the Executive
shall entitled to pay in lieu of outstanding holiday entitlement and
shall be required to pay the Company any salary received for holiday
taken in excess of his actual entitlement. The basis of payment and
repayment shall be 1/253 of the Executive's annual salary for each
day.
10. INCAPACITY
10.1. If the Executive is unavailable because of sickness (including mental
disorder) of injury he shall report this fact forthwith to the Company
Secretary's office.
10.2. If the Executive shall be absent from work due to sickness (including
mental disorder) or injury he shall be paid his full remuneration
hereunder for up to 6 months absence in any 12 month period, and
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thereafter such remuneration, if any, as the Board shall determine
from time to time.
10.3. If at any time during the period of his appointment the Executive
shall be unavailable for work for a period of 28 days in any 12 month
period he shall upon request and at the expense of the Company permit
himself to be examined by a registered medical practitioner to be
selected by the Company and shall authorise such medical practitioner
to disclose to and discuss with the Company's medical adviser the
results of such examination and any matters which arise from it in
order that the Company's medical adviser can notify the Company of any
matters which, in his opinion, might hinder or prevent the Executive
(if during a period of incapacity) from returning to work for any
period or (in other circumstances) from properly performing any
duties of his appointment at any time. The Executive shall at his
request be supplied with a copy of any such report or opinion obtained
pursuant to this sub clause
11. TRUST AND CONFIDENCE
11.1. As a condition of his appointment the Executive agrees to be bound by
the terms of the Trust and Confidence Agreement attached as Schedule
II hereto.
12. TERMINATION OF AGREEMENT
12.1. Automatic Termination:
This Agreement shall automatically terminate upon the Executive
reaching his 65th birthday.
12.2. Suspension:
In order to investigate a complaint against the Executive of
misconduct the Company is entitled to suspend the Executive on full
pay for a period not exceeding 14 days to carry out a proper
investigation and hold a disciplinary hearing.
12.3. Immediate Dismissal:
The Company may with immediate effect terminate this Agreement if the
Executive:
12.3.1. commits any act of gross misconduct or repeats or continues
(after written warning) any other material or serious breach
of his obligations under this Agreement; or
12.3.2. is guilty of any conduct which brings him or the Company or
any Group Company into serious disrepute; or
12.3.3. is convicted of any criminal offence punishable with 6 months
or more imprisonment (excluding an offence under the road
traffic legislation in the United Kingdom or elsewhere for
which he is not sentenced to any term of imprisonment whether
immediate or suspended); or
12.3.4. commits any act of dishonesty relating to the Company or any
Group Company any of it's or their employees or otherwise; or
12.3.5. becomes bankrupt or makes any composition with his creditors
or otherwise; or
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12.4. PAY IN LIEU:
On serving notice for any reason to terminate this Agreement or at any
time thereafter during the currency of the notice the Company shall be
entitled to pay the Executive his basic salary and benefits at the
rate then payable under clause 5 hereof for the unexpired portion of
the duration of his appointment or entitlement to notice as may be.
13. GENERAL
13.1. Statutory Particulars
The further particulars of employment not contained in the body of
this Agreement which must be given to the Executive in compliance with
the Employment Rights Act 1996 are given in Schedule I.
13.2. Accrued rights
The expiration or termination of this Agreement however arising shall
not operate to affect such of the provisions of this Agreement as are
expressed to operate or have effect after then and shall be without
prejudice to any accrued rights or remedies of the parties.
13.3. Proper Law
The validity construction and performance of this Agreement shall be
governed by the Laws of England and Wales.
13.4. Acceptance of Jurisdiction
All disputes claims or proceedings between the parties relating to the
validity construction of performance of this Agreement shall be
subject to the non exclusive jurisdiction of the High Court of Justice
in England and Wales to which the parties irrevocably submit.
13.5. Notices
Any notices to be given by a party under this agreement must be given
by delivery at or sending first class post or other faster postal
service or telex facsimile transmission or other means of
telecommunication in permanent written form to the last known postal
address or relevant telecommunications number of the other party.
Where notice is given sending in a prescribed manner it shall be
deemed to have been received by the addressee. To prove the giving of
a notice it shall be sufficient to show it was despatched. A notice
shall have effect from the sooner of it's actual or deemed receipt by
the addressee.
13.6. Each provision of this deed is independent and severable from the
remaining provisions and enforceable accordingly. If any provision of
this deed shall be unenforceable for any reason but would be
enforceable if part of the wording therefor were deleted, it shall
apply with such deletions as may be necessary to make it enforceable.
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IN WITNESS WHEREOF THE COMPANY AND THE EXECUTIVE HAVE EXECUTED THIS DOCUMENT AS
A DEED THE DAY AND YEAR FIRST BEFORE WRITTEN
Signed by the Executive )
and delivered as a Deed )----------------------
in the presence of: )
- -----------------------------
Witness
Signed and delivered as )
a deed by )----------------------
(Director) and by )
(Director/Secretary) )
for and on behalf of the )----------------------
Company in the presence of: )
- -----------------------------
Witness
7
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SCHEDULE 1
PART 1 EMPLOYMENT RIGHTS ACT 1996 ACT
The following information is given supplemental to the information given in the
body of this Agreement in order to comply with the requirements of the Act
1. The Executives employment with the Company commenced on 1st July 1997
2. The normal working hours are from 9.00 am to 5.30 pm. The executive shall
be expected to fulfill such hours as may be necessary so as to properly
fulfill his duties.
3. No contracting out certificate pursuant to the provisions of the Social
Security pension Act 1975 is held by the Company in respect of the
Executives employment.
The Executive is subject to the Company's Disciplinary Rules and Procedures
which will be in accordance with ACAS code of practise.
If the Executive has any grievance relating to his employment (other than
one relating to a disciplinary decision) he should refer such grievance to
the Chairman of the Board and if the grievance is not resolved by
discussion with him it will be referred to the Board for resolution.
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SCHEDULE 2
TRUST AND CONFIDENCE AGREEMENT
TRUST AND CONFIDENCE AGREEMENT
Dated the 1st day of July 1997
PARTIES:
"The Company": MSU (UK) Limited whose registered office is at Elder House,
526 to 528 Elder Gate, Central Milton Keynes, MK 1LR, United Kingdom.
"The Executive": Keith Peirson, 4, Chantry Drive, Ingatestone, Essex CM4
9HR, United Kingdom.
1. DEFINITIONS
In this Deed, the following phrases shall, unless the context requires
otherwise, have the following meanings:
1.1 "Businesses" means all and any trades or other commercial activities of
the Company or any Group Company:
1.1.1 with which the Executive shall have been concerned or involved
to any material extent at any time during his appointment by the
Company which the Company or any Group Company shall carry on with a
view to profit; or
1.1.2 which the Company or any Group Company shall at the Termination
Date have determined to carry on with a view to profit in the immediate
or foreseeable future and in relation to which the Executive shall at
the Termination Date possess any Confidential Business Information.
1.2 "Company Invention" means any improvement, invention or discovery made
by the Executive which applying the provisions of Section 39 of the
Patents Act 1977 in the determination of ownership is, as between the
parties, the property of the Company.
1.3 "Confidential Business Information" means all and any Corporate
Information, Marketing Information, Technical Information and other
information (whether or not recorded in documentary form or on computer
disk or tape) to which the Company or any Group Company attaches an
equivalent level of confidentiality to any third party:
1.3.1 which the Executive shall acquire at any time during his
appointment by the Company but which does not form part of the
Executive's own stock in trade; and
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1.3.2 which is not readily ascertainable to persons not connected with
the Company or any Group Company either at all or without a significant
expenditure of labour, skill or money.
1.4 "Corporate Information" means all and any information (whether or not
recorded in documentary form or on computer disk or tape) relating to
the business methods, corporate plans, management systems, finances,
maturing new business opportunities or research and development
projects of the Company or any Group Company.
1.5 "Customer" means any person firm or company who or which shall at the
Termination Date be negotiating with the Company or any Group Company
for the supply of any Restricted Products or the provision of any
Restricted Services or to whom or which the Company or any Group
Company shall at any time during the period of one year prior to the
Termination Date have supplied any Restricted Products or provided any
Restricted Services.
1.6 "Group Company" means any company which for the time being is a company
having an ordinary share capital (as defined in Section 832 of the
Income and Corporation Taxes Act 1988) of which not less than 25 per
cent is owned directly or indirectly by the Company or its holding
company applying the provisions of Section 838 of the Income and
Corporation Taxes Act 1988 in the determination of ownership.
1.7 "Marketing Information" means all and any information (whether or not
recorded in documentary form or on computer disk or tape) relating to
the marketing or sales of any past, present or future product or
service of the Company or any Group Company including, without
limitation, sales targets and statistics, market share and pricing
statistics, marketing surveys and plans, market research reports, sales
techniques, price lists, discount structures, advertising and
promotional material, the names, addresses, telephone numbers, contact
names and identities of customers and potential customers of any
supplies and potential suppliers to the Company or any Group Company,
the nature of their business operations, their requirements for any
product or service sold to or purchased by the Company or any Group
Company and all confidential aspects of their business relationship
with the Company or any Group Company.
1.8 "Material Interest" means:
1.8.1 the holding of any position as director, officer, employee,
consultant, partner, principal or agent;
1.8.2 the direct or indirect control or ownership (whether jointly or
alone) of any shares (or any voting rights attached to them) or
debentures save for the ownership for investment purposes only of not
more than three per cent of the issued ordinary shares of any company
whose shares are listed on any Recognised Investment Exchange (as
defined in Section 207 of the Financial Services Act 1986); or
1.8.3 the direct or indirect provision of any financial assistance.
1.9 "Restricted Area" means the United Kingdom
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1.10 'Restricted Products' means all and any products of a kind which shall be
dealt in, produced, marketed or sold by the Company or any Group Company
in the order course of the Business.
1.11 'Restricted Services' means all and any services of a kind which shall be
provided by the Company or any Group Company in the ordinary course of
the Business.
1.12 'Technical Information' means all and any trade secrets, secret formulae,
processes, inventions, designs, know-how, discoveries, technical
specifications and any other technical information (whether or not
recorded in documentary form or on computer disk or tape) relating to the
creation, production or supply of any past, present or future product or
service of the Company, or any Group Company. 1.13 'Termination Date'
means the date on which the Executive shall cease to work in any of the
Businesses.
2. ACKNOWLEDGEMENTS BY THE EXECUTIVE
The Executive acknowledges:
2.1 That the Company and each Group Company possesses a valuable body of
Confidential Business Information;
2.2 That the Company will give him access to Confidential Business
Information in order that he may carry out the duties of his appointment;
2.3 That the duties of his appointment include, without limitation, a duty of
trust and confidence and a duty to act at all times in the best interests
of the Company.
2.4 That the Company requires all its senior employees to accept restrictions
which are similar to those set out in clause 3 and 4 for its and each of
their mutual protection.
2.5 That his knowledge of Confidential Business Information directly benefits
him by enabling him to perform his management duties.
2.6 That the disclosure of any Confidential Business Information to any
customer or actual or potential competitor of the Company or any Group
Company would place such a company at a serious competitive disadvantage
and would cause immeasurable (financial and other) damage to the
Businesses.
2.7 That if, on leaving the employment of the Company, he was to hold any
Material Interest in a Customer or any actual or potential competitor of
the Company or any Group Company, it would place such company at a
serious competitive disadvantage and would cause immeasurable (financial
and other) damage to the Businesses.
3. OBLIGATIONS DURING EMPLOYMENT
3.1 Inventions
3.1.1 If at any time during his appointment the Executive (whether alone
or with any other person or persons) makes any invention which relates
either directly or indirectly to the business of the Company or any Group
Company, the Executive shall promptly disclose to the Company full
details, including drawings and models, of such
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invention to enable the Company to determine whether or not it is a
Company Invention.
3.1.2 Decisions as to the patenting and exploitation of any Company
Invention shall be at the sole discretion of the Company.
3.1.3 The Executive irrevocably appoints the Company to be his attorney
in his name and on his behalf to execute documents, to use the
Executive's name and to do all things which may be necessary or desirable
for the Company to obtain for itself or its nominee the full benefit of
the provisions of clause 3.1.3 and a certificate in writing signed by any
Director or the Secretary of the Company that any instrument or act falls
within the authority hereby conferred shall be conclusive evidence that
such is the case so far as any third party is concerned.
3.2 Copyright etc.
3.2.1 The Executive shall promptly disclose to the Company all copyright
works or designs originated, conceived, written or made by him alone or
with others (except only those works originated, conceived, written or
made by him wholly outside his normal working hours which are wholly
unconnected with his appointment) and shall hold them in trust for the
Company until such rights shall be fully and absolutely vested in the
Company.
3.2.2 The Executive hereby assigns to the Company by way of future
assignment all copyright, design right and other proprietary rights (if
any) for the full term thereof throughout the World in respect of all
copyright works and designs originated, conceived, written or made by the
Executive (except only those works or designs originated, conceived,
written or made by the Executive wholly outside his normal working hours
which are wholly unconnected with his appointment) during the period of
his appointment by the Company.
3.2.3 The Executive hereby irrevocably and unconditionally waives in
favour of the Company any and all moral rights conferred on him by
Chapter IV of Part I of the Copyright Designs and Patents Act 1988 for
any work in which copyright or design right is vested in the Company
whether by clause 3.2.2 or otherwise.
3.2.4 The Executive shall, at the request and expense of the Company, do
all things necessary or desirable to substantiate the rights of the
Company under clauses 3.2.2 and 3.2.3.
3.3 Share Dealings
3.3.1 The Executive shall comply, where relevant, with every rule of law,
every requirement of the Securities and Exchange Commission and every
regulation of the Company from time to time in force in relation to
dealings in shares, debentures or other securities of the Company or any
Group Company and unpublished price sensitive information affecting the
shares, debentures or other securities of any other company and, in
relation to overseas dealings, the Executive shall also comply with all
laws of the state and all regulations of the stock exchange, market or
dealing system in which such dealings take place.
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3.3.2 The Executive shall not (and shall procure so far as he is able
that his spouse shall not) deal or become or cease to be interested
(within the meaning of Part I of Schedule XIII to the Companies Act 1985)
in any securities of the Company except in accordance with any Company
rules or guidelines from time to time relating to securities transactions
by directors.
3.4 Conflict of Interest
3.4.1 The Executive agrees that during the period of his appointment by
the Company, he shall:
3.4.1.1 abide by any relevant Company policy which may be brought
to the attention of the Executive from time to time;
3.4.1.2 not directly or indirectly disclose to any person, firm or
company or use other than for any legitimate purposes of the
Company or any Group Company any Confidential Business Information;
3.4.1.3 not without the Company's prior written permission hold any
Material Interest in any person firm or company which:
(a) is or shall be in competition with any of the Businesses;
(b) impairs or might reasonably be thought by the Company to
impair his ability to act at all times in the best interests
of the Company; or
(c) requires or might reasonably be thought by the Company to
require him to disclose any Confidential Business Information
in order properly to discharge his duties to or to further his
interest in such person firm or company.
3.4.1.4 Not directly or indirectly receive or obtain in respect of
any goods or services sold or purchased or other business
transacted (whether or not by him) by or on behalf of the Company
or any Group Company any discount, rebate, commission or other
inducement (whether in cash or in kind) which is not authorised by
any Company rules or guidelines from time to time and if he or any
firm or company in which he holds any Material Interest shall
obtain any such discount, rebate, commission or inducement, he
shall immediately account to the Company for the amount so
received.
3.4.1.5 Not without the prior authority of the Company remove from
the Company premises or copy or allow others to copy the contents
of any document computer disk tape or other tangible item which
contains any Confidential Business Information or which belongs to
the Company or any Group Company.
3.4.1.6 Return to the Company upon request and, in any event, at
the Termination Date, all documents, computer disks and tapes and
other tangible items in his possession or under his control which
belong to the Company or any Group Company or which contain or
refer to any Confidential Business Information.
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3.4.1.7 If so requested by the Company delete all Confidential
Business Information from any computer disks, tapes or other
re-usable material in his possession or under his control and
destroy all other documents and tangible items in his possession or
under his control which contain or refer to any Confidential
Business Information.
4. OBLIGATIONS AFTER EMPLOYMENT
The Executive shall not within the Restricted Area directly or indirectly:
4.1 For the period of 12 months after the Termination Date hold any Material
Interest in any business which is or shall be wholly or partly in
competition with any of the Businesses.
4.2 For the period of 12 months after the Termination Date, hold any Material
Interest in any person firm or company (other than those which clause 4.1
above refers) which requires or might reasonably be thought by the Company
to require him to disclose or make use of any Confidential Business
Information in order properly to discharge his duties or to further his
interest in such person, firm or company.
4.3 For the period of 12 months after the Termination Date seek in any capacity
whatsoever any business, orders or custom for any Restricted Products or
Restricted Services from any Customer.
4.4 For the period of 12 months after the Termination Date, accept in any
capacity whatsoever orders for any Restricted Products or Restricted
Services from any Customer.
4.5 At any time before or after the Termination Date, induce or seek to induce
by any means involving the disclosure or use of Confidential Business
Information any Customer to cease dealing with the Company or any Group
Company or to restrict or vary the terms upon which it deals with the
Company or any Group Company.
4.6 For the period of 12 months after the Termination Date solicit or entice
away or seek to entice away from the Company or any Group Company any
person who is and was at the Termination Date employed by the Company or
any Group Company to work in any of the Businesses as a director, senior
manager or salesperson.
4.7 At any time after the Termination Date represent himself or permit himself
to be held out by any person, firm or company as being in any way connected
with or interested in the Company or any Group Company.
4.8 At any time after the Termination Date disclose to any person, firm or
company or make use of any Confidential Business Information.
5. GENERAL
5.1 Each provision of this Deed is independent and severable from the remaining
provisions and enforceable accordingly. If any provisions of this Deed
shall be unenforceable for any reason but would be enforceable if part of
the wording thereof were deleted, it shall apply with such deletions as may
be necessary to make it enforceable.
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5.2 The Executive has given the undertakings contained in clause 3 to the
Company as trustee for itself and for each Group Company and will at the
request and cost of the Company enter into direct undertakings with any
Group Company which correspond to the undertakings in clause 4, or which
are less onerous only to the extent necessary (in the opinion of the
Company or its legal advisors) to ensure that such undertakings are valid
and enforceable.
5.3 Upon termination of the Executive's employment for any reason, the Company
may require the Executive to attend an interview which shall be conducted
by a representative of the Company at which the Company's representative
shall review with the Executive the terms of this Deed and the precise
nature of the Executive's obligations to the Company under the Deed and any
Group Company under any Deed entered into pursuant to clause 5.2 above.
Such interview shall not be held with a view to the imposition any new or
further terms.
5.4 The provisions of this Deed may be amended only by a written instrument
executed by both the Company and the Executive.
5.5 The validity, enforceability, construction and interpretation of this Deed
shall be governed by English Law.
5.6 The rights and obligations of the Company hereunder shall be transferred to
its successors and assigns. The Executive may not, however, transfer or
assign his rights or obligations under this Deed.
Signed as a Deed by )
Keith Peirson )
in the presence of )
CHRISTINE ARMSTRONG /s/ KEITH PEIRSON
.................................... ...................................
Witness
Signed and delivered as a ) /s/ R. H. PHILLIPS
Deed by (Director) and by ) ....................................
(Director/Secretary) for and on ) /s/ WYNFORD P. HOLLOWAY
behalf of the Company in the ) ....................................
presence of )
CHRISTINE ARMSTRONG
....................................
Witness
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SERVICE AGREEMENT
Date: 24th day of January 1997
Parties
1. "The Company": MSU (UK) Limited having it's place of business
at Elder House, 526 to 528 Elder Gate, Central
Milton Keynes, Bucks, MK9 1LR
2. "The Executive": Richard Horby Phillips Wychwood, 86, Kimpton
Road, Blackmore End, Wheathampstead,
Hertfordshire, AL4 8LX.
Operative Provisions:
1. Interpretation
1.1 The headings and marginal headings to the clauses in this agreement
are for convenience only and have no legal effect.
1.2 Any reference in this agreement to any Act or delegated legislation
includes any statutory modification or re-enactment thereof or the
provisions referred to.
1.3 In this agreement:
'THE BOARD' means the board of directors of the Company and includes
any committee of the Board duly appointed by it.
'GROUP COMPANY' means any company which for the time being is a
company having an ordinary share capital (as defined in s.832 Income
and Corporation Taxes Act 1988) of which not less than 25 per cent is
owned directly or indirectly by the Company or it's holding company
applying the provisions of s.838 Income and Corporation Taxes Act 1988
in the determination of ownership.
'MANAGING DIRECTOR' means any person or persons jointly holding such
office of the Company from time to time and includes any person(s)
exercising substantially the functions of a managing director or chief
executive officer of the Company.
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'RECOGNISED INVESTMENT EXCHANGE' means any body of persons which is
for the time being a Recognised Investment Exchange for the purposes
of the Financial Services Act 1986.
2. Appointment and Duration
2.1 The Company appoints the Executive and the Executive agrees to serve
as the Financial Director. The Executive accepts that the Company may
reasonably require him to perform other duties or tasks not within the
scope of his normal duties and the Executive agrees to perform those
duties or undertake those tasks as if they were specifically required
under this Agreement.
2.2 The appointment commenced on 2 January 1997.
2.2.1 During the initial three months of this Agreement the Executive
shall work for four days a week ("the Initial Period").
2.2.2 Thereafter for the remainder of the term of this Agreement the
Executive shall carry out his duties on a full time basis.
2.2.3 The appointment shall continue until terminated by either party
giving one month's prior notice in writing if given in the
Initial Period and thereafter not less than six months calender
prior notice in writing.
2.3. The Executive warrants that by virtue of entering into this Agreement
he will not be in breach of any express or implied terms of any
contract with or of any other obligation to any third party binding on
him.
3. Duties of the Executive
3.1 The Executive shall at all times during the term of this Agreement:
3.1.1 devote substantially the whole of his time attention and ability
to the duties of his appointment;
3.1.2 faithfully and diligently perform those duties and exercise such
powers consistent with them which are from time to time assigned
to or vested in him;
3.1.3 obey all lawful and reasonable directions of the Board;
3.1.4 use his best endeavours to promote the interests of the Company
and it's Group Companies;
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3.1.5 keep the Board promptly and fully informed (in writing if so
requested) of his conduct of the business or affairs of the
Company and it's Group Companies and provide such explanations
as the Board may require;
3.1.6 not at any time to make any untrue or misleading statement to
the Company or any Group Company.
3.2 The Executive shall if and for so long as the Company reasonably
require during the period of this Agreement;
3.2.1 carry out duties on behalf of any Group Company:
3.2.2 act as an officer of any Group Company or hold any other
appointment or office as nominee or representative of the
Company or any Group Company:
3.2.3 Carry out the duties and the duties attendant upon any such
appointment as if they were duties to be performed by him on
behalf of the Company.
4. Place of Work
4.1 The Executive shall perform his duties at the Head Office of the
Company from time to time and/or such other places of business as the
Company requires, including occasional visits outside the United
Kingdom in the ordinary course of his duties.
5. Pay
5.1 During his appointment the Company shall pay to the Executive:
5.1.1 a basic salary of `L'50,000 per year during the Initial Period
and thereafter at the rate of `L'65,000 per year which shall
accrue day to day be payable by equal monthly instalments in
arrears on or about the 26th day of each month;
5.1.2 a bonus in each year of this Agreement in accordance with the
Company's executive bonus scheme as determined from time to time
by the Board.
5.2 The Executive's salary shall be reviewed by the Board on 30th June in
each year and the rate of salary may be increased by the Company with
effect from that date by such amount if any as it shall think fit.
5.3 The Company shall cover the cost of membership for the Executive and
his immediate family of an approved private patients medical plan with
a reputable medical expenses insurance company.
5.4 The Executive will be a member of the Company's proposed life
assurance scheme (when implemented) designed to give benefits equal to
four times his
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annual salary from time to time and the Company will pay promptly
all contributions due in respect of his membership of the scheme.
6. Car Allowance
6.1 The Company shall provide the Executive with:
6.1.1 a car use allowance of `L'750.00 per month or at his option:
6.1.2 for his sole business and private use a car of model and
specification selected by the Company which in the reasonable
opinion of the Board is commensurate with the status of the
Executive and the image of the Company.
6.2 In such latter case the Company shall bear all running costs and
expenses of the car and shall replace the car with the same or an
equivalent model when it has travelled 45,000 miles or on the third
anniversary of the date of it's purchase by the Company.
6.3 The Executive shall always comply with all regulations laid down by
the Company from time to time with respect to company cars (where
appropriate) and shall forthwith notify the Company of any accidents
involving his Company car and of any charges of driving offenses which
are brought against him and on the termination of his employment for
any reason whether lawful or not shall forthwith return his company
car to the Company at it's Head Office.
7. Expenses
7.1 The Company shall reimburse to the Executive all travelling hotel
entertainment and other expenses reasonably incurred by him in the
proper performance of his duties subject to the Executive complying
with such guidelines or regulations issued by the Company from time to
time in this respect and to the production to the Company of such
vouchers or receipts or other evidence of payment as it shall
reasonably require.
7.2 Where the Company issues a Company sponsored credit or charge card to
the Executive he shall use such credit or charge card only for
expenses reimbursable under clause 7.1 above and shall return it to
the Company forthwith on the termination of his employment.
8. Holiday
8.1 In addition to public holidays the Executive is entitled to 25 working
days paid holiday in each year from January 1 to December 31 to be
taken at such time or
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times as are agreed with the Board. The Executive shall not without
the consent of the Board carry forward any unused part of his holiday
entitlement to a subsequent year.
8.2 On the termination of his employment for whatever reason the Executive
shall be entitled to pay in lieu of outstanding holiday entitlement
and shall be required to pay the Company any salary received for
holiday taken in excess of his actual entitlement. The basis of
payment and repayment shall be 1/253 of the Executive's annual salary
for each day.
9. Incapacity
9.1 If the Executive is unavailable because of sickness (including mental
disorder) or injury he shall report this fact forthwith to the Company
Secretary's office.
9.2 If the Executive shall be absent from work due to sickness (including
mental disorder) or injury he shall be paid his full remuneration
hereunder for up to 6 months absence in any 12 month period, and
thereafter such remuneration, if any, as the Board shall determine
from time to time.
9.3 If at any time during the period of his appointment the Executive
shall be unavailable for work for a period of 28 days in any 12 month
period he shall upon request and at the expense of the Company permit
himself to be examined by a registered medical practitioner to be
selected by the Company and shall authorise such medical practitioner
to disclose to and discuss with the Company's medical adviser the
results of such examination and any matters which arise from it in
order that the Company's medical adviser can notify the Company of any
matters which, in his opinion, might hinder or prevent the Executive
(if during a period of incapacity) from returning to work for any
period or (in other circumstances) from properly performing any duties
of his appointment at any time.
10. Trust and Confidence
10.1 As a condition of his appointment the Executive agrees to be bound by
the terms of the Trust and Confidence Agreement attached as Schedule
II hereto.
11. Termination of Agreement
11.1 Automatic Termination: This Agreement shall automatically terminate
upon the Executive reaching his 65th birthday.
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11.2 Suspension:
In order to investigate a complaint against the Executive of
misconduct the Company is entitled to suspend the Executive on
full pay for a period not exceeding 28 days to carry out a
proper investigation and hold a disciplinary hearing.
11.3 Immediate Dismissal:
The Company may with immediate effect terminate this Agreement
if the Executive:
11.3.1 commits any act of gross misconduct or repeats or
continues (after written warning) any other material or
serious breach of his obligations under this Agreement;
or
11.3.2 is guilty of any conduct which in the reasonable opinion
of the Board brings him or the Company or any Group
Company into serious disrepute; or
11.3.3 is convicted of any criminal offence punishable with 6
months or more imprisonment (excluding an offence under
the road traffic legislation in the United Kingdom or
elsewhere for which he is not sentenced to any term of
imprisonment whether immediate or suspended); or
11.3.4 commits any act of dishonesty relating to the Company or
any Group Company any of it's or their employees or
otherwise: or
11.3.5 becomes bankrupt or makes any composition with his
creditors or otherwise; or
11.3.6 is in the reasonable opinion of the Board incompetent in
the performance of his duties.
11.4 Pay in lieu:
On serving notice for any reason to terminate this Agreement or
at any time thereafter during the currency of the notice the
Company shall be entitled to pay the Executive his basic salary
at the rate then payable under clause 5 hereof for the unexpired
portion of the duration of his appointment or entitlement to
notice as may be.
11.5 Miscellaneous:
On termination of this Agreement for any reason, the Executive
shall at the request of the Company resign (without prejudice
to any claims which the executive may have against the Company
arising out of this Agreement or the termination thereof) from
all and any offices which he holds as a director of the Company
or of any Group Company and from all other appointments and
offices which he holds as a
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nominee or representative of the Company or any Group Company
and if he shall fail to do so within seven days the Company is
hereby irrevocably authorised to appoint some person in his name
and on his behalf to sign any documents or do any things
necessary or requisite to effect such resignation(s) or
transfer(s).
12. GENERAL
12.1 Statutory Particulars
The further particulars of employment not contained in the
body of this Agreement which must be given to the Executive in
compliance with Part 1 Employment Protection (Consolidation)
Act 1978 as given in Schedule I.
12.2 Accrued rights
The expiration or termination of this Agreement however
arising shall not operate to affect such of the provisions of
this Agreement as are expressed to operate or have
effect after then and shall be without prejudice to any accrued
rights or remedies of the parties.
12.3 Proper Law
The validity construction and performance of this Agreement
shall be governed by the Laws of England and Wales.
12.4 Acceptance of Jurisdiction
All disputes claims or proceedings between the parties
relating to the validity construction or performance
of this Agreement shall be subject to the nonexclusive
jurisdiction of the High Court of Justice in England and
Wales to which the parties irrevocably submit.
12.5 Notices
Any notices to be given by a party under this agreement
must be given by delivery at or sending first class post or
other faster postal service or telex facsimile transmission or
other means of telecommunication in permanent written form to
the last known postal address or relevant telecommunications
number of the other party. Where notice is given sending in a
prescribed manner it shall be deemed to have been received when
in the ordinary course of the transmission it would have been
received by the addressee. To prove the giving of a notice it
shall be sufficient to show it was despatched. A notice shall
have effect from the sooner of it's actual or deemed receipt by
the addressee.
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12.6 Each provision of this deed is independent and severable from
the remaining provisions and enforceable accordingly. If any
provision of this deed shall be unenforceable for any reason but
would be enforceable if part of the wording therefor were
deleted, it shall apply with such deletions as may be necessary
to make it enforceable.
IN WITNESS WHEREOF THE COMPANY AND THE EXECUTIVE HAVE EXECUTED THIS DOCUMENT AS
A DEED THE DAY AND YEAR FIRST BEFORE WRITTEN
Signed by the Executive)
and delivered as a Deed) /s/ R. H. PHILLIPS
in the presence of: )--------------------------
/s/ CHRISTINE ARMSTRONG
- ---------------------------
Witness
Signed and delivered as )
a deed by ) /s/ WYNFORD P. HOLLOWAY
(Director) and by ) ---------------------------
(Director/Secretary) )
for and on behalf of the ) /s/ WILLIAM D. SNOWDEN
Company in the presence of: ) ---------------------------
[signature illegible]
- ---------------------------
Witness
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<PAGE>
SCHEDULE 1
PART 1 EMPLOYMENT PROTECTION (CONSOLIDATION) ACT 1978 ACT
The following information is given supplemental to the information given in the
body of this Agreement in order to comply with the requirements of Part 1 of the
Act
1 The Executives employment with the Company commenced on 2 January 1997
2 There are no normal hours of work The Executive shall fulfill such
hours of work as may be necessary so as to properly fulfil his duties.
3 No contracting out certificate pursuant to the provisions of the Social
Security pension Act 1975 is held by the Company in respect of the
Executives employment.
4 The Executive is subject to the Company's Disciplinary Rules and
Procedures which will be in accordance with ACAS code of practise.
5 If the Executive has any grievance relating to his employment (other
than one relating to a disciplinary decision) he should refer such
grievance to the Chairman of the Board and if the grievance is not
resolved by discussion with him it will be referred to the Board for
resolution.
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TRUST AND CONFIDENCE AGREEMENT
Dated the day of 1997
PARTIES:
1. "The Company": MSU (UK) Limited whose registered office is at Elder
House, 526 to 528 Elder Gate, Central Milton Keynes,
MK 1LR, United Kingdom.
2. "The Executive": Richard Horby Phillips of Wychwood, 86 Kimpton Road,
Blackmore End, Wheathampstead, Hertfordshire, AL4 8LX
1. DEFINITIONS
In this Deed, the following phrases shall, unless the context requires
otherwise, have the following meanings:
1.1 "Businesses" means all and any trades or other commercial activities of
the Company or any Group Company:
1.1.1 with which the Executive shall have been concerned or involved to
any material extent at any time during his appointment by the
Company which the Company or any Group Company shall carry on with
a view to profit; or
1.1.2 which the Company or any Group Company shall at the Termination
Date have determined to carry on with a view to profit in the
immediate or foreseeable future and in relation to which the
Executive shall at the Termination Date possess any Confidential
Business Information.
1.2 "Company Invention" means any improvement, invention or discovery made by
the Executive which applying the provisions of Section 39 of the Patents
Act 1977 in the determination of ownership is, as between the parties,
the property of the Company.
1.3 "Confidential Business Information" means all and any Corporate
Information, Marketing Information, Technical Information and other
information (whether or not recorded in documentary form or on computer
disk or tape) to which the Company or any Group Company attaches an
equivalent level of confidentiality to any third party:
1.3.1 which the Executive shall acquire at any time during his
appointment by the
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Company but which does not form part of the Executive's own stock
in trade; and
1.3.2 which is not readily ascertainable to persons not connected with
the Company or any Group Company either at all or without a
significant expenditure of labour, skill or money.
1.4 "Corporate Information" means all and any information (whether or not
recorded in documentary form or on computer disk or tape) relating to the
business methods, corporate plans, management systems, finances, maturing
new business opportunities or research and development projects of the
Company or any Group Company.
1.5 "Customer" means any person firm or company who or which shall at the
Termination Date be negotiating with the Company or any Group Company for
the supply of any Restricted Products or the provision of any Restricted
Services or to whom or which the Company or any Group Company shall at
any time during the period of one year prior to the Termination Date have
supplied any Restricted Products or provided any Restricted Services.
1.6 "Group Company" means any company which for the time being is a company
having an ordinary share capital (as defined in Section 832 of the Income
and Corporation Taxes Act 1988) of which not less than 25 per cent is
owned directly or indirectly by the Company or its holding company
applying the provisions of Section 838 of the Income and Corporation
Taxes Act 1988 in the determination of ownership.
1.7 "Marketing Information" means all and any information (whether or not
recorded in documentary form or on computer disk or tape) relating to the
marketing or sales of any past, present or future product or service of
the Company or any Group Company including, without limitation, sales
targets and statistics, market share and pricing statistics, marketing
surveys and plans, market research reports, sales techniques, price
lists, discount structures, advertising and promotional material, the
names, addresses, telephone numbers, contact names and identities of
customers and potential customers of any supplies and potential suppliers
to the Company or any Group Company, the nature of their business
operations, their requirements for any product or service sold to or
purchased by the Company or any Group Company and all confidential
aspects of their business relationship with the Company or any Group
Company.
1.8 "Material Interest" means:
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1.8.1 the holding of any position as director, officer, employee,
consultant, partner, principal or agent;
1.8.2 the direct or indirect control or ownership (whether jointly or
alone) of any shares (or any voting rights attached to them) or
debentures save for the ownership for investment purposes only of
not more than three per cent of the issued ordinary shares of any
company whose shares are listed on any Recognised Investment
Exchange (as defined in Section 207 of the Financial Services Act
1986); or
1.8.3 the direct or indirect provision of any financial assistance.
1.9 "Restricted Area" means
1.10 "Restricted Products" means all and any products of a kind which shall be
dealt in, produced, marketed or sold by the Company or any Group Company
in the order course of the Business.
1.11 "Restricted Services" means all and any services of a kind which shall
be provided by the Company or any Group Company in the ordinary course of
the Business.
1.12 "Technical Information" means all and any trade secrets, secret formulae,
processes, inventions, designs, know-how, discoveries, technical
specifications and any other technical information (whether or not
recorded in documentary form or on computer disk or tape) relating to the
creation, production or supply of any past, present or future product or
service of the Company or any Group Company.
1.13 "Termination Date" means the date on which the Executive shall cease to
work in any of the Businesses.
2. ACKNOWLEDGEMENTS BY THE EXECUTIVE
The Executive acknowledges:
2.1 That the Company and each Group Company possesses a valuable body of
Confidential Business Information;
2.2 That the Company will give him access to Confidential Business
Information in order that he may carry out the duties of his appointment;
2.3 That the duties of his appointment include, without limitation, a duty of
trust and confidence and a duty to act at all times in the best interests
of the Company.
2.4 That the Company requires all its senior employees to accept restrictions
which are
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similar to those set out in clause 3 and 4 for its and each of their
mutual protection.
2.5 That his knowledge of Confidential Business Information directly benefits
him by enabling him to perform his management duties.
2.6 That the disclosure of any Confidential Business Information to any
customer or actual or potential competitor of the Company or any Group
Company would place such a company at a serious competitive disadvantage
and would cause immeasurable (financial and other) damage to the
Businesses.
2.7 That if, on leaving the employment of the Company, he was to hold any
Material Interest in a Customer or any actual or potential competitor of
the Company or any Group Company, it would place such company at a
serious competitive disadvantage and would cause immeasurable (financial
and other) damage to the Businesses.
3. OBLIGATIONS DURING EMPLOYMENT
3.1 Inventions
3.1.1 If at any time during his appointment the Executive
(whether alone or with any other person or persons) makes
any invention which relates either directly or indirectly
to the business of the Company or any Group Company, the
Executive shall promptly disclose to the Company full
details, including drawings and models, of such invention
to enable the Company to determine whether or not it is a
Company Invention.
3.1.2 Decisions as to the patenting and exploitation of any
Company Invention shall be at the sole discretion of the
Company.
3.1.3 The Executive irrevocably appoints the Company to be his
attorney in his name and on his behalf to execute
documents, to use the Executive's name and to do all things
which may be necessary or desirable for the Company to
obtain for itself or its nominee the full benefit of the
provisions of clause 3.1.3 and a certificate in writing
signed by any Director or the Secretary of the Company that
any instrument or act falls within the authority hereby
conferred shall be conclusive evidence that such is the
case so far as any third party is concerned.
3.2 Copyright etc.
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3.2.1 The Executive shall promptly disclose to the Company all
copyright works or designs originated, conceived, written or
made by him alone or with others (except only those works
originated, conceived, written or made by him wholly outside his
normal working hours which are wholly unconnected with his
appointment) and shall hold them in trust for the Company until
such rights shall be fully and absolutely vested in the Company.
3.2.2 The Executive hereby assigns to the Company by way of future
assignment all copyright, design right and other proprietary
rights (if any) for the full term thereof throughout the World
in respect of all copyright works and designs originated,
conceived, written or made by the Executive (except only those
works or designs originated, conceived, written or made by the
Executive wholly outside his normal working hours which are
wholly unconnected with his appointment) during the period of
his appointment by the Company.
3.2.3 The Executive hereby irrevocably and unconditionally waives in
favour of the Company any and all moral rights conferred on him
by Chapter IV of Part I of the Copyright Designs and Patents Act
1988 for any work in which copyright or design right is vested
in the Company whether by clause 3.2.2 or otherwise.
3.2.4 The Executive shall, at the request and expense of the Company,
do all things necessary or desirable to substantiate the rights
of the Company under clauses 3.2.2 and 3.2.3.
3.3 Share Dealings
3.3.1 The Executive shall comply, where relevant, with every rule of
law, every requirement of the Securities and Exchange Commission
and every regulation of the Company from time to time in force
in relation to dealings in shares, debentures or other
securities of the Company or any Group Company and unpublished
price sensitive information affecting the shares, debentures or
other securities of any other company and, in relation to
overseas dealings, the Executive shall also comply with all laws
of the state and all regulations of the stock exchange, market
or
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<PAGE>
dealing system in which such dealings take place.
3.3.2 The Executive shall not (and shall procure so far as he is able
that his spouse and children shall not) deal or become or cease
to be interested (within the meaning of Part I of Schedule XIII
to the Companies Act 1985) in any securities of the Company
except in accordance with any Company rules or guidelines from
time to time relating to securities transactions by directors.
3.4 Conflict of Interest
3.4.1 The Executive agrees that during the period of his appointment
by the Company, he shall:
3.4.1.1 abide by any relevant Company policy which may be
promulgated from time to time;
3.4.1.2 not directly or indirectly disclose to any person, firm
or company or use other than for any legitimate purposes
of the Company or any Group Company any Confidential
Business Information;
3.4.1.3 not without the Company's prior written permission hold
any Material Interest in any person firm or company
which:
(a) is or shall be in competition with any of the
Businesses; or
(b) impairs or might reasonably be thought by the
Company to impair his ability to act at all times in
the best interests of the Company; or
(c) requires or might reasonably be thought by the
Company to require him to disclose any Confidential
Business Information in order properly to discharge
his duties to or to further his interest in such
person firm or company.
3.4.1.4 Not directly or indirectly receive or obtain in respect
of any goods or services sold or purchased or other
business transacted (whether or not by him) by or on
behalf of the Company or any Group Company any discount,
rebate, commission or other inducement (whether in cash
or in kind) which is not authorised
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<PAGE>
by any Company rules or guidelines from time to time and
if he or any firm or company in which he holds any
Material Interest shall obtain any such discount,
rebate, commission or inducement, he shall immediately
account to the Company for the amount so received.
3.4.1.5 Not without the prior authority of the Company remove
from the Company premises or copy or allow others to
copy the contents of any document computer disk tape or
other tangible item which contains any Confidential
Business Information or which belongs to the Company or
any Group Company.
3.4.1.6 Return to the Company upon request and, in any event, at
the Termination Date, all documents, computer disks and
tapes and other tangible items in his possession or
under his control which belong to the Company or any
Group Company or which contain or refer to any
Confidential Business Information.
3.4.1.7 If so requested by the Company delete all Confidential
Business Information from any computer disks, tapes or
other re-usable material in his possession or under his
control and destroy all other documents and tangible
items in his possession or under his control which
contain or refer to any Confidential Business
Information.
4. OBLIGATIONS AFTER EMPLOYMENT
The Executive shall not within the Restricted Area directly or indirectly:
4.1 For the period of 12 months after the Termination Date hold any
Material Interest in any business which is or shall be wholly or
partly in competition with any of the Businesses.
4.2 For the period of 12 months after the Termination Date, hold any
Material Interest in any person firm or company (other than those
which clause 4.1 above refers) which requires or might reasonably be
thought by the Company to require him to disclose or make use of any
Confidential Business Information in order properly to discharge his
duties to or to further his interest in such person, firm or company.
4.3 For the period of 12 months after the Termination Date seek in any
capacity whatsoever
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any business, orders or custom for any Restricted Products or
Restricted Services from any Customer.
4.4 For the period of 12 months after the Termination Date, accept in any
capacity whatsoever orders for any Restricted Products or Restricted
Services from any Customer.
4.5 At any time before or after the Termination Date, induce or seek to
induce by any means involving the disclosure or use of Confidential
Business Information any Customer to cease dealing with the Company or
any Group Company or to restrict or vary the terms upon which it deals
with the Company or any Group Company.
4.6 For the period of 12 months after the Termination Date solicit or
entice away or seek to entice away from the Company or any Group
Company any person who is and was at the Termination Date employed by
the Company or any Group Company to work in any of the Businesses as a
director, senior manager or salesperson.
4.7 At any time after the Termination Date represent himself or permit
himself to be held out by any person, firm or company as being in any
way connected with or interested in the Company or any Group Company.
4.8 At any time after the Termination Date disclose to any person, firm or
company or make use of any Confidential Business Information.
5. GENERAL
5.1 Each provision of this Deed is independent and severable from the
remaining provisions and enforceable accordingly. If any provisions of
this Deed shall be unenforceable for any reason but would be
enforceable if part of the wording thereof were deleted, it shall
apply with such deletions as may be necessary to make it enforceable.
5.2 The Executive has given the undertakings contained in clause 3 to the
Company as trustee for itself and for each Group Company and will at
the request and cost of the Company enter into direct undertakings
with any Group Company which correspond to the undertakings in clause
4, or which are less onerous only to the extent necessary (in the
opinion of the Company or its legal advisors) to ensure that such
undertakings are valid and enforceable.
5.3 Upon termination of the Executive's employment for any reason, the
Company may require the Executive to attend an interview which shall
be conducted by a representative of the Company at which the Company's
representative shall review with the Executive
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the terms of this Deed and the precise nature of the Executive's
obligations to the Company under the Deed and any Group Company under
any Deed entered into pursuant to clause 5.2 above.
5.4 The provisions of this Deed may be amended only by a written
instrument executed by both the Company and the Executive.
5.5 The validity, enforceability, construction and interpretation of this
Deed shall be governed by English Law.
5.6 The rights and obligations of the Company hereunder shall be
transferred to its successors and assigns. The Executive may not,
however, transfer or assign his rights or obligations under this Deed.
Signed as a Deed by )
Richard Horby Phillips ) /s/ RICHARD HORBY PHILLPS
in the presence of )
/s/ CHRISTINE ARMSTRONG
........................................
Witness
Signed and delivered as a )
Deed by (Director) and by ) /s/ WYNFORD P. HOLLOWAY
(Secretary) for and on ) /s/ WILLIAM D. SNOWDEN
behalf of the Company in the )
presence of )
[signature illegible]
.........................................
Witness /s/ 48 The Parade
Cardiff
<PAGE>
<PAGE>
SERVICE AGREEMENT
-----------------
Dated this 29th Day of January, 1997 (the "Effective Date").
PARTIES
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1. 'The Company': MSU (UK) Limited of Elder House, 525 to 528 Elder Gate,
Central Milton Keynes, England.
2. 'The Executive': G.J. Capaci of 2715 Amstel Way, Raleigh, North Carolina,
27613, U.S.A.
OPERATIVE PROVISIONS:
- ---------------------
1. INTERPRETATION
1.1 The headings and marginal headings to the clauses are for convenience
only and have no legal effect.
1.2 Any reference in this Agreement to any Act or delegated legislation
includes any statutory modification or re-enactment of it or the
provision referred to.
1.3 In this Agreement:
'THE BOARD' means the Board of Directors of the Company and includes
any committee of the Board duly appointed by it. 'GROUP COMPANY' means
any company which for the time being is a company having an ordinary
share capital (as defined in 'SS'832 of the Income and Corporation
Taxes Act of 1988) of which not less than 25 per cent is owned
directly or indirectly by the Company or its holding company applying
the provisions of 'SS'828 of the Income and Corporation
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<PAGE>
Taxes Act 1988 in the determination of ownership. 'MANAGING DIRECTOR'
means any person or persons jointly holding such office of the Company
from time to time and includes any person(s) exercising substantially
the functions of a Managing Director or Executive Officer of the
Company.
2. APPOINTMENT AND DURATION
2.1 The Company appoints the Executive and the Executive agrees to act as
Vice President of Business Development and Marketing. The Executive's
job description and objectives are as set out in Schedule 1 or,
subject to the agreement of the Executive, as shall from time to time
be directed by the Board. The Executive accepts that the Company may
in emergencies require him to perform other duties or tasks not within
the scope of his normal duties and the Executive agrees to perform
those duties or undertake those tasks as if they were specifically
required under this Agreement, provided that such duties will be
consistent with those of a senior executive and will not change the
person(s) to whom the Executive reports.
2.2 The appointment and this Agreement shall be deemed to have commenced
on the day immediately after the date upon which the Executive's
employment with IBM Corporation terminates, as indicated in a written
notice from the Executive to the Company, and shall continue (subject
to earlier termination as provided in this Agreement), unless either
party shall give 6 months written notice to the other
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party whereupon the appointment and this Agreement will instead
terminate at the end of the 6 month notice period.
2.3 The Executive warrants that by virtue of entering into this Agreement
or the other agreements or arrangements made or to be made between the
Company or any Group Company and him he will not be in breach of any
express or implied terms of any contract with or of any other
obligation to any third party binding upon him.
3. DUTIES OF THE EXECUTIVE
3.1 The Executive shall at all times during the period of this Agreement:
3.1.1 devote the whole of his time, attention and ability as the Board
consider necessary to the duties of his appointment;
3.1.2 faithfully and diligently perform those duties and exercise such
powers consistent with them which are from time to time assigned
to or vested in him;
3.1.3 obey all lawful and reasonable directions of the Board;
3.1.4 use his best endeavors to promote the interests of the Company
and its Group Companies;
3.1.5 keep this Board promptly and fully informed (in writing if so
requested) of his conduct of the business or affairs of the
Company and its Group Companies and provide such explanations as
the Board reasonably may require;
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3.1.6 not at any time make to the Board any untrue or misleading
statement relating to the Company or any Group Company.
3.2 The Executive shall (without further remuneration) if and for so long
as the Company require during the term of the Agreement;
3.2.1 carry out the duties of his appointment on behalf of any Group
Company;
3.2.2 act as an officer of any Group Company or hold any other
appointment or office on behalf of, or as nominee or
representative of the Company or any Group Company, unless the
Executive determines that such service would present an
unreasonable risk of liability to or damage to the reputation of
the Executive or that an unreasonable risk of bankruptcy of the
Group Company exists;
3.2.3 carry out such duties and the duties attendant upon any such
appointment as if they were duties to be performed by him on
behalf of the Company.
3.3 The Company hereby agrees to indemnify the Executive to the fullest
extent permissible under applicable law against any liability
(including reasonable legal fees and other expenses) for any act or
omission related to his service for the Company or any Group Company.
4. PLACE OF WORK
4.1 The Executive shall generally perform his duties from the place of
business of the Company in the United States of America. The Company
may reasonably require
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the Executive to travel in the normal course of his duties, including
international travel, to other places of business of the Company or
of any Group Company.
4.2 If the Company and the Executive agree to change the Executive's place
of work such that the Executive has to relocate his residence, the
Company shall provide the Executive with a reasonable relocation
package as shall be negotiated by the Company and the Executive at the
time such change is contemplated.
5. PAY
5.1 During his appointment, the Company shall pay to the Executive:
5.1.1 a salary at the rate of $125,000 U.S. Dollars per year which
shall accrue day to day and be payable by equal monthly
installments in arrears. The salary shall be deemed to include
any fees receivable by the Executive as a Director of the
Company or any Group Company, or of any other company or
unincorporated body in which he holds office as nominee or
representative of the Company or any Group Company; and
5.1.2 an annual performance bonus based on criteria established by
agreement of the Company and the Executive within 60 days of the
Effective Date, which criteria may be modified by agreement of
the Company and the Executive; and
5.2 The Executive's salary shall be reviewed by the Board annually and the
rate of salary shall be increased by the Company in line with the
company salary review policy.
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5.3 The Company will grant to the Executive nonqualified stock options as
described in Schedule 2 hereto.
6. PENSION
6.1 The Company will establish and maintain a retirement plan which is
qualified under section 401(a) of the U.S. Internal Revenue Code of
1986, as amended (the 'Code'), and under which the Company shall make
annual nondiscretionary contributions on the Executive's behalf in an
amount equal to 7.5% of the Executive's salary in effect for such year
and under which the Executive shall be entitled to elect salary
deferral contributions to the maximum extent permitted under the
applicable Code provisions. The Company shall make the annual
nondiscretionary contributions specified above in monthly installments
each equal to one-twelfth of the total amount of such nondiscretionary
contributions for the applicable year.
7. INSURANCE BENEFITS
7.1 The Company shall establish and maintain a private medical scheme that
provides benefits equivalent to those provided by IBM Corporation to
the Executive and his family at the time the Executive terminates
employment with IBM Corporation. The Executive shall be entitled to
participate in such scheme at the Company's expense for himself, his
spouse and dependent children, subject always to the rules of such
scheme.
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7.2 For any period prior to the implementation of such a scheme the
Company shall reimburse the Executive for the total premium paid by
the Executive for continued coverage under the medical plan of his
prior employer for himself, his spouse and his dependent children. In
order to compensate the Executive for the taxes payable on such
reimbursement, the total amount of such reimbursement shall be
increased as follows: total reimbursement = total premium divided
by .6.
8. EXPENSE
8.1 The Company shall reimburse to the Executive on a monthly basis all
travelling, hotel, entertainment and other expenses reasonably
incurred by him in the proper performance of his duties subject to the
production to the Company of such vouchers or other evidence of actual
payment of the expenses as the Company may reasonably require.
8.2 Where the Company issues a company sponsored credit or charge card to
the Executive he shall use such card only for expenses reimbursable
under clause 8.1 above, and shall return it to the Company forthwith
on the termination of his employment.
8.3 All expenses in excess of $5,000 for any one event must be approved in
advance in writing by the Board.
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9. HOLIDAY
9.1 In addition to public holidays, the Executive is entitled to 25
working days paid holiday in each calendar year. The Executive shall
not without the consent of the Board carry forward any unused part of
his holiday entitlement to a subsequent holiday year.
9.2 On termination of his appointment for whatever reason, the Executive
shall be entitled to pay in lieu of outstanding holiday entitlement
and shall not be required to repay to the Company any salary received
for holiday taken in excess of his actual entitlement. The basis for
payment and repayment shall be 1/253 of the Executive's annual salary
for each day.
10. INCAPACITY
10.1 If the Executive shall be prevented by illness (including mental
disorder), injury or other incapacity from properly performing his
duties hereunder he or his representative shall report this fact
forthwith to the Company Secretary's office and if the Executive is so
prevented for 30 or more consecutive business days he shall provide a
medical practitioner's statement on the 31st day and weekly thereafter
so that the whole period of incapacity is certified by such
statements.
10.2 If the Executive shall be absent from his duties hereunder due to
illness (including mental disorder), accident or other incapacity duly
certified in accordance with the provisions of sub-clause 10.1 hereof,
he shall be paid his full remuneration hereunder (including bonus and
commission) for up to 6 months' absence in any
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period of 12 consecutive months and thereafter such remuneration, if
any, as the Board shall determine from time to time.
10.3 If the Executive shall be absent from his duties hereunder due to
illness (including mental disorder), injury or other incapacity for 30
or more consecutive business days, the Executive shall at the request
and expense of the Company permit himself to be examined by a
registered medical practitioner to be selected by the Company and
shall authorize such medical practitioner to disclose to and discuss
with the Company's medical advisor the results of such examination and
any matters which arise from it in order that the Company's medical
adviser can notify the Company of any matters which, in his opinion,
might hinder or prevent the Executive (if during a period of
incapacity) from returning to work for any period or (in other
circumstances) from properly performing any duties of his appointment
at any time.
11. TERMINATION OF AGREEMENT
11.1 Automatic Termination
This Agreement shall automatically terminate:
11.1.1 on the Executive reaching his 65th birthday; or
11.1.2 6 months after the Executive is provided with written notice
that he has become prohibited by law from being a Director; or
11.1.3 if he resigns his office
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11.2 Suspension
In order to investigate a complaint against the Executive of
misconduct the Company is entitled to suspend the Executive on full
pay for so long as may be necessary to carry out a proper
investigation and hold a disciplinary hearing.
11.3 Immediate Dismissal
The Company may by notice terminate this Agreement with immediate
effect if the Executive:
11.3.1 commits any act of fraud, gross negligence, or willful
misconduct or repeats or continues (after written warning) any
other material or serious breach of his obligations under this
Agreement; or
11.3.2 is guilty of any conduct which in the reasonable opinion of the
Board brings him, the Company or any Group Company into serious
disrepute; or
11.3.3 is convicted of any criminal offense punishable with 6 months
or more imprisonment (excluding an offence under the road
traffic legislation for which he is not sentenced to any term
of imprisonment whether immediate or suspended); or
11.3.4 embezzles, or otherwise dishonestly takes for his own benefit,
any assets of the Company, any Group Company, or any of its or
their employees.
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11.4 Immediate Termination by the Executive
The Executive may by notice terminate this Agreement with immediate
effect if the Company:
11.4.1 commits any material breach of the Company's obligations under
this Agreement; or
11.4.2 causes any material reduction in the level of responsibility,
status, office, title, reporting relationships, working
conditions, authority or duties of the Executive; or
11.4.3 files a petition relating to bankruptcy, insolvency,
reorganization, winding-up, liquidation or dissolution or is
the subject of any similar filing.
11.5 Dismissal on Short Notice
The Company may terminate this Agreement, notwithstanding clause
10.2, by not less than 6 months' prior notice given at any time while
the Executive is incapacitated by ill-health or accident from
performing his duties under this Agreement and has been so
incapacitated for a period or periods aggregating 6 calendar months in
the preceding 12 months. Provided that the Company shall withdraw any
such notice, with the consent of the Executive, if during the currency
of the notice the Executive returns to full time duties and provides a
medical practitioner's certificate satisfactory to the Board to the
effect that he has fully recovered his health and that no recurrence
of his illness or incapacity can reasonably be anticipated.
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<PAGE>
<PAGE>
11.6 Pay In Lieu
On either party's serving 6 months' prior notice to terminate this
Agreement (as provided in sub-clause 2.2) or at any time thereafter
during the currency of such notice the Company shall pay to the
Executive his basic salary (at the rate then payable under clause 5
hereof) and all other compensation and benefits provided hereunder for
the unexpired portion of the duration of his appointment or
entitlement to notice as may be the case.
11.7 Miscellaneous
On the termination of this Agreement for whatever reason, the
Executive shall at the request of the Company resign (without
prejudice to any claims which the Executive may have against any
company arising out of this Agreement or the termination thereof) from
all and any offices which he may hold as a Director of the Company or
offices which he holds as nominee or representative of the Company or
any Group Company and if he would fail to do so within seven days the
Company is hereby irrevocably authorized to appoint some person in his
name and on his behalf to sign any documents or do any things
necessary or requisite to effect such resignations.
12. GENERAL
12.1 Other Terms
The provisions of the Company's standard terms and conditions of
employment (as amended from time to time) shall be terms of the
Executive's employment
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<PAGE>
except to the extent that they are unreasonable and/or inconsistent
with this Agreement.
12.2 Statutory Particulars
The further particulars of terms of employment not contained in the
body of this Agreement which must be given to the Executive in
compliance with Part 1 of the Employment Protection (Consolidation)
Act 1978 shall be set forth in a schedule attached hereto and agreed
to in writing by the Executive.
12.3 Prior Agreements
This Agreement sets out the entire agreement and understanding of the
parties and is in substitution for any previous contracts of
employment or for services between the Company or any of its Group
Companies and the Executive (which shall be deemed to have been
terminated by mutual consent).
12.4 Accrued Rights
The expiration or termination of this Agreement however arising shall
not operate to affect such of the provisions of this Agreement as are
expressed to operate or have effect after then and shall be without
prejudice to any accrued rights or remedies of the parties.
12.5 Proper Law
The validity construction and performance of this Agreement shall be
governed by the laws of the State of North Carolina without regard to
its principles of the choice of law or the conflict of laws.
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<PAGE>
<PAGE>
12.6 Notices
Any notice to be given by a party under this Agreement must be in
writing and must be given by delivery at or sending first class post
or other faster postal service, or telex, facsimile transmission or
other means of telecommunication in permanent written form (provided
the addressee has his or its own facilities for receiving such
transmissions) to the last known postal address or relevant
telecommunications number of the other party. Where notice is given
sending in a prescribed manner it shall be deemed to have been
received when in the ordinary course of the means of transmission it
would be received by the dispatched. A notice shall have effect from
the sooner of its actual or deemed receipt by the addressee.
/s/ WILLIAM D. SNOWDEN (Secretary)
- ----------------------------------
FOR AND ON BEHALF OF
MSU CORPORATION
/s/ Gerald J. Capaci
- ------------------------------
MR. G. CAPACI
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<PAGE>
<PAGE>
SCHEDULE 1
JOB DESCRIPTIONS AND OBJECTIVES
YEAR 1
1. To organize an appropriate serviced office at reasonable local rates.
2. In line with a plan to be submitted to the Board for approval, to:
2.1 Maximize MSU product and technology sales in North America by closing
business with retail groups, OEM's and licensees as appropriate in
line with regional business plan;
2.2 to support/promote existing MSU customers in the region;
2.3 handle negotiations/customers in other territories by agreement with
the Board;
3. To maximize profitability of the North American region in line with the
approved regional business plan.
4. To propose, agree and implement such marketing and promotions plans as are
necessary to maximize MSU's regional sales revenues.
5. To prepare, and upon request present to the Board, comprehensive monthly
status reports.
-15-
<PAGE>
<PAGE>
SCHEDULE 2
EXECUTIVE'S ENTITLEMENT TO SHARES
"Shares" are defined as shares of Common Stock of MSU Corporation of $0.01 each.
"Market Value" shall mean the last trading value, in U.S. Dollars, of the Shares
reported by NASDAQ, a successor to NASDAQ or any similar market system or
exchange or, if the Shares are not traded on any such system or exchange, fair
market value of the Shares within the meaning of Code section 422 and the rules
and regulations thereunder.
1. As soon as possible following the execution of this Agreement, the Company
shall grant to the Executive a nonqualified stock option to purchase
100,000 Shares at a price per Share equal to the Market Value on the date
of the grant; such option shall be fully vested upon grant and shall be
exercisable on or before the 5th anniversary of the Effective Date of this
Agreement.
2. As soon as administratively possible following the earlier of (i) the first
date following the first anniversary of the Effective Date of this
Agreement on which the Market Value is at least $15.00 per Share, or (ii)
the first date during the first year of this Agreement on which the Market
Value has been at least $15.00 per Share for a period of 30 consecutive
days, the Company shall grant to the Executive a nonqualified stock option
to purchase 100,000 Shares at a price per Share equal to 50% of the Market
Value on the applicable date specified in (i) or (ii) above; such option
shall be fully vested upon
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<PAGE>
grant and shall be exercisable on or before the 5th anniversary of the
applicable date specified in (i) or (ii) above.
3. As soon as administratively possible following the earlier of (i) the first
date following the second anniversary of the Effective Date of this
Agreement on which the Market Value is at least $20.00 per Share, or (ii)
the first date during the first year of this Agreement on which the Market
Value has been at least $20.00 per Share for a period of 30 consecutive
days, the Company shall grant to the Executive a nonqualified stock option
to purchase 100,000 Shares at a price per Share equal to 50% of the Market
Value on the applicable date specified in (i) or (ii) above; such option
shall be fully vested upon grant and shall be exercisable on or before the
5th anniversary of the applicable date specified in (i) or (ii) above.
4. Unless such Shares are registered under applicable state and federal
securities laws, acquisition of Shares will be for investment purposes
only.
5. In the event that:
5.1 this Agreement is terminated by the Company for any reason or by the
Executive as provided in Section 11.4 herein; and
5.2 the options described in clause 2 and/or 3 above have not yet been
granted; and
5.3 either a timing and/or Share pricing milestone described in clause 2
and/or 3 above is achieved within 6 months of the date of termination;
-17-
<PAGE>
<PAGE>
the Company shall grant to the Executive such option(s) as the Executive
would have been entitled to pursuant to clause 2 and/or 3 above if such
timing and/or Share pricing milestone had been achieved prior to the date
of such termination. Such option(s) shall be granted as soon as
administratively possible after the date on which the timing and/or Share
pricing milestone is achieved, such option(s) shall be fully vested at
grant, and the Executive shall be entitled to exercise such option at any
time and from time to time for a period of 5 years from the date of grant.
6. Notwithstanding any other provision of this Schedule 2, in the event of a
merger or consolidation to which the Company or MSU Corporation is a party
(other than as the surviving entity), or of any other acquisition of a
majority of the outstanding shares of the common stock of the Company or
MSU Corporation or of any transfer of all or substantially all of the
assets of the Company or MSU Corporation, or of the liquidation or
dissolution of the Company or MSU Corporation (any such event shall be
referred to herein as a "Transaction"), (i) if the option described in
clause 2 above has not yet been granted, the Company shall grant to the
Executive an option to purchase 100,000 Shares, and (ii) if the option
described in clause 3 above also has not yet been granted, the Company
shall grant to the Executive an option to purchase an additional 100,000
Shares. The option(s) described in (i) and/or (ii) above shall be granted
as of the effective date of the Transaction or such earlier date as may be
determined by the Company (the "Grant Date"), shall be fully vested and
exercisable at grant, shall contain
-18-
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<PAGE>
a purchase price equal to 50% of the Market Value on the Grant Date, and
shall automatically terminate upon consummation of the Transaction.
7. The price and the number of Shares purchasable pursuant to any option
granted or to be granted pursuant to this Agreement shall be adjusted as
necessary to reflect any reclassification, change, conversion, subdivision,
combination, or stock dividend of or relating to the Shares.
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the registrant's financial statements for the year ended June 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 859,238
<SECURITIES> 0
<RECEIVABLES> 105,842
<ALLOWANCES> 0
<INVENTORY> 12,325
<CURRENT-ASSETS> 1,121,959
<PP&E> 76,305
<DEPRECIATION> 41,764
<TOTAL-ASSETS> 2,086,341
<CURRENT-LIABILITIES> 2,677,975
<BONDS> 1,829,742
0
0
<COMMON> 159,869
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,086,341
<SALES> 0
<TOTAL-REVENUES> 1,479,911
<CGS> 650,790
<TOTAL-COSTS> 650,790
<OTHER-EXPENSES> 2,915,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,380
<INCOME-PRETAX> (2,112,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,106,709)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
