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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-28622-A
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MSU CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
FLORIDA 22-274288
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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ELDER HOUSE, 526-528 ELDER GATE,
CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
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Registrant's telephone number, including area code: 44 1908 232100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ____ No _X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 30, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant, by reference to the average bid and
asked prices for such stock as reported by Prophet Information Services, Inc.
through America On-line, was $4,900,243.02.
As of September 30, 1998, the registrant had issued and outstanding
16,481,337 shares of Common Stock.
________________________________________________________________________________
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FORM 10-K INDEX
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
MSU Corporation, formerly Capital Acquisitions 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; however it
has remained dormant since its incorporation.
Unless the context otherwise requires, references in this Annual Report on
Form 10-K to the 'Company' refer to MSU Corporation, MSU PLC, MSU Limited and
MSU US. Unless otherwise stated, the information contained in this Annual Report
on Form 10-K is as of September 30, 1998.
EXCHANGE RATES
MSU PLC and MSU Limited conduct a significant amount of their operations in
pounds sterling. References to $ in this Annual Report on Form 10-K are to US
dollars and in many instances represent translations of pounds sterling into
dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such dollar
amounts. Unless otherwise stated, the translations of pounds sterling into
dollars have been made at the average rate for the year indicated. The following
table sets forth, for the periods indicated, certain information concerning the
rates of pounds sterling per dollar:
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<CAPTION>
FISCAL YEAR AT END AVERAGE
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 .62 .64 .59
1998..................................... .60 .60 .62 .60
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- ------------
(1) Represents the average of the rates on the last day of each month during the
relevant period.
(2) Represents the highest and lowest rates used in the average rate
calculation.
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 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 before
consumer electronic manufacturers and others with an interest in the Company's
chip technology and products.
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To date, the Company has developed numerous consumer electronic products on
its own behalf and also 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
utilising the Company's chips or chipsets.
During the year ending June 30, 1997, sales of Internet Access Devices by
one of the Company's joint venture partners, Mitac, Inc., a Taiwanese
corporation ('Mitac') commenced and further sales have been made in the year
ended June 30, 1998, and to date approximately 15,000 of such devices have been
shipped. The Company is in discussion with Mitac concerning the amount of
royalties receivable in respect of sales to date, but until this matter has been
resolved the Company considers it prudent to recognise no income from this
source in the financial statements.
On May 6, 1998 the Company entered into a licensing agreement with American
Interactive Media Inc. ('AIM') whereby the Company granted to AIM a world-wide
non-exclusive license in respect of the MSU proprietary intellectual property
relating to the Internet Access Device. The consideration for the license was
$1,150,000 in cash and 560,000 restricted shares of common stock in AIM of which
60,000 shares were issued directly to Capital Bay Securities and Daybreak Fund
LLG in settlement of the short term funding received of $314,985, together with
accrued interest and other fees owing.
Other than in the very limited circumstances as described more fully herein
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 their can be no assurance that any developed products will be
manufactured, marketed or sold. In fiscal 1998, the Company's revenues were
derived almost entirely from license fees.
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 and that it
would not announce prior to July 1995 a product using the intellectual property
developed by the Company in conjunction with and licensed to IBM. IBM retains a
non-exclusive licence 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 in writing. The
Company has offered its Internet Access Device and related ISP Chip technology
to IBM and IBM has advised the Company of its rejection of such offer. The
Company has not yet offered the Envoy Chip or the Wynpeg Chipset to IBM.
CHIP TECHNOLOGY
Slipstream Application 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
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computer discs and storage devices are unable to store efficiently the
additional amount of data necessary in each pixel and within each time frame to
generate images adequately, the Company's Slipstream ASIC Chip makes use of CD
technology and uses a CD interface and a graphics accelerator for enhanced
retrieval. The Slipstream Chip further enhances retrieval from the CD using a
digital signal processor that interfaces to a digital-to-analog converter and
makes use of the advanced CD compression techniques. The signals are compressed
to allow for more effective and efficient storage. The Slipstream ASIC Chip also
includes algorithms which eliminate unimportant or redundant data so that
storage space is not wasted.
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 -- 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
Internet Access Device. See 'BUSINESS -- Products'. Prior prototype Consumer
Internet Access Devices used the Slipstream ASIC Chip. The ISP Chip provides
more Internet related features (at a lower cost) than the Slipstream ASIC Chip.
The ISP Chip is a graphics and sound processor which also provides interfacing
and logic for the CPU and system memory. The ISP Chip is available in Silicon.
The Company is in the late stages of development of an ISP Chip version 2 and in
the early stages of development of an ISP Chip -- version 3. Such ISP Chips are
intended to provide enhanced Internet features and capabilities.
CD Services Chip ('Envoy Chip'). The Envoy Chip reduces the complexity in
compact disc drive systems and the cost of interfacing to compact disc drives in
both PC's and consumer CD products. The Envoy Chip replaces six chips typically
used within a CD mechanism. The three principal electronic components of a
compact disc player are the servo processor, signal processor and micro
controller. The Envoy Chip provides the servo, signal and control functions. The
Envoy Chip is also suitable for CD ROM applications as it can replace principal
components along the data path. The Envoy Chip is available in Silicon.
M-Peg Chipsets ('Wynpeg Chipsets'). The Wynpeg Chipset incorporates the
Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group. M-PEG 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 at some future unspecified time. There can be no assurance that the
development of such Wynpeg Chipset -- version 2 will ever be commenced or
completed.
PRODUCTS
Generic (Video) CD Player. A 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 utilised 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.
Internet Access Device. The Company's 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 as
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. The most recent Internet Access Device is based on
the ISP Chip -- version 2. It is anticipated that future
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generations of the 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 Internet Access Device. The software is stored on memory chips
and hard coded in the Internet Access Device. The software enables users to
interact with the Internet via its e-mail and browser functions. During the year
ended June 30, 1998 significant software modifications to the Internet Access
Device were completed and Mitac has commenced production of the latest 4
megabyte version of the proprietary Slipstream Internet Access Device. 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 unauthorised modifications,
there can be no assurance that unauthorised modifications will not occur.
The Company's ISP Chip Internet Access Device has been demonstrated
internationally to manufacturers and others. The Company has experienced
significant interest in this 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
customised Internet Access Devices. During fiscal 1997 and 1998 approximately
15,000 devices were manufactured and either sold to commercial customers or were
purchased from Mitac by the Company and sold as production samples to other
potential customers.
The agreement with Mitac grants a non exclusive license to Mitac to
manufacture and sell the Company's Internet Access Device, including the ISP
Chipset and software. The agreement also provides for a royalty payment by Mitac
in addition to sharing the profits from product sales. The agreement had an
initial term of eighteen months and is renewed automatically for successive
one-year periods unless terminated by either party on three months' notice. The
agreement may also be terminated by either party in the event of a bankruptcy,
assignment or inability to perform by the other party.
The agreement dated May 6, 1998 with AIM, which supersedes all previous
agreements with AIM, grants AIM a non-exclusive world wide license to make, use,
modify, have made, sell, market and distribute the software embedded or used by
the Company in the development or manufacture of its proprietary Internet Access
Device. The agreement also grants the Company, a non-exclusive world-wide
license from AIM to make, have made, copy, sell and market AIM's Frames software
for incorporation into internet access browsers including the Frames software
and to sub license others to do so.
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, amongst 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.
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SUPPLY AND MANUFACTURING
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 customised Internet Access Device proposed to be manufactured by
Mitac and the Envoy chip. The Company has no written agreement with United Micro
Corporation. See 'BUSINESS -- Prototype Products -- Consumer Internet Access
Device'. To date the Company has not experienced any significant problems
obtaining the requisite number of chips for its operations although its demands
have been relatively small. The Company has commenced discussions with
additional manufacturers for the production of additional chips and chipsets
should the need arise. Should demand for the Company's chips 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.
Arrangements with new manufacturers could result in substantial delays,
engineering charges and additional expense.
Mitac is the only present manufacturer of customised Internet Access
Devices using the Company's chips and software. Should Mitac cease to
manufacture the customise Internet Access Devices, the Company would be
adversely affected in the short term, although there are other companies which
can manufacture the product.
RESEARCH AND DEVELOPMENT
Since 1992 the Company has been engaged in developing its own chips and
prototype products. It has done so independently and pursuant to research and
development arrangements. Research is conducted at the Company's facilities
located in Milton Keynes and Newmarket, England through engineers and
programmers employed by it as well as independent contractors. During the fiscal
years ended June 30, 1996, 1997 and 1998, the Company expended approximately
$1.2 million, $1.4 million and $1.4 million respectively on unreimbursed
research and development (which exclude all overhead costs other than employee,
independent contractor, development tool and prototyping cost), all of which has
been expensed.
The multimedia, consumer electronics, computer and hardware and software
industries are characterised 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, and there can be no assurance that the
Company will be able to meet any of these demands. Any material failure of the
Company to meet any of these demands would adversely affect the use and
acceptance of the Company's chips and chipsets and the introduction and sale of
products using the 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,
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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. 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 round
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. It is the Company's intention to
complete the filing of the necessary information to support this application.
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 unauthorised 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 (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).
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 these trademark registrations will be
accepted or, if accepted, will later not be cancelled or invalidated or that the
Company's rights will not be subject to rights of prior users. The Company
relies heavily on trademark protection under common law. There can be no
assurance that such common law rights will not be limited or invalidated by
third parties.
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EMPLOYEES
The Company has 16 employees, including four executive officers, two
business development personnel, eight 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 and
Peirson which restricts certain of their activities for one year after departure
from the Company. See 'EXECUTIVE COMPENSATION -- Employment Agreements'. The
Company has no current plans to obtain key-man insurance on its key personnel.
The multimedia, consumer electronics and computer industries are characterised
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 Significant Sales of Products that Employ the Company's Chips;
Dependence on Third Parties; Inadequacy of Insurance Coverage. Products that
incorporate the Company's chips or chipsets have only been manufactured in
relatively small quantities pursuant to development contracts and arrangements.
There can be no assurance that significant numbers 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 is and will continue to be
dependent upon the manufacturing, marketing, financial, technological and other
abilities of third parties with which it has established, or is attempting to
establish commercial relations to develop, manufacture and market products using
the Company's chips or chipsets. If the Company is unable to establish the
requisite third party commercial relations, products using its chips or chipsets
may never be successfully manufactured, marketed or sold. If any such third
party fails to commit sufficient resources to complete the proper development,
manufacturing or marketing of such products, the Company's reputation, business
relationships, and product acceptance could be adversely affected. In addition,
the Company will have little, if any, control over the timing or methods
employed in the manufacture marketing or sale of such products. Accordingly, if
any products using the Company's chips or chipsets, perform poorly, are inferior
in quality or do not achieve market success, poor performance may be associated
with the Company's chips and chipsets. The Company 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 endeavour to obtain adequate coverage,
although no assurance can be given that adequate insurance will be obtained.
SERVICE PROVIDER
The Company has no binding agreement with an Internet or on-line service
provider. If customised 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
customised 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
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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.
COMPETITION
The market for multimedia, consumer electronics, computer and Internet
products is highly competitive. Numerous competitors have commercialised, 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 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 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 companies, and for the year ended June 30,
1998 it was virtually all attributable to a licensing arrangement with one
customer; American Interactive Media Inc. Unless the products developed or to be
developed in conjunction with customers are manufactured, marketed and sold, no
future revenues are likely to be received from existing arrangements. The
Company could be materially adversely affected if no products developed in
conjunction with the companies with which it has arrangements are ultimately
manufactured, marketed and sold.
An agreement with Zilog provides for license fees and royalty payments to
the Company by Zilog in exchange for the grant of a world-wide, non-exclusive
license to manufacture, market and sell the ISP Chipset revision 2 and future
plug-in replacements for use in the Company's Netbox designs. The agreement also
provides for support and development services by the Company to Zilog and its
customers. The agreement may be terminated by either party in the event of a
bankruptcy, breach, inability to perform, assignment or change in control of the
other party. Following a change in control of Zilog, the company has given
notice of its intention to terminate the contract and discussions are currently
taking place which are likely to result in a new agreement being concluded.
9
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<PAGE>
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 utilising 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, 1998, 1997, and 1996, which states
'the Company has suffered and continues to suffer significant losses from its
operations, has an accumulated deficit and revenue and cash flow from its
operations have not developed to the point where the Company can internally fund
its operations. These factors, among others, raise substantial doubt about its
ability to continue as a going concern.' See 'FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT ACCOUNTANTS'.
International Operations and Changes in Exchange Rates. The Company has
entered into contracts with manufacturers located in the United States, Taiwan,
Hong Kong, Germany and the Peoples Republic of China. The Company's
international operations will subject it to various government regulations,
export controls and the normal risks involved in international operations and
sales. A majority of the Company's revenue to date has been received in US
dollars; however, the Company's main operating subsidiary conducts business in
pounds sterling. Any decline in the value of 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 minimising the consequences of currency
fluctuations and does not intend to do so in the immediate future.
Peoples Republic of China. The Company's interests may be adversely
affected by the political environment in China. China is a communist country
which since 1949 has been, and is expected to continue to be, controlled by the
Communist Party of China. Changes in the top political leadership of the Chinese
government may have a significant impact on policy and the political and
economic environment in China. Moreover, economic reforms and growth in China
have been more successful in certain provinces than in others, and the
continuation or increase of such disparities could affect political or social
stability. China only recently has permitted greater flexibility in its economic
sector, however the government of China has exercised and continues to exercise
substantial control over virtually every section of the Chinese economy through
regulation and state ownership. Accordingly, government actions in the future,
including any decision not to continue to support the economic reform program
that commenced in the late 1970's and possibly to return to the more
centrally-planned economy that existed prior thereto, could have a significant
effect on economic conditions in China and on the operations of the Company.
The Company's interests may be adversely affected by the economic
environment in China. The economy of China differs significantly from the
economy of the United States and western Europe in such respects as structure,
level of development, gross national product, growth rate, capital reinvestment,
resource allocation, self sufficiency, rate of inflation (see 'Inflation' below)
and balance of payments position, among others. Only recently has the Chinese
government encouraged substantial private economic activities.
The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly retrained economic expansion recently. Similar
actions by the central government of China in the future could have a
significant adverse effect on economic conditions in China and the economic
prospects of the Company.
10
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<PAGE>
Over the last few years, China's economy has registered a high growth rate
and there have been recent indications that the rates of inflation have
increased. In 1996, China's overall inflation rate was estimated to be 6.3%
compared to 14.8% in 1995 and 21.7% in 1994. In response, the Chinese government
recently has taken measures to curb the excessive expansion of the economy.
These measures have included devaluations of the Chinese currency, the Renminbi,
restrictions on the availability of domestic credit (reducing the discretionary
spending capability of certain of the Company's potential customers) and limited
re-centralization of the approval process for purchase of some foreign products.
there can be no assurance that these austerity measures alone will succeed in
slowing down the economy's excessive expansion or control inflation, nor that
they will not result in severe dislocations in the Chinese economy in general.
To further combat inflation, the Chinese government may adopt additional
measures, including the establishment of freezes or restraints on certain
projects or markets, which may have an adverse effect on the company's
operations.
China's legal system in a civil law system which is based on written
statutes and in which decided legal cases have little precedential value. China
does not have a well developed, consolidated body of laws governing enterprises
with foreign investments. as a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion. as
legal systems in China develop, foreign business entities may be adversely
affected by new laws, changes to existing laws (or interpretations thereof) and
pre-emption of provincial or local laws by national laws. In circumstances where
adequate laws exist, it may not be possible to obtain swift and equitable
enforcement thereof.
Hong Kong. The Company may be materially adversely affected by factors
affecting Hong Kong's political situation and its economy or in its
international political and economic relations. Hong Kong was a British Crown
Colony, but sovereignty over Hong Kong was transferred to China on July 1, 1997
and Hong Kong became a Special Administrative Region ('SAR') of the People's
Republic of China ('PRC'). As provided in the Sino-British joint declaration on
the question of Hong Kong and the Basic Law of the Hong Kong SAR of the PRC
('the 'Basic Law'), the Hong Kong SAR shall have a high degree of autonomy
except in foreign affairs and defence, Under the Basic Law, the Hong Kong SAR is
to have its own legislature, legal and judicial system and economic autonomy for
50 years. Although, based on current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the transfer
of sovereignty over Hong Kong will have a material adverse effect on the
Company's business, financial condition or results of operations of the Company
in the future, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.
The Company has been advised that no treaty exists between Hong Kong and
the United States providing for the reciprocal enforcement of foreign
judgements. However, the courts in Hong Kong are generally prepared to accept a
foreign judgement as evidence of a debt due. An action may then be commenced in
Hong Kong for recovery of this debt. A Hong Kong court will only accept a
foreign judgement as evidence of a debt due if: (i) the judgement is for a
liquidated amount in a civil matter; (ii) the judgement is final and conclusive
and has not been stayed or satisfied in full; (iii) the judgement is not
directly or indirectly for the payment of foreign taxes, penalties, fines or
charges of a like nature (in this regard a Hong Kong court is unlikely to accept
a judgement for an amount by doubling, trebling or otherwise multiplying a sum
assessed as compensation for loss or damage sustained by the person in whose
favour the judgement was given); (iv) the judgement was not obtained by actual
or constructive fraud or duress; (v) the foreign court has taken jurisdiction on
grounds that are recognised by the common law/rules as to conflict of laws in
Hong Kong; (vi) the proceedings in which the judgement was obtained were not
contrary to natural justice (i.e. the concept of fair adjudication); (vii) the
proceedings in which the judgement was obtained, and the judgement itself and
the enforcement of the judgement are not contrary to the public policy of Hong
Kong; (viii) the person against whom the judgement is given is subject to the
jurisdiction of the Hong Kong court; and (ix) the judgement is not a claim for
contribution in respect of damages awarded by a judgement which does not satisfy
the foregoing. Enforcement of a foreign judgement in Hong Kong may also be
limited of affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
11
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<PAGE>
VOLABILITY OF STOCK PRICES
During the year ended June 30, 1998 the Company acquired an interest in
560,000 shares of common stock in AIM of which 60,000 were transferred to
satisfy liabilities amounting to approximately $350,000. At the date of this
report on Form 10-K, the Company is still holding 500,000 shares of common stock
in AIM. The trading price of this common stock could be subject to significant
fluctuations in response to variations in operating results and from other
factors. AIM 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. Whilst the Company sees its
investment in AIM as being a long term investment and has no immediate
intentions to dispose of this investment, there can be no assurance that value
of the investment will be maintained.
ITEM 2. PROPERTIES
The Company presently leases:
(i) Approximately 2,900 square feet of office space at Elder House,
526-528 Eldergate, Central Milton Keynes, MK9 1LR, England. The lease is
for a five year term expiring March 21, 2001 and provides for an annual
rental of $45,700. The Company is also responsible for taxes, insurance and
service charges which should approximate, in the aggregate, to $36,000
annually. Management believes that this leased facility is suitable and
adequate for its intended use, although as the Company grows further
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, to $4,150
annually.
ITEM 3. LEGAL PROCEEDINGS
On December 15, 1997, the Company received a complaint which was filed in
New York State Superior Court, New York County, by Forte Communications Inc.,
alleging damages in the amount of $112,800, for public relations and consulting
services rendered by the Plaintiff to the Company, and alleged expenses. The
Company has filed an answer to the suit on the basis of Forte's failure to
fulfil its contractual obligations and to obtain the necessary authority for
alleged expenses.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Since May 24, 1995, bid and ask quotations of the Company's common stock
have been reported by the National Association of Securities Dealers ('NASD')
Electronic Bulletin Board. From November 2, 1994 through May 24 1995 there was
no 'established public trading market', although bid quotations were reported
sporadically in the 'pink sheets' published by the National Quotation bureau and
on the NASD Electronic Bulletin Board. The company's NASDAQ symbol is MUCP. The
following table sets forth the range of high and low bid quotations without
adjustment for retail mark-ups, mark-downs 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, 1998:
Quarter ended June 30, 1998................................................ $ 1.50 $ 0.65
Quarter ended March 31, 1998............................................... $ 1.60 $ 0.60
Quarter ended December 31, 1997............................................ $ 3.10 $ 2.40
Quarter ended September 30, 1997........................................... $ 4.10 $ 2.40
Fiscal Year ended June 30, 1997:
Quarter ended June 30, 1997................................................ $ 4.19 $ 1.75
Quarter ended March 31, 1997............................................... $ 6.87 $ 2.25
Quarter ended December 31, 1996............................................ $10.50 $ 4.50
Quarter ended September 30, 1996........................................... $11.31 $ 7.87
Fiscal Year ended June 30, 1996
Quarter ended June 30, 1996................................................ $10.75 $ 4.38
Quarter ended March 31, 1996............................................... $ 5.63 $ 1.00
Quarter ended December 31, 1995............................................ $ 5.00 $ 3.03
Quarter ended September 30, 1995........................................... $13.75 $ 1.00
</TABLE>
On June 30, 1998 there were approximately 170 stockholders of the Company's
common stock, including holders of record and participants in security position
listings, but excluding those shares of common stock held in street name.
The Company has never paid cash dividends on its common stock and does not
anticipate it will do so in the foreseeable future. The Company currently
intends to retain future earnings, if any, to fund the development and growth of
its business. The payment of future cash dividends by the Company on its common
stock will be at the discretion of the Board of Directors and will depend on the
Company's earnings (if any), financial condition, cash flows, capital
requirements, and contractual prohibitions with respect to the payment of
dividends and other considerations as the Board of Directors may consider
relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the financial
statements of the Company. The financial statements for each of the fiscal years
in the five-year period ended June 30, 1998 have been audited by Moore
Stephens-Lovelace P.A., independent certified public accountants. The following
selected financial data should be read in conjunction with and are qualified in
their entirety by the MSU Corporation consolidated Financial statements and the
notes thereto included elsewhere in this Report on Form 10-K.
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<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Total Revenue................................................. 4,179 1,480 393 1,596 875
Profit (Loss) from operations................................. 286 (2,113) (1,402) (882) (1,366)
Net Profit (Loss)............................................. 292 (2,107) (1,397) (878) (1,365)
Basic profit (loss) per share................................. 0.02 (0.13) (0.10) (0.07) (0.31)
Fully diluted profit (loss) per share......................... 0.02 (0.13) (0.10) (0.07) (0.31)
Fixed charges to earnings surplus (deficiency)................ 561 (2,080) (1,351) (843) (1,305)
Balance Sheet data (at year end):
Working Capital............................................... (4,401) (1,556) (1,856) (2,662) (1,841)
Total assets.................................................. 2,573 2,086 164 363 197
Long term debt................................................ -- 1,830 -- -- --
Shareholders' deficit......................................... (2,074) (2,421) (1,816) (2,620) (1,770)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-K contains forward looking statements that involve
risks and uncertainties. The statements contained in this report on Form 10-K
that are not purely historical are forward-looking statements within the meaning
of 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. All forward-looking statements
included in this report on Form 10-K are based on information available to the
Company at the date of this report on Form 10-K, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the Company's inability to
market its products, infeasibility of developing new products, the Company's
inability to obtain adequate financing for its continued operations and other
factors discussed elsewhere in this annual report on Form 10-K. The following
discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report on Form 10-K.
OVERVIEW
On October 3, 1994 MSU Corporation, formerly Capital Acquisition Company,
acquired the outstanding capital stock of MSU PLC, the parent of MSU Limited.
(MSU PLC and MSU Limited referred to as 'MSU') through the issuance of 9,422,222
shares of its common stock. This transaction has been accounted for as a
recapitalisation 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 recapitalisation 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 (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 year ended June
30, 1998 the company made a net profit of approximately $292,000; however during
the years ended June 30, 1997 and 1996 the Company incurred net losses of
approximately $2,107,000 and $1,397,000 respectively. At June 30, 1998 there was
an
14
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accumulated deficit of approximately $6,841,000. Additionally, the Company has
had recurring negative cash flows from operations.
Between June 1997 and September 1997 the company sold approximately $2.3
million 10% convertible secured promissory notes which were convertible into
shares of the Company's common stock at a conversion price of $3.00 (see later
for subsequent changes to the conversion price); or were repayable on July 1,
1998. In April 1998, Capital Bay Securities, as agent for the Noteholders,
issued a Notice of Default on the Company as interest had not been paid on the
promissory notes on due dates. On May 6, 1998 the Noteholders agreed that in
consideration for the issuance of 168,000 shares of common stock, representing
interest through July 31, 1998, the Notes would not be declared in default at
any time prior to July 31, 1998 for any reason whatsoever. On August 7, 1998,
the Noteholders agreed that in consideration for a reduction of the conversion
price to $0.75, they would release all of their collateral security over the
assets of the Company, except for the security of the 500,000 shares of common
stock of AIM, and extend the period over which they would not declare the Notes
to be in default to September 30, 1998 (which was subsequently extended to
December 15, 1998). In the event of the Noteholders not electing to convert
their promissory notes into shares of common stock, there can be no guarantee
that the Company will have sufficient funds available to repay the promissory
notes.
The Company expects that it is likely to incur net losses at least through
the end of the second quarter of fiscal 1999 as it attempts to further develop,
upgrade and market its products and to develop its infrastructure and
organisation to support anticipated operations, including anticipated product
demand. The foregoing 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 in fiscal 1999 if anticipated revenues from licensing fees
and royalties in respect of sales of the proprietary Internet Access Device,
development fees and royalties in respect of sales of the Envoy chip, or
royalties and conditional and forecasted purchase orders of customised Internet
Access Devices, are not realised. Such conditional and forecasted purchase
orders in respect of the Internet Access Devices assume, without limitation,
approval of final production samples by potential purchasers; acceptance by and
demand for the customised Internet Access Devices by consumers; satisfactory
product performance, including chip and software performance; modem approval
from the local or national telephone company, 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
fiscal 1999 and/or be unable to continue as a going concern. The foregoing
factors raise substantial doubt about the Company's ability to continue as a
going concern without sufficient funds to meet its cash requirements. There can
be no assurance that the Company will be able to obtain sufficient funds to
enable it to continue as a going concern.
The Company's strategy is to increase cash flow from operations through
further development, upgrade and marketing of its chips and products
incorporating such technology, with particular emphasis on Internet Access
Devices incorporating its proprietary Slipstream technology and the Envoy chip.
In order to support this strategy, the Company anticipates that if revenues from
trading operations are not generated in the coming months, it will, at least in
the short term, have to continue to fund 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 organisation to
support its anticipated operations activity, although it has no funds to address
these concerns presently.
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 it will ever achieve profitability
or that it will be able to continue as a going concern. See Report of
Independent Auditors and Company's financial statements appearing elsewhere in
this Annual Report on Form 10-K.
15
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RESULTS OF OPERATIONS
REVENUES
The Company has no customers to date that frequently and systematically
purchase its products or retain its services. Revenues during the years ended
June 30, 1998, 1997 and 1996 were approximately $4,195,000, $1,480,000 and
$393,000 respectively. In fiscal 1998 the revenues derived almost entirely from
the license fees received from AIM. In fiscal 1997 the revenues derived
principally from chip sales, license and development fees, and royalty fees paid
in connection with the sale of customised Internet Access Devices. In fiscal
1996, revenues were derived principally through development arrangements in
which the Company performed engineering and designwork for its customers for a
development fee. Typically the Company's development arrangements also provide
for royalties and/or license fees to be paid to the Company if the customer
sells products developed in conjunction with the Company and/or incorporating
the company's proprietary technology. To date, apart from the license fees and
royalties receivable in 1998 from AIM, and in 1997 in connection with the sale
of the Internet Access Devices, none of these development arrangements have
resulted in royalty or continuing license revenue to the Company. The Company
would be materially adversely effected if customers fail to manufacture, market
or sell products developed in conjunction with the Company.
During the years ended June 30, 1998, 1997 and 1996 the Company's revenues
were principally derived from one, four and three customers respectively.
Because of the concentration of its revenues in such a small number of
customers, the loss of one customer could have a material adverse effect on the
Company's business.
The Company's revenues by geographic region during the years ended June 30,
1998, 1997 and 1996 were approximately as follows:
<TABLE>
<CAPTION>
LOCATION 1998($) 1997($) 1996($)
- ----------------------------------------------------------- --------- ------- -------
<S> <C> <C> <C>
Europe..................................................... 8,000 -- 110,000
Far East................................................... -- 730,000 --
North America.............................................. 4,171,000 750,000 280,000
</TABLE>
The approximate 380% increase in revenue in 1997 compared to 1996 is
primarily a reflection of the low revenue in 1996, but it did include royalties
in respect of product sales and fees from development contracts which the
Company had anticipated would provide continuing revenue streams into 1998 and
subsequent years; which has not proved to be the case. Revenues in 1998
increased by approximately 285% compared to 1997, but because the 1998 revenues
were derived principally from one source, comparison between the years is not
meaningful. Other revenues were not generated in 1998 as the Company
concentrated its efforts on further software developments of its proprietary
Internet Access Device and the Envoy chip.
COST OF REVENUES
The cost of revenues for the years ended June 30, 1998, 1997 and 1996 were
approximately $8,000, $651,000, and $66,000 respectively. As a percentage of
revenues, cost of revenues were approximately 0.2% in 1998, 44% in 1997 and 17%
in 1996. The cost of revenue fluctuations are due to variations in gross margins
as between license fees, chip sales, support services and development services.
The gross margin on license fees is 100%, that on development and support
services is usually 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 expenditure 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
1998,
16
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1997 and 1996 research and development costs (which exclude all overhead costs
other than employee, independent contractor, development tool and prototyping
costs, all of which has been expensed), were approximately $1,409,000,
$1,386,000 and $1,248,000 respectively. As a percentage of revenues, research
and development expenses were approximately 34% in 1998, 94% in 1997 and 318% in
1996. 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 $1,500,000 per year.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES
Selling general and administrative expenses were approximately $1,211,000,
$1,485,000 and $404,000 for the years ended June 30, 1998, 1997 and 1996
respectively. Selling general and administrative expenses consists of the cost
of employees (other than those dedicated to research and development),
advertising and promotion costs, which are charged to operations as incurred,
communication, rent and occupancy costs; and professional fees. The 18% decrease
in such expenses in 1998 compared to 1997 is primarily due to a reduction in
personnel, marketing and promotional costs in this year during which the Company
was concentrating on the development of its products. In 1997 this category of
expense was 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 1997 in
Las Vegas), and professional costs incurred in the preparation of prior
delinquent Exchange Act periodic reports.
DEPRECIATION EXPENSE
Depreciation expense was approximately $50,000, $44,000 and $32,000 for the
fiscal years ended June 30, 1998, 1997 and 1996 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 $298,000, $26,000 and $45,000 for the
fiscal years ended June 30, 1998, 1997 and 1996. The interest expense in 1998
was principally due to an interest cost of approximately $230,000 in respect of
the 10% convertible promissory notes and $67,000 in respect of short term loan
financing received during the year. The interest expense in 1997 was principally
due to the interest of $17,600 paid in respect of certain bridge financing.
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, collateralised by a security
interest on substantially all of the assets of the Company and payable on
demand. There have however been no borrowings from this source during either
1998 or 1997.
AMORTISATION OF DEFERRED FINANCING COSTS
Amortisation of deferred financing costs approximated $918,000 for the year
ended June 30, 1998. These costs were incurred in connection with the sale of
the 10% convertible promissory notes between June and September 1997 and include
the costs associated with the preparation, filing and subsequent withdrawal of a
Registration Statement on Form S-1 in connection with the shares underlying the
notes. All such costs have now been fully expensed.
17
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through the receipt of the license
fees from AIM and private sales of equity securities. For the fiscal year ended
June 30, 1998, net cash used in operating activities approximated $1,399,000 and
was primarily attributable to the Company's net profit for the fiscal year and
the costs associated with the issuance of the 10% convertible promissory notes,
which were actually mostly expended in the previous year. These were offset by
non-cash revenues of $2,915,000 in the form of stock in AIM. Cash used in
investment activities of approximately $82,000 for the fiscal year ended June
30, 1998 were the result of the acquisition of electronics equipment. Cash flows
from financing activities of approximately $872,000 in the fiscal year ended
June 30, 1998 were primarily attributable to the issuance of common stock of the
Company ($775,000) and to the issuance of the balance of the 10% convertible
promissory notes ($470,000).
Capital expenditures were approximately $82,000 for the fiscal year ended
June 30, 1998. The company currently estimates that capital expenditures for
fiscal 1998 will be approximately $200,000 to $250,000. The Company has no
material commitments, other than an operating lease and four employment
agreements.
As at June 30, 1998 the Company's principal source of liquidity was
$166,000 in cash. Since June 30, 1998 additional liquidity has been provided
from the sale of 2 million shares of common stock in the Company for $1,000,000.
The company believes that the cash flows expected to be generated by
operations through the remainder of fiscal 1999 will be sufficient to meet a
significant portion of its cash needs for working capital and capital
expenditures for the remainder of fiscal 1999. The preceding statement is a
forward looking statement which assumes the realisation 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 but not limited to approval of final
production samples of the Envoy chip and customised 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, for which there can be no
assurance. The sale of additional equity or convertible debt securities will
result in additional dilution to the Company's stockholders. There can be no
assurance that the Company's liquidity requirements will be met or that the
Company will be able to continue as a going concern.
YEAR 2000 COMPLIANCE ISSUES.
The Year 2000 computer problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
Management of the Company does not anticipate that any significant modification
or replacement of the Company's software will be necessary for its computer
systems to properly utilize dates beyond December 31, 1999 or that the Company
will incur significant operating expenses to make any such computer system
improvements. Also, none of the products designed by the Company which are
currently in manufacture utilize date-sensitive chips. The Company is not able
to determine, however, whether any of its suppliers, lenders, customers or
service providers will need to make any such modifications or replacements or
whether the failure to make such software corrections will have a material
adverse effect on the Company's operations or financial condition. Although it
is management's belief that the failure by such entities to make required
software corrections could have a material adverse effect on the Company's
operations or financial condition, management is not able to estimate the amount
of such adverse effects, if any. The Company is in the process of assessing the
status of these entities' year 2000 compliance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company (and their respective
positions within MSU PLC, MSU Limited and MSU US Operations Inc.) and their
respective ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Wynford Peter Holloway................... 49 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..................... 64 Deputy Chairman and non-executive Director of the
Company
William Derek Snowdon.................... 44 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................... 52 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.
Keith Peirson............................ 56 Managing Director of the Company
Fred Kashkooli........................... 58 Director of the Company
</TABLE>
Wynford Peter Holloway has served as Chief Executive Officer and a director
of the Company since October 1994, and as Chairman of MSU PLC and MSU 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 with effect from 1 July 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 company being sold.
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.
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
19
<PAGE>
<PAGE>
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
and since November 1997 has been chief executive officer of Telegen Inc. Mr
Kashkooli has been an independent management consultant since 1991 and has over
twenty nine 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 was managing design
centres 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 hold a BS in Electrical
Engineering from California State University.
Each director serves for a term of one year from election. Each officer
serves for a term as set forth in their respective employment agreements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation earned during the Company's last three fiscal years by the
Company's Chief Executive Officer and the Company's other executive officers
receiving in excess of $100,000 in total annual salary and bonus (collectively
the 'named executive officers'):
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1)(2) ($) ($)(2)
- ------------------------------------------------------------- ------ ------- ----- ------------
<S> <C> <C> <C> <C>
Wynford Peter Holloway....................................... 1998 199,200(3) -- 35,778
1997 112,000 -- 29,000
1996 112,000 -- 17,072
Keith Charles Hall........................................... 1998 n/a -- n/a
1997 48,000* -- 9,000*
1996 96,000 -- 8,000
Richard Horby Phillips....................................... 1998 65,736 -- 11,345
1997 41,500* -- 7,470*
Keith Edward Peirson......................................... 1998 138,660 -- 25,715
</TABLE>
- ------------
* Part of the year; to or from date of resignation/appointment
(1) All salaries and other annual compensation were paid by MSU Limited.
(2) Represents personal benefits in addition to salary. Of Mr Holloway's
personal benefits; 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; and the 1998 amount represents $29,520 in respect of a car
allowance and $6,258 in respect of contributions to a personal retirement
plan. Of Mr Hall's personal benefits, 100% of each of 1996 and 1997 amounts
were for a car allowance. All of Mr Phillips 1997 personal benefits were in
respect of a car allowance and of the 1998 personal benefits $8,610 was in
respect of a car allowance and $2,735 in respect of contributions to a
personal retirement plan. Mr Pierson's benefits in 1998 were $18,040 in
respect of a car allowance and $7,675 in respect of contributions to a
personal retirement plan.
(3) At the date of this report $82,000 of the salary due to W P Holloway had not
been paid.
20
<PAGE>
<PAGE>
LONG TERM COMPENSATION
Other than in respect of the stock options, details of which are set out on
pages 23 to 24, there were no long term compensation awards or payouts in any of
the years ended June 30, 1998, 1997 or 1996.
EMPLOYMENT AGREEMENTS
In 1994, the Company 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
$199,200, $116,200 and $33,200 respectively. The employment agreements are
rolling term agreements and automatically renew for a further three year term at
the expiration of each year. The Company renegotiated the contracts with Mr.
Holloway and Mr. Hall in each of the years ended June 30, 1997, 1996 and 1995
which resulted in a reduction in their annual minimum base salaries of
approximately $147,000, $130,000 and $130,000 for each of the years ended June
30, 1997, 1996 and 1995 respectively. The renegotiations were due to lower than
expected operating performance and cash flows. In the year ended June 30, 1998
the full salary has been expensed for Mr. Holloway although as at the date of
this report on Form 10-K, $82,000 has not yet been paid to him.
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 to serve as the Company's Chief Financial Officer in
consideration for an annual base salary of approximately $108,000, subject to
annual increases within the discretion of the Board. As part of the employment
contract Mr. Phillips also received stock options to purchase 100,000 shares of
the Company's common stock at a price equal to the market value of the stock at
the date of the grant. During an initial period Mr. Phillips was to receive a
lower base salary at the annual rate of $83,000 until he was able to devote all
of his time to the Company's affairs. From March 1, 1998 the Board and Mr.
Phillips mutually agreed to reduce his time commitment to the Company, until
such time as activity levels increase, and he is currently devoting
approximately one day a week to the company's affairs and during this period is
receiving a salary at the annual rate of $30,000.
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. As part of the
employment contract, Mr. Peirson also received stock options to purchase 300,000
shares of the Company's common stock at a price equal to the market value of the
stock at the date of the grant.
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.
The agreements with Messrs. Holloway, Snowdon, Phillips and Peirson each
provide for automatic termination once the employee reaches 65 years of age. The
Company has the right under each agreement to terminate the agreement
immediately for cause and then has the option to pay the employee his base
salary for the remainder of the term. Each agreement contains a non-competition
clause, restricting the employee from soliciting the Company's customers and
employees and from holding an interest in a competing firm.
21
<PAGE>
<PAGE>
COMPENSATION OF DIRECTORS
Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the company's fiscal year ended
June 30 1998
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
OPTIONS POTENTIAL REALISABLE VALUE
NUMBER OF GRANTED AT ASSUMED ANNUAL RATE OF
SECURITIES 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>
Keith Edward Peirson......... 300,000 32.5% $2.25 $ 2.25 8/05/02 864,000 1,086,750
300,000 32.5% $0.65 $ 0.65 5/31/03 249,600 313,950
(Notes 1)
and 2
Jeremy Miles Simpson......... 67,800 7.4% $1.75 $ 1.75 10/26/02 -- 151,8 191,026
253,846 27.6% $0.65 $ 0.65 2/23/03 -- 211,200 265,650
(Note 3)
</TABLE>
- ------------
(1) The stock options granted to Mr Peirson are in accordance with the
provisions of his employment contract with the company. Mr Peirson has been
granted options in respect of 300,000 shares of common stock exercisable
between June 30, 1998 and August 5, 2002. 100,000 are exercisable from 30
June 1998; 100,000 from 30 June 1999 and 100,000 from June 30, 2000.
(2) On 5 May 1998 Mr Peirson was granted further options in respect of 300,000
shares of common stock of which 150,000 are exercisable immediately and
150,000 from 5 May 1999 provided that Mr Peirson is still in the employment
of the company at that date. The options expire on 4 May 2003.
(3) The stock options granted to Mr Simpson were in consideration of his
agreeing to subscribe for 67,600 shares of common stock of the Company on
October 26,1997 and 253,846 shares on February 23, 1998.
(4) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the assumption that the Company's
common stock will appreciate in value from the date of the grant to the end
of the option term (five years from the date of the grant) at annualised
rates of 5% and 10% (total appreciation of approximately 28% and 61%),
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the common stock.
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30 1998. No
options were exercised by such officers during the Company's fiscal year ended
June 30 1998.
22
<PAGE>
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR END(#) AT FISCAL YEAR END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Wynford Peter Holloway..................... 270,000(2) -- $-- $
William Derek Snowdon...................... 120,000 -- -- --
Richard Horby Phillips..................... 100,000 -- -- --
Keith Edward Peirson....................... 250,000 350,000 43,500 43,500
Jeremy Miles Simpson....................... 384,146 -- 73,615
</TABLE>
(1) Values stated are based on the average bid and ask prices of $0.94 per share
of the Company's common stock as reported by Bloomberg Financial Inc. on
June 30 1998, 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee. During fiscal 1998, Messrs.
Holloway, Simpson, Snowdon, Phillips, Peirson and Kashkooli, 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. The Company incurred $129,000 in legal fees to Phoenix Walters
during fiscal 1998.
Between September 1994 and March 1995, Mr. Phillips provided consultancy
services to the Company for which he rendered invoices for $16,500. Payment for
these services has not yet been effected by the Company and as of September 1998
the amount remained unpaid.
TXC Corporation is a principal stockholder of the Company and holds a
non-exclusive licence to use the Wynpeg Chipset technology in connection with
the manufacture of video CD players. Such licence was granted to TXC Corporation
in connection with a development contract entered into in July 1994. Of the
$2,159,910 aggregate capital contribution made to the Company by TXC
Corporation, $1,400,000 is represented by an unsecured, interest free loan
payable to TXC Corporation at such time as the Company is reasonably able to do
so without jeopardising its financial condition, and the balance was an equity
contribution.
In June 1996, MSU Limited obtained a $76,000 credit facility from National
Westminster Bank Plc. The credit facility was secured by a floating debenture on
all of the Company's assets and the personal guarantees of each of Messrs
Holloway, Hall and Snowdon. The Guarantees of Messrs Hall and Snowdon were
secured by a pledge of the pledgor's shares of the Company's 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. The debentures and personal guarantees remain in place with the Bank
to serve as collateral for additional credit facilities requested by the Company
and approved by the Bank. The pledged shares have been released, but the Bank is
likely to require that such shares be pledged again in connection with any
credit facility.
In September 1996, an amount of $160,000 was loaned to the Company by the
Employee Trust. This loan was unsecured, interest free with no date fixed for
repayment. In July 1997, $33,200 was repaid and in January and February 1998,
amounts totalling approximately $44,000 were loaned to the
23
<PAGE>
<PAGE>
Company on the same basis as above resulting in an amount of $170,980 owing to
the Employee Trust at June 30, 1998.
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 is the Company's shares of
its subsidiaries together with 235,000 shares of common stock of the Company
which are owned by the Employee Trust. The Promissory notes were repaid in June
1997, and no amount is now outstanding.
In consideration of the benefit derived by the Company as a result of the
above interest free loan of $160,000 and the guarantee provided by the Employee
Trust, the Trust was granted an option to acquire 100,000 shares of the
Company's common stock at an exercise price of $2.12; 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.
In September 1996, an amount of $250,000 was received by the Company in
consideration for 50,000 shares of common stock in the Company. This transaction
was subsequently rescinded and the amount of $250,000 became payable. Payment of
this was guaranteed personally by Mr. Holloway as, due to poor liquidity, the
Company was unable to effect repayment on the due date. The amount due was
finally paid 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
in connection with the issuance of the 10% Convertible Notes, Messrs. Holloway
and Snowdon agreed to restrictions on their rights of selling, or otherwise
disposing of, the Company's shares of common stock registered in their
respective names. In consideration for the benefit derived by the Company for
their agreeing to these restrictions, Messrs. Holloway and Snowdon were each
granted options to acquire 20,000 shares of the Company's common stock at $3.56,
being the market price ruling 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of the date of this report
on Form 10-K, by (i) each person known by the Company to be the beneficial owner
of more than 5% of its common stock, (ii) each named executive officer of the
Company, (iii) each director of the Company, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned.
24
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE OF CLASS
NAME OF BENEFICIAL OWNER OWNED (SEE NOTE 3)
- ----------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
*Wynford Peter Holloway.................................... 4,999,777(1)(2)(3)(4)(5) 29.7%
*William Derek Snowdon..................................... 542,277(3)(4)(5) 3.3%
*Jeremy Miles Simpson...................................... 1,025,737(3)(4) 6.0%
*Richard Horby Phillips.................................... 100,000(3) 0.6%
*Keith Peirson............................................. 250,000(3)(6)
*Fred Kashkooli............................................ (7)
Peter Brian Weber and Vivian George Bines
as Trustees for the Employee Trust
48 The Parade, Cardiff CF2 3AB England................... 2,691,444(2) 16.1%
TXC Corporation
5F No. 15 SEC 2
Chung Yang S Road
Peitoi, Taipei, Taiwan................................... 1,615,589 9.7%
McLaughlin Group LLC
13750 US 281 North #660
San Antonio Texas 78232.................................. 2,250,000(6) 13.6%
*All Directors and Executive Officers as a group (6
persons)................................................. 6,917,791 41.3%
</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 favour of all past, present
and future employees of MSU Limited and MSU PLC and any subsequent companies
and their spouses and children. No allocations under the Trust have been
made. Under the Trust Deed and so long as Mr Holloway is living, his
consent, as Settlor, is required for the appointment of beneficiaries and
the appointment of new trustees. The Trustees also have the authority to
delegate powers to Mr Holloway. Pursuant to an unwritten agreement and
understanding, Mr Holloway shares voting and dispositive powers with respect
to the shares held by the Employee Trust.
(3) For the purpose of the above table, a person or group of persons is deemed
to have 'beneficial ownership' of any shares which such person has the right
to acquire within 60 days. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above, any
security which such person or group of such persons has the rights to
acquire within 60 days after such date is deemed to be outstanding for the
purpose of computing ownership for such person or persons, but is not deemed
to be outstanding for the purpose of computing the percentage of ownership
of any other person. Accordingly the above table includes the following
shares issuable pursuant to options which are now exercisable, or are
exercisable within 60 days hereof.
<TABLE>
<CAPTION>
NAME NO. OF SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Wynford Peter Holloway...................................................... 170,000
William Derek Snowdon....................................................... 120,000
Jeremy Miles Simpson........................................................ 384,146
Peter Brian Weber and Vivian George Bines................................... 100,000
Richard Horby Phillips...................................................... 100,000
Keith Edward Peirson........................................................ 250,000
</TABLE>
(4) Excludes the following shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days)
<TABLE>
<CAPTION>
NAME NO. OF SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Keith Peirson............................................................... 350,000
</TABLE>
(footnotes continued on next page)
25
<PAGE>
<PAGE>
(footnotes continued from previous page)
(5) See 'Executive Compensation -- Compensation Committee Interlocks and Insider
Participation' regarding a potential pledge arrangement with National
Westminster Bank Plc. covering shares held by Mr. Holloway and Mr. Snowdon.
(6) Includes 650,000 shares issuable pursuant to a currently execisable warrant
to purchase 650,000 shares of Company common stock at $1 each
(7) Mr. Kashkooli is the beneficial holder of $24,000 10% Convertible Notes
which are convertible into 32,000 shares of the Company's common stock.
(8) See 'Executive Compensation -- Compensation Committee Interlocks and Insider
Participation' regarding a prior pledge agreement with National Westminster
Bank Plc. covering shares held by Mr. Holloway and Mr. Snowdon
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Lawrence Ko, a director and former employee of TXC
Corporation, entered into an agreement in February 1996 pursuant to which Mr. Ko
will represent and promote the Company and its technologies in Taiwan, and at
the Company's request, mainland China and Hong Kong. The Company's intention is
to work through Mr. Ko in most matters relating to such countries and
territories; however the Company has reserved the right to handle independently
all matters relating to existing contacts, negotiations and contracts. Mr. Ko
will receive compensation based upon revenue attained by the Company (consisting
of from 5% to 10% of revenue, plus warrants to acquire 75,000 shares for each $1
million of revenue attained, with an exercise price of 50% of 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 common stock owned by the Employee Trust and was originally due on
October 2, 1996. The loan was then to be repaid in 37,500 shares of Company
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 Company 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 now be
repaid in 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 proceeds
received by the Employee Trust were 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 undetermined date, and are not evidenced by written agreements. In
July 1997 $33,200 of the amount loaned to the Company was repaid to the Employee
Trust.
Effective January 30, 1996 and February 29, 1996, McLaughlin Group LLC
acquired from the Company in a private transaction 800,000 and 800,000 shares,
respectively, of the Company's common stock. The common stock acquisitions were
effected pursuant to a common stock purchase agreement, as amended.
Consideration for the common stock was $1.0 million in cash. McLaughlin Group
LLC was also granted certain demand and piggyback registration rights. The
Company has agreed to indemnify McLaughlin Group LLC against certain liabilities
in connection with any shares so registered.
On July 21, 1997 McLaughlin Group LLC was granted a warrant to purchase
650,000 shares of the Company's common stock at an exercise price of $1.00 per
share, such right to expire on 20 July, 2002. In consideration for the granting
of this warrant McLaughlin Group LLC agreed to waive its rights under the
agreement of January 30, 1996 whereby it had been granted (i) a warrant to
purchase such number of shares of Company common stock as equals 3.5% of the
outstanding shares of common stock on the date the warrant 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 `L'1.0 million and was
due to expire eighteen months after March 1, 1996; and (ii) the right to acquire
additional shares of capital stock upon issuance by the Company of additional
capital stock (except in certain specified
26
<PAGE>
<PAGE>
cases) in order to maintain the same proportion of voting power of the Company
as is 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. McLaughlin
International, Inc. serves as a consultant to the Company pursuant to two
engagement letters entered into on November 8, 1995 and May 17, 1996
respectively. The engagement letters provide that McLaughlin International, Inc.
will act as a consultant to the Company in connection with certain strategic
transactions, relating to the marketing and distribution of the Company's
products and technology in Japan and to a select number of companies located
principally in the United States, for a period of six months, subject to
extension by mutual agreement. The November 8, 1995 engagement letter was
extended for a further six month period. As compensation under the November 8,
1995 engagement letter, which covers Japan, McLaughlin International, Inc. will
receive for a period of seven years (in the case of revenues and royalties) or
an indefinite period or one time payment (in the case of fees) a percentage of
revenue, royalties and fees (with such percentages ranging from 5% to 10%
dependent upon what and how much is received) received by the Company as a
direct or indirect result of the efforts of McLaughlin International, Inc. As
additional compensation, McLaughlin International, Inc. will receive warrants to
acquire 75,000 shares of common stock per each $1 million in fees received by
the Company (not to exceed 750,000 warrant shares) plus bonus warrants to
acquire 250,000 shares in the event the Company receives $20 million in fees, in
each case as a direct or indirect result of the efforts of McLaughlin
International, Inc. Such warrants will be exercisable for a five year term at a
price equal to the lesser of $10 or 50% of the market price of the Company's
stock on the date of issue. Shares of common stock issuable upon exercise of the
warrants will carry customary registration rights. As compensation under the May
17, 1996 engagement letter, McLaughlin International, Inc. will receive for the
duration of the relationship (between the Company and the party introduced by
the consultant) a percentage of upfront research and development fees/payments;
equity private placement proceeds; service provider revenue/fees; and chip sales
(with such percentages ranging from 4% to 8%) received by the Company as a
direct or indirect result of the efforts of McLaughlin International, Inc. To be
entitled to 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. As of September 1997, the Company had no indebtedness to McLaughlin
International.
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, respectively, $163,000, $114,100 and $79,000 in cash. The
price paid for the shares of common stock in each case was the market price
prevailing on the respective dates. In addition, Mr. Simpson was granted options
to acquire 50,000 shares of common stock at a price of $2.12 per share in
respect of the May 7, 1997 transaction and 12,500 shares of common stock at a
price of $2.37 per share in respect of the June 4, 1997 transaction. In both
cases the options are exercisable at any time after six months from the date of
the respective grants. The end of the option term in each case is five years
from the date of the grant.
Effective October 26, 1997 and February 23, 1998 Jeremy Miles Simpson
acquired from the Company, in private transactions, 67,800 and 253,846 shares
respectively of the Company's common stock. Consideration for the common stock
was, respectively, $169,000, and $165,000 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 67,800 shares of
common stock at a price of $1.75 per share in respect of the October 27, 1997
transaction and 253,846 shares of common stock at a price of $0.65 per share in
respect of the February 23, 1998 transaction. In both cases the options are
exercisable immediately. The end of the option term in each case is five years
from the date of the grant.
27
<PAGE>
<PAGE>
See 'Item 11. EXECUTIVE COMPENSATION -- Compensation Committee Interlocks
and Insider Participation' for additional relationships and related
transactions.
The Company believes that all transactions with officers, directors or
affiliates to date are on terms no less favorable than those available from
unaffiliated third parties. It is the Company's policy that all future
transactions with officers, directors, or affiliates will be approved by members
of the Company's Board of Directors not having an interest in the transaction
and will be on terms no less favorable than could be obtained from unaffiliated
third parties.
28
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K
(a) The following documents are filed as part of this report
Financial Statements
Independent Auditors' report
Consolidated Balance Sheets at June 30, 1997 and 1998
Consolidated Statements of Income for the years ended June 30, 1996,
June 30, 1997 and June 30, 1998
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended June 30, 1996, June 30, 1997 and June 30, 1998.
Consolidated Statements of Cash Flows for the years ended June 30,
1996, June 30, 1997 and June 30, 1998
Notes to Consolidated Financial Statements
Financial Statement Schedules
None
Exhibits
<TABLE>
<C> <S>
2 -- Exchange Agreement among Capital Acquisition Company and the shareholders of MSU PLC(3)
3.1 -- Articles of Incorporation(1)
3.2 -- Amendment to Articles of Incorporation(4)
3.3 -- Bylaws(1)
3.4 -- Amendment to Bylaws(2)
4.1 -- Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.2 -- Amendment to Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.3 -- Warrant issued to McLaughlin Group LLC(4)
10.1 -- Service Agreement with Wynford Peter Holloway(4)
10.2 -- Service Agreement with Keith Charles Hall(4)
10.3 -- Service Agreement with William Derek Snowdon(4)
10.4 -- Placement Agreement with Millport Limited as amended and confirmed(4)
10.5 -- Employee Trust(4)
10.6 -- Office Lease Agreement with Brixton Estates Plc.(4)
10.7 -- Manufacturing, Distribution and Joint Venture Agreement with American Interactive Media, Inc.
Confidential treatment has been requested for specific portions of the Manufacturing, Distribution and
Joint Venture Agreement(4)
10.8 -- Engagement letter, dated November 8, 1995 as amended with McLaughlin International, Inc.(4)
10.9 -- Engagement letter, dated May 17, 1996 with McLaughlin International, Inc.(4)
10.10 -- Form of Director Option granted to each Director in consideration of 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 of 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)
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
<C> <S>
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 -- Letter re change in certifying accountant from Coopers & Lybrand LLP(4)
21 -- Subsidiaries of Registrant(5)
24 -- Power of Attorney. Reference is made to the signature page of this report
27 -- Financial Data Schedule
</TABLE>
-----------------
(1) Contained in exhibits to the Registration Statement on Form S-18 (File No.
33-07861-A), declared effective by the Securities and Exchange Commission on
November 6, 1986.
(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
ended February 28, 1990, filed with the Securities and Exchange Commission
in May 1990.
(3) Contained in exhibits to the 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
September 25 1997.
(6) Filed herewith.
(b) Reports on Forms 8-K
None.
30
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorised.
MSU CORPORATION
By: /s/ Richard Horby Phillips
...................................
RICHARD HORBY PHILLIPS
DIRECTOR
Date: December 31, 1998
Each person whose signature appears below authorises Richard Horby Phillips
or William Derek Snowdon or either of them, each who may act without joinder of
the other, to execute in the name of such person who is an officer or director
of the Registrant and to file any amendments to this annual report on Form 10-K
necessary or advisable to enable the Registrant to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such changes in such report as such attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/S/ WYNFORD PETER HOLLOWAY Chief Executive Officer and Director December 31, 1998
......................................... (Principal Executive Officer)
(WYNFORD PETER HOLLOWAY)
/S/ WILLIAM DEREK SNOWDON Secretary and Director December 31, 1998
.........................................
(WILLIAM DEREK SNOWDON)
/S/ RICHARD HORBY PHILLIPS Director (Principal Financial December 31, 1998
......................................... and Accounting Officer)
(RICHARD HORBY PHILLIPS)
/S/ KEITH EDWARD PEIRSON Director December 31, 1998
.........................................
(KEITH EDWARD PEIRSON)
Director
.........................................
(JEREMY MILES SIMPSON)
Director
.........................................
(FRED KASHKOOLI)
</TABLE>
31
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Certified Public Accountants...................................................... F-1
Financial Statements:
Consolidated Balance Sheets........................................................................ F-2
Consolidated Statements of Operations.............................................................. F-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>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MSU CORPORATION
Central Milton Keynes, England
We have audited the accompanying consolidated balance sheets of MSU
Corporation and subsidiaries as of June 30, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998 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, has substantial debt that is due on December 15, 1998, negative working
capital, the Company continues to have negative cash flow from operations and
currently has a very limited client base. 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.
Certified Public Accountants
Orlando, Florida
September 11, 1998,
except for Note 12
as to which the date is
December 15, 1998
F-2
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 166,040 $ 859,238
Accounts receivable............................................................ -- 105,842
Inventory...................................................................... -- 12,325
Prepaid expenses and other..................................................... 79,411 144,554
----------- -----------
Total current assets...................................................... 245,451 1,121,959
Equipment, net of accumulated depreciation of $84,544 in 1998 and $41,764 in 1997... 108,647 76,305
Investments......................................................................... 2,218,500 --
Other assets:
Deferred financing costs....................................................... -- 803,077
Deferred registration costs.................................................... -- 85,000
----------- -----------
-- 888,077
----------- -----------
Total assets.............................................................. $ 2,572,598 $ 2,086,341
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank overdraft................................................................. $ -- $ 131,595
Current portion of long-term debt.............................................. 2,470,730 162,680
Shareholder advance payable.................................................... 1,400,000 1,400,000
Note payable................................................................... -- 250,000
Accounts payable and accrued liabilities....................................... 767,711 713,461
Related-party payable.......................................................... 7,681 20,239
----------- -----------
Total current liabilities................................................. 4,646,122 2,677,975
Long-term debt...................................................................... -- 1,829,742
Commitments and contingencies:
Shareholders' deficit:
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,590,237 and
15,986,891 shares issued and outstanding at June 30, 1998 and 1997,
respectively.................................................................. 165,902 159,869
Additional paid-in capital..................................................... 5,287,790 4,456,560
Cumulative translation adjustments............................................. 10,046 94,701
Net unrealized loss............................................................ (696,500) --
Accumulated deficit............................................................ (6,840,762) (7,132,506)
----------- -----------
Total shareholders' deficit............................................... (2,073,524) (2,421,376)
----------- -----------
Total liabilities and shareholders' deficit............................... $ 2,572,598 $ 2,086,341
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................................................. $4,179,203 $ 1,479,911 $ 392,693
Expenses:
Cost of revenues................................................. 7,796 650,790 65,795
Selling, general and administrative.............................. 1,211,334 1,485,577 403,636
Depreciation..................................................... 49,556 43,709 31,545
Amortization of deferred financing and registration costs........ 917,891 -- --
Interest expense................................................. 297,706 26,380 45,491
Research and development......................................... 1,408,664 1,386,340 1,248,186
---------- ----------- -----------
Total expenses.............................................. 3,892,947 3,592,796 1,794,653
---------- ----------- -----------
Operating income (loss)..................................... 286,256 (2,112,885) (1,401,960)
Nonoperating income:
Interest income.................................................. 5,488 6,176 5,199
---------- ----------- -----------
Net income (loss)........................................... $ 291,744 $(2,106,709) $(1,396,761)
---------- ----------- -----------
---------- ----------- -----------
Basic and diluted income (loss) per common share...................... $0.02 $(0.13) $(0.10)
---------- ----------- -----------
---------- ----------- -----------
Weighted average number of common shares outstanding.................. 16,246,000 15,700,000 14,494,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
$0.01 PAR VALUE ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
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)
Issuance of common shares..... 603,346 6,033 769,384 --
Issuance of options to
purchase 903,846 shares of
common stock................ -- -- 61,846 --
Translation adjustments....... -- -- -- --
Change in market value of
investments available for
sale........................ -- -- -- --
Net income.................... -- -- -- 291,744
---------- -------- ---------- -----------
Balance -- June 30, 1998...... 16,590,237 $165,902 $5,287,790 $(6,840,762)
---------- -------- ---------- -----------
---------- -------- ---------- -----------
<CAPTION>
STOCK CUMULATIVE NET TOTAL
SUBSCRIPTIONS TRANSLATION UNREALIZED SHAREHOLDERS'
RECEIVABLE ADJUSTMENTS LOSS DEFICIT
------------- ----------- ---------- -------------
<S> <<C> <C> <C> <C>
Balance -- June 30, 1995......$ (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)
Issuance of common shares..... -- -- -- 775,417
Issuance of options to
purchase 903,846 shares of
common stock................ -- -- -- 61,846
Translation adjustments....... -- (84,655) -- (84,655)
Change in market value of
investments available for
sale........................ -- -- (696,500) (696,500)
Net income.................... -- -- -- 291,744
------------- ----------- ---------- -------------
Balance -- June 30, 1998......$ -- $10,046 $ (696,500) $ (2,073,524)
------------- ----------- ---------- -------------
------------- ----------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 291,744 $(2,106,709) $(1,396,761)
Adjustments to reconcile net income (loss) to net cash used in
operating activities............................................
Depreciation.................................................... 49,556 43,709 31,545
Amortization of deferred costs.................................. 917,891 -- --
Non-cash expense related to issuance of stock purchase
options....................................................... 61,846 -- 21,500
Non-cash revenue related to sale of license..................... (2,915,000) -- --
(Increase) decrease in accounts receivable, net................. 105,842 (93,495) 36,907
(Increase) decrease in inventories.............................. 12,325 (12,325) --
(Increase) decrease in prepaid expenses......................... 65,146 (82,401) (15,076)
Increase in other assets........................................ (29,814) (888,077) --
Increase (decrease) in accounts payable and accrued
liabilities................................................... 54,249 216,329 (87,414)
Increase (decrease) in related-party payable.................... (12,558) 12,013 (5,462)
----------- ----------- -----------
Total adjustments.......................................... (1,690,517) (804,247) (18,000)
----------- ----------- -----------
Net cash used in operating activities...................... (1,398,773) (2,910,956) (1,414,761)
Cash flows from investing activities
Acquisitions of equipment, net.................................. (81,900) (77,299) (31,163)
Cash flows from financing activities
Proceeds from (repayments of) borrowings under short-term credit
facilities, net............................................... (131,595) 131,595 (861,937)
Proceeds from issuance of convertible 10% promissory notes...... 470,008 1,829,742 --
Proceeds from issuance of note payable.......................... -- 250,000 --
Repayment of note payable....................................... (250,000) -- --
Proceeds from issuance of note to related party................. 41,500 162,680 --
Repayment of note to related party.............................. (33,200) -- --
Issuance of common stock........................................ 775,417 1,477,001 2,139,500
----------- ----------- -----------
Net cash provided by financing activities.................. 872,130 3,851,018 1,277,563
Effect of exchange rate changes...................................... (84,655) (58,330) (4,652)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................. (693,198) 804,433 (173,013)
Cash and cash equivalents at beginning of year....................... 859,238 54,805 227,818
----------- ----------- -----------
Cash and cash equivalents at end of year............................. $ 166,040 $ 859,238 $ 54,805
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
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).
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, 1998, 1997 and 1996, the Company generated net income of approximately
$290,000 and net losses of approximately $2,107,000 and $1,397,000,
respectively. At June 30, 1998, the Company had an accumulated deficit of
approximately $6,841,000, has a net working capital deficiency of approximately
$4,400,000 and has approximately $2,300,000 of convertible promissory notes that
become due on September 30, 1998 (see Note 9). The Company subsequently
defaulted on the convertible promissory notes (See Note 12). Additionally, the
Company has had recurring negative cash flows from operations and currently has
a very limited client base. 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 will have to expend significant amounts of cash on
research and development in order to potentially produce revenues in the future,
and it anticipates the initial source of such funds to be derived from the
issuance of additional debt or equity securities. The issuance of any additional
securities would further dilute the current ownership structure. The Company
also intends to develop its infrastructure and organization to support its
enhanced operations as funds become available. However, there can be no
assurance that management will be successful in the implementation of its plans.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments convertible into
known amounts of cash with an original maturity when purchased of three months
or less.
F-7
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVESTMENTS
Investments consist of publicly traded stock of a U.S.-based company. This
stock was conveyed to the Company in partial payment of fees due under a
licensing agreement dated May 6, 1998 (see Note 3). In accordance with FASB
Statement No. 115, 'Accounting for Certain Investments in Debt and Equity
Securities,' these investments are accounted for as available for sale
securities. Consequently, the unrealized holding loss on these securities is
reported as a separate component of shareholders' equity. Upon the sale of the
underlying securities, the unrealized loss will be recognized in the statements
of operations.
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 5).
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 $-0-, $544,000, and $368,000 for the years ended June 30, 1998,
1997 and 1996, respectively.
Certain arrangements provide for the customer to pay a royalty or licensing
fee. Royalty fees are to be paid to the Company if the customer uses the
Company's work product in commercial applications. Royalty and licensing fees
earned by the Company in the year ended June 30, 1998, amounted to approximately
$4,170,000. In the years ended June 30, 1997 and 1996, 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.
F-8
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DEFERRED FINANCING COSTS
The costs attributable to the issuance of convertible promissory notes were
deferred and amortized over the term of the notes. The notes mature on July 1,
1998 (see Note 9), therefore, all deferred financing costs have been amortized
as of June 30, 1998.
DEFERRED REGISTRATION COSTS
Legal, accounting and other costs related to the Company's proposed
registration of shares (see Note 11) were capitalized as deferred registration
costs. These costs were expensed in fiscal 1998 when the Company chose to forgo
the registration of the stock.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at discovery of new knowledge
which will be useful in developing new products or processes, or significantly
enhancing existing products, and the implementation of such through design,
building and testing of prototypes. The Company expenses all research and
development costs as they are incurred.
NET INCOME (LOSS) PER SHARE
During the fiscal year ended June 30, 1998, the Company adopted 'Statement
of Financial Accounting Standards No. 128 -- Earnings Per Share' (SFAS 128),
which requires presentation of both basic and diluted earnings per share. Basic
earnings per share is based on the weighted average number of common shares
outstanding during each year. Diluted earnings per share is based on the sum of
the weighted average number of common shares outstanding plus common stock
equivalents arising out of stock options and convertible debt. Earnings per
share information for all periods have been restated to conform to the
requirements of SFAS 128.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the fiscal year
ended June 30, 1998:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income......................................................... $ 291,744 16,245,000 $0.02
---------
---------
Effect of Dilutive Securities
Common stock options............................................. 47,000
-------------
Diluted EPS
Net income plus assumed conversions................................ $ 291,744 16,292,000 $0.02
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
Options to purchase 1,562,500 shares of common stock were outstanding
during the fiscal year ended June 30, 1998, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire through
2001, were still outstanding at June 30, 1998.
Common share equivalents were not considered in the earnings per share
calculation for 1996 and 1997 because their effect would have been
anti-dilutive. As a result, both basic and diluted earnings per share for 1996
and 1997 were calculated based on 15,700,000 and 14,494,000 weighted average
common shares outstanding during the years, respectively.
F-9
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
TRANSLATION OF FOREIGN CURRENCY
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the cumulative translation adjustments account in shareholders' equity.
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 investments in publicly traded equity securities. 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 bank deposit accounts and believes that it is not exposed to any
significant credit risk on cash and cash equivalents. The Company's equity
security holdings consists of an investment in one company (see Note 3). As a
result, the Company has a significant credit risk related to its investment and
is subject to the concentrated market risk related to not having a diversified
portfolio. Volatility in the investment's stock price or low trading volume may
have a negative impact on the Company's financing position.
Financial instruments reflected in the Company's balance sheets at June 30,
1998 and 1997 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 4).
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 -- LICENSING AGREEMENT
On May 6, 1998, the Company entered into a licensing agreement with
American Interactive Media, Inc. (AIM), whereby the Company granted to AIM a
worldwide, non-exclusive license in respect of the MSU proprietary intellectual
property relating to the Internet Access Device. The consideration for the
license was $1,150,000 in cash and 560,000 restricted shares of common stock in
AIM, of which 60,000 shares were issued directly to Capital Bay Securities and
Daybreak Fund LLC in settlement of certain short-term funding received by the
Company of $314,985, together with accrued interest and other fees owing to
Capital Bay Securities and Daybreak Fund LLC.
NOTE 4 -- 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
F-10
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
RELATED-PARTY TRANSACTIONS -- (CONTINUED)
March 1994 agreement. As of June 30, 1998, the $1,400,000 remaining balance of
the advance remains unpaid. The advance is noninterest bearing, unsecured and is
due and payable, under the terms of the borrowing, when the Company is
reasonably able to do so without jeopardizing its financial condition.
The Company has received services from a law firm in which a director of
the Company is employed. Amounts charged to operations for these legal services
during the years ended June 30, 1998, 1997 and 1996, approximated $122,000,
$117,000, and $44,000, 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, 1998 and 1997, 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, 1998.
In September 1996, a trust in which a director has an interest loaned the
Company approximately $163,000 (see Note 9). 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 5 -- INCOME TAXES
As of June 30, 1998 and 1997, the Company had a U.S. net operating loss
carryforward of approximately $2,000,000 and $460,000, respectively, available
to offset future taxable income. The net operating loss carryforward expires
through the year 2011. 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 had a United Kingdom net
operating loss carryforward of approximately $6.0 million. Current year net
income from the Company's subsidiaries was approximately $1.8 million resulting
in a reduction of the net operating loss carryforward to approximately $4.2
million at June 30, 1998, 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 $1.3 million and $1.8 million at June 30,
1998 and 1997, respectively. The Company has established a valuation allowance
to fully offset these deferred tax assets, as their future realization is
uncertain.
F-11
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE 6 -- STOCKHOLDERS' DEFICIT
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 9).
During the year ended June 30, 1998, the Company issued, in private
transactions, an aggregate of 603,346 shares of common stock in exchange for net
proceeds of approximately $775,000. Of this amount, approximately $451,000 was
received in cash at the time of the transactions, and approximately $324,000 was
received as forgiveness of interest on certain notes payable.
NOTE 7 -- 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 9). In accordance with these agreements, the
Company has issued warrants to the placement agent for 10,000 shares of the
Company's common stock, exercisable from May 1997 to May 2000 at a price of
$3.00 per share and to the bridge loan noteholders for 60,000 shares of the
Company's common stock exercisable at $3.00 per share through January 2000.
In May 1997, the Company issued to a consultant a warrant to purchase up to
150,000 shares of the Company's restricted common stock at an exercise price of
$2.00 per share. No compensation expense was recorded for these options, as
management believes the restrictions associated with any shares
F-12
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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. During the year ended June 30,
1998, 10,000 of these options were canceled. The remaining options expire in
June 2002.
Pursuant to an employment agreement, in August 1997 and May 1998, the
Company granted options to a director to acquire an aggregate of 600,000 shares
of the Company's stock at exercise prices as follows: 300,000 options
exercisable at $2.25 per share and 300,000 options exercisable at $0.65 per
share. These options are exercisable as follows: options relating to 300,000
shares are exercisable in equal amounts in August 1998, 1999 and 2000, and
options relating to this other 300,000 shares are exercisable in equal amounts
in May 1998 and 1999. The options expire three years after their respective
dates of issuance.
In February 1998, the Company granted options to a director to acquire an
aggregate of 321,646 shares of the Company's stock at exercise prices ranging
from $1.75 to $0.65. These options are immediately exercisable and expire in
February 2003.
Compensation expense recorded for stock options granted in the years ended
June 30, 1998, 1997 and 1996, approximated $230,000, $-0- and $20,000,
respectively, and is included in selling, general and administrative expenses.
Activity related to the Company's stock options during the years ended June
30, 1996, 1997 and 1998, was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------------- --------------
<S> <C> <C>
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
Grants................................................ 1,121,646 $ 1.39
Exercises............................................. (37,000) $ 1.00
Cancellations......................................... (320,000) $ 2.18
----------------
June 30, 1998.............................................. 2,767,146 $ 1.86
----------------
----------------
Options exercisable at June 30, 1998.................. 2,272,146 $ 1.92
---------------- ------
---------------- ------
</TABLE>
F-13
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
The range of exercise prices for options outstanding at June 30, 1998 was
$0.65 to $5.00. The following table summarizes information about options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES LIFE (IN YEARS) EXERCISE PRICE
- ----------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
$0.65 to $2.50............................................. 2,387,146 3.9 $ 1.42
---------
$3.00 to $5.00............................................. 380,000 3.1 $ 4.66
---------
2,767,146 3.8 $ 1.86
---------
---------
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
---------------------------
WEIGHTED
NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------- --------- --------------
<S> <C> <C>
$0.65 to $2.50.............................................................. 1,912,146 $ 1.39
$3.00 to $5.00.............................................................. 360,000 $ 4.73
---------
2,272,146
---------
---------
</TABLE>
SFAS No. 123, 'Accounting for Stock-Based Compensation' (SFAS 123)
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 accounts for its options and warrants according to
APB No. 25 and follows the disclosure provisions of SFAS 123. Accordingly, if
options or warrants are granted to employees or others for services and other
consideration with an exercise price below the fair market value on the date of
the grant, the difference between the exercise price and the fair market value
is charged to operations. The fair value of the options granted during the
fiscal years ended June 30, 1998, 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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected life (in years)............................................... 5 5 5
Risk-free interest rate................................................ 6.5% 6.0% 6.0%
Volatility............................................................. 130% 135% 171%
Dividend yield......................................................... 0.0% 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.
F-14
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss......................................... $(1,310,000) $(3,430,000) $(1,406,000)
Pro forma loss per share................................... $ (0.08) $ (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 8 -- SHORT-TERM BORROWINGS
The Company has borrowed funds from time to time for working capital under
various credit facilities with its principal bank. These borrowings have
generally provided for interest on outstanding amounts at a rate of 3% above the
financial institution's prime rate. All such borrowings and bank overdrafts are
subject to the bank's discretion and are collateralized by a floating debenture
on substantially all of the assets of the Company and are payable on demand.
In July 1997, the Company repaid the $250,000 noninterest-bearing note
payable and issued to the holder thereof 25,000 shares of its restricted common
stock.
NOTE 9 -- 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 Notes 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 7).
In 1996 and 1998, the Company received loans in the amount of approximately
$163,000 and $8,000, respectively, from its employee trust (see Note 10). The
loans are unsecured, bear no interest, and have no defined terms for repayment.
Long-term debt consists of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<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................................................. $ 2,299,750 $1,829,742
Unsecured, noninterest-bearing note payable, no specified date for
repayment................................................................ 170,980 162,680
----------- ----------
2,470,730 1,992,422
Less current portion....................................................... (2,470,730) (162,680)
----------- ----------
Total long-term debt............................................. $ -- $1,829,742
----------- ----------
----------- ----------
</TABLE>
Capital Bay Securities, as agent for the noteholders, issued a Notice of
Default on the Company as interest had not been paid on the promissory notes on
the due dates. On May 6, 1998, the noteholders agreed that in consideration for
the issuance of 168,000 shares of common stock, representing interest through
July 31, 1998, the notes would not be declared in default at any time prior to
July 31, 1998 for
F-15
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
LONG TERM DEBT -- (CONTINUED)
any reason whatsoever. In August 1998, the noteholders agreed that in
consideration for a reduction of the conversion price to $0.75, they would
release all of their collateral security over the assets of the Company, except
for the security of the 500,000 shares of common stock of AIM, and extend the
period over which they would not declare the notes to be in default to
September 30, 1998 (which was subsequently extended through December 15, 1998)
(See Note 12). In the event that the noteholders do not elect to convert their
promissory notes into shares of common stock, there can be no guarantee that the
Company will have sufficient funds available to repay the promissory notes on
September 30, 1998.
Cash paid for interest was approximately $230,000, $26,000 and $45,000 for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under operating leases entered into during
1997 and 1998, which expire through March 2001. Future minimum rental payments
and service charges required under the leases at June 30, 1998, are
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
- --------------------------------------------------------------------------------------------- -------
<S> <C>
1999...................................................................................... $93,000
2000...................................................................................... $88,000
2001...................................................................................... $61,000
</TABLE>
For the years ended June 30, 1998, 1997 and 1996, rent expense totaled
approximately $68,000, $54,000 and $26,000, respectively.
EMPLOYMENT AGREEMENTS
The Company currently has employment agreements with four of its executive
officers requiring the payment of aggregate minimum annual salaries of
approximately $424,000.
CONCENTRATIONS
The Company has no customers to date that frequently and systematically
purchase its products or retain its services.
Revenues for the years ended June 30, 1998, 1997 and 1996 were generated
from a small number of customers, the loss of any one of which could have a
material adverse affect on the Company's business. In fiscal 1998, substantially
all of its revenues were derived from one transaction with one customer (see
Note 3).
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-16
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company's revenue, by geographic region, during the years ended June
30, were approximately as follows:
<TABLE>
<CAPTION>
LOCATION 1998 1997 1996
- ---------------------------------------------------------------- ---------- ---------- --------
<S> <C> <C> <C>
Europe.......................................................... $ 8,000 $ -- $110,000
Far East........................................................ -- 730,000 --
North America................................................... 4,171,000 750,000 280,000
---------- ---------- --------
$4,179,000 $1,480,000 $390,000
---------- ---------- --------
---------- ---------- --------
</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, 1998 and 1997, 2,591,944 and 2,914,444 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, 1998 and 1997, 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.
In December 1997, the Company received a complaint demanding approximately
$113,000 for unpaid public relations and consulting services. The Company has
filed an answer to the suit stating that the Plaintiff failed to fulfill its
contractual obligations and, accordingly, the Company is not liable for the
claimed damages.
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.
F-17
<PAGE>
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE 11 -- REGISTRATION OF SHARES
The Company intended 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 9) and to register 218,000 shares of
common stock to be sold by certain selling shareholders. In 1998, the Company
chose to withdraw the Registration Statement.
NOTE 12 -- SUBSEQUENT EVENTS
From July 1, 1998 to December 14, 1998, approximately $1,270,000 of
convertible notes and interest accrued thereon were exchanged for approximately
1,690,000 shares of restricted common stock. The Company intends to register
these shares by filing a Form S-1 prior to June 30, 1999.
In October and November 1998, the Company issued an aggregate of 2,000,000
shares of its restricted common stock for $1,000,000 consideration to persons
related to the Mclaughlin Group LLC. (a major shareholder of the Company). In
addition to these shares, the recipients have also been granted warrants to
purchase an additional 1,000,000 shares of common stock for $0.50 per share
through October 2003.
F-18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the financial
statements of MSU Corporation as at and for
the year ended June 30, 1998 and is qualified
in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 166,040
<SECURITIES> 2,218,500
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 245,451
<PP&E> 108,647
<DEPRECIATION> 84,544
<TOTAL-ASSETS> 2,572,598
<CURRENT-LIABILITIES> 4,646,122
<BONDS> 2,470,730
<COMMON> 165,902
0
0
<OTHER-SE> (2,239,426)
<TOTAL-LIABILITY-AND-EQUITY> 2,572,598
<SALES> 0
<TOTAL-REVENUES> 4,179,203
<CGS> 0
<TOTAL-COSTS> 7,796
<OTHER-EXPENSES> (3,587,445)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,706
<INCOME-PRETAX> 291,744
<INCOME-TAX> 0
<INCOME-CONTINUING> 291,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291,744
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0
</TABLE>
