<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MSU CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
FLORIDA 6770 22-274288
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)
</TABLE>
ELDER HOUSE, 526-528 ELDERGATE, CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
011 44 1908 232100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WYNFORD PETER HOLLOWAY
ELDER HOUSE, 526-528 ELDERGATE, CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
011 44 1908 232100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
GERALD A. ADLER, ESQ.
MARY P. O'HARA, ESQ.
BONDY & SCHLOSS LLP
6 EAST 43RD STREET
NEW YORK, N.Y. 10017
(212) 661-3535
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on the form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH AGGREGATE
CLASS OF SECURITIES OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
10% Secured Convertible Promissory Note, with an aggregate
value of $2,299,740......................................... $2,299,750 679
Common Stock Purchase Warrants................................ 0 0
Options for Common Stock...................................... 0 0
Common Stock(2)............................................... $2,192,800 646
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the registration
fee. The estimate is made pursuant to Rule 357(i) of the Securities Act of
1933, as amended.
(2) The shares of Common Stock being registered hereby include 766,583 shares
underlying the 10% Secured Promissory Notes in the aggregate value of
$2,299,750 (no additional consideration is required for conversion of the
Promissory Notes); 45,000 shares underlying the Warrants, exercisable at
$3.00 per share of Common Stock; 70,000 shares underlying Options,
exercisable at $2.50 per share of Common Stock; 45,000 shares underlying the
Options, exercisable at $3.56 per share; and 638,000 shares at $2.70 per
share, calculated at the average of the bid and asked price as of October
13, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO
BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER , 1997
PROSPECTUS
MSU CORPORATION
$2,299,750 10% SECURED CONVERTIBLE PROMISSORY NOTES DUE JULY 1, 1998
45,000 COMMON STOCK PURCHASE WARRANTS
115,000 STOCK OPTIONS
926,583 SHARES OF COMMON STOCK UNDERLYING THE NOTES, WARRANTS
AND OPTIONS
638,000 SHARES OF COMMON STOCK
This Prospectus relates to $2,299,750 aggregate principal amount of 10%
Secured Convertible Promissory Notes due July 1, 1998 ("Notes") of MSU
Corporation (the "Company"), 45,000 Common Stock Purchase Warrants ("Warrants"),
115,000 Stock Options ("Options"), 926,583 shares of common stock, $.01 par
value, of the Company ("Common Stock") issuable upon conversion of the Notes and
exercise of the Warrants and Options ("Underlying Shares"), and 638,000 shares
of Common Stock by certain other selling shareholders ("Additional Shares"). The
Notes, Warrants, Options, Underlying Shares and Additional Shares (collectively,
the "Securities") may be offered and sold from time to time by the holders named
herein or by their transferees, pledgees, donees or their successors
(collectively, the "Selling Securityholders") pursuant to this Prospectus.
The Notes are convertible at the option of the holder into shares of Common
Stock of the Company, at any time after the effective date of this Registration
Statement, at a conversion rate of one share of Common Stock per $3.00 of
promissory note principal. The Warrants are exercisable for one share of Common
Stock at $3.00 and expire in January 2000. The Options are exercisable for one
share of Common Stock at prices ranging from $2.50 to $3.56 per share and expire
in their entirety in June 2002. For more detailed information see "Description
of Securities." On October 13, 1997, the closing bid and ask prices of the
Common Stock, which is quoted on the over-the-counter bulletin board under the
symbol "MUCP," were $2.75 and $2.64 per share, respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. The Company will bear all costs
relating to the offer and sale of the Securities, which are estimated to be
approximately $102,825 except that the Selling Securityholders will pay any
commissions, fees and discounts of underwriters, brokers, dealers or agents.
THE DATE OF THIS PROSPECTUS IS OCTOBER , 1997
<PAGE> 3
The Securities may be offered by the Selling Securityholders from time to
time in transactions (which may include block transactions) on any exchange or
market on which such Securities are listed or quoted, as applicable, in
negotiated transactions, through a combination of such methods of sale, or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of the sale, at prices related to the prevailing market prices or at
negotiated prices. The Selling Securityholders may effect such transactions by
selling the Securities directly to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders and/or the purchasers of the Securities for whom such
broker-dealers may act as agents or to whom they may sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements and other information filed by the Company can
be inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
regional offices of the Commission located in New York at Seven World Trade
Center, 13th Floor, New York, New York 10048 and in Los Angeles at 5670 Wilshire
Blvd., 11th Floor, Los Angeles, CA 90036. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of certain fees prescribed by the
Commission. In addition, the Commission maintains a web site that contains proxy
statements, reports and other information filed through the Electronic Data
Gathering, Analysis and Retrieval by the Company which can be accessed over the
Internet at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-1
(the "Registration Statement") filed on October 17,1997, as the same may from
time to time be amended, by the Company with the Commission under the Securities
Act. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Securities offered hereby. Statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to a copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, upon
written or oral request of such person, a copy of any and all of the information
incorporated herein by reference, other than the exhibits to such information
(unless such exhibits are specifically incorporated by reference into such
information). Requests should be directed to MSU Corporation at its principal
executive offices, Elder House, 526/528 Elder Gate, Central Milton Keynes MK9
1LR, England.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements of the Company after the end of each
fiscal year and make available such other periodic reports as the Company may
deem appropriate or as may be required by law.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including the financial
statements and notes thereto, appearing elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. When used
in this Prospectus, the words "believes," "intends," "anticipates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Such risks and uncertainties include
the timing and acceptance of new product introductions, the actions of the
Company's competitors and those discussed under the caption "Risk Factors."
THE COMPANY
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 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, the term "the Company" includes MSU Corporation, MSU PLC, MSU Limited,
and MSU US.
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 at 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 to
consumer electronic manufacturers and others with an interest in the Company's
chip technology and products.
To date, the Company has developed numerous consumer electronic products on
its own behalf and also 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 to the
Company plus royalties based on sales of products utilizing the Company's chips
or chipsets.
Other than in very limited circumstances as described more fully herein, no
products developed pursuant to development contracts have been sold and no
royalties have been received by the Company. 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 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).
The Company was incorporated in June 1986. The Company's executive offices
are located at Elder House, 526/528 Elder Gate, Central Milton Keynes MK9 1LR,
England and its telephone number is 011 44 1908 232100.
3
<PAGE> 5
THE OFFERING
Securities................. The securities being registered hereby include
$2,299,750 aggregate principal amount of 10%
Secured Convertible Promissory Notes, 45,000 Stock
Purchase Warrants, 115,000 Stock Options, 926,583
shares of Common Stock issuable upon the conversion
of the Notes and exercise of the Warrants and
Options, and 638,000 shares of Common Stock by
certain other selling shareholders.
The Notes.................. The Notes are convertible at the option of the
holder into shares of Common Stock of the Company
at any time after the effective date of this
Registration Statement, at a conversion rate of one
share of Common Stock per $3.00 of promissory note
principal. Interest on the Notes is 10% per annum.
The Notes mature on July 1, 1998.
Warrants................... The Common Stock Purchase Warrants are exercisable
for one share of Common Stock at $3.00 per share.
The Warrants expire in January 2000.
Options.................... The Common Stock Options permit the holders thereof
to acquire an aggregate of 115,000 shares of the
Company's Common Stock. The Options are exercisable
for one share of Common Stock at prices ranging
from $2.50 to $3.56 per share and expire in their
entirety in June 2002.
Common Stock............... The Company is authorized to issue 50,000,000
shares of Common Stock, of which approximately
16,093,791 shares are currently outstanding.
Holders of Common Stock are entitled to receive
dividends as the Board of Directors may from time
to time declare out of funds legally available
therefor. To date, the Company has not declared or
paid any cash dividends with respect to its Common
Stock. Holders of Common Stock are entitled to one
vote per share on each matter submitted to a vote
at any meeting of shareholders. Upon any
liquidation, winding up or dissolution, holders of
Common Stock are entitled to receive pro rata all
assets of the Company available for distribution
after payment of debts and other liabilities of the
Company.
Risk Factors............... An investment in the Securities offered hereby
involves a high degree of risk to the public
investors and, therefore, the Securities should not
be purchased by anyone who cannot afford a loss of
their entire investment. Prospective investors
should carefully review and consider the factors
set forth under "Risk Factors," as well as other
information contained herein, before purchasing any
of the Securities. See "Risk Factors."
4
<PAGE> 6
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary consolidated financial information for
fiscal years ended June 30, 1997, 1996 and 1995 and certain balance sheet
information, which information has been derived from and should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto for the year ended June 30, 1997.
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YEAR ENDED JUNE 30,
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1997 1996 1995
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CONSOLIDATED STATEMENT OF OPERATIONS
Revenues............................................. $ 1,479,911 $ 392,693 $1,595,856
Cost of Revenues..................................... 650,790 65,795 604,058
Operating Loss....................................... (2,112,885) (1,401,960) (881,818)
Net Loss Per Common Share............................ (0.13) (0.10) (0.07)
</TABLE>
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<CAPTION>
JUNE 30,
1997
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<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and Cash Equivalents............................ $ 859,238
Total Assets......................................... 2,086,341
Total Current Liabilities............................ 2,677,975
Total Shareholder's Deficit.......................... (2,421,376)
Total Liabilities and Shareholder's Deficit.......... 2,086,341
</TABLE>
5
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RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. Prior to making any investment decision, prospective investors should
carefully consider the following risk factors together with the other
information presented in this Prospectus including the financial statements and
notes thereto.
Significant Operating Losses: Accumulated Deficit: Uncertainty of Future
Operating Results. The Company has achieved only limited revenues to date,
primarily in connection with development contracts, and has incurred significant
losses each year since inception. For the fiscal years ended June 30, 1995, 1996
and 1997, the Company incurred net losses of approximately $878,000, $1,397,000
and $2,107,000 respectively, resulting in an accumulated deficit of
approximately $7,133,000 and total shareholders deficit of approximately
$2,421,000 at June 30, 1997. For at least the next fiscal year, the Company may
incur additional losses 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. There is no
assurance that the chips or other products developed by the Company will be
marketed or sold, or if sold, such products will achieve consumer acceptance.
There can be no assurance that significant revenues or profitability will ever
be achieved or, if they are achieved, that they can be sustained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Modification of Auditor's 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 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." See "Financial Statements and Report of
Independent Certified Public Accountants" included elsewhere in this Prospectus.
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 utilizing the Company's chips or chipsets perform poorly, are
inferior in quality or do not achieve market success, such flaws may become
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 trading agreements. However, it continues to endeavor to obtain
adequate coverage, although no assurance can be given that adequate insurance
with be obtained.
Dependence on New Product Development; Rapid Technological Changes. The
multimedia, consumer electronics, computer and hardware and software industries
are characterized by rapidly changing technology, evolving industry standards
and frequent introductions of new products. The broad array of competing and
incompatible emerging technologies may lead consumers to postpone buying
decisions until one or more of such technologies gain widespread acceptance. The
Company's success will depend upon its ability to anticipate such technological
changes, adapt its products, introduce competitive products with features that
meet changing customer requirements, and remain competitive in terms of price
and product performance, and there can be no assurance that the Company will be
able to meet any of these demands. Any material failure of the Company to meet
any of these demands would adversely affect the use and acceptance of the
6
<PAGE> 8
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.
No Agreement with Service Provider. The Company has no binding agreement
with an Internet or online 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 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 and others. There can be no assurance that a service provider
will agree to use the Company's software and retain the Company's services for
support which would likely result in greater potential revenues to the Company.
Dependence on Key Personnel and Attraction of Qualified Personnel. The
Company is highly dependent on the experience of certain key personnel including
certain of its executive officers and computer programmers, designers and
engineers who contribute to the development and production of the Company's
chips, chipsets and other products. If the Company were to lose the services of
one or more of these key employees, before a qualified replacement could be
obtained, its business, financial conditions or results of operations could be
materially adversely affected. The Company has entered into employment contracts
with Messrs. Holloway, Snowdon, Phillips, and Peirson which restricts certain of
their activities for one year after departure from the Company. The Company has
also entered into an employment contract with Mr. Capaci. See
"Management -- 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 life
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 services of additional personnel, whether for
replacement purposes or for new positions, necessary for the Company's growth
and success.
Competition. The market for multimedia, consumer electronics, computer and
Internet products is highly competitive. Numerous competitors have
commercialized, are developing or are expected to introduce hardware, software
and other products that are or may be directly competitive with the Company's
products. 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 Microsystems, Microsoft and IBM are involved in the
development, sale and/or provision of Internet access devices or alternative
means of permitting access to the Internet, all of which do or could compete
with the Company's Internet Access Device. Competitive factors could result in
price
7
<PAGE> 9
reductions or increased spending on product development, marketing and sales
that would adversely affect the Company's ability to compete and to be
profitable. Accordingly, there can be no assurance that the Company will be able
to compete successfully against its present competitors or potential competitors
or that such competition will not have a material adverse 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, such competitor may have a competitive
advantage over the Company.
Intellectual Property and Proprietary Rights; Absence of Patent
Protection. The Company's ability to compete successfully depends, in part, on
its ability to protect its intellectual property and proprietary technology in
the United Kingdom, the United States and other countries. The Company has no
issued patents other than its pending patent with respect to its Envoy CD
Controller, 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
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.
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, whilst
commissioned by the Company for such purpose, remain the property of the
Company, unlike in the United States where an assignment of such rights from the
independent contractor would be necessary to attain ownership of all such
rights.
The Company has registered trademarks for the names: (i) Wynpeg in the
United Kingdom, Hong Kong, Taiwan and the United States and (ii) Slipstream in
the United Kingdom. In addition, applications have been filed for the
registration of the Envoy trademark in the United Kingdom, China and Hong Kong,
Europe, Japan, Taiwan Singapore and in the United States of America. There can
be no assurance that these trademark registrations will be accepted or, if
accepted, will later not be canceled or invalidated or that the Company's rights
will not be subject to rights of prior users. The Company relies heavily on
trademark
8
<PAGE> 10
protection under common law. There can be no assurance that such common law
rights will not be limited or invalidated by third parties.
Significant Customers. To date, the Company has no customers that
frequently and systematically purchase its products. The Company's revenue for
the fiscal year ended June 30, 1997 was largely attributable to four (4)
customers, including Mitac, (Internet Access 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.
At present, 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 operation would be adversely affected.
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 licence 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.
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 have been received in US
dollars; however, the Company's main operating subsidiary conducts business in
pounds sterling. Any decline in the value of pounds 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.
Possible Volatility of Stock Price. The trading price of the Common Stock
could be subject to significant fluctuations in response to variations in
operating results and such other factors. The Company has in the past
experienced such volatility. In addition, the stock markets in the United States
have, from time to time, experienced significant price and volume fluctuations
that are unrelated or disproportionate to the operating performance of
individual companies. Such fluctuations may adversely affect the price of the
Company's Common Stock.
Significant Outstanding Options, Warrants and Notes. As of the date of this
Prospectus, there were outstanding stock Options, Warrants and Notes relating to
an approximate aggregate of 3,689,083 shares of Common Stock at exercise prices
ranging from $1.00 to $5.00 per share. Of this amount, approximately 3,018,583
shares are subject to immediate exercise or conversion of the Options, Warrants
and Notes. To the extent that such Options, Warrants and Notes are exercised or
converted, dilution to the Company's shareholders will occur. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected, since the holders of such Options, Warrants and Notes
can be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than the exercise terms provided in such securities.
9
<PAGE> 11
Absence of Dividends. The Company has never declared or paid any cash
dividends on its Common Stock. The Company intends to retain its earnings, if
any, to finance the growth and development of its business and therefore does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
Current Prospectus and State Registration Required to Exercise Warrants and
Options. At such time as the shares of Common Stock underlying the Options and
Warrants ("Underlying Shares") become registered under the Securities Act,
holders of the Options and Warrants will be able to exercise the Warrants and
Options in accordance with and as limited by the terms of such securities and
then only if (i) a current Prospectus under the Securities Act relating to the
Underlying Shares is then in effect and (ii) the Underlying Shares are qualified
for sale or exempt from qualification under the applicable securities laws of
the state in which the various holders of Options and Warrants reside. Although
the Company has agreed to use its best efforts to maintain a current
registration statement covering the Underlying Shares, there can be no assurance
that the Company will be able to do so. The value of the Underlying Shares may
be greatly reduced if a registration statement covering the Underlying Shares is
not kept current or if the Underlying Shares are not qualified or exempt from
qualification in the states in which the holders of Options and Warrants reside.
Penny Stock Rule. Trading in the Company's securities is conducted on the
NASD's Electronic Bulletin Board or "pink sheets." In the absence of the Common
Stock being quoted on Nasdaq or in the event the Company has less than
$2,000,000 in net tangible assets, trading in the Common Stock would be covered
by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") for non-Nasdaq and non-exchange listed securities. Under
such rule, broker-dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
The Securities and Exchange Commission (the "SEC") has adopted regulations
that generally define a penny stock to be any equity security that has a market
price of less than $5.00 per share, subject to certain exemptions. Such
exemptions include an equity security listed on Nasdaq and an equity security
issued by an issuer that has (i) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for three (3) years; (ii) net
tangible assets of at least $5,000,000, if such issuer has been in continuous
operation for less than three (3) years; or (iii) average revenue of at least
$6,000,000 for the proceeding three (3) years. Unless such an exemption is
available, the regulations require the delivery of a disclosure schedule
explaining the penny stock market and the risks associated therewith prior to
any transaction involving a penny stock. The Company's Common Stock is presently
subject to the regulations on penny stock, therefore, the market liquidity for
the Common Stock could be severely and adversely affected due to the limitations
on the ability of broker-dealers to sell the Common Stock in the public market.
Shares Eligible for Future Sale. As of October 6, 1997, the Company had
approximately 16,093,791 shares of Common Stock issued and outstanding. Of these
shares, 6,189,315 are freely tradable without restriction or registration under
the Securities Act, except that any shares purchased by an "affiliate" of the
Company (as defined in the rules and regulations promulgated under the
Securities Act) will be subject to the resale limitations under Rule 144 under
the Securities Act. The remaining 9,904,476 shares of outstanding Common Stock
were issued by the Company in private transactions in reliance upon exemptions
from registration under the Securities Act. Such shares may be sold only
pursuant to an effective registration statement filed by the Company or an
applicable exemption, including the exemption contained in Rule 144 promulgated
under the Securities Act. In general, under Rule 144 as currently in effect, a
shareholder, including an affiliate of the Company, may sell shares of Common
Stock after at least one year has elapsed since such shares were acquired from
the Company or an affiliate of the Company. The number of shares of Common Stock
which may be sold within any three-month period is limited to the greater of one
percent of the then outstanding Common Stock or the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale was filed under Rule 144. Certain other requirements
of Rule 144 concerning availability of public information, manner of sale and
notice of sale must also be satisfied. In addition, a shareholder who is not an
affiliate of the Company (and who has not been an affiliate of the Company for
90 days prior to the sale) and who has beneficially owned shares acquired from
the
10
<PAGE> 12
Company or an affiliate of the Company for over two years may resell the shares
without compliance with the foregoing requirements under Rule 144.
No predictions can be made as to the effect, in any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock, or the perception that such sales may
occur, could have a material adverse effect on prevailing market prices. See
"Description of Securities."
Authorization of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of preferred stock with such designation,
rights and preferences as may be determined from time to time by the Board of
Directors. The Board of Directors is empowered, without shareholder approval, to
make issuances of preferred stock with dividend, liquidation, conversion, voting
or other rights superior to those of holders of the Company's Common Stock. Such
issuances could adversely affect the voting power or other rights of the holders
of the Company's Common Stock. In the event the Company elects to issue
Preferred Shares, the Preferred Shares could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of its preferred stock, there can be no assurance that the Company
will not do so in the future.
Forward Looking Statements. This Prospectus and the information
incorporated herein by reference contains various "forward-looking statements"
within the meaning of Federal and state securities laws, including those
identified or predicated by the words "believes," "anticipates," "expects,"
"plan" or similar expressions. Such statements are subject to a number of
uncertainties that could cause the actual results to differ materially from
those projected. Such factors include, but are not limited to, those described
under "Risk Factors." Given these uncertainties, prospective purchasers are
cautioned not to place undue reliance upon such statements.
11
<PAGE> 13
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
by the Selling Securityholders. However, the Company will receive proceeds from
the issuance of certain Underlying Shares upon the exercise of the Warrants and
Options. If the Warrants and Options are exercised in full, the Company will
receive gross proceeds of $470,200. In the event the Warrants and Options are
exercised, the Company intends to use the proceeds for general operating
expenses and for research and development, however, such allocation represents
Management's best current estimate of the use of proceeds and actual use could
vary based upon the circumstances existing at the time of exercise and receipt
of proceeds.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying dividends 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 consideration as the Board of Directors may consider
relevant.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997.
<TABLE>
<S> <C>
Debt:
Short-term debt............................................. $ 2,677,975
Long-term debt.............................................. 1,829,742
Shareholder's equity
Common Stock, $0.01 par value; 50,000,000 shares authorized;
15,986,891 shares issued and outstanding at June 30,
1997..................................................... 159,869
Additional paid-in capital.................................... 4,456,560
Other......................................................... 94,701
Accumulated deficit........................................... (7,132,506)
-----------
Total shareholders' deficit......................... (2,421,376)
-----------
Total capitalization................................ $ 2,086,341
==========
</TABLE>
12
<PAGE> 14
MARKET PRICE OF COMMON STOCK
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 under the symbol "MUCP." 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
following table sets forth the range of high and low bid quotations without
adjustment for retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
RANGE OF BID
INFORMATION
----------------
HIGH LOW
------ -----
<S> <C> <C>
Fiscal Year ended June 30, 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 October 13, 1997, the high and low bid prices were $2.75 and $2.64 per
share, respectively and there were approximately 154 stockholders of the
Company's Common Stock, excluding those shares of Common Stock held in street
name.
13
<PAGE> 15
SELECTED 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 Stephens
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
Registration Statement.
<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.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements based upon
current expectations and certain contingencies. The statements contained in this
Prospectus that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act and 21E of the Exchange Act,
including without limitation, statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. Reliance upon these
statements involves risks since these expectations and contingencies may not
occur or, if they do occur, the outcomes may be significantly different that
those upon which the Company based such forward-looking statements. All
forward-looking statements included in this document are based on information
available to the Company on the date of this Prospectus, and the Company assumes
no obligation to update any such forward-looking statements. The Company's
actual results could differ materially form those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below under "Risk Factors" and elsewhere in this Prospectus. The following
discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
On October 3, 1994 MSU Corporation, formerly Capital Acquisition Company,
acquired the outstanding capital stock of MSU LC, 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 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 customized 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
15
<PAGE> 17
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
customized 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 Prospectus.
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
$1,596,000 respectively. In fiscal 1997 the revenues were derived principally
from chip sales, license and development fees, and royalty fees paid in
connection with the sale of customized Internet Access Devices. In fiscal 1996,
revenues were derived principally through development arrangements in which the
Company performed engineering and design work for its customers for a
development fee and, in fiscal 1995, from chip sales in connection with a
development arrangement. Typically, the Company's development arrangements also
provide for royalties and/or license fees to be paid to the Company if the
customer sells products developed in conjunction with the Company and/or
incorporating the Company's proprietary technology. To date, apart from the
royalties received in 1997 in connection with the sale of the Internet Access
Devices, none of these development arrangements have resulted in royalty or
continuing license revenue to the Company. The Company would be materially
adversely affected if customers fail to manufacture, market or sell products
developed in conjunction with the Company.
During the years ended June 30, 1997, 1996 and 1995 the Company's revenues
were principally derived from four, three and two customers, respectively.
Because of the concentration of its revenues in such a small number of
customers, the loss of one customer could have a material adverse effect on the
Company's business.
The Company's revenues by geographic region during the years ended June 30,
1997, 1996 and 1995 were approximately as follows:
<TABLE>
<CAPTION>
LOCATION 1997($) 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
</TABLE>
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
16
<PAGE> 18
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 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.
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
17
<PAGE> 19
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 security
interest 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 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.
18
<PAGE> 20
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 Prospectus 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.
EXCHANGE RATES
MSU PLC and MSU Limited conduct a significant amount of their operations in
pounds sterling. References to dollars in this Prospectus 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:
<TABLE>
<CAPTION>
AT END AVERAGE
FISCAL YEAR ENDED JUNE 30 OF 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.
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The Company has, to date, developed several 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 ended 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 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
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storage. The Slipstream ASIC Chip also includes algorithms which eliminate
unimportant or redundant data so that storage space is not wasted.
The Slipstream ASIC Chip -- version 4.5 is available in silicon. The
Company's prototype generic (Video) CD Player is based upon the Slipstream ASIC
Chip. See "BUSINESS -- Prototype Products."
Internet Services Processor ("ISP Chip"). The ISP Chip is a version of the
Slipstream ASIC Chip designed for use in Internet products such as the Company's
prototype 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 and
the ISP Chip -- version 2 are available in Silicon. The Company is in the late
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.
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
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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 customized 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 canceled; or that any products will be manufactured or sold to
any third party.
Consumer PC. The Consumer PC is a CD based consumer product compatible with
most PC software and providing Internet connection capability, but operating via
a standard television set. The Consumer PC resembles a VCR or CD player in both
appearance and operation but serves in many capacities including as a video CD
player and a PC CD ROM software disc player. The Consumer PC is not currently
based on chip technology, but is based on system software designed by the
Company. The Company plans to design a custom chip to incorporate the key
features of the Consumer PC in the near future. The Company has participated in
a Consumer PC product development arrangement with a German manufacturer.
Development of the product has been completed. However, to date, no products
have been manufactured for sale.
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.
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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 operation would be adversely affected.
RESEARCH AND DEVELOPMENT
Since 1992 the Company has been engaged in developing its own chips and
prototype products. It has done so independently, 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 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
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.
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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.
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 March 25, 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 canceled 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,
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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 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 endeavor 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 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
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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 Microsystems, Microsoft and IBM are involved in the development,
sale and/or provision of Internet access devices or alternative means of
permitting access to the Internet, all of which do or could compete with the
Company's Internet Access Device. 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 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
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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.
DESCRIPTION OF PROPERTY
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.
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 canceled). 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, 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
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
27
<PAGE> 29
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 New York 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.
28
<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company, including their respective
positions within MSU PLC, MSU Limited and MSU US Operations Inc.:
<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>
The Company's directors and executive officers have significant experience
in the computer industry and related businesses, as well as operating public and
private companies.
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
29
<PAGE> 31
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 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 B.S. in Electrical Engineering from California State
University.
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 $100,000 in total annual salary and bonus:
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL
FISCAL SALARY BONUS COMPENSATION
NAME YEAR ($)(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.
30
<PAGE> 32
LONG TERM COMPENSATION
Other than in respect of the stock options, details of which are disclosed
elsewhere in this Prospectus, 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 $125,000, subject
to annual increases within the discretion of the Board of Directors. In
addition, the Company will make an annual nondiscretionary contribution to a
retirement plan for Mr. Capaci at a rate of 7.5% of his annual salary and will
establish and maintain a medical benefits plan for Mr. Capaci, his spouse and
dependent children.
COMPENSATION OF DIRECTORS
Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.
31
<PAGE> 33
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1997.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATE OF
SECURITIES GRANTED TO MARKET STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OF PRICE ON FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE DATE OF EXPIRATION ------------------------------
NAME GRANTED YEAR ($ PER SHARE) GRANT DATE 0%($) 5%($) 10%($)
- ------------------ ---------- ---------- ------------- -------- ---------- ----- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wynford Peter
Holloway........ 150,000 23.0% $2.12 $ 2.12 4/18/02 -- 87,858 194,142
(Note 1)
20,000 3.1% $3.25 $ 3.25 6/24/02 -- 17,958 39,683
(Note 2)
William Derek
Snowdon......... 20,000 3.1% $3.25 $ 3.25 6/24/02 -- 17,958 39,683
(Note 2)
Richard Horby
Phillips........ 100,000 15.3% $2.12 $ 2.12 5/11/02 -- 58,572 129,428
(Note 3)
Gerald J.
Capaci.......... 300,000 46.0% $2.12 $ 2.12 5/11/02 -- 58,572 129,428
(Note 3)
Jeremy Miles
Simpson......... 62,500 9.5% $2.12(500) $ 2.12 5/11/02 -- 29,286 64,714
(Note 4) $2.37(100) $ 2.37 6/30/02 -- 8,785 18,086
</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 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 $20.00.
(4) The stock options granted to Mr. Simpson were in consideration of his
agreeing to subscribe for 79,012 shares of common stock of the Company on
May 12, 1997 and 48,012 shares on June 4, 1997.
(5) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the assumption that the Company's
common stock will appreciate in value from the date of the grant to the end
of the option term (five years from the date of the grant) at annualized
rates of 5% and 10% (total appreciation of approximately 28% and 61%),
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the common stock.
32
<PAGE> 34
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30, 1997. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END(#) FISCAL YEAR END($)(1)
--------------------------- ---------------------------
NAME 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>
- ---------------
(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 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.
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.
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
33
<PAGE> 35
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 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 American
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 ("Bank"). The credit facility was secured by a security
interest 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 their 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 MS 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.
In consideration of the benefit derived by the Company as a result of the
above interest free loan of $163,000 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.
34
<PAGE> 36
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, their 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> 37
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of the date of this
Prospectus, 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....................................... 4,987,777(1)(5) 31.1%
*William Derek Snowdon........................................ 522,277(3)(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 Vivian George Bines as Trustees for the
Employee Trust 48 The Parade, Cardiff CF2 3AB England....... 2,699,444(2)(3) 16.7
TXC Corporation 5F No. 15 SEC 2 Chung Yang S Road Peitoi,
Taipei, Taiwan.............................................. 2,051,333 12.7%
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).................................................... 6,103,122 37.5%
</TABLE>
- ---------------
(1) Mr. Holloway owns 2,138,333 shares of record. 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 favor 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.
<TABLE>
<CAPTION>
NO. OF
NAME SHARES
----------------------------------------------------------- -------
<S> <C>
Wynford Peter Holloway..................................... 150,000
William Derek Snowdon...................................... 100,000
Jeremy Miles Simpson....................................... 50,000
Peter Brian Weber and Vivian George Bines.................. 100,000
Richard Horby Phillips..................................... 100,000
Gerald J. Capaci........................................... 100,000
</TABLE>
36
<PAGE> 38
(4) Excludes the following shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
<TABLE>
<CAPTION>
NO. OF
NAME SHARES
--------------------------------------------------------- -------
<S> <C>
Wynford Peter Holloway................................... 20,000
William Derek Snowdon.................................... 20,000
Jeremy Miles Simpson..................................... 12,500
Gerald J. Capaci......................................... 200,000
Keith Peirson............................................ 300,000
</TABLE>
(5) See "Executive Compensation -- Compensation Committee Interlocks and Insider
Participation" regarding a prior 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 exercisable 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.
CERTAIN 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 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.
37
<PAGE> 39
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 purchase price 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 July 20, 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
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.
Mark McLaughlin, a member of McLaughlin Group LLC, is president and a
principal stockholder of McLaughlin International, Inc. ("MII"). MII served 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 up-front 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
38
<PAGE> 40
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.
See "Item 11. EXECUTIVE COMPENSATION -- Compensation Committee Interlocks
and Insider Participation" for additional relationships and related
transactions.
The Company believes that all transactions with officers, directors or
affiliates to date are on terms no less favorable than those available from
unaffiliated third parties. It is the Company's policy that all future
transactions with officers, directors, or affiliates will be approved by members
of the Company's Board of Directors not having an interest in the transaction
and will be on terms no less favorable than could be obtained from unaffiliated
third parties.
SELLING SECURITYHOLDERS
The Notes registered hereby were issued and sold from June through October
1997 in transactions exempt from the registration requirements of the Securities
Act pursuant to Rule 506 of Regulation D of the Securities Act to "accredited
investors" as that term is defined by Rule 501 of Regulation D of the Securities
Act. The Warrants registered hereby were issued in February 1997 in transactions
exempt from the registration requirements of the Securities Act pursuant to Rule
506 of Regulation D of the Securities Act. The Warrants expire in January 2000.
The Company granted an aggregate of 115,000 Options to nine employees. The
Options, which expire in June 2002, were issued pursuant to Section 4(2) of the
Securities Act. The Company is also registering an aggregate of 926,583
Underlying Shares issuable upon conversion of the Notes and exercise of the
Warrants and Options, and 638,000 Additional Shares on behalf of certain Selling
Securityholders.
The Notes, Warrants, Options, Underlying Shares and Additional Shares of
Common Stock may be offered and sold from time to time by the holders named
herein or by their transferees, pledgees, donees or their successors pursuant to
this Prospectus. The Notes are convertible at the option of the holder into
shares of Common Stock of the Company, at any time after the effective date of
this Registration Statement, at a conversion rate of one share of Common Stock
per $3.00 of promissory note principal. The Notes are secured by certain assets
of the Company. The Warrants are exercisable at $3.00 per share through January
2000. The Options are exercisable at prices ranging from $2.50 to $3.56 per
share. Options for 70,000 shares of Common Stock are currently exercisable, with
Options relating to 22,500 shares exercisable in June 1998 and Options relating
to 22,500 shares exercisable in June 1999.
The following table sets forth certain information with respect to the
Selling Securityholders, including the amount of Securities beneficially owned
by each Selling Securityholder prior to this offering and, where applicable, the
number of shares of Common Stock beneficially owned by such Selling
Securityholder upon the conversion or exercise of Notes, Warrants or Options.
Except as otherwise provided, none of the Selling Securityholders has, or within
the past three years has had, any position, office or other material
relationship with the Company or any of its predecessors or affiliates. Because
some of the Selling Securityholders may offer all or some portion of the Notes,
Warrants, Options, Underlying Shares or Additional Shares pursuant to this
Prospectus, no estimate can be given as to the amount of the Notes or number of
Warrants, Options, Underlying Shares or Additional Shares that will be held by
the Selling Securityholders upon termination of any such sales.
The following information pertains to the Notes and the Common Stock
issuable upon conversion of the Notes:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF SHARES OF COMMON
NOTES BENEFICIALLY STOCK BENEFICIALLY OWNED
SELLING SECURITYHOLDER OWNED AND OFFERED HEREBY AND OFFERED HEREBY(1)(2)
- ---------------------------------------------- ------------------------ --------------------------
<S> <C> <C>
Abedian, Bruce................................ 12,000 4,000
Bahneman, Scott and Helen..................... 24,000 8,000
Buchan, Robert A. Jr.......................... 18,000 6,000
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF SHARES OF COMMON
NOTES BENEFICIALLY STOCK BENEFICIALLY OWNED
SELLING SECURITYHOLDER OWNED AND OFFERED HEREBY AND OFFERED HEREBY(1)(2)
- ---------------------------------------------- ------------------------ --------------------------
<S> <C> <C>
Capitol Bay Money Purchase Plan............... 36,000 12,000
Capitol Bay 401K Plan......................... 6,000 2,000
Chattin Daniel................................ 20,000 6,667
Chin, Stella and Marcellus Win................ 48,000 16,000
Chou, Georgia C............................... 24,000 8,000
Coker Development, Inc........................ 48,000 16,000
Crider, Kelly................................. 48,000 16,000
Crist Griffiths Schulz Biorn mpp Trust fbo R.
Biorn....................................... 24,000 8,000
Elara Ltd..................................... 192,000 64,000
Ellis, David, IRA............................. 12,000 4,000
Freewald, Bernard and Leah Z.................. 24,000 8,000
Gardiner, Blanche L........................... 24,000 8,000
Geneovese, Anthony, IRA....................... 24,000 8,000
Geneovese, Anthony and Sharon................. 24,000 8,000
Giles, Jerry.................................. 24,000 8,000
Golden Pheasant LTD........................... 168,000 56,000
Henninger, Steve.............................. 24,000 8,000
Hsu, Dr. Carl................................. 45,000 15,000
Hunter, Grant and Marilyn A. TTEE............. 21,500 7,167
Hunter, James and Shari....................... 24,000 8,000
Hunter, Stephen A.,........................... 38,000 12,667
International Commodities Brokers Limited..... 98,000 32,667
J&S Asphalt................................... 18,000 6,000
Jain Family Trust, dated 12/11/95............. 12,000 4,000
Jain, Saurabh................................. 12,000 4,000
Jet Resources, Inc............................ 50,000 16,667
Kashawagi, Warren, IRA........................ 19,000 6,334
Kashkooli, Fred, IRA.......................... 24,000 8,000
Keller, John and Norma........................ 22,500 7,500
Kelley, Larry D. and Mary Jane, IRA........... 50,000 16,667
Kelley, Larry D. IRA.......................... 50,000 16,667
Kircher, Stephen.............................. 12,000 4,000
Leppeck, Robert and Julie..................... 24,000 8,000
Lim, Raymond W................................ 24,000 8,000
Line, Dan..................................... 24,000 8,000
Mahrouzadeh, Kamran........................... 12,000 4,000
Martin, Daniel................................ 22,500 7,500
Matsinger, Herbert M. Jr., TTEE for the
Matsinger, Irene LivingTrust,............... 51,000 17,000
McBratney, Sean............................... 15,000 5,000
McDonald Limited.............................. 96,000 32,000
Mirani, Suresh and Mohinani, Shoba de
Mirani...................................... 100,000 33,334
Nelson, John L................................ 12,000 4,000
Netley Financial S.A.......................... 20,000 6,667
Nyman, Timonthy B. and Diana G., JRWROS....... 50,000 16,667
Patterson, Stephen C., IRA.................... 12,000 4,000
Patterson, Virginia A., IRA................... 12,000 4,000
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NUMBER OF SHARES OF COMMON
NOTES BENEFICIALLY STOCK BENEFICIALLY OWNED
SELLING SECURITYHOLDER OWNED AND OFFERED HEREBY AND OFFERED HEREBY(1)(2)
- ---------------------------------------------- ------------------------ --------------------------
<S> <C> <C>
Patterson, Stephen C. and Virginia A.......... 24,000 8,000
Pilegaard, Erik............................... 22,500 7,500
Reilly, Patrick L............................. 12,000 4,000
Reilly, Patrick L., IRA....................... 12,000 4,000
Rossini, Greg A. and Zeree D.................. 30,000 10,000
Soares, Michael A............................. 12,000 4,000
Taylor, Phillip............................... 12,000 4,000
The Reeder Family Trust....................... 24,000 8,000
Thomas, Stephen P............................. 45,000 15,000
Waked, Nidal.................................. 30,000 10,000
Wallace, Susan................................ 24,000 8,000
Wiechers, Michael............................. 24,000 8,000
Wells, Tommy D. and Judith A. Trust........... 25,000 8,334
Weststyn, Jalin L. and Weststyn, Linda C.,
Trust 1996.................................. 93,750 31,250
Whitmire, Melburn G........................... 92,500 30,834
Vandesteeg, Javier............................ 22,500 7,500
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon conversion of the Notes.
(2) Assumes a conversion price of one share of Common Stock per $3.00 of
promissory note principal.
41
<PAGE> 43
The following information pertains to the Warrants and the Common Stock
issuable upon exercise of the Warrants:
<TABLE>
<CAPTION>
NUMBER OF WARRANTS NUMBER OF SHARES OF COMMON
BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
SELLING SECURITYHOLDER AND OFFERED HEREBY AND OFFERED HEREBY(3)(4)
- -------------------------------------------------- ------------------ --------------------------
<S> <C> <C>
Golden Pheasant, LTD.............................. 12,000 12,000
Jet Resources, Inc................................ 5,000 5,000
Kelley, Larry D................................... 5,000 5,000
Kelley, Larry D. and Mary Jane JTWROS............. 5,000 5,000
Mirani, Suresh and Shoba Mohini de Mirani......... 10,000 10,000
Nyman, Timothy B. and Diana G..................... 5,000 5,000
Waked, Nidal H.................................... 3,000 3,000
</TABLE>
- ---------------
(3) Includes shares of Common Stock issuable upon exercise of the Warrants.
(4) Each Warrant is exercisable for one share of common Stock at an exercise
price of $3.00.
The following information pertains to 115,000 Options and the Common Stock
issuable upon exercise of the Options:
<TABLE>
<CAPTION>
NUMBER OF WARRANTS NUMBER OF SHARES OF COMMON
BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
SELLING SECURITYHOLDER AND OFFERED HEREBY AND OFFERED HEREBY(5)(6)
- -------------------------------------------------- ------------------ --------------------------
<S> <C> <C>
Armstrong, Christine ............................. 15,000 15,000
Kent, Robert ..................................... 5,000 5,000
Millard, Simon ................................... 5,000 5,000
Pennycate, Christian ............................. 15,000 15,000
Phillips, Geoffrey ............................... 15,000 15,000
Sadowski, Carol .................................. 5,000 5,000
Tapp, Colin ...................................... 5,000 5,000
Watts, John ...................................... 50,000 50,000
</TABLE>
- ---------------
(5) Includes shares of Common Stock issuable upon exercise of the Options.
(6) The Options are exercisable for one share of Common Stock at prices ranging
from $2.50 to $3.56 per share.
The following information pertains to 638,000 shares of Common Stock
offered by certain Selling Securityholders:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
BENEFICIALLY OWNED
SELLING SECURITYHOLDER AND OFFERED HEREBY
--------------------------------------------------- -------------------
<S> <C>
Forte Communications, Inc.......................... 50,000
McLaughlin Group LLC............................... 500,000
Direct International Limited....................... 88,000
</TABLE>
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the
Securities offered hereby. The Company will bear all costs relating to the offer
and sale of the Securities, which are estimated to be approximately $102,825
except that the Selling Securityholders will pay any commissions, fees and
discounts of underwriters, brokers, dealers or agents. The Securities may be
sold from time to time to purchasers directly by the Selling Securityholders.
Alternatively, the Selling Securityholders may from time to time offer the
Securities through brokers, dealers or agents, including Capital Bay Securities,
who may receive compensation in the form of discounts, concessions or commission
from the Selling Securityholders and/or the purchasers of the Securities for
whom they may act as agent. The Selling Securityholders and any such brokers,
dealers or
42
<PAGE> 44
agents who participate in the distribution of the Securities may be deemed to be
"underwriters," and any profits on the sale of the Securities by them and any
discounts, commissions or concessions received by any such brokers, dealers or
agents might be deemed to be underwriting discounts and commissions under the
Securities Act. To the extent the Selling Securityholders may be deemed to be
underwriters, the Selling Securityholders may be subject to certain statutory
liabilities of, including, but not limited to, Sections 11, 12 and 17 of the
Securities Act and Rule 10b-5 under the Exchange Act.
The Securities offered hereby may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
Securities may be sold by one or more of the following methods, without
limitation: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the Securities as agent but may position and resell a portion of
the block as principal to facilitate the transactions; (b) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (d) an exchange
distribution in accordance with the rules of such exchange, if any; (e)
face-to-face transactions between sellers and purchasers without a
broker-dealer; (f) through the writing of options; and (g) other. At any time a
particular offer of the Securities is made, a revised Prospectus or Prospectus
Supplement, if required, will be distributed which will set forth the aggregate
amount and type of Securities being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, any
discounts, commissions, concessions and other items constituting compensation
from the Selling Securityholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers. Such revised Prospectus or Prospectus
Supplement and, if necessary, a post-effective amendment to the Registration
Statement of which this Prospectus is a part, will be filed with the Commission
to reflect the disclosure of additional information with respect to the
distribution of the Securities. In addition, the Securities covered by this
Prospectus may be sold in private transactions or under Rule 144 rather than
pursuant to this Prospectus.
Except as otherwise described herein, to the best knowledge of the Company,
there are currently no plans, arrangements or understandings between any Selling
Securityholders and any broker, dealer, agent or underwriter regarding the sale
of the Securities by the Selling Securityholders. There is no assurance that any
Selling Securityholder will sell any or all of the Securities offered by such
holder hereunder or that such Selling Securityholder will not transfer, devise
or gift such Securities by other means not described herein.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Regulation M
which may limit the timing of purchases and sales of any of the Securities by
the Selling Securityholders and other such persons. Furthermore, Regulation M of
the Exchange Act may restrict the ability of any person engaged in the
distribution of the Securities to engage in market-making activities with
respect to the particular Securities being distributed for a period of up to
five business days prior to the commencement of such distribution. All of the
foregoing may affect the marketability of the Securities and the ability of any
person or entity to engage in market-making activities with respect to the
Securities.
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. The Company will bear all costs
relating to the offer and sale of the Securities, except that the Selling
Securityholders will pay any commissions, fees and discounts of underwriters,
brokers, dealers or agents.
43
<PAGE> 45
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.01 par value. Common Stock
As of October 6, 1997, there were 16,093,791 shares of Common Stock
outstanding and 154 shareholders of record, excluding those held in street name.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Holders of Common
Stock do not have any cumulative voting rights for the election of directors.
Holders of Common stock are entitled to receive ratably such dividends, if any,
as may be prescribed by the Board of Directors from time to time out of funds
legally available for that purpose. Upon any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, holders of Common Stock are
entitled to receive pro rata all assets of the Company available for
distribution to its shareholders after payment or provision for payment of debts
and other liabilities of the Company. The shares of Common Stock are neither
redeemable nor convertible. All of the outstanding shares of Common Stock are,
and the shares of Common Stock issuable upon conversion of the Notes will be,
fully paid and non-assessable.
NOTES
The Company issued an aggregate of $2,299,750 convertible promissory notes
bearing interest at the rate of 10% per annum and maturing on July 1, 1998
pursuant to a Confidential Investment Memorandum dated June 17, 1997. The Notes
are convertible at the rate of one share of Common stock per $3.00 of promissory
note principal at any time after the effective date of the Registration
Statement. The Notes were issued pursuant to Rule 506 of Regulation D of the
Securities Act, to accredited investors only as that term is defined in Rule 501
of Regulation D. The Notes are secured by certain assets of the Company.
WARRANTS
The Warrants were issued as partial consideration to purchasers of certain
promissory notes of the Company and entitle the holders thereof to purchase an
aggregate of 45,000 shares of the Company's Common Stock at an exercise price of
$3.00 per share. The Warrants expire in January 2000.
OPTIONS
The Company issued Options to certain employees to purchase an aggregate of
115,000 shares of Common Stock. Options to purchase 70,000 shares of Common
Stock are exercisable at $2.50 share and Options to purchase 45,000 shares of
Common Stock are exercisable at $3.56 per share. Options for 70,000 shares of
Common Stock are currently exercisable, with Options relating to 22,500 shares
exercisable in June 1998 and Options relating to 22,500 shares exercisable in
June 1999. The Options expire in their entirety in June 2002.
TRANSFER AGENT
The transfer agent for the Common Stock is American Securities Transfer &
Trust, Inc 1825 Lawrence Street, Denver, Colorado 80202-1817.
DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
It is the position of the Commission that insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company , that such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
As of October 6, 1997, the Company has outstanding an aggregate of
16,093,791 shares of Common Stock of which 9,904,476 are "restricted securities"
as that term is defined under Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), in that such Common Stock was purchased or
acquired by such stockholders of the Company in transactions not involving a
public offering.
In general, these restricted shares may be sold only pursuant to a
registration statement under the Securities Act or an applicable exemption,
including the exemption provided by Rule 144. Under Rule 144 as currently in
effect, a shareholder, including an affiliate of the Company may sell shares of
Common Stock after at least one year has elapsed since such shares were acquired
from the Company or an affiliate of the Company. The number of shares of Common
Stock which may be sold within any three-month period is limited to the greater
of one percent of the then outstanding Common Stock or the average weekly
trading volume in the Common Stock during the four calender weeks preceding the
date on which notice of such sale was filed under Rule 144. Certain other
requirements of Rule 144 concerning availability of public information, manner
of sale and notice of sale must also be satisfied. In addition, a shareholder
who is not an affiliate of the Company (and who has not been an affiliate of the
Company for 90 days prior to the sale) and who has beneficially owned shares
acquired from the Company or an affiliate of the Company for over two years may
resell the shares of Common Stock without compliance with the foregoing
requirements of Rule 144.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock or the perception that such sales may occur,
could have a material adverse effect on prevailing market prices and could
impair the Company's ability to raise capital through the sale of its equity
securities.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Bondy & Schloss LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1994,
1995, 1996 and 1997 incorporated by reference in this Prospectus and included
elsewhere in the Registration Statement have been audited by Moore Stephens
Lovelace, P.L., independent certified public accountants, as indicated in their
report included herein. Such Consolidated Financial Statements have been
included in reliance upon the authority of said firm as experts in accounting
and auditing.
45
<PAGE> 47
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Certified Public Accountants.................................. F-2
Financial Statements:
Consolidated Balance Sheets....................................................... F-3
Consolidated Statements of Operations............................................. F-4
Consolidated Statements of Changes in Shareholders' Deficit....................... F-5
Consolidated Statements of Cash Flows............................................. F-6
Notes to Consolidated Financial Statements........................................ F-7
</TABLE>
F-1
<PAGE> 48
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-2
<PAGE> 49
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 amortizations 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-3
<PAGE> 50
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-4
<PAGE> 51
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
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance -- June 30, 1994....................... 10,196,380 $101,964 $ 805,492 $(2,750,617)
Issuance of common shares.................... 2,738,342 27,383 268,589 --
Translation adjustments...................... -- -- -- --
Net loss..................................... -- -- -- (878,419)
---------- -------- ----------- -----------
Balance -- June 30, 1995....................... 12,934,722 129,347 1,074,081 (3,629,036)
Issuance of common shares.................... 2,600,000 26,000 1,888,500 --
Collection of stock subscriptions
receivable................................ -- -- -- --
Issuance of options to purchase 100,000
shares of common stock.................... -- -- 21,500 --
Translation adjustments...................... -- -- -- --
Net loss....................................... -- -- -- (1,396,761)
---------- -------- ----------- -----------
Balance -- June 30, 1996....................... 15,534,722 155,347 2,984,081 (5,025,797)
Issuance of common shares.................... 452,169 4,522 1,472,479 --
Translation adjustments...................... -- -- -- --
Net loss..................................... -- -- -- (2,106,709)
---------- -------- ----------- -----------
Balance -- June 30, 1997....................... 15,986,891 $159,869 $ 4,456,560 $(7,132,506)
========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
STOCK CUMULATIVE TOTAL
SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
RECEIVABLE ADJUSTMENTS DEFICIT
------------- ----------- -------------
<S> <C> <C> <C>
Balance -- June 30, 1994............................ $ -- $ 56,261 $ (1,786,900)
Issuance of common shares......................... (225,000) -- 70,972
Translation adjustments........................... -- (25,912) (25,912)
Net loss.......................................... -- -- (878,419)
--------- ----------- -----------
Balance -- June 30, 1995............................ (225,000) 30,349 (2,620,259)
Issuance of common shares......................... -- -- 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
Translation adjustments........................... -- 40,302 40,302
Net loss.......................................... -- -- (1,396,761)
--------- ----------- -----------
Balance -- June 30, 1996............................ -- 70,651 (1,815,718)
Issuance of common shares......................... -- -- 1,477,001
Translation adjustments........................... -- 24,050 24,050
Net loss.......................................... -- -- (2,106,709)
--------- ----------- -----------
Balance -- June 30, 1997............................ $ -- $ 94,701 $ (2,421,376)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 52
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-6
<PAGE> 53
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 Devices and for the formation of a
joint venture to market the Company's technology in the United States.
Additionally, an agreement has been negotiated which provides for Mitac, Inc. to
manufacture and market customized Internet Access Devices using the Company's
proprietary technology. However, there can be no assurance that management will
be successful in the implementation of its plans. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-7
<PAGE> 54
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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.
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).
F-8
<PAGE> 55
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 accounts and believes that it
is not exposed to any significant credit risk on cash and cash equivalents.
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
F-9
<PAGE> 56
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 3 -- RELATED-PARTY TRANSACTIONS (CONTINUED)
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.
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.
F-10
<PAGE> 57
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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 $2,359,500. 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.
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.
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. 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, 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 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 common restricted stock at an exercise price of
$2.00 per share. No compensation expense was
F-11
<PAGE> 58
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 6 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
recorded for these options, as management believes the restrictions associated
with any shares received by the option grantees on exercise will subject those
shares to a discount from unrestricted market value.
In 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
AVERAGE
NUMBER OF EXERCISE
SHARES 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>
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 WEIGHTED
AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (IN YEARS) 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
=========
</TABLE>
F-12
<PAGE> 59
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 6 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
-------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES 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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected life (in years)....................................... 5 5
Risk-free interest rate........................................ 6.0 % 6.0 %
Volatility..................................................... 135% 171%
Dividend yield................................................. 0.0 % 0.0 %
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Pro forma net loss................................ $(3,430,000) $(1,406,000)
Pro forma loss per share.......................... $ (0.22) $ (0.10)
</TABLE>
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.
F-13
<PAGE> 60
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 7 -- SHORT-TERM BORROWINGS (CONTINUED)
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.
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.
F-14
<PAGE> 61
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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.
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 the 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.
F-15
<PAGE> 62
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 9 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
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-16
<PAGE> 63
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATIONAL
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
AND SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 12
Market Price of Common Stock.......... 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 19
Management............................ 29
Executive Compensation................ 30
Principal Shareholders................ 36
Certain Transactions.................. 37
Selling Securityholders............... 39
Plan of Distribution.................. 42
Description of Securities............. 44
Disclosure of Commission Position of
Indemnification for Securities Act
Liabilities......................... 44
Shares Eligible for Future Sale....... 45
Legal Matters......................... 45
Experts............................... 45
Index to Financial Statements and
Supplementary Data.................. F-1
</TABLE>
======================================================
======================================================
MSU CORPORATION
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Company (also referred to herein as the Registrant) in connection with the
Securities offered hereby:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 1,325
Legal fees and expenses........................................... 75,000
Accounting fees................................................... 4,500
Printing and engraving expenses................................... 12,000
Miscellaneous..................................................... 10,000
-------
Total fees and expenses................................. $102,825
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "FBCA"), in general, allows
corporations to indemnify their directors and officers against expenses actually
and reasonable incurred in connection with a proceeding, if the person acted in
good faith and in a manner the person reasonably believed to be in, or not
opposed to, the best interests of the corporation. In the case of a criminal
action or proceeding, the director or officer must have had no reasonable cause
to believe that the person's conduct was unlawful. The FBCA also provides that
indemnification is not exclusive, and a corporation may make any other or
further indemnification under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, however no indemnification may be made if
a judgement or other final adjudication establishes that such director or
officers' actions or omissions to act, were material to the cause of action so
adjudicated and constitute: (a) a violation of the criminal law, unless the
director or officer had reasonable cause to believe his/her conduct was lawful
or had no reasonable cause to believe his/her conduct was unlawful; (b) a
transaction from which the director or officer derived an improper personal
benefit; (c) in the case of a director, a director held liable for an unlawful
distribution, as defined by the FBCA; or (d) willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
It is the position of the Commission that insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company, that such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs set forth certain information with respect to all
securities sold by the Company within the past three years without registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
information includes the names of the purchasers, the date of issuance, the
title and number of securities sold and the consideration received by the
Company for the issuance of these shares.
II-1
<PAGE> 65
The following shares of Common Stock were issued by the Company without
registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as transactions
by an issuer not involving a public offering:
On November 10, 1994, the Company issued the following shares of Common
Stock to the individuals listed pursuant to the Exchange Agreement with MSU
Public Limited Company and Capital Acquisition Company:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
----------------------------------------------------- ----------------
<S> <C>
Wynford Peter Holloway............................... 2,208,333
M.E. Baxter.......................................... 141,022
Robert William Kent.................................. 141,022
Keith C. Hall........................................ 515,277
William Derek Snowdon................................ 515,277
Trustees MSU Employees............................... 2,944,444
TXC Corporation...................................... 2,208,333
Shield Capital Ltd................................... 159,625
Martin Brennan....................................... 441,667
Fairbairn & Greystoke................................ 60,000
Hull Investments Ltd................................. 87,222
</TABLE>
In November 1994, the Company issued Martin Miller 150,000 shares of Common
Stock as partial compensation for placement agent services in connection with a
Regulation S offering.
On June 21, 1995, the Company issued Brae Ltd 100,000 shares of Common
Stock for $227,250.
In January and February 1996, the Company issued McLauglin Group, LLC
800,001 and 799,999 shares of Common Stock, respectively, for an aggregate
offering price of $1,000,000.
On December 30, 1996, the Company issued 125,001 shares of Common Stock to
Harris Ltd. for 750,000.
On December 31, 1996, the Company issued 50,000 shares of Common Stock to
Irving Goldstein in a warrant exchange transaction at an exercise price of $1.00
per share, which amount was offset by consulting fees owed to Mr. Goldstein by
the Company. .
On February 19, 1997, the Company issued 50,000 shares of Common Stock to
Marketview Financial Inc. for $100,000, which amount the Company received in
1996.
On June 26, 1997, the Company issued 150,000 shares of Common Stock to
Capital Bay Securities for investment banking services rendered.
In July 1997, the Company granted Common Stock Options to nine of its
employees entitling them to purchase an aggregate of 50,000 shares of the
Company's Common Stock at $3.65 per share.
The following securities were issued by the Company without registration
under the Securities Act in accordance with Rule 506 of Regulation D of the
Securities Act:
In February 1997, the Company completed an offering of an aggregate of
$600,000 of its 8.5% convertible promissory notes and Common Stock Purchase
Warrants to 10 "accredited investors," as that term is defined by Rule 501 of
Regulation D.
From June through October 1997, the Company offered an aggregate of
$2,299,750 of its 10% convertible promissory notes to 59 "accredited investors,"
as that term is defined by Rule 501 of Regulation D.
II-2
<PAGE> 66
The following shares of Common Stock were issued without registration under
the Securities Act in accordance with Regulation S of the Securities Act:
On June 21, 1995, the Company issued Broadford Ltd. 50,000 shares of Common
Stock for U.S. $113,625.
On June 21, 1995, the Company issued Lamlash Ltd. 50,000 shares of Common
Stock for U.S. $113,625.
On August 9, 1995, the Company issued London & Canberra Trust Ltd. 12,000
shares of Common Stock for U.S. $27,270. On September 27, 1995, the Company
issued an additional 500 shares to London & Canberra Trust Ltd. for U.S. $1,136.
On November 14, 1995, the Company issued Cabost Ltd. 150,000 shares of
Common Stock for U.S. $180,000.
On November 14, 1995, the Company issued Sleat Ltd. 325,000 shares of
Common Stock for U.S. $487,500.
On November 14, 1995, the Company issued Rothsay Ltd. 325,000 shares of
Common Stock for U.S. $422,500.
On November 14, 1995, the Company issued Lamlash Ltd. 175,000 shares of
Common Stock for U.S. $210,000.
Effective May 7, 1997, June 4, 1997 and September 5, 1997, Jeremy Miles
Simpson, a Director of the Company, 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 $162,000,
$114,000 and $79,000 in cash, respectively. The price paid for the shares of
Common Stock in each case was the market price prevailing on the respective
dates of purchase. In addition, Mr. Simpson was granted options to acquire
50,000 shares of Common Stock at a price of $2.12 per shares 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
grant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
2.1 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)
5.1 Opinion and Consent of Bondy & Schloss
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)
</TABLE>
II-3
<PAGE> 67
<TABLE>
<C> <S>
10.7 Manufacturing, Distribution and Joint Venture Agreement with American Interactive
Media, Inc. Confidential treatment has been requested for specific portions of the
Manufacturing, Distribution and Joint Venture Agreement(4)
10.8 Confidential treatment has been requested for specific portions of the
Manufacturing, Distribution and Joint venture Agreement(4) 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(5)
10.18 Service Agreement with Gerald J. Capaci(5)
16.1 Letter re change in certifying accountant from Coopers & Lybrand LLP(4)
21.1 Subsidiaries of Registrant(5)
23.1 Consent of Moore Stephens-Lovelace P.L.
23.2 Opinion and Consent of Bondy & Schloss(6)
24.1 Power of Attorney. (reference is made to the signature page of this Registration
Statement)
27.1 Financial Data Schedule(5)
</TABLE>
- ---------------
(1) Contained in exhibits to the Registration Statement on Form S-18 (File No.
33-07861-A), declared effective by the Securities and Exchange Commission on
November 6, 1986.
(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
ended February 28, 1990, filed with the Securities and Exchange Commission
in May 1990.
(3) Contained in exhibits to the 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) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
ended June 30, 1997, filed with the Securities and Exchange Commission on
October September 26, 1997.
(6) The Consent of Bondy & Schloss is contained in Exhibit 5.1.
II-4
<PAGE> 68
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are being
made, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
Statement.
(iii) include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(3) Registrant will remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registration the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. The Registrant further undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the Offering.
II-5
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Central Milton Keynes, United
Kingdom, on October 16, 1997.
MSU Corporation
By: /s/ WYNFORD PETER HOLLOWAY
------------------------------------
Wynford Peter Holloway
Chief Executive Officer
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 Registration Statement on
Form S-1 necessary or advisable to enable the Registrant to comply with the
Securities Act of 1933, as amended, and the Securities and Exchange Act of 1934,
as amended, including any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, which amendments may make such
changes in such Registration Statement as such attorney-in-fact may deem
appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ WYNFORD PETER HOLLOWAY Chief Executive Officer, October 16, 1997
- --------------------------------------------- Director
Wynford Peter Holloway
/s/ WILLIAM DEREK SNOWDON Secretary, Director October 16, 1997
- ---------------------------------------------
William Derek Snowdon
/s/ RICHARD HORBY PHILLIPS Chief Financial and Accounting October 16, 1997
- --------------------------------------------- Officer, Director
Richard Horby Phillips
/s/ GERALD J. CAPACI Vice President, Director October 17, 1997
- ---------------------------------------------
Gerald J. Capaci
/s/ JEREMY MILES SIMPSON Director October 16, 1997
- ---------------------------------------------
Jeremy Miles Simpson
/s/ KEITH PEIRSON Director October 15, 1997
- ---------------------------------------------
Keith Peirson
Director October , 1997
- ---------------------------------------------
Fred Kashkooli
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
BONDY & SCHLOSS LLP LETTERHEAD
October 16, 1997
MSU Corporation
Elder House
526-528 Elder Gate
Central Milton Keynes, MK9 1LR
England
Re: Registration Statement on Form S-1 of MSU Corporation
Ladies and Gentlemen:
We have acted as counsel to and for MSU Corporation, a Florida corporation
(the "Company"), in connection with the preparation and filing of a Registration
Statement on Form S-1 (Registration No. 33-28622-A), together with any and all
exhibits and schedules attached thereto (the "Registration Statement"), filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), relating to $2,299,750 10% Secured Convertible Promissory
Notes due July 1, 1998 (the "Notes"), 45,000 Common Stock Purchase Warrants (the
"Warrants"), 115,000 Stock Options (the "Options"), 926,583 shares of Common
Stock underlying the Notes, Warrants and Options and 916,744 shares of Common
Stock.
We have examined the Company's Certificate of Incorporation, as amended,
By-laws, resolutions of the Board of Directors of the Company and such other
items we deem material to this opinion.
Based upon the foregoing information and examination, it is our opinion
that the shares of Common Stock of the Company covered by the Registration
Statement have been duly authorized and, when sold, issued and paid for, will be
validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and we further consent to the reference under the caption
"Legal Matters" in the Prospectus which forms a part of the Registration
Statement to the fact that this opinion concerning the validity of the issue has
been rendered by us.
Very truly yours,
/s/ BONDY & SCHLOSS LLP
--------------------------------------
BONDY & SCHLOSS LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated August 28, 1997 with respect to the consolidated financial
statements of MSU Corporation and Subsidiaries. We also consent to the reference
to our Firm under the caption "Experts" in the registration statement.
MOORE STEPHENS LOVELACE, P.L.
Certified Public Accountants
Orlando, Florida
October 17, 1997
