<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 33-28622-A
------------
MSU Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 22-274288
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elder House, 526-528 Elder Gate,
Central Milton Keynes, MK9 1LR, England
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 441908232100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 X No .
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
As of September 30, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant, by reference to the closing price for such
stock as reported by Commodity Systems, Inc. through Yahoo! Finance, was
$52,388,994.
As of August 31, 1999, the registrant had issued and outstanding 25,240,748
shares of Common Stock.
<PAGE>
October 5, 1999
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS
ITEM 2 PROPERTIES
ITEM 3 LEGAL PROCEEDINGS
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5 MARKET 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
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
<PAGE>
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 Web 2 U Limited, formerly called MSU
(UK) Limited, ("Web 2 U 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, Web 2 U Limited
and MSU US. Unless otherwise stated, the information contained in this Annual
Report on Form 10-K is as of September 1999.
Exchange Rates
MSU PLC and Web 2 U 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:
Fiscal year ended At end of Average
June 30 period Rate(1) High(2) Low(2)
- -----------------------------------------------------------------------------
1995 .63 .63 .65 .61
1996 .65 .65 .64 .61
1997 .60 .62 .64 .59
1998 .60 .60 .62 .60
1999 .63 .61 .63 .60
(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.
<PAGE>
General Overview
The Company designs and develops computer chips and chipsets
principally for use in high volume consumer electronics products. Most of the
Company's chips can perform multiple functions, thereby eliminating the need for
multiple chips and permitting a more efficient printed circuit board design and
a diminished risk of malfunction and error 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. These 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.
To date, the Company has developed numerous consumer electronic
products on its own behalf and as a result of development contracts or
arrangements with manufacturers based in China, Taiwan, Germany, the United
States, Hong Kong and the United Kingdom. These contracts have typically
provided for the payment of development and/or license fees to the Company and
royalties on sales of products utilizing 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 were made in the year ended
June 30, 1998, but to date only about 15,000 devices have been shipped. In the
year ending June 30, 1999 no sales, other than a few samples, were made as the
Company concentrated its efforts on further software developments of its
proprietary Internet Access Device.
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 LLC 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 arrangements have been sold
and no royalties have been received. In most instances, the Company has no
control over a third party's manufacturing, marketing or purchasing decisions,
and accordingly there can be no assurance that any developed products will be
manufactured, marketed or sold. In fiscal 1998, the Company's revenues were
derived almost entirely from license fees. In fiscal 1999, apart from a very
small amount of income mostly derived from sample sales, the Company had no
income.
-2-
<PAGE>
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 prototype Internet Access Device and related ISP Chip
technology to IBM and IBM has advised the Company of its rejection of such
offer. The Company has not yet offered the Envoy Chip or the Wynpeg Chipset to
IBM.
Chip Technology
Slipstream Application Specified Integrated Circuit ("Slipstream ASIC
Chip"). The Slipstream ASIC Chip is a multi-function chip which provides
graphics capability and high quality sound for multimedia systems. The
Slipstream ASIC Chip incorporates (i) a video generator, that generates the
video signal from digital information; (ii) a graphics accelerator, that
controls memory and access to digital information allowing the manipulation and
control of images; and (iii) digital signal processors, that allow the
compression and decompression of data from CDs permitting the storage of massive
amounts of data necessary for the storage and retrieval of images. These
functions are typically achieved through the use of a group of chips in series.
Computer image creation begins with the creation of pixels. Pixels are
individual picture elements that make up a video display such as a computer or
television screen. Each pixel contains information that is defined by the signal
or program, such as a movie or video game, that it is displaying. The more
information that may be held in each unit, the sharper and the more defined the
image. As computer hardware is able to process the information in a signal or
program with greater speed, the information projected in each pixel may be
changed more quickly, creating an improved illusion of motion, animation and
shading of images on the computer screen. The Slipstream ASIC Chip generates and
processes the pixel information necessary for image creation and movement.
Because conventional computer discs and storage devices are unable to store
efficiently the additional amount of data necessary in each pixel and within
each time frame to generate images adequately, the Company's Slipstream ASIC
Chip makes use of CD technology and uses a CD interface and a graphics
accelerator for enhanced retrieval. The Slipstream ASIC Chip further enhances
retrieval from the CD using a digital signal processor that interfaces to a
digital-to-analog converter and makes use of the advanced CD compression
techniques. The signals are compressed to allow for more effective and efficient
storage. The Slipstream ASIC Chip also includes algorithms which eliminate
unimportant or redundant data so that storage space is not wasted.
-3-
<PAGE>
The Slipstream ASIC Chip-version 4.5 is available in silicon. The
Company's prototype generic (Video) CD Player is based upon the Slipstream ASIC
Chip. See "BUSINESS- Prototype Products."
Internet Services Processor ("ISP Chip"). The ISP Chip is a version of
the Slipstream ASIC Chip designed for use in Internet products such as the
Company's Internet Access Device, Web2u. 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 ISP3 Chip is
available in Silicon. The Company is in the early specification stages of
development of an ISP4.
For the ISP4, the Company plans to license an MPEG 11 core which will
provide a low cost solution to multi-media set top application focused on the
fast converging broadcast and telecommunications markets. In addition, the
Company currently anticipates that ISP4 will incorporate an advance Reduced
Instruction Set Processor ("RISP") which will not only improve product
performance dramatically but will remove the Company's reliance on third party
microprocessor suppliers, such as Intel and AMD, to further reduce the cost.
CD Services Chip ("Envoy Chip"). The Envoy Chip reduces the complexity
in compact disc drive systems and the cost of interfacing to compact disc drives
in both PC's and consumer CD products. The Envoy Chip replaces six chips
typically used within a CD mechanism. The three principal electronic components
of a compact disc player are the servo processor, signal processor and micro
controller. The Envoy Chip provides the servo, signal and control functions. The
Envoy Chip is also suitable for CD ROM applications as it can replace principal
components along the data path. The Envoy Chip is available in silicon.
M-Peg Chipsets ("Wynpeg Chipsets"). The Wynpeg Chipset incorporates the
Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group ("M-PEG"). M-PEG is an
international standards body that defined a world-wide standard for the
compression of video data called Philips White Book Video M-PEG Standard. The
Company's Wynpeg chipset is capable of decompressing video signals in accordance
with such standard. The Company intends to develop a version 2 of the Wynpeg
Chipset as part of the ISP program and the MPEG11 decoder to reduce the costs of
the set top box and enable development of cable ready boxes.
-4-
<PAGE>
Products
Generic (Video) CD Player. The prototype Generic CD Player, based on
the Slipstream ASIC Chip, is a multi media product capable of use as a video CD
player, audio CD player, and for a photo CD and Karaoke. This CD based multi
media product consists of a conventional CD player equipped with an internal
audio amplifier; a karaoke function which has the ability to run stereo sound
track and produce graphics on the screen with overlaying text for lyrics; and a
photo CD compatible with standard photo CDs and capable of supporting Kodak
multi session- photo CDs. The prototype Generic CD Player operates with a
standard television set.
The Company has 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, Web2u is
a low cost, easy to use, small set top device which provides access to the
Internet and on-line services via a telephone connection, standard television
set and a hand held remote control unit. A keyboard is available at an
additional cost to the consumer. Access to the Internet and on-line services is
conventionally via PCs, which represent both a cost and technology barrier to
many consumers. The most recent Internet Access Device is based on the ISP
Chip-version 2. It is anticipated that future 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 prototype Internet Access Device. The software enables
users to interact with the Internet via its e-mail and browser functions. During
the year ended June 30, 1999 significant software modifications to the Internet
Access Device were completed. It is possible for software updates to Internet
Access Devices sold and in use to 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"), Mitac and Shanghai Thakral Electronic Industries Corp.
("Thakral") for the development, manufacture and sale of customised Internet
Access Devices. During fiscal 1997 and 1998 approximately 15,000 devices were
manufactured and sold by Mitac, either to commercial customers or were purchased
from Mitac by the Company and sold as production samples to other potential
customers.
In 1999, 500 devices incorporating the latest software release were
manufactured by Thakral, many of which are currently being used as production
samples by a number of potential customers. A production order for a further
5,000 devices was placed by the Company with Thakral in August 1999.
No production samples have been approved by customers; however, the
Company has received no indication of any material problems with such samples.
There can be no assurance that the final production samples will be approved by
either of these two companies or any other third parties, that orders once
placed by a third party will not be cancelled, or that any products will be
manufactured or sold to any third party.
-5-
<PAGE>
The Company had an agreement with Mitac which granted 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 provided for a
royalty payment by Mitac in addition to sharing the profits from product sales.
The agreement was mutually rescinded during fiscal 1999, and the Company no
longer licenses to Mitac.
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.
The agreement with Thakral grants a non-exclusive license to Thakral to
manufacture and sell the Company's Internet access device using the ISP Chip
set, the related software and all related intellectual property. The agreement
provides for the sale by Thakral of the finished and packaged Internet access
devices to MSU and/or its OEM. MSU is to make payment for the supply of the
Internet access devices to it or its OEM customers by irrevocable letter of
credit in favor of Thakral price in the amount of each purchase order. MSU
agrees to supply Thakral with ISP Chip Sets at a fixed price per set during the
term of the agreement.
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.
-6-
<PAGE>
Strategy
The Company's strategy can be segmented into three specific areas:
people, processes, and products. The Company anticipates that this three-fold
focus will enable it to attack the Internet related products market
aggressively.
People
The early focus of the Company was driven more by product design than
by organizational structure. The Company has begun to reshape its organization
to make it function more in line with successful technology based companies. By
adding key members to its existing management team, intends to strengthen three
areas: overall management of the Company, product development and market
understanding and product positioning.
Process
Secondly, the Company is instituting critical processes around
management controls and product development. The Company believes that
management controls will enable it to clearly define its financial and
technology development targets. The Company also believes that formalized
product development processes will allow the Company to routinize its existing
product development process, leading to increased utilization of its innovation
resources.
Product
Finally, the Company has decided to focus its products around Internet
based communication devices. The strategy here is two-fold: firstly, to launch
the Company's next generation television set top Internet Access Device, and
secondly, to drive down the existing price level. The Company believes it has an
advantage in that it develops proprietary integrated chipsets which allow it to
reduce the number of standard chips, thereby, driving down the overall product
cost.
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 borrowing
from third parties, to the extent such sources of capital are available to the
Company. These sources of capital may not be available to the Company, which
would hamper the Company's progress and have a material adverse effect on its
financial condition.
-7-
<PAGE>
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. The Company may not be successful in
addressing any of the foregoing risks or in implementing its strategy. The
Company also may not achieve profitability or be able to continue as a going
concern. See Report of Independent Auditors and Company's financial statements
appearing elsewhere in this document.
Support Services
The Company has provided and will continue to provide consulting and
other development services pursuant to contracts entered into with consumer
electronic manufacturers and others. Company employees assist in, among other
matters, identifying trends in consumer preference and generating new product
ideas. The Company is involved in the development of software compatible with
certain of its products and intends to offer technical support to consumers of
its products and hardware and software engineers; however, such activities may
not result in profits to the Company.
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 Thakral
and the Envoy chip. The Company has no written agreement with United Micro
Corporation. See "BUSINESS 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, the Company
may not 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.
The Company has set up manufacturing with Thakral in China. Should this
not proceed, the Company would be adversely affected in the short term, although
there are other companies which can manufacture the Internet Access Device.
Thakral is a major Asian consumer company, and sales in China are only possible
with local manufacturing facilities.
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, 1997, 1998 and 1999, the Company expended approximately
$1.4 million, $1.4 million and $1.6 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.
-8-
<PAGE>
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. The Company may not be able to meet
any of these demands. Any material failure of the Company to meet any of these
demands would adversely affect the use and acceptance of the Company's chips and
chipsets and the introduction and sale of products using the Company's chips or
chipsets, and would increase the likelihood that competitive products would
become broadly accepted. There can be no assurance that the Company will
successfully anticipate technological changes or that products developed by
others will not render obsolete or commercially unviable the Company's chips and
chipsets and the products using such chips and chipsets.
Intellectual Property and Proprietary Rights
The Company's ability to compete successfully depends, in part, on its
ability to protect its intellectual property and proprietary technology in the
United Kingdom, the United States and other countries. The Company has no issued
patents, other than its pending patent with respect to its Envoy CD Controller
(see below), but relies on a combination of trade secret protection,
confidentiality agreements and licensing agreements with strategic partners,
employees, consultants, vendors and licensees. The Company believes that the two
dimensional design representation prepared for each of its chips is protected
under the UK Copyright, Designs and Patent Act of 1988, which requires no
registration with respect to such technology, and that the three dimensional
aspects of each of its chips, including the electronic routes in the silicon,
are protected under the UK Topography Rights. The Company believes that its chip
technology is entitled to comparable protection under the US Copyright Act of
1976 and the Semiconductor Chip Protection Act of 1984. Although the
Semiconductor Chip Protection Act does not require registration, the failure to
register results in the loss of benefits after the passage of two years from the
first commercial sale of a chip. The Company has not registered any of its chips
under such Act; however it intends to do so within the prescribed period. It is
the Company's belief that patents for ASIC Chip technology are rarely granted
because of rapid technology changes and the relative ease of designing around
such patents. Despite this, the Company filed patent applications in the United
Kingdom and the United States directed to the Slipstream ASIC Chip technology.
The Company elected not to continue with the prosecution of these applications,
due in large part to a lack of working capital, and the applications have been
abandoned.
A UK Patent application ( No.9706198.0 ) in respect of the Envoy CD
Controller was filed on March 25, 1997. It is the Company's intention to
complete the filing of the necessary information to support this application.
-9-
<PAGE>
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, any patent issued to the Company may be challenged, invalidated or
avoided by design-around efforts. The rights granted under any such patent may
not provide the desired competitive advantages to the Company. The Company's
competitors may independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies, or the
Company's patents may 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, while
commissioned by the Company for such purpose, remain the property of the
Company, unlike in the United States where an assignment of such rights from the
independent contractor would be necessary to attain ownership of all such
rights.
The Company has registered and/or applied for 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).
(iii) Web 2U (applications) in the United Kingdom (App. No. GB219254),
dated March 23, 1999, China (App. No. CN99000 4550), dated April 29, 1999,
European Union (App. No. EM1138221), dated April 10, 1999, Hong Kong (App. No.
HK99/04522, dated April 13, 1999, Japan (App. No. JP44644/99, dated May 24,
1999, Singapore (App. No. T99/038960), dated April 21, 1999, Taiwan (App. No.
TW88023575), dated May 18, 1999 and the United States (App. No. US75/694832),
dated April 30, 1999.
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 not later 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. Such common law rights
may be limited or invalidated by third parties.
-10-
<PAGE>
Employees
The Company has 20 employees, including four executive officers, two
business development personnel, twelve technical personnel and two
administrators. 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 and
Phillips 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
-11-
<PAGE>
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 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 Company also believes that Motorola, Inc., Sony
Corp. and Cirrus Logic Inc., may be developing chips competitive with the
Company's chips. Additionally numerous companies such as Web TV, ViewCall,
Oracle, Sun Mircosystems, Microsoft and IBM are involved in the development,
sale and/or provision of Internet access devices or alternative means of
-12-
<PAGE>
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, the Company may not be able to compete successfully
against its present competitors or potential competitors and such competition
may have a material adverse effect on the Company's business, financial
condition and 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 competitors 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.
The 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.
Variability of Operating Results
If the Company is able to generate significant revenues, the Company
expects that its operating results will fluctuate as a result of changes in
composition of its revenues, the occurrence and timing of new product
introductions, if any, by third parties that it develops products with, and the
Company's expenditures on research and development. Should the Company derive
revenue from sales of its chips and chipsets to and/or royalties or licence fees
from third parties, based on the sale of products utilizing the Company's chips
and chipsets, the Company's revenue will vary with demand for such products. Any
revenue may be affected by the seasonal nature of the market for consumer
electronics, multimedia and computer products. Such demand may increase or
decrease as a result of a number of factors that cannot be predicted and which
are not within the Company's control, such as consumer preferences and product
announcements by competitors.
-13-
<PAGE>
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, 1999, 1998, and 1997, which
states 'the Company has suffered, and continues to suffer, significant losses
from its operations, has an accumulated deficit, continues to have negative cash
flows from operations and currently has a very limited customer base. 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 minimizing 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 and balance of payments
position, among others. Only recently has the Chinese government encouraged
substantial private economic activities.
-14-
<PAGE>
In recent years, China's economy has registered a high growth rate from
time to time which can bring about an increase in the rate of inflation. In
response, the Chinese government has taken measures to curb the excessive
expansion of the economy. These measures can included devaluations of the
Chinese currency, the Renminbi, restrictions on the availability of
domestic credit and limited recentralization of the approval process for
purchase of some foreign products. There can be no assurance that austerity
measures taken by the Chinese government will succeed in slowing down the
economy's excessive expansion nor control inflation, or that they will not
result in severe dislocations in the Chinese economy in general. This could
drive up costs to manufacture the Company's Internet Access Device in China. 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 is 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 defense, 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.
-15-
<PAGE>
Volatility of Stock Prices
During the year ended June 30, 1998 the Company acquired an interest in
560,000 restricted 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
restricted 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. While 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. The AIM
stock has been pledged as collateral against $505,000 in promissory notes issued
by the Company in December 1998 and January 1999.
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, it intends to seek further
facilities.
(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. The action was subsequently
settled in January 1999 by the Company agreeing to issue to Forte 55,000 shares
of common stock for those services.
The Company has no access to a significant portion of its corporate
records, other than drafts and copies of certain documents, for the period from
approximately September 1994 through December 1995, making it difficult to
conclude that certain corporate matters were properly effected. The Company
believes matters were effected properly; however it cannot confirm this with
total certainty. The corporate records are currently in the possession of one of
the Company's former New York law firms which has refused, upon demand, to
release such records until amounts allegedly due such law firm are paid. The
Company disputes the amount allegedly due this firm based on the Company's
belief that it was billed for many matters that were not authorised by the
Company
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-16-
<PAGE>
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 OTC 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 OTC Bulletin Board. The Company's Bulletin
Board 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.
Range of Bid Information
-------------------------
High Low
---- ---
Fiscal Year ended June 30, 1999:
Quarter ended June 30, 1999 $ 7.12 $1.30
Quarter ended March 31, 1999 $ 2.94 $1.00
Quarter ended December 31, 1998 $ 1.56 $0.40
Quarter ended September 30, 1998 $ 1.56 $0.34
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
On August 31, 1999, there were approximately 297 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.
-17-
<PAGE>
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, 1999 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.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(in thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Total Revenue $ 32 $ 4,179 $ 1,480 $ 393 $ 1,596
Profit (Loss) from operations (3,496) 286 (2,113) (1,402) (882)
Net Profit (Loss) (9,685) 292 (2,107) (1,397) (878)
Basic profit (loss) per share (0.47) 0.02 (0.13) (0.10) (0.07)
Fully diluted profit(loss) per share (0.47) 0.02 (0.13) (0.10) (0.07)
Balance Sheet data (at year end):
Working Capital 1,521 (4,401) (1,556) (1,856) (2,662)
Total assets 3,341 2,573 2,086 164 363
Long term debt 505 -- 1,830 -- --
Shareholders' equity (deficit) 1,542 (2,074) (2,421) (1,816) (2,620)
</TABLE>
-18-
<PAGE>
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 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
The Company operates primarily through Web 2 U Limited (formerly, MSU
(UK) Limited) which is principally engaged in the design and development of
computer chips and chipsets mainly for use in high volume consumer electronic
products.
The consolidated financial statements include the accounts of MSU
Corporation, MSU PLC, Web 2 U 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, 1999 the Company incurred a net loss of approximately $9,685,000;
during the year ended June 30, 1998 a net profit of approximately $292,000 was
made and during the year ended June 30, 1997 a net loss of approximately
$2,107,000 was incurred. At June 30, 1999 there was an accumulated deficit of
approximately $16,526,000. Additionally, the Company has had recurring
negative cash flows from operations.
Through December 1998 and January 1999 the Company issued new
convertible promissory notes which are collateralized by 500,000 shares of
common stock in AIM. $505,000 of these promissory notes are convertible at any
time at a conversion price of $3.00 for each $3.00 of promissory notes held.
Conversion is to take place on or before December 2001. To the extent that the
loans are not converted they will be repayable at par in December 2001. Interest
is due on these notes at between 6% an 8% per annum and
-19-
<PAGE>
has been paid up to December 2001 through the issuance of shares of common stock
at a price of between $0.72 and $0.75 per share. 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 2000 as it attempts to further
develop, upgrade and market its products and to develop its infrastructure and
organization to support anticipated operations, including anticipated product
demand. The foregoing statement is a forward looking statement that involves
risks and uncertainties. The reader should be aware that the Company is likely
to incur net losses in fiscal 2000 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 realized. Such conditional and forecasted purchase
orders in respect of the Internet Access Devices assume, without limitation,
approval of final production samples by potential purchasers; acceptance by and
demand for the customised Internet Access Devices by consumers; satisfactory
product performance, including chip and software performance; 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 2000 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.
During the year ended June 30, 1999, significant software modifications
to the television set top Internet Access Device were completed, and the Company
announced the commencement of production samples of the latest 4 megabyte
version of the proprietary television set top box Internet Access Device
(recently named Web2u). The Company is continuing to develop the main component
of the television set top Internet Access Device, the ISP Chip, which will
provide enhanced internet features. In addition, the development of the
Company's Envoy chip is continuing, and the Company considers that commercial
sales could commence in fiscal 2000
The Company's strategy can be segmented into three specific areas:
people, processes and products. The Company anticipates that this three-fold
focus will enable it to attack aggressively the Internet related products
market.
-20-
<PAGE>
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 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. The Company may be unsuccessful in
addressing any of the foregoing risks or in implementing its strategy. The
Company may not achieve profitability or 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.
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, 1999, 1998 and 1997 were approximately $32,000, $4,179,000 and
$1,480,000, respectively. Comparison of revenues during the year ended June 30,
1999 with previous years is not meaningful as in fiscal 1999, apart from the
sales of a small number of samples, there was no revenue generated as the
Company continued to concentrate its efforts on further software and hardware
developments of its television set top Internet Access Device and the Envoy
chip. In fiscal 1998, the revenues derived almost entirely from the license fees
received from AIM. In fiscal 1997, the revenues derived principally from chip
sales, license and development fees, and royalty fees paid in connection with
the sale of customised Internet Access Devices. Typically the Company's
development arrangements also provide for royalties and/or license fees to be
paid to the Company if the customer sells products developed in conjunction with
the Company and/or incorporating the Company's proprietary technology. To date,
apart from the license fees and royalties receivable in 1998 from AIM, and in
1997 in connection with the sale of the Internet Access Devices, none of these
development arrangements has resulted in royalty or continuing license revenue
to the Company. The Company would be materially adversely effected if its
customers failed to manufacture, market or sell products developed in
conjunction with the Company.
During the years ended June 30, 1999, 1998 and 1997, the Company's
revenues were principally derived from none, one and four customers
respectively. Because of the concentration of its revenues in such a small
number of customers, the loss of one customer could have a material adverse
effect on the Company's business.
The Company's revenues by geographic region during the years ended June
30, 1999, 1998 and 1997 were approximately as follows:
Location 1999($) 1998($) 1997($)
- --------------------------------------------------------------------
Europe 2,000 8,000 --
Far East 17,000 -- 730,000
North America 13,000 4,171,000 750,000
-21-
<PAGE>
Revenues in 1998 increased by approximately 182% 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 1999
and 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, 1999, 1998 and 1997
were approximately $53,000, $8,000 and $651,000, respectively. Cost of sales in
the year ended June 30, 1999 mostly related to the direct production cost of
samples which have been expensed to the extent that the Company considers such
cost is not recoverable. As a percentage of revenues, cost of revenues were
approximately 168% in 1999, 0.2% in 1998 and 44% in 1997. 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%. The gross margin 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 were to Mitac and were
sold at cost (approximately $600,000).
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 television set top Internet
Access Device and specific research and development performed pursuant to
development arrangements with third parties. For the years ended June 30, 1999,
1998 and 1997, research and development costs (which exclude all overhead costs
other than employee, independent contractor, development tool and prototyping
costs, all of which have been expensed), were approximately $1,556,000,
$1,409,000 and $1,386,000, respectively. As a percentage of revenues, research
and development expenses were approximately 490% in 1999, 34% in 1998 and 94%
in 1997. 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 $1,700,000 per year.
Selling General and Administrative Expenses
Selling, general and administrative expenses were approximately
$1,686,000, $1,211,000 and $1,486,000 for the years ended June 30, 1999, 1998
and 1997, respectively. Selling general and administrative expenses consist 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
39% increase in such expenses in 1999 is primarily due to the non-recurring
costs of an external review of the Company's objectives and strategy and to the
consequent management re-organization of approximately $250,000. The 18%
decrease in such expenses in 1998 compared to 1997 is primarily due to a
reduction in personnel, marketing and promotional costs in that year during
which the Company was concentrating on the development of its products.
Non-Operating Income (Expense)
In 1999, the Company recorded an impairment loss on its investment of
approximately $2,500,000 in shares of AIM common stock, which declined in market
value, as the Company believes the decline in market value to be permanent.
Additionally, during 1999, the Company capitalized and immediately charged to
expense approximately $3,670,000 of discount associated with convertible note
issuances during fiscal 1999.
-22-
<PAGE>
Depreciation Expense
Depreciation expense was approximately $74,000, $50,000 and $44,000 for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Depreciation
is calculated using the straight line method over the estimated useful lives of
the Company's depreciable assets which consist principally of electronic
equipment used in the design and testing of the Company's products.
Interest Expense
Interest expense was approximately $158,000, $298,000 and $26,000 for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively. The interest
expense in 1999 is mainly attributable to interest on the $2.3 million 10%
convertible promissory notes issued in 1997 which were either converted or
repaid in fiscal 1999, together with interest on the 6% and 8% convertible
promissory notes issued in December 1998 and January 1999. 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.
Loan Cost Amortization and Registration Costs
In 1999, the Company received a late invoice for approximately $33,000
in printing costs incurred in respect of a Registration Statement which was
filed in 1997 and then withdrawn in 1998. The Company believes that a retention
for registration expenses which was made in June 1997 by the attorneys acting
for the 10% noteholders, together with other amounts held back in an Escrow
Account should be sufficient to cover this liability. However, as the Company
has not yet been able to satisfactorily ascertain the amount of funds still held
in the escrow account, as a matter of prudence, provision has been made for this
amount in the financial statements as part of selling, general and
administrative expenses.
Amortization 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.
-23-
<PAGE>
Liquidity and Capital Resources
The Company has financed its current operations primarily through
private sales of unregistered equity and debt securities.
For the year ending June 30, 1999, cash used in operating activities of
approximately $2,512,000 was primarily attributed to the Company's net loss for
the year of approximately $9,685,000. Cash flows from financing activities of
approximately $4,996,000 were mainly attributable to (i) the sale of new
convertible promissory notes of $3,670,000 in May 1999; which were converted
into common shares at $2.00 per share in June 1999; (ii) the sale of common
stock during the year for approximately $1,014,000; and (iii) the proceeds from
the sale of 6% and 8% secured convertible promissory notes for $505,000.
Capital expenditures were approximately $100,000 for fiscal 1999 which
mainly relates to the acquisition of electronic equipment. The Company currently
estimates that its capital expenditures for fiscal 2000 will be approximately
$1,000,000. The Company has no material commitments, other than two operating
leases for premises and three employment agreements.
As at June 30, 1999, the Company's principal source of liquidity was
approximately $2,600,000 in cash.
The Company believes that the cash flows expected to be generated by
operations through the remainder of fiscal 2000, together with its cash balances
at June 30, 1999, will be sufficient to meet a significant portion of its cash
needs for working capital and capital expenditures for the remainder of fiscal
2000. The preceding statement is a forward looking statement which assumes the
realization of revenue from conditional and forecasted purchase orders. Such
forward looking statement is subject to certain risks and uncertainties,
including but not limited to approval of final production samples of the Envoy
chip and customized Internet Access Devices by potential customers; acceptance
by and demand for such product by consumers; satisfactory product performance;
and the ability of such products to successfully compete in an extremely
competitive market place. To satisfy the balance of the Company's liquidity
requirements, the Company will attempt to sell additional equity or debt
securities and/or obtain additional credit facilities to the extent the Company
is able to do so, 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 a 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 the 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 continuing to assess 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
-24-
<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, Web 2 U Limited and MSU US Operations Inc.)
and their respective ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Wynford Peter Holloway 50 President, Chairman, Chief Executive
Officer and Director of the Company,
Chairman of MSU PLC and Web 2 U Limited,
and President of MSU US Operations Inc.
Jeremy Miles Simpson 65 Deputy Chairman and non-executive
Director of the Company
William Derek Snowdon 45 Secretary and Director of the Company,
Secretary of MSU PLC and Web 2 U
Limited, and a Director and Secretary of
MSU US Operations Inc.
Richard Horby Phillips 53 Principal Financial Officer and
Director of the Company, Director of
MSU PLC and Web 2 U Limited and a Director
and Treasurer of MSU US Operations Inc.
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 Web 2 U 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 Web 2 U 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 July 1, 1997. Mr. Simpson, who is a freeman of the
City of London, was executive chairman of Gordon Russell Plc., a UK publicly
quoted company, from 1986 to 1989, prior to the 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.
-25-
<PAGE>
William Derek Snowdon LLB has served as secretary and a director of the Company
since October 1994 and as secretary of MSU PLC and Web 2 U 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 was a partner with the firm of Phoenix Walters for 15 years before
moving to, and becoming a partner in, Hugh James Ford Simey, solicitors, in
1999. 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 Web 2 U 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
six other UK companies.
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.
-26-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation earned during the Company's last three fiscal years by the
Company's Chief Executive Officer and the Company's other executive officers
receiving in excess of $100,000 in total annual salary and bonus (collectively
the 'named executive officers"):
Summary Compensation Table
Annual compensation
<TABLE>
<CAPTION>
Other
Annual
Name and Principal Fiscal Salary Bonus Compensation
Position Year ($)(1) ($) ($)(2)
<S> <C> <C> <C> <C>
Wynford Peter
Holloway 1999 195,300(3) -- 38,604
1998 199,200 -- 35,778
1997 112,000 -- 29,000
*Keith Edward Peirson 1999 305,075(4) -- 28,376
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 Web 2 U Limited.
(2) Represents personal benefits in addition to salary. Of Mr. Holloway's
personal benefits; the 1997 amount is in respect of a car allowance; the
1998 amount represents $29,520 in respect of a car allowance and $6,258 in
respect of contributions to a personal retirement plan; and the 1999 amount
represents $29,295 in respect of a car allowance and $9,309 in respect of
contributions to a personal retirement plan. Mr. Peirson'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. His benefits in 1999 were
$17,903 in respect of a car allowance and $10,473 in respect of
contributions to a personal retirement plan
(3) At the date of this report $158,000 of the salary due to W P Holloway for
the years ended June 30, 1998 and June 30, 1999 had not been paid.
(4) Mr. Peirson resigned with effect from May 31, 1999 and his salary in the
above table includes $161,855 paid to him during the year ended June 30,
1999 as compensation for the cancellation of employment contract.
-27-
<PAGE>
Long Term Compensation
Other than in respect of the stock options, details of which are set
out elsewhere in this Form 10-K, there were no long term compensation awards or
payouts in any of the years ended June 30, 1999, 1998 or 1997.
Employment Agreements
In 1994, the Company entered into employment agreements with each of
Wynford Peter Holloway and William Snowdon providing for annual base salaries
(subject to annual increases within the discretion of the Board) of $189,600 and
$31,600, 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 contract with Mr. Holloway in each of the
years ended June 30, 1997, 1996 and 1995 which resulted in a reduction in his
annual minimum base salary of approximately $79,000 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 years ended June 30,
1998 and June 30, 1999 the full salary has been expensed for Mr. Holloway
although as at the date of this report on Form 10-K, $158,000 has not yet been
paid to him. On July 1, 1999 Mr. Snowdon's annual salary was increased to
$41,000 to recognize the additional time which Mr. Snowdon was having to devote
to the Company's affairs.
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,
receiving a salary at the annual rate of $30,000. On July 1, 1999, to recognize
the additional time which Mr. Phillips was having to devote to the Company's
affairs, this was increased $38,000 per annum.
-28-
<PAGE>
All of the above agreements with Messrs. Holloway, Snowdon and
Phillips, also provide for a car allowance or use of an automobile, including
reimbursement of any automobile expenses, and participation in bonus plans when
and if formulated by MSU PLC or Web 2 U Limited. The Company is also obligated
to provide private medical coverage and life insurance. For one year after
termination, the executives are restricted from holding a material interest in
any competitor, seeking or receiving orders for any products or services
produced or marketed by MSU PLC or Web 2 U Limited six months prior to
termination of the executive.
The agreements with Messrs. Holloway, Snowdon and Phillips each provide
for automatic termination once the employee reaches 65 years of age. The Company
has the right under each agreement to terminate the agreement immediately for
cause and then has the option to pay the employee his base salary for the
remainder of the term. Each agreement contains a non-competition clause,
restricting the employee from soliciting the Company's customers and employees
and from holding an interest in a competing firm.
Compensation of Directors
Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.
Stock Option Grant Table
The following table sets forth certain information concerning options
granted to the named executive officers during the company's fiscal year ended
June 30 1999
Options granted in Last Fiscal year
<TABLE>
<CAPTION>
Number of Percent of Potential Realisable Value
Securities Options Total at Assumed Annual Rate of
Underlying Granted to Market Stock Price Appreciation
Options Employees Exercise or Price on for Option Term
Granted in fiscal Base Price date of Expiration --------------------------------
Name Year ($ per share) Grant Date 0%($) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wynford 1,000,000 (note 1) 52.3% $0.50 $0.50 10/24/03 -- $638,141 $ 805,255
Peter 300,000 15,7% $0.65 $0.65 7/29/03 -- $248,875 $ 314,049
Holloway
Willam 125,000 (note 1) 6.5% $0.50 $0.50 10/24/03 -- $ 79,768 $ 100,657
Derek 150,000 7.8% $0.65 $0.65 7/29/03 -- $124,437 $ 157,025
Snowdon
Richard 50,000 2.6% $0.65 $0.65 7/29/03 -- $ 41,479 $ 52,342
Horby
Phillips
Jeremy 105,857 5.5% $0.35 $0.35 9/24/03 -- $ 47,286 $ 59,669
Miles
Simpson (note 3)
</TABLE>
(1) The stock options granted to Mr. Holloway and Mr. Snowdon on October 24,
1998 are compensation for the grant of a pledge of respectively 2,000,000
and 250,000 of their shares of common stock in the Company as part of the
security given to collateralize convertible promissory notes issued by
the Company during the year ended June 30, 1999.
(2) Of the stock options granted to Mr. Holloway, Mr. Snowdon and Mr. Phillips
on 29 July 1998, half were exercisable on the date of the grant and half
became exercisable on July 29, 1999 provided that they were still in the
employment of the company at that date.
(3) The stock options granted to Mr. Simpson were in consideration of his
making a loan of $33,200 to the Company in September 1998. In accordance
with the agreement with Mr. Simpson the loan was subsequently converted
into 95,857 shares of common stock of the Company.
(4) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the assumption that the Company's
common stock will appreciate in value from the date of the grant to the end
of the option term (five years from the date of the grant) at annualised
rates of 5% and 10% (total appreciation of approximately 28% and 61%),
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the common stock.
-29-
<PAGE>
Stock Option Exercises and Holdings Table
The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30, 1999. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1999
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options In-the-Money Options
Name at Fiscal Year End (#) at Fiscal Year End ($)(1)
- --------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wynford Peter
Holloway 1,570,000(2) -- 4,618,250 --
William Derek
Snowdon 395,000 -- 496,250 --
Richard Horby
Phillips 150,000 -- 336,750 --
Jeremy Miles
Simpson 490,003 -- 1,442,437 --
Keith Edward 350,000 -- 808,750 --
Peirson
</TABLE>
(1) Values stated are based on the average bid and ask prices of $3.875 per
share of the Company's common stock as reported by Bloomberg Financial Inc. on
June 30, 1999, 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.
-30-
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Company has no compensation committee. During fiscal 1999, all of
the Company's directors and executive officers participated in deliberations of
the Board of Directors concerning executive officer compensation.
Between October 1994 and March 1999, the law firm of Phoenix Walters
Solicitors regularly rendered legal services as counsel to the Company. W D
Snowdon, a director and executive officer of the Company, was a partner of
Phoenix Walters Solicitors until March 1999. The Company incurred $81,000 in
legal fees to Phoenix Walters during fiscal 1999.
Since April 1999, the law firm of Hugh James Ford Simey, 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 Hugh James Ford
Simey Solicitors. The Company incurred $34,000 in legal fees to Hugh James Ford
Simey during fiscal 1999.
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 fully effected by the Company and as
of September 1999 approximately $7,300 of 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 was represented by an unsecured interest free loan
payable to TXC Corporation at such time as the Company was reasonably able to do
so without jeopardizing its financial condition, and the balance was an equity
contribution. During the year ended June 30, 1999, 1,400,000 shares of common
stock were issued by the Company to TXC Corporation in full and final settlement
of this liability.
In June 1996, MSU Limited obtained a $76,000 credit facility from
National Westminster Bank Plc. The credit facility was collateralized 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 collateralized by a pledge of the pledgor's shares of Company
common stock. In consideration of the benefit derived by the Company as a result
of the guarantees provided by 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.
-31-
<PAGE>
In September 1996, an amount of approximately $160,000 was loaned to
the Company by the Employee Trust. This loan was unsecured, interest free with
no date fixed for repayment. During the year ended June 30, 1999, $18,250 was
repaid, and in September 1998, an additional $40,000 was loaned to the Company
on the same basis as above. In October 1998, the Company issued 322,500 shares
of common stock in consideration for the Trust foregiving $161,250 of the loan.
The conversion price of $0.50 was the market price at the date the agreement to
the conversion was made. An amount of $20,500 remained owing to the Employee
Trust at June 30, 1999.
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, which were due to
mature in February 1998. The Company's shares of its subsidiaries together with
235,000 shares of common stock of the Company owned by the Employee Trust were
pledged as collateral for the borrowings. 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 as of 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 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 prevailing on the date of agreement. The options are
exercisable in full commencing on December 25, 1997 and expire on June 24, 2002.
In December 1998, January 1999 and May 1999 the Company issued
collateralized convertible promissory notes. The collateral security included
pledges of over 2,000,000 shares of common stock in the Company owned by Mr.
Holloway and 250,000 shares owned by Mr. Snowdon. As consideration for the
benefit derived by the Company for the benefit of the provision of this
security, Mr. Holloway and Mr. Snowdon were granted options to acquire 1,000,000
shares and 125,000 shares, respectively, of the Company's common stock at an
exercise price of $0.50; being the market price of the shares of common stock in
the Company at the date of the agreement to provide such security. The options
are exercisable in full commencing on October 25, 1998 and expire on October 24,
2003.
In September 1998, J M Simpson made a loan to the Company of
approximately $33,200. In December 1998, Mr. Simpson exercised his right under
the loan agreement to convert the loan into 95,857 shares of common stock at the
market price prevailing on the date of the loan (September 25, 1998). In
addition, as further consideration for the loan, Mr. Simpson was granted an
option to subscribe for a further 105,857 shares of common stock at $0.35 per
share at any time up to September 24, 2003.
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.
-32-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of the date of this report
on Form 10-K, by (i) each person known by the Company to be the beneficial owner
of more than 5% of its common stock, (ii) each named executive officer of the
Company, (iii) each director of the Company, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
Shares Beneficially Percentage of Class
Name of Beneficial Owner Owned (see note 3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*Wynford Peter Holloway 6,692,777(1)(2)(3)(4)(5) 24.9%
*William Derek Snowdon 792,277(3)(4)(5) 3.1%
*Jeremy Miles Simpson 1,598,916(3)(4) 6.2%
*Richard Horby Phillips 150,000(3) 0.6%
*Fred Kashkooli (7)
Peter Brian Weber and
Vivian George Bines as
Trustees for the Employee Trust
48 The Parade, Cardiff CF2 3AB
England 3,014,444(2)(3) 11.9%
Mark McLaughlin and
McLaughlin Group LLC
13750 US 281 North #660
San Antonio Texas 78232 4,669,547(6) 17.7%
*All Directors and Executive
Officers as a group (5 persons) 9,233,970 34.8%
</TABLE>
(1) Mr. Holloway owns 2,208,333 shares of record. Pursuant to an unwritten
agreement and understanding, Mr. Holloway shares voting and dispositive
power with respect to the shares held by the Employee Trust.
(2) The Employee Trust constituted by a Trust Deed dated May 24, 1994 (of which
Wynford Peter Holloway was the Settlor), is in favor of all past, present
and future employees of MSU Limited and MSU PLC and any subsequent
companies and their spouses and children. No allocations under the Trust
have been made. Under the Trust Deed, and so long as Mr. Holloway is
living, his consent, as Settlor, is required for the appointment of
beneficiaries and the appointment of new trustees. The Trustees also have
the authority to delegate powers to Mr. Holloway. Pursuant to an unwritten
agreement and understanding, Mr. Holloway shares voting and dispositive
powers with respect to the shares held by the Employee Trust.
-33-
<PAGE>
(3) For the purpose of the above table, a person or group of persons is deemed
to have 'beneficial ownership' of any shares which such person has the
right to acquire within 60 days. For purposes of computing the percentage
of outstanding shares held by each person or group of persons named above,
any security which such person or group of such persons has the rights to
acquire within 60 days after such date is deemed to be outstanding for the
purpose of computing ownership for such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage of
ownership of any other person. Accordingly the above table includes the
following shares issuable pursuant to options which are now exercisable, or
are exercisable within 60 days hereof.
Name No. of Shares
------------------------------------------------------
Wynford Peter Holloway 1,470,000
William Derek Snowdon 395,000
Jeremy Miles Simpson 490,003
Peter Brian Weber and 100,000
Vivian George Bines
Richard Horby Phillips 150,000
(4) Excludes the following shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days)
Name No. of Shares
------------------------------------------------------
None
(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 and 376,000
shares issuable pursuant to a currently exercisable warrant to purchase
376,000 shares at $0.50 each
(7) Mr. Kashkooli was the beneficial holder of $24,000 10% Convertible Notes
which were repaid in the year ended June 30, 1999.
-34-
<PAGE>
ITEM 13. Certain Relationships And Related Transactions
In August 1996, Direct International Limited, a Taiwanese company,
loaned $300,000 to the Employee Trust. Such loan is collateralized by 250,000
shares of the Company's 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 by the Employee Trust. In September 1998, a further loan
advance of $40,000 was made to the Company, and during the year ended June 30,
1999, $18,250 was repaid. In October 1998, the Company issued 322,500 shares of
common stock in consideration for the Trust forgiving $161,250 of the loan. The
conversion price of $0.50 was the market price at the date the agreement to the
conversion was made. An amount of $20,500 remained owing to the Employee Trust
at June 30, 1999.
Effective January 30, 1996 and February 29, 1996, pursuant to a stock
purchase agreement, McLaughlin Group LLC acquired from the Company in private
transactions 800,000 and 800,000 shares, respectively, of the Company's common
stock for an aggregate purchase price of $1 million. McLaughlin Group LLC was
also granted certain demand and piggyback registration rights. The Company has
agreed to indemnify McLaughlin Group LLC against certain liabilities in
connection with any shares so registered.
On July 21, 1997, McLaughlin Group LLC was granted a warrant to
purchase 650,000 shares of the Company's common stock at an exercise price of
$1.00 per share, such right to expire on 20 July, 2002. In consideration for the
granting of this warrant McLaughlin Group LLC agreed to waive its rights under
the stock purchase agreement of January 30, 1996 whereby it had been granted (i)
a warrant to purchase such number of shares of 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 $1.0
million and was due to expire eighteen months after March 1, 1996; and (ii) the
right to acquire additional shares of capital stock upon issuance by the Company
of additional capital stock (except in certain specified cases) in order to
maintain the same proportion of voting power of the Company as is owned prior to
the issuance.
-35-
<PAGE>
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 an
agreement dated February 10, 1999 which terminated August 9, 1999.
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.
In November 1998, the Company sold in private transactions, 2,000,000
shares of its common stock for cash of $1,000,000. In addition the acquirors of
the shares were granted warrants entitling them to subscribe for a further
1,000,000 shares of common stock at $0.50 per share at any time up to October
2003. Mr. McLaughlin and parties related to Mr. McLaughlin were parties to the
above transactions as a result of which they acquired 752,000 shares of common
shares in the Company for $376,000 cash and warrants to subscribe for a further
376,000 shares of common stock at $0.50 per share.
In January 1999, McLaughlin Group LLC, who had purchased $330,560 of
the 10% convertible promissory notes from the original subscribers, exercised
their right of conversion in respect of these notes into 440,747 shares of
common stock in the Company at the conversion price of $0.75 per share.
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.
-36-
<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, 1998 and 1999
Consolidated Statements of Operations for the years ended June 30, 1997,
June 30, 1998 and June 30, 1999
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
years ended June 30, 1997. June 30, 1998 and June 30, 1999.
Consolidated Statements of Cash Flows for the years ended June 30, 1997 June 30,
1998 and June 30, 1999
Notes to Consolidated Financial Statements.
Financial Statement Schedules
- -----------------------------
None
Exhibits
- --------
2 Exchange Agreement among Capital Acquisition Company and the
shareholders of MSU PLC(3)
3.1 Articles of Incorporation(1)
3.2 Amendment to Articles of Incorporation(4)
3.3 Bylaws(1)
3.4 Amendment to Bylaws(2)
4.1 Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.2 Amendment to Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.3 Warrant issued to McLaughlin Group LLC(4)
10.1 Service Agreement with Wynford Peter Holloway(4)
10.2 Service Agreement with Keith Charles Hall(4)
10.3 Service Agreement with William Derek Snowdon(4)
10.4 Placement Agreement with Millport Limited as amended and confirmed(4)
10.5 Employee Trust(4)
10.6 Office Lease Agreement with Brixton Estates Plc.(4)
10.7 Manufacturing, Distribution and Joint Venture Agreement with 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)
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)
10.19 Advisory and Investment Banking Agreement, dated January 27, 1999 with
May Davis Group, Inc. (terminated)
-37-
<PAGE>
10.20 Agreement with Barry Jordan
10.21 Agreement with Thakral Electronics Industrial Corp. Limited
10.22 Consulting Agreement with McLaughlin Group (expired)
10.23 Agreement with HSBC
10.24 Form of 6% Convertible Secured Promissory Note
10.25 Form of 8% Convertible Secures Promissory Note
10.26 Form of 10% Convertible Promissory Note
16 Letter re change in certifying accountant from Coopers & Lybrand(4)
17 Subsidiaries of Registrant(5)
24 Power of attorney. Reference is made to the signature page of this report
27 Financial data schedule
(1) Contained in exhibits to the Registration Statement on Form S-18 (File No.
33-07861-A), declared effective by the Securities and Exchange Commission
on November 6, 1986.
(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
endFebruary 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
-38-
<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 October 13, 1999
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
<S> <C> <C>
/s/ Wynford Peter Holloway Chief Executive Officer October 13, 1999
- -------------------------- and Director (Principal
WYNFORD PETER HOLLOWAY Executive Officer
/s/ William Derek Snowdon Secretary and Director October 13, 1999
- --------------------------
WILLIAM DEREK SNOWDON
/s/ Richard Horby Phillips Director (Principal October 13, 1999
- -------------------------- Financial and Accounting
RICHARD HORBY PHILLIPS Officer
/s/ Jeremy Miles Simpson Director October 13, 1999
- -------------------------
JEREMY MILES SIMPSON
Director ___________, 1999
- -------------------------
FRED KASHKOOLI
</TABLE>
-39-
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1999, 1998 and 1997
<PAGE>
C O N T E N T S
--------
Page
Number
------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Shareholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<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, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 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,
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 30, 1999
F-1
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,604,504 $ 166,040
Accounts receivable 566 --
Inventory 39,500 --
Prepaid expenses and other 170,457 79,411
------------ ------------
TOTAL CURRENT ASSETS 2,815,027 245,451
EQUIPMENT, net of accumulated depreciation of $152,279
and $84,544 in 1999 and 1998, respectively 134,959 108,647
INVESTMENTS 390,625 2,218,500
------------ ------------
TOTAL ASSETS $ 3,340,611 $ 2,572,598
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of debt $ 75,000 $ 2,299,750
Shareholder advance payable -- 1,400,000
Accounts payable and accrued liabilities 1,032,947 767,711
Related-party notes, advances and payables 185,811 178,661
------------ ------------
TOTAL CURRENT LIABILITIES 1,293,758 4,646,122
LONG-TERM DEBT 505,000 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; 50,000,000 shares authorized; 25,364,262 and
16,590,237 shares issued and outstanding at
June 30, 1999 and 1998, respectively 253,642 165,902
Additional paid-in capital 17,854,174 5,287,790
Stock subscription receivable (148,750) --
Accumulated other comprehensive income (loss) 108,820 (686,454)
Accumulated deficit (16,526,033) (6,840,762)
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,541,853 (2,073,524)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 3,340,611 $ 2,572,598
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ 31,746 $ 4,179,203 $ 1,479,911
EXPENSES
Cost of revenues 53,374 7,796 650,790
Selling, general and administrative 1,686,286 1,211,334 1,485,577
Depreciation 74,082 49,556 43,709
Amortization of deferred financing and
registration costs -- 917,891 --
Interest expense 157,675 297,706 26,380
Research and development 1,555,918 1,408,664 1,386,340
------------ ------------ ------------
TOTAL EXPENSES 3,527,335 3,892,947 3,592,796
------------ ------------ ------------
OPERATING INCOME (LOSS) (3,495,589) 286,256 (2,112,885)
NON-OPERATING INCOME (EXPENSE)
Interest income 4,693 5,488 6,176
Amortization of discount on convertible notes (3,670,000) -- --
Impairment loss on carrying value of investments (2,524,375) -- --
------------ ------------ ------------
TOTAL NON-OPERATING INCOME (EXPENSE) (6,189,682) 5,488 6,176
------------ ------------ ------------
NET INCOME (LOSS) $ (9,685,271) $ 291,744 $ (2,106,709)
============ ============ ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (0.47) $ 0.02 $ (0.13)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,550,000 16,245,000 15,700,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Comprehensive $0.01 Par Value Additional Stock Comprehensive
Income --------------------- Paid-In Subscription Accumulated Income
(Loss) Shares Amount Capital Receivable Deficit (Loss)
----------- ---------- -------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 $ -- 15,534,722 $155,347 $ 2,984,081 $ -- $ (5,025,797) $ 70,651
Issuance of Common Shares -- 452,169 4,522 1,472,479 -- -- --
Translation Adjustments 24,050 -- -- -- -- -- 24,050
Net Loss (2,106,709) -- -- -- -- (2,106,709) --
----------- ---------- -------- ----------- --------- ------------ --------
Comprehensive Loss $(2,082,659) -- -- -- -- -- --
=========== ========== ======== =========== ========= ============ ========
Balance - June 30, 1997 $ -- 15,986,891 159,869 4,456,560 -- (7,132,506) 94,701
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 (84,655) -- -- -- -- -- (84,655)
Change In Market Value of
Investments Available for Sale (696,500) -- -- -- -- -- (696,500)
Net Income 291,744 -- -- -- -- 291,744 --
----------- ---------- -------- ----------- --------- ------------ --------
Comprehensive Loss $ (489,411) -- -- -- -- -- --
=========== ========== ======== =========== ========= ============ ========
Balance - June 30, 1998 $ -- 16,590,237 165,902 5,287,790 -- (6,840,762) (686,454)
Issuance of Common Shares -- 8,774,025 87,740 8,797,946 (148,750) -- --
Issuance of Options to Purchase
112,500 Shares of Common Stock -- -- -- 98,438 -- -- --
Translation Adjustments 98,774 -- -- -- -- -- 98,774
Reclassification of Change in
Market Value of Investments
Available for Sale to Account for
Permanent Impairment 696,500 -- -- -- -- -- 696,500
Charge for Discount on
Convertible Notes Issued -- -- -- 3,670,000 -- -- --
Net Loss (9,685,271) -- -- -- -- (9,685,271) --
----------- ---------- -------- ----------- --------- ------------ --------
Comprehensive Loss $(8,889,997) -- -- -- -- -- --
=========== ========== ======== =========== ========= ============ ========
Balance - June 30, 1999 -- 25,364,262 $253,642 $17,854,174 $(148,750) $(16,526,033) $108,820
</TABLE>
[RESTUBBED FROM ABOVE TABLE]
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
(Deficit)
-----------
<S> <C>
Balance - June 30, 1996 $(1,815,718)
Issuance of Common Shares 1,477,001
Translation Adjustments 24,050
Net Loss (2,106,709)
Comprehensive Loss --
-----------
Balance - June 30, 1997 (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)
Change In Market Value of
Investments Available for Sale (696,500)
Net Income 291,744
Comprehensive Loss --
-----------
Balance - June 30, 1998 (2,073,524)
Issuance of Common Shares 8,736,936
Issuance of Options to Purchase
112,500 Shares of Common Stock 98,438
Translation Adjustments 98,774
Reclassification of Change in
Market Value of Investments
Available for Sale to Account for
Permanent Impairment 696,500
Charge for Discount on
Convertible Notes Issued 3,670,000
Net Loss (9,685,271)
-----------
Comprehensive Loss --
-----------
Balance - June 30, 1999 $ 1,541,853
===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(9,685,271) $ 291,744 $(2,106,709)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation 74,082 49,556 43,709
Amortization of deferred costs -- 917,891 --
Amortization of discount on convertible notes 3,670,000 -- --
Impairment loss on carrying value of investments 2,524,375 -- --
Non-cash expense related to issuance of
stock purchase options 98,438 61,846 --
Issuance of stock for debt forgiveness, services
and settlements 172,213 -- --
Issuance of stock for relief of interest 153,049 -- --
Conversion loss on issuance of common stock under market 142,546 -- --
Non-cash revenue related to sale of license -- (2,915,000) --
(Increase) decrease in accounts receivable, net (566) 105,842 (93,495)
(Increase) decrease in inventories (40,749) 12,325 (12,325)
(Increase) decrease in prepaid expenses and other (87,737) 35,332 (970,478)
Increase in accounts payable and accrued liabilities 304,852 54,249 216,329
Increase (decrease) in related-party advances payable 163,000 (12,558) 12,013
----------- ----------- -----------
TOTAL ADJUSTMENTS 7,173,503 (1,690,517) (804,247)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,511,768) (1,398,773) (2,910,956)
=========== =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net (106,628) (81,900) (77,299)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings under
short-term credit facilities, net -- (131,595) 131,595
Proceeds from issuance of convertible promissory notes 4,175,000 470,008 1,829,742
Repayment of convertible promissory notes (326,939) -- --
Proceeds from issuance of note payable 75,000 -- 250,000
Repayment of note payable -- (250,000) --
Proceeds from issuance of note to related party 77,200 41,500 162,680
Repayment of note to related party (18,250) (33,200) --
Issuance of common stock 1,013,650 775,417 1,477,001
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,995,661 872,130 3,851,018
EFFECT OF EXCHANGE RATE CHANGES 61,199 (84,655) (58,330)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,438,464 (693,198) 804,433
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 166,040 859,238 54,805
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,604,504 $ 166,040 $ 859,238
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
MSU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1999, 1998 and 1997
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 Web 2 U
Limited, formerly MSU UK Limited.
MSU Corporation operates primarily through Web 2 U 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. The activity of MSU US Operations has not been
significant since its inception. 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., Web 2 U 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, 1999, 1998 and 1997, the Company
generated net income (losses) of approximately $(9,685,000),
$292,000 and $(2,107,000), respectively. At June 30, 1999, the
Company had an accumulated deficit of approximately $16,526,000.
Additionally, the Company has had recurring negative cash flows
from operations and currently has a very limited client base (see
Note 10). 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 and/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.
F-6
<PAGE>
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.
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, unless a
determination is made that the holding loss is other than
temporary. Upon the sale of the underlying securities, the
unrealized loss included in equity will be recognized in the
statements of operations. If the holding loss is determined to be
permanent, the loss is recognized in the year such a determination
is made.
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
generally 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
$544,000 for the year ended June 30, 1998. None of the
arrangements resulted in development fees or related support
service fees, in the years ended June 30, 1999 and 1997.
F-7
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Certain arrangements provide for the customer to pay a royalty or
licensing fee. 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, 1999 and 1997, none of the
arrangements resulted in royalty or licensing revenue to the
Company.
Revenue from the sale of chipset products to customers is
recognized at the time the products are shipped.
Deferred Financing Costs
The costs attributable to the issuance of certain convertible
promissory notes were deferred and amortized over the term of the
notes. The 10% convertible notes matured on July 1, 1998 (see Note
9), therefore, all deferred financing costs related to that
issuance had 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.
Common share equivalents were not considered in the earnings per
share calculation for 1999 and 1997 because their effect would
have been anti-dilutive. As a result, both basic and diluted
earnings per share for 1999 and 1997 were calculated based on
20,550,000 and 15,700,000 weighted average common shares
outstanding during the years, respectively.
F-8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income (Loss) Per Share (Continued)
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.
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.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires companies to report an additional
measure of income (loss) on the statements of operations or to
create a new financial statement that shows the new measure of
income (loss). Other comprehensive income (loss) includes foreign
currency translation gains and losses and unrealized gains and
losses on equity securities that are excluded from net income.
Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss).
Concentrations of 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
F-9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk and Fair Value of Financial
Instruments (Continued)
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 an adverse impact on the Company's
financial position.
Financial instruments reflected in the Company's balance sheets at
June 30, 1999 and 1998 include cash and cash equivalents,
subscription receivable, notes payable, and other borrowings. The
carrying amount of cash and cash equivalents, subscription
receivable, 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) and other borrowings.
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.
Reclassifications
Certain amounts in the June 30, 1998 financial statements have
been reclassified to conform to the June 30, 1999 presentation.
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. In fiscal 1999, the trading value of the
Company's investment in AIM declined significantly. The Company
determined the loss to be permanent and, accordingly, recognized
an impairment loss on carrying value of investments of
approximately $2,500,000 in the accompanying financial statements.
At June 30, 1999, the Company's investment serves as collateral
on certain borrowings (see Note 9).
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 March 1994 agreement. As
of June 30, 1998, the $1,400,000 remaining balance of the advance
remained unpaid. The advance was repaid by the Company in December
1998 through the issuance of 1,400,000 shares of restricted common
stock of the Company.
The Company has received services from law firms in which a
director of the Company was employed. Amounts charged to
operations for these legal services during the years ended June
30, 1999, 1998 and 1997, approximated $115,000, $122,000 and
$117,000, respectively.
F-10
<PAGE>
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 is to
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, 1999.
In September 1996, a trust in which a director has an interest
(the Employee Trust) loaned the Company approximately $163,000.
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. During the fiscal year
ended June 30, 1999, a further $40,000 was advanced on similar
terms, and approximately $18,000 was repaid in cash. In October
1998, approximately $161,000 of this note was repaid through the
issuance of 322,500 shares of restricted common stock of the
Company.
In September 1998, a director loaned the Company approximately
$33,000. The loan was unsecured, bore no interest, and had no
defined terms for repayment. As consideration for this, the
Company granted to the director an option over a five-year period
to subscribe for approximately 106,000 shares of the Company's
common stock with an exercise price of $0.35, being the market
value of the Company's common stock at the date of grant of the
options. During December 1998, this note was repaid through the
issuance of approximately 96,000 shares of restricted common stock
of the Company.
Amounts due under related party notes, advances and payables as of
June 30, 1999 and 1998, amounted to approximately $186,000 and
$179,000, respectively. The June 30, 1999 and 1998 balances
consist of primarily approximately $158,000, and $79,000 due to a
director for unpaid salaries and approximately $21,000 and
$171,000 due to the Employee Trust, respectively.
NOTE 5 - INCOME TAXES
As of June 30, 1999, 1998 and 1997, the Company had a U.S. net
operating loss carryforward of approximately $2.5 million, $2
million and $460,000, respectively, available to offset future
taxable income. The net operating loss carryforward expires
through the year 2019. Under U.S. federal tax laws, certain
changes in ownership of a company may cause a limitation on future
utilization of these loss carryforwards.
As of June 30, 1999, 1998 and 1997, the Company's subsidiaries had
a United Kingdom net operating loss carryforward of approximately
$7.2 million, $4.2 million and $6.0 million, respectively. Under
United Kingdom tax laws, operating losses carry forward
indefinitely.
Deferred tax assets resulting from the Company's United Kingdom
income tax loss carryforwards were approximately $2.1 million,
$1.3 million and $1.8 million at June 30, 1999, 1998 and 1997,
respectively. The Company has established a valuation allowance to
fully offset all deferred tax assets and carryforwards, as their
future realization is uncertain.
NOTE 6 - STOCKHOLDERS' DEFICIT
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 consideration 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
unregistered common stock in exchange for net consideration of
approximately $451,000 cash at the time of the transactions, and
approximately $324,000 as forgiveness of interest on certain notes
payable.
F-11
<PAGE>
During the year ended June 30, 1999, the Company issued, in
private transactions, an aggregate of 8,774,025 shares of
unregistered common stock in exchange for net consideration of
approximately $8,737,000. Approximately $1,021,000 was received in
cash for the issuance of 2,027,500 shares of common stock at the
time of the transactions. Stock subscriptions receivable in the
amount of approximately $149,000 relate to the issuance of 150,000
shares of common stock. Common stock representing 1,923,607 shares
was issued to various parties for settlement of approximately
$1,782,000 of certain advances, notes and settlements payable.
Accrued interest payable approximating $153,000 was relieved
through the issuance of 207,500 shares of common stock.
Convertible notes payable in the amount of approximately
$5,638,000 were converted into 4,465,418 shares of common stock
during the year ended June 30, 1999. Conversion cost of securities
issued below market during the fiscal year ended June 30, 1999
approximated $143,000, of which approximately $40,000 was as a
result of related-party transactions, and was recorded as
additional paid-in capital in the accompanying statements of
changes in shareholders' equity (deficit) (see Note 4).
NOTE 7 - STOCK OPTIONS AND WARRANTS
In connection with the private placement of 1,600,000 shares of
its common stock in 1996, the Company issued a warrant, which was
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 bridge 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 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 terms
are as follows: options relating to 25,000 shares were exercisable
on June 30, 1998; options relating to 25,000 shares were
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 common 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. Options relating
to 250,000 shares of common stock have expired due to the
director's termination of employment. The remaining options are
exercisable as follows: options relating to 200,000 shares are
exercisable in equal amounts in August 1998 and 1999, and options
relating to the remaining 150,000 shares became exercisable in May
1998. These options expire three years after their respective
dates of issuance.
F-12
<PAGE>
In February 1998, the Company granted options to a director to
acquire an aggregate of 321,646 shares of the Company's common
stock at exercise prices ranging from $1.75 to $0.65. These
options are immediately exercisable and expire in February 2003.
In July and August 1998, the Company granted options to ten of its
employees to acquire an aggregate of 88,000 shares of the
Company's common stock at an exercise price of $0.94 per share.
These options are exercisable in equal amounts in June 1999 and
2000. As of June 30, 1999, 11,500 of these options have lapsed due
to termination of the respective employees.
In August 1998, options to purchase 145,000 shares of the
Company's common stock were granted to an investment broker as
consideration to extend the due date for the payment of interest
on certain convertible promissory notes (see Note 9). These
options are exercisable immediately at an exercise price of $1.00.
In September 1998, the Company granted options to three directors
to acquire an aggregate of 500,000 shares of the Company's common
stock at an exercise price of $0.65. These options are exercisable
in equal amounts in September 1998 and 1999 and expire in
September 2003.
In connection with the private placement of 2,000,000 shares of
its common stock in November and December 1998, the Company issued
warrants, which are exercisable immediately, to purchase 1,000,000
shares of the Company's common stock for consideration of
$500,000.
As consideration for a loan to the Company in September 1998, a
director of the Company was granted options to purchase 105,857
shares of common stock at an exercise price of $0.35 per share.
These options are immediately exercisable and expire in September
2003.
In connection with the issuance of collateralized, convertible
promissory notes (see Note 9) in the fiscal year ended June 30,
1999, two directors of the Company offered as security for the
loan an aggregate of 2,250,000 shares of the Company's common
stock owned by the directors. As consideration for pledging the
collateral for the notes, the directors were granted options to
purchase an aggregate of 1,125,000 shares of common stock at an
exercise price of $0.50 per share. These options are immediately
exercisable and expire in November 2003.
In November 1998, the Company granted options to eight of its
employees to acquire an aggregate of 65,000 shares of the
Company's common stock at an exercise price of $0.75 per share.
These options are immediately exercisable. As of June 30, 1999,
25,000 of these options have lapsed due to termination of the
respective employees.
In January 1999, the Company issued options to a consultant to
purchase 25,000 shares of the Company's common stock at an
exercise price of $2.94 per share. These options are immediately
exercisable and expire in January 2004.
F-13
<PAGE>
NOTE 7 - STOCK OPTIONS AND WARRANTS (Continued)
In January 1999, the Company issued options to a consultant to
purchase 112,500 shsares of the Company's common stock to an
unrelated Company at an exercise price of $1.50 per share. These
options are immediately exercisable and expire in January 2004.
Compensation expense recorded for stock options granted in the
years ended June 30, 1999, 1998 and 1997, approximated $98,000,
$230,000, and $-0-, respectively, and is included in selling,
general and administrative expenses.
Activity related to the Company's stock options during the years
ended June 30, 1997, 1998 and 1999, was as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------
Weighted Average
Number of Shares Exercise Price
-------------------------- ----------------------------
<S> <C> <C>
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
Grants 3,166,357 $0.61
Exercises (172,500) $0.96
Cancellations (316,500) $1.54
--------------------------
June 30, 1999 5,444,503 $1.18
==========================
Options exercisable at June 30, 1999 5,031,253 $1.20
========================== ============================
</TABLE>
The range of exercise prices for options outstanding at June 30,
1999 was $0.35 to $5.00. The following table summarizes
information about options outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------------------------
Weighted
Number Average
of Contractual Weighted Average
Range of Exercise Prices Shares Life (in years) Exercise Price
------------------------------- ----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
$0.35 to $2.50 5,079,503 3.7 $0.93
$3.00 to $5.00 365,000 2.2 $4.71
-----------------------
5,444,503 3.6 $1.18
=======================
<CAPTION>
Exercisable Options
----------------------------------------------------------------------
Weighted Average
Range of Exercise Prices Number of Shares Exercise Price
------------------------------- ---------------------- -----------------------
<S> <C> <C>
$0.35 to $2.50 4,666,253 $0.93
$3.00 to $5.00 365,000 $4.71
----------------------
5,031,253 $1.20
======================
</TABLE>
F-14
<PAGE>
NOTE 7 - STOCK OPTIONS AND WARRANTS (Continued)
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, 1999, 1998 and 1997 reported below, has been estimated at the
dates of grant using the Black-Scholes option-pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Expected life (in years) 5 5 5
Risk-free interest rate 7.5% 6.5% 6.0%
Volatility 131% 130% 135%
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.
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 approximately as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Pro forma net loss $ (11,259,000) $ (1,310,000) $ (3,430,000)
Pro forma loss per share $(0.55) $(0.08) $(0.22)
</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, including 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. At June 30, 1999
and 1998, there were no borrowings outstanding under this
arrangement.
F-15
<PAGE>
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
old 10% Notes). Interest was payable quarterly and the old 10%
Notes matured July 1, 1998. The old 10% Notes were collateralized
by the assets of the Company and were originally convertible into
shares of the Company's common stock at a rate of one share of
common stock for each $3.00 of old 10% Notes principal converted.
Proceeds received by the Company, net of offering costs,
approximated $1,524,000. During the year ended June 30, 1998, the
Company issued an additional $470,000 of the old 10% 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).
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 any reason whatso-ever. 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. As of June 30, 1999, all of the 10%
convertible notes were paid or converted to shares of the
Company's common stock.
In December 1998, the Company issued $175,000 of 8% convertible
promissory notes (the 8% Notes). Interest was prepaid on the 8%
Notes through December 2001, with an issuance of approximately
58,000 shares of the Company's common stock. The 8% Notes are
collateralized by certain assets of the Company and two directors
(see Note 7), mature in December 2001, 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 the 8% Notes principal converted.
Proceeds received by the Company, net of offering costs,
approximated $156,000. 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.
In January 1999, the Company issued $330,000 of 6% convertible
promissory notes (the 6% Notes). Interest was prepaid on the 6%
Notes through December 2001, with an issuance of approximately
80,000 shares of the Company's common stock. The 6% Notes are
collateralized by certain assets of the Company and two directors
(see Note 7), mature in December 2001, 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 the 6% Notes principal converted.
Proceeds received by the Company, net of offering costs,
approximated $307,000. 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.
In May 1999, the Company issued $3,670,000 of new 10% convertible
promissory notes (the new 10% Notes). Interest was payable on
these Notes quarterly. The new 10% Notes were collateralized by
certain assets of the Company and two directors (see Note 7) and,
in June 1999, were converted into shares of the Company's common
stock at a rate of one share of common stock for each $2.00 of the
new 10% Notes principal converted. Proceeds received by the
Company from the issuance of the new 10% Notes, net of offering
costs, approximated $3,376,000 in cash and $160,000 in forgiveness
of non-convertible promissory notes. Since the conversion price of
these notes was below the market price of the Company's stock at
the date of issuance, a discount relating to this beneficial
conversion feature in the amount of $3,670,000 was recorded in the
year ended June 30, 1999. Due to the conversion of the new 10%
Notes, this discount was fully amortized as of June 30, 1999 and
appears in the accompanying statements of operations.
F-16
<PAGE>
The Company signed notes payable with three individuals in March
1999 for consideration of $235,000. Two of these notes were
subsequently paid by the issuance of $160,000 of new 10%
convertible notes to the respective noteholders. The note related
to the remaining $75,000 of principal outstanding at June 30,
1999, is unsecured and was due at June 30, 1999.
In 1999 and 1998, the Company received loans in the amount of
approximately $40,000 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, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<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 $0.75 of note principal converted $ - $ 2,299,750
Convertible 8% promissory notes, interest payable quarterly,
maturing December 2001, 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 175,000 -
Convertible 6% promissory notes, interest payable quarterly,
maturing December 2001, 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 330,000 -
Unsecured, noninterest-bearing notes payable, no specified
date for repayment 75,000 -
---------------- -----------------
580,000 2,299,750
Less current portion (75,000) (2,299,750)
---------------- -----------------
Total long-term debt $ 505,000 $ -
================ =================
</TABLE>
Maturities on long-term debt obligations are as follows:
Year Ending
June 30, Principal
------------------- -----------------
2000 $ 75,000
2001 $ -
2002 $ 505,000
Cash paid for interest was approximately $-0-, $230,000 and
$26,000 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
F-17
<PAGE>
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, 1999, are approximately as follows:
Year Ending
June 30, Amount
------------------- ---------------
2000 $ 88,000
2001 $ 61,000
For the years ended June 30, 1999, 1998 and 1997, rent expense
totaled approximately $115,000, $68,000 and $54,000, respectively.
Pension Plan
The Company has a defined contribution pension plan for the
benefit of its employees. The plan requires an employee
contribution of 2.5% of the employee's salary to participate and
fixes the employer contribution at 6.5% of the salary for all
participating employees. For each of the years ended June 30,
1999, 1998 and 1997, the Company made contributions of
approximately $54,000, $36,000 and $37,000 to the plan,
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 $279,000, along with certain
other benefits.
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, 1999, 1998 and 1997 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.
The Company's revenue, by geographical region, during the years
ended June 30, were approximately as follows:
<TABLE>
<CAPTION>
Location 1999 1998 1997
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Europe $ 2,000 $ 8,000 $ -
Far East 17,000 - 730,000
North America 13,000 4,171,000 750,000
----------------- ----------------- -----------------
$ 32,000 $ 4,179,000 $ 1,480,000
================= ================= =================
</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 does not believe that 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.
F-18
<PAGE>
Employee Trust
As of June 30, 1999 and 1998, 2,914,444 and 2,591,944 shares of
the Company's common stock were held by an employee trust (the
Trust), whose beneficiaries are substantially all of 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, 1999 and 1998, 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 filed an answer to the lawsuit stating that
the Plaintiff failed to fulfill its contractual obligations and,
accordingly, the Company believed it was not liable for the
claimed damages. In January 1999, this matter was settled by the
Company agreeing to issue to the complainant 55,000 shares of the
Company's common stock, resulting in settlement expense of
approximately $96,000.
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/or prospective
agreements. However, management continues to endeavor to obtain
adequate coverage, although no assurance can be given that
adequate insurance will be obtained.
Year 2000 Issues (Unaudited)
Because many computerized systems use only two digits to record
the year in date fields (for example, the year 1998 is recorded as
"98"), such systems may not be able to process dates accurately in
the year 2000 and after.
The Company's management has made efforts to determine the
possible effects of Year 2000 issues on its operations and is
implementing remedial actions. Management will also attempt to
determine if its significant customers, vendors and other third
parties upon which it relies have addressed or will be able to
address any affected systems on a timely basis. Management does
not expect the potential disruption from Year 2000 issues to have
a material effect on the Company's business operations, but the
outcome remains uncertain. The accompanying financial statements
contain no provision or adjustments related to the ultimate
outcome of this uncertainty.
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.
F-19
<PAGE>
ADVISORY AND INVESTMENT BANKING AGREEMENT
-----------------------------------------
This Agreement is made and entered into as of the 27th day of January, 1999
by and between May, Davis Group Inc., a New York corporation ("May Davis"), and
includes and not limited to MSU (UK) Ltd. and any and all affiliates ("the
Company") as defined under Securities Act of 1933.
In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages May Davis for the term specified in
Paragraph 2 hereof to render consulting advice to the Company as an investment
banker relating to financial and similar matters upon the terms and conditions
set forth herein.
2. Term: Except as otherwise specified in pargraph 4 hereof, this Agreement
shall be effective from January 1, 1999 to December 31, 2000 (two years). There
shall be an initial 6-month probationary period ("Initial Term") during which
either party could terminate if (i) relationship found to be unsatisfactory,
(ii) insolvency of either party, or (iii) if either party is acquired.
3. Duties of May Davis: During the term of this Agreement, May Davis shall
provide the Company with such regular and customary financial consulting advice
as is reasonably requested by the Company, provided the Consultant shall not be
required to undertake duties not reasonably within the scope of this Agreement.
It is understood and acknowledged by the parties that the value of May Davis's
advice is not readily quantifiable, and that although May Davis shall be
obligated to render the advice contemplated by this Agreement upon the
reasonable request of the Company, in good faith, May Davis shall not be
obligated to spend any specific amount of time in so doing. May Davis's duties
may include but will not necessarily be limited to, providing recommendations
concerning the following matters:
a. Rendering advice with regard to any of the following corporate
finance matters:
(i) changes in the capitalization of the Company;
(ii) changes in the Company's corporate structure;
(iii) redistribution of shareholdings of the Company's stock;
(iv) offerings of securities in public and private transactions;
(v) alternative uses of corporate assets;
(vi) structure and use of debt;
(vii) sales of stock by insiders pursuant to Rule 144 or otherwise;
(vii) counsel management with respect to listing on a National
Exchange; and
(ix) provide strategic plan for the company over the next two
years.
b. In addition to the foregoing, May Davis agrees to furnish advice to
the Company if requested in connection with (i) the acquisition of and/or merger
with other companies, the sale of the Company itself, or any of its assets,
subsidiaries or affiliates, or similar type of transaction (hereinafter referred
to as a "Transaction"), and (ii) financings from financial
<PAGE>
institutions, including but not limited to lines of credit, performance bonds,
letters of credit, loans or other financings (hereinafter referred to as a "Bank
Financing").
c. May Davis shall also render such other financial consulting and/or
investment banking services as may from time to time be agreed upon by May Davis
and the Company.
4. Compensation: The Company shall pay May Davis the following
compensation:
Upon execution of this Agreement, (and in addition to the expenses provided
for in Paragraph 5 hereof), the Company will reserve for May Davis 400,000
warrants exercisable for a period of five (5) years commencing one year from the
date hereof at an exercise price of $1.50 per share; the Company will issue such
warrants to May Davis upon the following basis: 112,500 upon execution of
Agreement, 37,500 at the conclusion of the Initial Term and remaining issued on
a quarterly basis over the remainder of the Term accruing monthly.
5. Expenses of May Davis: In addition to the fees payable hereunder, and
regardless of whether any transaction set forth in Paragraph 4 hereof is
proposed or consummated, the Company shall reimburse May Davis for all fees and
disbursements of May Davis' counsel and May Davis' travel and out-of-pocket
expenses incurred in connection with the Services performed by May Davis
pursuant to this Agreement, including without limitation, hotels, food and
associated expenses and long-distance telephone calls.
6. Liability of May Davis: The Company acknowledges that all opinions and
advice (written or oral) given by May Davis to the Company in connection with
May Davis's engagement are intended solely for the benefit and use of the
Company in considering the transaction to which they relate, and the Company
agrees that no person or entity other than the Company shall be entitled to make
use of or rely upon the advice of May Davis to be given hereunder, and no such
opinion or advice shall be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose, nor may the company make any public references to May Davis, or use May
Davis's name in any annual reports or any other reports or releases of the
Company without May Davis's prior written consent.
7. May Davis's Services to Others: The Company acknowledges that May Davis
or its affiliates are in the business of providing financial services and
consulting advice to others. Nothing herein contained shall be construed to
limit or restrict May Davis in conducting such business with respect to others,
or in rendering such advice to others.
8. Company Information:
a. The Company recognizes and confirms that, in advising the Company and
in fulfilling its engagement hereunder, May Davis will use and rely on data,
material and other information furnished to May Davis by the Company. The
company acknowledges and agrees that in performing its services under this
engagement, May Davis may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same.
b. Except as contemplated by the terms hereof or as required by
applicable law, May Davis shall keep confidential all material non-public
information provided to it by
2
<PAGE>
Company, and shall not disclose such information to any third party, other than
such of its employees and advisors as May Davis determines to have a need to
know.
9. Indemnification:
a. The Company shall indemnify and hold harmless against any and all
liabilities, claims, lawsuits, including any and all awards and/or judgments to
which it may become subject under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "Act") or any
other federal or state statute, at common law or otherwise, insofar as said
liabilities, claims and lawsuits (including awards and/or judgments) arise out
of or are in connection with the services rendered by May Davis or any
transactions in connection with this Agreement, except for any liabilities,
claims and lawsuits (including awards and/or judgments), arising out of acts or
omissions of May Davis. In addition, the Company shall also indemnify and hold
May Davis harmless against any and all costs and expenses, including reasonable
counsel fees, incurred or relating to the foregoing.
May Davis shall give the Company prompt notice of any such liability, claim
or lawsuit which May Davis contends is the subject matter of the Company's
indemnification and the Company thereupon shall be granted the right to take any
and all necessary and proper action, at its sole cost and expense, with respect
to such liability, claim and lawsuit, including the right to settle, compromise
and dispose of such liability, claim or lawsuit, excepting therefrom any and all
proceedings or hearing before any regulatory bodies and/or authorities.
May Davis shall indemnify and hold the Company harmless against any and all
liabilities, claims and lawsuits, including any and all awards and/or judgments
to which it may become subject under the 1933 Act, the Act or any other federal
or state statute, at common law or otherwise, insofar as said liabilities,
claims and lawsuits (including awards and/or judgments) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
required to be stated or necessary to make the statement therein, not
misleading, which statement or omission was made in reliance upon information
furnished in writing to the Company by or on behalf of May Davis for inclusion
in any registration statement or prospectus or any amendment or supplement
thereto in connection with any transaction to which this Agreement applies. In
addition, May Davis shall also indemnify and hold the Company harmless against
any and all costs and expenses, including reasonable counsel fees, incurred or
relating to the foregoing.
The Company shall give to May Davis prompt notice of any such liability,
claim or lawsuit which the Company contends is the subject matter of May
Davis's indemnification and May Davis thereupon shall be granted the right to
take any and all necessary and proper action, at its sole cost and expense, with
respect to such liability, claim and lawsuit, including the right to settle,
compromise or dispose of such liability, claim or lawsuit, excepting therefrom
any and all proceedings or hearings before any regulatory bodies and/or
authorities.
b. In order to provide for just and equitable contribution under the act
in any case in which (i) any person entitled to indemnification under this
Section 9 makes claim for indemnification pursuant hereto but it is judicially
determined (by the entry or a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 10, then, and in each such case, the
3
<PAGE>
Company and May Davis shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after any contribution from others)
in such proportion taking into consideration the relative benefits received by
each party from the offering covered by the prospectus with respect to any
transactions in connection with this Agreement (taking into account the position
of the proceeds of the offering realized by each), the parties' relative
knowledge and access to information concerning the matter with respect to which
the claim was assessed, the opportunity to correct and prevent any statement or
omission and other equitable considerations appropriate under the circumstances;
provided, however, that no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Within fifteen (15) days after receipt by any party to this Agreement
(or its representative) of notice of the commencement of any action, suit or
proceeding, such party will, if a claim for contribution in respect thereof is
to be made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to notify
the Contributing Party will not relieve it from any liability which it may have
to any other party other than for contribution hereunder. In case any such
action, suit or proceeding is brought against any party, and such party notifies
a Contributing Party or his or its representative of the commencement thereof
within the aforesaid fifteen (15) days, the Contributing Party will be entitled
to participate therein with the notifying party and any other Contributing Party
similarly notified. Any such contributing Party shall not be liable to any
party seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of the Contributing Party. The indemnification provisions contained in
this Section 10 are in addition to any other rights or remedies which either
party hereto may have with respect to the other or hereunder.
10. May Davis an Independent Contractor: May Davis shall perform its
services hereunder as an independent contractor and not as an employee of the
Company or an affiliate thereof. It is expressly understood and agreed to by the
parties hereto that May Davis shall have no authority to act for, represent or
bind the Company or any affiliate thereof in any manner, except as may be agreed
to expressly by the Company in writing from time to time.
11. Miscellaneous
(1) This Agreement between the Company and May Davis constitutes
the entire agreement and understanding of the parties hereto, and supersedes
any and all previous agreements and understandings, whether oral or written,
between the parties with respect to the matters set forth herein.
(2) Any notice or communication permitted or required hereunder
shall be in writing and shall be deemed sufficiently given if hand-delivered
or sent (i) postage prepaid by registered mail, return receipt requested, or
(ii) by facsimile, to the respective parties as set forth below, or to such
other address as either party may notify the other in writing.
If to the Company, to: MSU (UK) Ltd.
Elder House
526-528 Elder Gate
Central Milton Keynes MK 9 ILR
England
with a copy to: (attorney)
4
<PAGE>
If to May Davis, to: May, Davis Group Inc.
1 World Trade Center
New York, NY 10048
with a copy to: Jay Kaplowitz, Esq.
Gersten, Savage, Kaplowitz, Fredericks & Curtin
101 E. 52nd Street
New York, NY 10022
(3) This Agreement shall be binding upon and inure to the benefit
of each of the parties hereto and their respective successors, legal
representatives and assigns.
(4) This Agreement may be executed in any number of counterparts,
each of which together shall constitute one and the same original document.
(5) No provision of this Agreement may be amended, modified or
waived, except in a writing signed by all of the parties hereto.
(6) This Agreement shall be construed in accordance with and governed
by the laws of the State of New York, without giving effect to conflict of law
principles. The parties hereby agree that any dispute which may arise between
them arising out of or in connection with this Agreement shall be adjudicated
before a court located in New York City, and they hereby submit to the exclusive
jurisdiction of the courts of the State of New York located in New York, New
York and of the federal courts in the Southern District of New York with respect
to any action or legal proceeding commenced by any party, and irrevocably waive
any objection they now or hereafter may have respecting the venue of any such
action or proceeding brought in such a court or respecting the fact that such
court is an inconvenient forum, relating to or arising out of this Agreement,
and consent to the service of process in any such action or legal proceeding by
means of registered or certified mail, return receipt requested, in care of the
address set forth in Paragraph 11(b) hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
MAY, DAVIS GROUP INC.
By: /s/ Owen May
--------------------------------------------
Owen May, Chairman
MSU (UK) Ltd.
Elder House
526-528 Elder Gate
Central Milton Keynes MK 9 ILR
England
By:____________________________________________
5
<PAGE>
January 15, 1999
Mr. William D. Snowdon
Partner
Phoenix Walters Solicitors
48 The Parade Cardiff CF2 3AB
DX33019 - Cardiff
Dear Bill:
Per our discussions, this letter serves as a formal proposal for consulting
services to be provided by myself to MSU. As stated in a prior email, the terms
of the engagement are to be as follows:
Scope of Work:
Working with the management and staff of MSU (the Firm), its Board of Directors,
or other representatives I proposed to provide the following services:
1: Perform an assessment of the Firm's current capabilities
2: Assess the Firm's current technology and marketing strategy
3: Develop a 5 year strategic plan
4: Provide bi-weekly progress reports (3 in total)
5: Develop mechanism for tracking progress towards strategic plan and monitor on
a bi-monthly basis for 1st 12 months
Timing:
It is anticipated that this scope of work will take at minimum 6 weeks from the
time of commencement. The results of which will be presented to the Firm, it's
Board of Directors, or other representatives (including Mr. Owen May of the May
Davis Group).
Per our discussion I anticipate flying to the UK on Tuesday evening the 12th of
January to arrive on Wednesday morning for our kick-off. I will be in the UK
through Saturday evening the 16th.
Additional meetings in the UK will be at the sole discretion of MSU or the Board
of Directors. Other correspondences will be electronically or by telephone.
<PAGE>
Barry G. Jordan
January 15, 1999
Page 2
Compensation:
xxxxxxxxxxx xxxxxxxxxxx
o 25,000 shares of stock (144 restricted stock with piggyback rights).
o Options to purchase an additional 25,000 shares of stock. Note: Value of
purchase options to be stated as of the close of business on the
commencement of this engagement (1/13/99) with terms of purchase to extend up
to at least a 5 year period.
Expenses:
Expenses for this engagement shall be reimbursed as following:
Travel:
MSU shall provide airfare for my travel to the UK on the 12th with a return on
the 16th. Travel shall be from either the Newark or JFK airports. The tickets
should be at least business class.
Additional travel to the UK will be at the discretion of Firm. Future travel
will be covered under these terms. It is not anticipated that travel would be
required with the United States, unless requested by the Firm under these
conditions.
Lodging:
Hotel should be provided by the Firm, at its discretion.
Transportation:
Transportation should be provided by the firm while I am in the UK (including
travel r/t from the airport).
Additional Expenses:
Additional expenses for meals an other miscellaneous items will be submitted to
the Firm for repayment.
Expenses for items not listed shall be agreed to in advance by the Firm.
As I stated earlier, I am looking forward to working with you on this engagement
and look forward to meeting you next week. I will be forwarding you, under
separate cover, data and interview requests.
<PAGE>
Barry G. Jordan
January 15, 1999
Page 3
Please indicate your acceptance of these terms and conditions by signing below
on behalf of the Firm.
/s/ William D. Snowdon
- ------------------------
Signature
William D. Snowdon
- ------------------------
Printed Name
Company Secretary
- ------------------------
Relationship to the Firm
Sincerely,
/s/ Barry G. Jordan
---------------------
Barry G. Jordan
<PAGE>
THIS AGREEMENT is made the day of 1999
BETWEEN:
1. MSU (UK) Limited, a United Kingdom Company having its registered office at
Elder House, 526-528 Elder Gate, Milton Keynes, MK9 ILR, England ("MSU")
and
2. Shanghai Thakral Electronics Industrial Corp. Limited, 68, Chang Ping Road,
Shanghai 200041 PR of China ("Thakral").
RECITALS
(a) MSU is the owner of the Intellectual Property Rights in the ISP Chip Set and
the Product.
(b) MSU desires to purchase the Product from Thakral in a fully manufactured
form.
(c) MSU agrees to grant a license to Thakral on a non-exclusive basis to
manufacture the Product on behalf of MSU and its OEM customers.
(d) The Parties have agreed to enter into the commitments of this Agreement and
regulate their rights in the manner appearing below.
IT IS AGREED as follows:
1. Interpretation
1.1. "Intellectual Property Rights" (IPR's) shall mean industrial and
other rights in the Product and ISP Chip Set including but not
limited to copyright confidential information, patents and the
right to apply for patents, protected designs (whether registered
or not) semi conductor and topography rights and technical
know-how.
1.2. "ISP Chip Set" shall mean the MSU propriety Internet Services
Processor as described in the ISP Chip Set reference manual.
1.3. "Know-how" shall mean:-
1.3.1. Pre-production drawings for the Product;
1.3.2. Layout and other documents for manufacturing assembling
and testing the product;
1.3.3. Purchasing specifications for components of the Product
1.3.4. Test specifications for manufactured items;
1.3.5. Documents relating to installation, maintenance, factory
operation, data testing and training;
1.3.6. Drawing specifications and information for the manufacture
or procurement of all production tools, gauges, inspection
equipment and accessories required for the manufacture of
the Product;
1.3.7. Specifications of machine tools and accessories required
for the manufacture of the Product together with written
advice on their ordering selection and procurement;
1.3.8 Technical assistance and training in the implementation of
all the foregoing in accordance with an agreed detailed
program.
1.4. "Product" shall mean the MSU proprietary Internet Access Device
incorporating the ISP Chip Set and Software.
<PAGE>
1.5. "Selling Price" shall mean the bill of materials agreed with MSU
from time to time plus $10.00 United States Dollars.
1.6. "Software" shall mean MSU proprietary Internet Access Devise
software including Browser, E-Mail, printer driver and
enhancements.
1.7. "Technical Information" shall mean technical knowledge and data
specifications of materials and the manufacturing techniques and
other information of a secret and confidential nature in
existence at the date of this Agreement which are necessary to
enable THAKRAL to manufacture the Product properly and
efficiently in reasonable quantities of a standard and quality
required by this Agreement.
2. Commencement Date and Term
2.1. This Agreement shall be effective upon execution by the
authorised representative of both Parties on the date first above
shown.
2.2. The term of this Agreement shall be for an initial period of
eighteen months from the commencement date being the day of April
1999 and shall automatically renew for further periods of one
year unless three months prior notice in writing of termination
is given by either Party.
3. Grant of License
3.1. MSU hereby grants THAKRAL a non-exclusive license to make the
Product during the continuance of this Agreement using for this
purpose (but not further or otherwise) the ISP Chip Set the
Software the Intellectual Property Rights and the Know How.
3.2. Engagement by THAKRAL of manufacturing sub-contractors and agents
who will have access to Technical Information shall be subject to
the prior approval of MSU. Such approval shall not be
unreasonably withheld provided the provisions of Clause 3.3
herein are complied with.
3.3. THAKRAL shall ensure that all manufacturing sub-contractors and
agents who will have access to Technical Information shall enter
into direct covenants of confidentiality with MSU in the form of
the Confidentiality and Trust Agreement set out in Schedule A
hereto.
3.4. Subject to agreement as to terms MSU is prepared to enter into
negotiations for a further license to enable THAKRAL to make,
distribute and sell the Product itself or an behalf of THAKRAL's
OEM customers.
4. Improvements
4.1. It is anticipated that MSU will continue to develop the Product,
improvements arising from the developments carried on by MSU
shall remain it's exclusive property.
5. Manufacture (General)
5.1. It is the intention of the Parties that the Product will be
manufactured to the agreed specification (sufficient details of
which are to be provided to THAKRAL) by THAKRAL for the supply to
MSU and its OEM customers.
<PAGE>
5.2. THAKRAL may sub-contract the whole or any part of the
manufacturing process but always subject to Clause 3.2 and 3.3.
5.3. Suppliers and Subcontractors
5.3.1 THAKRAL shall use all necessary efforts to ensure that
any sub-contractor or manufacturing agent with access to
the Product, the ISP Chip Set, the Software, IPR's or
Technical Information will not motify, reverse, engineer,
decompile, and or disassemble the Product.
5.3.2. THAKRAL shall not mask, modify or suppress any copyright
notices or any other propriety right notices.
Furthermore THAKRAL shall not unload, decode or password
protect any part of the Product or render any part of the
Product to any third party for unauthorized use or
reverse engineering.
5.4. Technical Support
5.4.1. MSU shall support THAKRAL. MSU shall provide technical
support in relation to the Technical Information free of
charge provided that THAKRAL shall treat such information
as trade secrets and shall not disclose such
information to any third party within prior written
consent of MSU of pursuant to the terms of clause 3.3
above.
5.4.2. Upon MSU's request, THAKRAL shall return to MSU all of
the Technical Information provided with all copies or
duplicate documentation on the expiry or termination date
of this Agreement.
5.5. Supply of ISP Chip Set
5.5.1. MSU agrees to provide the ISP Chip Set to THAKRAL at [*]
US Dollars per set during the contract period. This may
be subject to re-negotiation according to volume.
6. Manufacture for MSU/OEM customers
6.1. THAKRAL shall undertake MSU to and/or to MSU OEM customers
reasonable obligations in relation to quality control.
6.2. MSU shall place all of its orders for manufacture of the Product
with THAKRAL subject only to quality, delivery and agreement as
to price
6.3. Payment and Price.
6.3.1. THAKRAL shall supply the product to MSU and its OEM
customers finished and packaged FOB Shanghai as defined
by Incoterms 1990 Edition, issued by the International
Chamber of Commerce at the Selling Price.
6.3.2. Payment. MSU shall make payment for supply of Product to
MSU or its OEM customers by irrevocable letter of credit
in favour of THAKRAL which shall be made in the amount of
each purchase order.
7. Confidentiality
7.1. Each party will enter into a Trust and Confidence Agreement in
the form set out in Schedule A regulating to the fullest extent
allowed by the law the respective responsibilities and duties
*The omitted information is confidential and is to be filed separately with the
Securities and Exchange Commission.
<PAGE>
of confidentiality governing the ISP Chip Set, the Software,
IPR's Know How and Technical Information, the subject of which
this Agreement.
7.2. THAKRAL undertakes to ensure that all employees, suppliers, sub-
contractors, sub-licensees and any other person or organisations
who it is reasonable to contemplate having access to the IPR's,
Know How or Technical Information will covenant directly with
MSU in the same terms as the Trust and Confidence Agreement.
8. Marks
8.1. It is anticipated that from time to time the Product will carry a
distinctive mark or logo together with an acknowledgement of MSU
design and ownership of rights. Such marks will be carried on the
packaging of the Product.
8.2. THAKRAL shall leave in position and not cover or erase any notice
or other marks (including without limitation details of patents
or trademark or copyright relating to the Product or its
ownership by MSU which MSU may reasonably insist are placed or
fixed to the Product or their packaging supplied pursuant to this
Agreement).
9. Interest
9.1. All sums due from either of the Parties to the other which are
not paid on the due date shall bear interest from day to day at
the annual rate of 1.5% (one point five percent) over the current
National Westminster Bank Plc daily base rate with a minimum of
7% (seven percent) per annum.
10. Warranty
10.1. THAKRAL warrants that the Product hardware will conform to the
agreed specification and will be free from all defects in
material (other than the ISP Chipset and any materials supplied
by MSU) and workmenship for a period of 14 months commencing from
the date of delivery to MSU or its OEM customers.
10.2. Provided MSU or its OEM customers notifies THAKRAL promptly in
writing of any defect or nonconformity, THAKRAL shall, at its own
expense, promptly repair or replace such defective Product in
THAKRAL facilities.
11. Indemnities
11.1. MSU shall indemnify and hold harmless THAKRAL against claim,
costs and expenses that THAKRAL may incur in connection with any
claim of infringement of any third party IPR's caused by or
arising out of the manufacture, importation, possession, sale or
use of the Product and in respect of claims arising out of any
defect in the ISP Chipset, Know-how, software and Technical
information. This indemnity shall include all costs and expenses
of refuting defending or settling any claims as well as any
damage or compensation ordered to any third party by any Court.
11.2. THAKRAL shall except to the extent that the claim is due to any
defect in the ISP Chipset, Know-how, software and Technical
information, fully indemnify and hold harmless MSU against any
<PAGE>
claims or actions bought by third parties against MSU due to
manufacturing defects in the Product. This indemnity shall
include all costs and expenses of refuting defending or settling
any claims as well as any damage or compensation ordered to any
third party by any Court.
11.3. THAKRAL shall have no liability and shall be fully and completely
indemnified by MSU for any claim or suit where:
11.3.1. Infringement is primarily attributable to THAKRAL's
incorporation of MSU supplied designs into the Product;
11.3.2. Such claim or suit would have been avoided but for the
combination, operation or use of the Product with
devices, parts or software not supplied by THAKRAL or is
subcontractors;
11.3.3. Such claim or suit would have been avoided but for the
modification or alteration of the Product by MSU or a
third party.
12. Termination
12.1. Notwithstanding the provisions of clause 2, either party may be
notice in writing to the other terminate this Agreement
immediately upon the happening of any one of the following
events;
12.1.1. If either party shall become bankrupt or be wound up or
make any arrangement or composition with its creditors.
12.1.2. If THAKRAL attempts or purports to assign or transfer
this Agreement without MSU's prior written consent.
12.1.3. If either Party's ability to carry out its obligations
hereunder is prevented or substantially interfered with
for any reason whatsover (whether or not within the
control of the Party) including without limitation by
reason of any regulation, law, decree or any act of state
or other action of a government.
13. Limitation of Liabilities
13.1. Force Majeure. Neither party shall be liable to the other for any
delay, loss, damage or injury caused by acts of God, governmental
order or regulation, restraining imposed by governmental action,
national strikes, commotion, riots, war, war like situations,
hostilities, governmental disposal, mobilisation, blockage,
embargo, custody, revolution, fire, earthquake, tornado,
explosion, storm, flood or for any other cause beyond its
reasonable control (hereinafter referred to as Force Majeure).
13.1.1. Notification of such delay arising solely from
circumstances attributable to the Force Majeure shall be
given as soon as possible and followed in writing to the
other party within seven days of the occurrence of such
an event.
13.1.2. Should any failure of performance persist for more than
twenty eight days MSU may by written notice to THAKRAL
forthwith cancel the particular order or part thereof of
effected and such cancellation shall be without any
liability on the part of MSU to pay for any costs or
cancellation charge arising from such cancellation.
<PAGE>
13.2. If any section or subsection of this Agreement is found by
competent authority to be void, voidable, illegal or otherwise
unenforceable, the remaining provisions of this Agreement shall
remain in full force and effect.
13.3. No agency or Partnership. The Parties are not partners or joint
ventures nor is one Party entitled to act as the agent of the
other (unless specifically authorized in writing) nor shall
either Party be liable in respect of any representation, act or
omission of the other Party whatever nature.
13.4. Whole Agreement. This Agreement contains the whole agreement
between the Parties and supersedes any prior written or oral
agreements between them in relation to its subject matter and the
Parties confirm that they have not entered into this Agreement on
the basis of any representations that are not expressly
incorporated into this Agreement.
13.5. No Modification. This Agreement may not be modified except by an
instrument in writing signed by both of the Parties of their duly
authorized representatives.
13.6. Survival of Terms. The warranties an indemnities and obligations
of confidentiality contained in this Agreement and the provision
for payment of any accounting in respect of continuing fees and
other sums due to either party under this Agreement shall survive
the termination or expiry of this Agreement.
13.7. Governing Law. Where either Party has any complaint of the other
under this Agreement it may at it's option commence proceedings
in any Court of competent jurisdiction in either London or
Shanghai.
Signed__________________________ Signed__________________________
AUTHORIZED REPRESENTATIVE AUTHORIZED REPRESENTATIVE
OF MSU (UK) LIMITED OF SHANGHAI THAKRAL
ELECTRONICS INDUSTRIAL
CORP. LIMITED
<PAGE>
SCHEDULE A
TRUST AND CONFIDENCE AGREEMENT
This Trust and Confidence Agreement is made the day 199_
B E T W E E N
B E T W E E N:
1. MSU (UK) Limited whose registered office is at Elder House, 526-528 Elder
Gate, Milton Keynes, MK9 ILR, United Kingdom ("MSU")
2. Shanghai Thakral Electronics Industrial Corp., Limited a corporation
organised under the laws of PR of China whose principal place of business
is at 68, Chang Ping Road, Shanghai 200041 PR of China ("the Recipient").
RECITALS
(a) MSU has developed a product for accessing the Internet incorporating its
Proprietary Internet Services Processor, Chip Set, and Software ("the
Product") and is the owner of confidential information relating to the
Product and of intellectual property rights therein.
(b) To enable the Recipient to evaluate the Product with a view to taking a
license to either:
(i) component supply, or;
(ii) manufacture, and/or;
(iii) sell the same
MSU is willing to disclose information relating to the Product to the
Recipient under conditions of confidentiality.
OPERATIVE PROVISIONS
1. Interpretation
1.1. For the purposes of this Agreement Proprietary Information means any
and all information which is now or at any time hereafter in the
possession of MSU and which relates to the Product, including without
limitation data, know-how, formula, processes, designs, photographs,
drawings, specifications, software programs and samples and any other
material bearing or incorporating any information relating to the
Product.
2. Undertakings of the Recipient
2.1. In consideration of MSU disclosing information relating to the Product
to the Recipient, the Recipient hereby undertakes:
2.1.1. to use all Proprietary Information so disclosed exclusively for
the purpose of evaluation or any license granted in respect of
the Product, and;
2.1.2. to maintain confidential all Proprietary Information that it
may acquire in any manner;
<PAGE>
and it will accordingly not directly or indirectly use or
disclose any of the Proprietary Information in whole or in part
save for the purpose of and in accordance with this Agreement
3. Exceptions
3.1. The foregoing restrictions on the Recipient shall not apply to any
Proprietary Information which:
3.1.1. the Recipient can prove by documentary evidence produced to
MSU within 28 days of disclosure that such Proprietary
Information was already in the possession of the Recipient and
at its free disposal before the disclosure to the Recipient;
3.1.2. is hereafter disclosed to the Recipient without any
obligations of confidence by a third party who has not derived
it directly or indirectly from MSU;
3.1.3. is or becomes generally available to the public in printed
publications in general circulation through no act or default
on the part of the Recipient or the Recipient's agents or
employees.
4. Inclusion
4.1. Without prejudice to the generality of clause 3.1.3 information shall
not be deemed to be generally available to the public by reason only
that it is known to only a few of those people to whom it might be of
commercial interest, and a combination of two or more portions of the
Proprietary Information shall not be deemed to be generally available
to the public by reason only of each separation being so available.
5. Confidentiality measures
5.1. To secure the confidentiality attaching to the Proprietary
Information the Recipient shall:
5.1.1. keep separate all Proprietary Information and all information
generated by the Recipient based thereon from all documents
and other records of the Recipient;
5.1.2. keep all documents and other material bearing or incorporating
any of the Proprietary Information at the usual place
business of the Recipient, namely
5.1.3. not use, reproduce, transform, or store any of the Proprietary
Information in any externally accessible computer or electronic
information retrieval system or transmit it in any form or by
any means whatsoever outside of its usual place of business;
5.1.4. allow access to the proprietary exclusively to those
employees of the Recipient who have reasonable need to see and
use it for the purposes of its evaluation by the Recipient and
shall inform each of the said employees of the confidential
nature of the Proprietary Information and of the obligations
on the Recipient in respect thereof;
5.1.5. wherever reasonably practicable obtain a written statement
from each of its employees having access to the Proprietary
Information undertaking to maintain the same confidential and
<PAGE>
shall take such steps as may be reasonably desirable to
enforce such obligations.
5.1.6. make copies of the Proprietary Information only to the extent
that the same is strictly required for the purposes of any
licence granted to the Recipient;
5.1.7. on request of MSU made at any time shall deliver up to MSU all
documents and other material in the possession, custody or
control of the Recipient that bear or incorporate any part of
the Proprietary Information.
6. Governing Law
6.1. The construction validity and performance of this Agreement shall be
governed by English Law.
SIGNED _____________________________________________________
SHANGHAI THAKRAL ELECTRONICS INDUSTRIAL CORP. LIMITED
SIGNED _____________________________________________________
MSU (UK) LIMITED
<PAGE>
DATED 10th FEBRUARY 1999
- --------------------------------------
(1) MSU (UK) LIMITED
(2) MCLAUGHLIN INTERNATIONAL
CONSULTANCY AGREEMENT
PHOENIX WALTERS
CARDIFF UNITED KINGDOM
WDS/MSU/1M78013
<PAGE>
CONTENTS
--------
PARTIES
- -------
CLAUSES
- -------
1. Interpretation
2. Consultancy Services
3. Duration
4. Consultant's Obligations
5. Fee
6. Expenses
7. Termination
8. Confidential Information
9. Tax Liabilities
10. Entire Agreement
11. Notices
12. Governing Law Jurisdiction and Service of Process
13. Restriction of Assignment
<PAGE>
THIS AGREEMENT is made 10th February 1999
PARTIES
- -------
(1) MSU (UK) LIMITED whose registered office is at 526-528 Elder House Elder
Gate Milton Keynes United Kingdom MK9 1LR ("the Company")
(2) McLaughlin International of 13750 US 281 North Suite 660 San Antonio Texas
78232 United States of America ("the Consultant")
AGREEMENT
- ---------
1. INTERPRETATION
--------------
In this Agreement:
1.1 The following words and expressions shall have the following meanings:
"the Commencement Date" 10th February 1999
"Services" the services to be provided by the
Consultant to the Company set out in the
Schedule to this Agreement
"the Territory" the United States of America or such
other countries as shall time to time be
agreed in writing
1
<PAGE>
2. CONSULTANCY SERVICES
--------------------
The Company engages the Consultant to provide the Services to the Company and
the Consultant agrees to provide the Services upon the terms and conditons set
out in this Agreement
2. DURATION
--------
This Agreement shall commence on the Commencement Date and subject to the
provisions of clause 7 shall be for an initial term of 6 months terminating on
the 9th August 1999. The Company may at its option extend the term of this
agreement for a further term from 9th August 1999.
4. CONSULTANT'S OBLIGATIONS
------------------------
4.1 During the period of this Agreement the Consultant shall make himself or his
staff available to the Company and devote such of his time attention and
abilities to the Company's business for such periods during each week of
this Agreement as may be necessary to fulfil his obligations in the
Territory
4.2 The Consultant shall perform his obligations and provide the Services with
reasonable skill and care
5. FEE
---
In consideration of the Services to be rendered by the Consultant the Company
shall pay to the Consulant:-
5.1 a monthly fee of $7,500.00 per month payable monthly in arrears to be paid
within 14 days of delivery of the Consultant's invoice therefor
2
<PAGE>
5.2 by way of further consideration to issue upon execution of this agreement
100,000 warrants of MSU Corporation Common Stock exercisable at $1.50 for
a term of 5 years from the Commencement Date. In the event of the Company
electing an extension of the Term for a second period of 6 months pursuant
to cl 3 above the Consultant shall be entitled to receive a further
100,000 warrants of MSU Corporation Common Stock exercisable at $1.50 for
a term of 5 years from the Commencement Date.
5.3 In the event of the Company electing to extend the Term for a period in
excess of one year for any reason then the Consultant shall be entitled to
exercise any further warrants at a price of $1.50
6. EXPENSES
--------
The Company shall reimburse to the Consultant all travelling and other out of
pocket expenses reasonably incurred by him in the proper provision of the
Services provided that on request the Consultant shall provide the Company with
such vouchers or other evidence of actual payment of such expenses that the
Company may reasonably require. All expenses incurred in excess of $1000.00 in
respect of any single item or $3000.00 cumulatively in any one month period
shall require the prior written approval of the Company.
7. TERMINATION
-----------
Notwithstanding Clause 3:-
7.1 the Company may be notice in writing immediately terminate this Agreement
if the Consultant shall:-
7.1.1 be in breach of any of the terms of this Agreement which in the case
of a breach capable of remedy is not remedied by the Consultant
within 21 days of receipt by the Consultant of a notice from the
Company specifying the breach and requiring its remedy
3
<PAGE>
7.1.2 be incompetent guilty of gross misconduct and/or any serious or
persistent negligence in respect of his obligations hereunder
7.1.3 fail or refuse after written warning to carry out the duties
reasonably and properly required of him hereunder
7.1.4 be unable through illness or injury to provide any services to the
Company
7.2 the Consultant may by notice in writing immediately terminate this
Agreement if:
7.2.1 the Company shall fail to make punctual payment of all sums due to
the Consultant under the terms of this Agreement
7.2.2 the Company is unable to pay its debts or enters into compulsory or
voluntary liquidation (other than for the purpose of effecting a
reconstruction or amalgamation in such manner that the Company
resulting from such reconstruction or amalgamation if a different
legal entity shall agree to be bound by and assume the obligations
of the Company under this Agreement) or compounds with or convenes
a meeting of its creditors or has a receiver or manager or an
administrator appointed or ceases for any reason to carry on
business or takes or suffers any similar action which in the opinion
of the Consultant means that the Company may be unable to pay its
debts
8. CONFIDENTIALITY
8.1 The Consultant shall not except as authorised or required by his
obligations reveal to any person any information concerning the Company
which may come to his knowledge and shall keep with complete secrecy all
information entrusted to him and shall not use or attempt to use any such
information in any manner which may injure or cause loss either directly or
indirectly to the Company or its business or may be likely so to do
4
<PAGE>
8.2 This restriction shall continue to apply at the termination of this
Agreement without limit in point of time but shall cease to apply to
information which may come into the public domain other than through the
fault of the Consultant
8.3 The Consultant or his personal representatives shall upon the termination
of his engagement immediately deliver up to the Company all correspondence
documents specification papers and property belonging to the Client (and
all copies thereof) which may be in his possession under his control
9. TAX LIABILITIES
It is hereby declared that it is the intention of the parties that the
Consultant shall be responsible for all tax liabilities or similar charges in
respect of his fees and the Consultant hereby indemnifies the Company in respect
of any claims that may be made by the relevant authorities against the Company
in respect of tax or similar charges relating to the Services provided hereunder
10. INDEMNIFICATION
10.1 The Consultant shall fully indemnify and hold harmless the Company against
any claims costs and expenses or actions brought by third parties against
the Company arising from the services rendered by the Consultant in
connection with this agreement except for any liabilities, claims and
lawsuits arising out of acts or omissions of the Company. This indemnity
shall include all costs and expenses of refuting defending or settling any
claims as well as any damage or compensation ordered to any third party by
any Court.
10.2 The Company shall fully indemnify and hold harmless the Consultant against
any claims costs and expenses or actions brought by third parties against
the Consultant arising from the services rendered by the Consultant in
connection with this agreement except for any liabilities, claims and
lawsuits arising out of acts or omissions of the Consultant. This indemnity
shall include all costs and expenses of refuting defending or settling any
claims as well as any damage or compensation ordered to any third party by
any Court in relation to the foregoing.
5
<PAGE>
11. ENTIRE AGREEMENT
In relation to its subject matter this Agreement represents the entire
understanding and constitutes the whole agreement and supersedes any previous
agreement between the parties and save as provided in this Agreement no party
has relied on any representation made by any other party who is not a party to
this Agreement
12. NOTICES
12.1 A notice approval consent or other communication in connection with this
Agreement:
12.1.1 must be in writing;
12.1.2 in the case of the Company must be marked for the attention of
Wynford Peter Holloway - Chairman and William D Snowdon - Secretary
12.1.3 must be left at the address of the addressee or sent by prepaid
ordinary post (airmail if posted to or from a place outside the
United Kingdom) to the address of the addressee or sent by facsimile
to the facsimile number of the addressee which is specified in this
Agreement or if the addressee notifies another address or facsimile
number in England and Wales then to that address or facsimile number
12.2 A notice approval consent or other communication shall take effect from the
time it is received (or if earlier the time it is deemed to be received in
accordance with clause 12.3) unless a later time is specified in it
12.3 A letter or facsimile is deemed to be received
6
<PAGE>
12.3.1 in the case of a posted letter unless actually received earlier on
the tenth day after posting if posted to or from a place outside the
United Kingdom; and
12.3.2 in the case of facsimile on production of a transmission report from
the machine from which the facsimile was sent which indicates that
the facsimile was sent in its entirety to the facsimile number of
the recipient
13. GOVERNING LAW JURISDICTION AND SERVICE OF PROCESS
13.1 This Agreement shall be governed by and construed in accordance with the
substantive law of the State of New York
13.2 Each party irrevocably agrees the Courts of the State of New York shall
have exclusive jurisdiction in relation to any claim dispute or difference
concerning this Agreement and any matter arising therefrom
13.3 Each party irrevocably waives any right that it may have to object to an
action being brought in those Courts to claim that the action has been
brought in an inconvenient forum or to claim that those Courts do not have
jurisdiction
14. RESTRICTION ON ASSIGNMENT
No party may assign his or its rights under this Agreement
IN WITNESS whereof this Agreement has been entered into the day and year
first before written
THE SCHEDULE
The Services
To act during the Term as the Company's non exclusive sales representative for
the products including but not limited to the Slipstream(TM) Internet Access
Device ("the Product") with a view to achieving sales and or strategic
commercial alliances for the commercial exploitation of the Product in the
Territory
SIGNED by ) /s/ William D. Snowdon
duly authorised on behalf of the Company )
SIGNED by ) /s/ Mark McLaughlin
duly authorised on behalf of the Consultant )
7
<PAGE>
HSBC Investment Bank plc
Vintners Place, 68 Upper Thames Street, London EC4V 3BJ
5 August 1999
Strictly private & confidential
The Directors
MSU (UK) Ltd
Elder House
526-528 Elder Gate
Central Milton Keynes
MK9 1LR
For the attention of Wyn Holloway
Dear Sirs
PROJECT BOWMAN
1. Introduction
We are writing to confirm that HSBC Investment Bank plc ("we") would be
pleased to act as financial adviser to MSU (UK) Ltd ("you") in relation to
the raising of finance for the development of your products and services,
referred to in this letter as the "Transaction". We set out below the scope
of our work, the basis of our remuneration and additional terms of our
engagement. We will act on an exclusive basis in connection with the
Transaction.
Jonathan Gray will be the director in charge of the Transaction. It is
intended that the team primarily consists of Ian Zilberkweit, Markus
Salolainen, Laurent Horrut and Kamal Pastakia, with other or additional
participation as we consider necessary.
2. Responsibilities
Our responsibilities comprise the following:
2.1 providing financial advice on alternative methods of raising funds for
the development and deployment of your products and services;
2.2 identifying potential financial investors and strategic partners and,
at your request, introducing you to selected parties;
Registered in England: number 976092
Regulated by SFA. Member of the London Stock Exchange.
Registered Office: Thames Exchange, 10 Queen Street Place, London EC4R 1BL
Telephone: (0171) 260 9000 Member HSBC Group
<PAGE>
2.3 preparation, with you and your other advisers, of presentations and
submissions to potential investors and partners;
2.4 advising and, at your request, participating in negotiations on the
detailed proposals with potential investors and partners;
2.5 advising on the preparation for the flotation, including the proposed
capital and financial structure of the company, the structure of the
offer, timing of the flotation, the board structure, share and other
incentive arrangements, appointment of other advisers and detailed
marketing and other flotation procedures;
2.5 preparation, with you and your other advisers, of a prospectus
incorporating listing particulars, together with supporting
documentation;
2.6 instructing, on your behalf, such other professional advisers as are
required to prepare information and/or to provide advice (including
stockbrokers, lawyers, accountants, valuers and public relations
consultants), and co-ordinating their work;
2.7 review with you and your other advisers of the working capital and
indebtedness position for you contained in the listing particulars
together with any public profit forecast and, if satisfactory to us,
issuance of the required letters to the London Stock Exchange;
2.8 approving and/or issuing, if satisfactory to us, of investment
advertisements which may be required in connection with the flotation;
2.9 fulfilment of the obligations of sponsorship as set out in Chapter 2
of the Listing Rules of the London Stock Exchange; and
2.10 such other advice and assistance, as requested by you and as may be
agreed with us, in relation to any capital raising and flotation.
Our responsibilities to shareholders in relation to the possible flotation
are owed to shareholders as a group. Accordingly, our advice will not take
account of the specific circumstances of any shareholder and we will not
enquire about individual positions.
3. Fees and Expenses
3.1 In the event that the Transaction is completed, we shall be paid a fee
calculated on the basis set out below:
(i) 5% of the permanent capital (debt or equity) raised through a private
placement for the development of MSU (UK) Ltd and/or its products and
services, plus
(ii) 1% of any short term capital (debt or equity) raised for the
development of MSU (UK) Ltd and/or its products and services, plus
2
<PAGE>
(iii) a call option over 1.5% of the pre-float company, with a strike price
of US$1.5m (which reflects a valuation of US$100m for 100% of the
fully diluted share capital of the company), exercisable within 3
years after flotation (or in other circumstances such as, but not
limited to, a change of control of MSU (UK) Ltd or its successor),
plus
(iv) assuming a full London listing, a corporate finance fee of the market
capitalisation of the floated entity at issue price, calculated
according to the scale below:
- 1% on the transaction value up to (pound)400m; plus
- 0.7% on the transaction value above (pound)400m but below
(pound)500m; plus
- 0.6% on the transaction value above (pound)500m but below
(pound)600m; plus
- 0.5% on the transaction value above (pound)600m, plus
(v) assuming a full London listing,a syndicate fee of 2% of issue size
(funds raised and shares sold), subject to a minimum of (pound)1m.
3.2 Definition of funds raised for MSU (UK) Ltd will include:
(i) proceeds from sale of any assets; and/or
(ii) funds invested in MSU (UK) Ltd or any of its subsidiaries for the
purpose of development of the MSU or related system; and/or
(iii) funds invested or committed by a third party to a company or entity in
which MSU (UK) Ltd or any of its subsidiaries has an economic
interest, for purpose of developing the MSU or related system; and/or
(iv) contractual payments for any licences, intellectual property or other
intangible elements of the MSU system transferred or licensed to a
third party.
3.3 For the purposes of calculation of our fees, the amount of funds raised will
be calcuated as:
(i) value of any assets (tangible or intangible), contributed committed or
made available. Valuation will be based where possible on equivalent
market value; and/or
(ii) the present value, or present value as estimated based upon agreed
business plan and forecasts, of any contracts entered into, such a
present value will be calculated based on a 10% discount rate.
3.4 Should the transaction structure be such that the provision of funds is
committed to by investors at later dates, then the net present value of
contracted commitments will be taken as the benchmark for the calculation of
a success fee. For these purposes a discount rate of 10% will be chosen. If
all or part of this commitment of funds is contingent upon operational or
financial milestones, the appropriate fee part will be payable when
commitment of funds becomes unconditional.
3
<PAGE>
3.5 In the event that the funds raised are based in whole or in part on
intangible assets we, at our discretion, will have the option to commute
the fee payable into equity in MSU (UK) Ltd or any of its subsidiaries or
associates. We also reserve the right to convert any such fees into equity
at a valuation of US$100m.
3.6 In the event that the Transaction is not completed, we shall be paid a fee
of L12,000 per month, accruing on a monthly basis following signature of
this letter, up to a maximum of L78,000. Any fees payable under this
paragraph 3.6 shall be offset against fees payable pursuant to paragraph
3.1 above. We shall invoice you on a periodic basis for fees payable under
this paragraph 3.6.
3.7 In the event our services are terminated before completion of the project
and the transaction contemplated in paragraph 1 of this letter is completed
within a period of 24 months after the effective date of termination or
expiry, you shall pay us the success fee referred to above, less any amount
already paid under this paragraph.
3.8 Whether the Transaction is completed or not, you will also reimburse us, on
request, for (i) the fees and disbursements of legal and other advisers
retained by us (whether on our own account or on your behalf), (ii) the
costs of any printing and proofing of documents prepared in connection with
the Transaction and (iii) reasonable travel, accommodation, courier and any
other out of pocket expenses incurred in connection with the Transaction
together in each case with an amount equal to any VAT incurred thereon
which is not otherwise recoverable by us.
3.9 All fees and expenses payable to us will be paid in sterling and, in any
case where they are calculated or incurred by reference to a currency other
than sterling, fees and expenses will be converted into sterling on the
date of payment to us using an exchange rate acceptable to us.
3.10 All amounts payable to us shall be paid together with any applicable VAT.
3.11 No fee payable to any other adviser by you or buy any other company in
connection with the Transaction shall reduce or otherwise affect any fee or
commission payable hereunder.
3.12 Our respective obligations in relation to any underwriting arrangements
between us including HSBC Investment Bank's fees, commissions and expenses
therefor shall be set out in and be subject to a separate underwriting
agreement to be negotiated and entered into between us, and no obligations
therefor shall be accepted or implied as a result of this letter. HSBC
Investment Bank's fees, commissions and expenses under this separate
underwriting agreement shall are limited to the syndicate fee as described
in 3.1(v) above.
4
<PAGE>
4 Duration of Agreement
Subject to the provisions of paragraph 15 (Termination) of the Term and
Conditions, our appointment under these Terms of Engagement shall run for 6
months from the date hereof and shall be subject to extension by mutual
agreement.
5 Miscellaneous
This agreement (i) may not be amended or modified except in writing; (ii)
incorporates the Terms and Conditions set out in the attached Appendix
("Terms and Conditions"), but subject as aforesaid, represents the entire
understanding between the parties and (iii) shall be governed by and
construed in accordance with English law.
In the event of conflict between the provisions of paragraphs 1 to 5 of
this Letter and the Terms and Conditions then the former shall apply to the
exclusion of the latter.
Your particular attention is drawn to paragraph 8. (Material Interests) of
the Terms and Conditions. This explains that, as HSBC Investment Bank is
part of the HSBC Group which is a worldwide financial services operation,
conflicts of interest may arise. Examples are set out in that paragraph and
this includes, in the case of acquisitions, the possibility of a private
equity fund within the HSBC Group also being a potential purchaser;
however, in any such case, the activities are quite separate within the
relevant divisions and "Chinese Walls" are strictly maintained.
In respect of this transaction, we have categorised you in accordance with
the Rules of SFA as an Ordinary Business Investor.
If you agree with the above, please sign and return the enclosed copy of
this letter, whereupon this letter shall constitute a binding agreement
between us.
Yours faithfully
/s/ Jonathan Gray
- ---------------------------------------
Jonathan Gray
Director - Corporate Finance & Advisory
We hereby confirm our agreement to the terms of HSBC Investment Bank's
appointment as financial adviser on the above transaction.
/s/ xxxxxxxxx 11/8/99
- --------------------- --------------------------
Director Date
for and on behalf of
MSU (UK) Ltd
5
<PAGE>
HSBC INVESTMENT BANK PLC
APPENDIX
TERMS AND CONDITIONS FOR PROVISION
OF CORPORATE FINANCE AND ADVISORY SERVICES
1 Status of these terms and conditions
These terms and conditions will apply to any corporate finance services
which we provide to you or other members of your group. They will be
supplemented by one or more letter agreements, together known as the "Terms
of Engagement" which will deal with, amongst other things, the services we
are to provide and the fees we are to be paid.
2 Services to be provided
We will provide to you the corporate finance services which are from time
to time agreed between us as described in paragraph 1 above or otherwise.
In connection with the Transaction, we may be assisted by certain of our
Related Companies. For the purposes of these Terms of Engagement, the
expression "We" shall where appropriate include such Related Companies, so
that such Related Companies shall have the same rights and be subject to
the same obligations as us in connection with the Transaction.
We will not be responsible for:
(a) providing specialist or technical advice in connection with those
matters for which you have agreed to provide or procure, or would
normally provide or procure specialist advice (for example on legal,
regulatory, accounting or taxation matters);
(b) the verification of any circular, prospectus, or other public document
produced by or on your behalf; and
(c) the verification of any information provided or representations made to
us by or on your behalf (including by your other advisers),
in connection with the Transaction.
A
<PAGE>
These terms and conditions do not apply to any services provided by us for
the underwriting of any issue of securities by you or the arranging or
underwriting of any bank financing for you in relation to a Transaction.
Such services (if any) and the fees and commissions payable in respect
thereof will be the subject of separate agreements between us.
3 Laws, rules and regulations
In carrying on our corporate finance business we are subject not only to
the general laws which apply to such business, but also to a number of
rules and regulations and the requirements of a number of regulators, many
of which will also apply directly to you. Particular examples are the rules
and regulations of The London Stock Exchange (including, where applicable,
the disclosure and other obligations of a sponsor owed to The London Stock
Exchange under its rules and regulations), the Panel on Takeovers and
Mergers, The Securities and Futures Authority ("SFA") and the Bank of
England. You agree that our duties to you will not restrict our freedom to
take all steps which we consider to be necessary to comply with the laws,
rules and regulations applicable to us.
You undertake to obtain appropriate advice in respect of all laws and
regulations which may be applicable to you in the UK or any other
jurisdiction and to communicate that advice (as soon as practicable) to us
if it is or may be relevant to the carrying our by us of our services to
you. We will not incur any liability to you in respect of any applicable
law or regulations where we have acted in good faith in accordance with any
such advice.
You agree to notify us as soon as practicable if you propose to enter into
any agreement or arrangement with any adviser for the purpose of or in
connection with the Transaction the terms of which provide that the
liability of that adviser to you or any other person is excluded or limited
in any manner and no such agreement shall be entered into without our prior
consent.
In the event that you have agreed to appoint or have already appointed a
financial adviser for the purpose of or in connection with the Transaction
and intend to appoint us as co-adviser for the purpose of or in connection
with such Transaction, you will provide us with details of the terms upon
which such adviser has been appointed or is agreed to be appointed.
B
<PAGE>
4 Consents and approvals
You agree to inform us of any material consents and approvals etc. of any
governmental or other regulatory body or authority which may be necessary
to enable you to carry you any Transaction and to use your best endeavours
to obtain and maintain these (and comply with any relevant terms and
conditions attaching to them) when and as needed during the course of the
Transaction.
5 Provision of Information
For the purpose of enabling us to carry out our duties in connection with
any Transaction, you agree to provide us with all information under your
control which we may reasonably request to assist us in acting for you, and
to allow us full access to all appropriate directors, officers and
employees of the Group and to any other advisers to the Group (whether
retained in connection with the Transaction or not). We will rely on you to
check beforehand that all information provided to us is true and complete
in all material respects and not misleading. You agree to let us know
immediately if you subsequently discover that information provided to us
does not meet this standard. You also agree to provide us with any further
information of which you are or become aware and which you ought reasonably
to expect is of relevance to us in acting for you.
In addition, you agree that:
(a) we may require confirmation or evidence to support information
contained in, or omitted from, any document we are required to approve,
or in respect of which you may incur any liability to third parties,
whether or not you accept full responsibility for the preparation and
contents of the document;
(b) we may refuse to issue, consent to the issue of, or approve any
document, or require you to cease to distribute any document, if at any
time we become aware of information which in our opinion renders the
document untrue, inaccurate or misleading in any material respect;
(c) without detracting from our obligation to make such enquiries as we may
consider appropriate in the discharge of our obligations hereunder, we
shall be entitled to rely upon all information supplied to us by you or
your advisers and shall not in any respect be responsible for the
accuracy or completeness of, or have any obligation to verify, the
same; and
C
<PAGE>
(d) any documents provided to us in final form will be approved by your
Board, and for which your directors will be solely responsible.
For the purposes of the expressions "to the best of your knowledge and
belief" or "you are, or become aware", you shall be deemed to be aware of
or have knowledge of all matters which you would have reasonably discovered
after due and careful enquiry of your executive directors and your
operational management team.
6 Conduct of transactions
You agree that where we are acting for you in connection with a Transaction
you will tell us in advance of any significant steps which you or any of
your other agents or advisers propose to take in respect of that
Transaction and will make sure that we are fully informed of all material
developments which arise during the course of the Transaction. In
particular, you will consult us before:
(a) any dealings take place in your securities or those of any company in
relation to which we are advising you, by you or any of your directors
(or their associates) or any person acting in concert with you, as well
as making sure (as required under paragraph 3 above) that all such
dealings are properly disclosed in accordance with the relevant laws
and regulations; or
(b) any other step, other than one which falls within the scope of
paragraph 14 (Announcements) below, is taken by you or any person whom
you control or, if you become aware of it, any other person, which may
have an effect on the terms of, or the conduct of, the relevant
Transaction.
7 Fees and expenses
You will pay us the fees which are agreed between us (under the Terms of
Engagement as described in paragraph 1, or otherwise).
Any amount not paid within 15 days after the issue of an invoice will bear
interest at the rate of 2 per cent above the base rate from time to time of
Midland Bank plc.
D
<PAGE>
8 Material interests
HSBC Group is a worldwide financial services operation. As such HSBC Group
is involved, inter alia, in Corporate Finance activities, capital market
activities, securities issuing, trading, private equity, banking and
investment management, which are all carried out independently. As a
result, entities within the HSBC Group may from time to time effect
transactions for their own account or for the account of customers, and
hold positions in securities or options on securities of you and your
Related Companies and other companies, which may be the subject of a
Transaction, or otherwise have a financial interest in the Transaction. In
connection with these activities, the HSBC Group has rules and procedures
which prevent disclosure of confidential information between the Group's
various legal entities and also between different divisions within these
legal entities including "Chinese Wall" procedures complying with the Rules
of the SFA. These rules and procedures may prevent the disclosure of
information to you or HSBC divisions advising you. Conflicts of interest
may arise which you and the HSBC division advising you may not become aware
of. In addition separate elements within the HSBC Group may be aware of an
interest or relationship which may give rise to a conflict of interest.
The following are examples of ways in which conflicts of interest may
arise:
(a) we or a Related Company may in the past have been adviser to, or may be
a lender to, a company whose securities you may be acquiring or selling
or with whom you may be entering into a transaction;
(b) we or a Related Company may hold or invest or deal in or underwrite, or
give investment advice relating to or exercise voting rights attaching
to, all manner of investments in the normal course of their activities,
such as market-making, investment advisory or discretionary investment
management or private equity investment business; it is possible that
these may be investments which are in some way connected to or may be
of interest to you or otherwise relevant to the Transaction;
(c) we may act for a number of clients operating in the same industry or
sector. Among others, the consequences of this are that:
(i) we may have information from another client which may be of
interest to you, but will keep that information confidential to
the other client; or
(ii) we may be acting in connection with a transaction for another
client and so may be unable to act for you.
You acknowledge and accept that we may have interests or duties which
conflict with your interests and which would or might otherwise conflict
with the duties owed by us to you.
E
<PAGE>
You accept that our agreeing to provide services to you does not require
any other member of the HSBC Group or any other division within HSBC to
restrict its activities in any way nor to provide you or us or the HSBC
division advising you with any information whatsoever about, or derived
from, those activities nor does it create any obligation to advise you of
any conflict of interest which exists or may arise.
You also accept that in acting for you we will not be required to disclose
to you nor to make use for your benefit any information known to use which
(i) belongs to or is confidential to another client or (ii) belongs to or
is confidential to any of our Related Companies or (iii) belongs to or is
confidential to us and relates to some other part of our business.
Although some directors and employees of other HSBC Group companies are
members of our board of directors and/or are involved in our management
structure or prudential controls, they are bound by equivalent duties of
confidentiality and so do not make available to us any confidential
information derived from their other activities in the Group.
Subject to relevant regulations and rules, we reserve the right to deal
with or otherwise engage the services of other parts of the HSBC Group and
we (and other members of the HSBC Group) will, without liability to
account, remain entitled to retain any benefit resulting from such
engagement or provision of service of this kind.
9 Confidentiality
Any confidential information which you provide to us shall be kept
confidential by the division of HSBC advising you. You agree that other
divisions within HSBC are not bound by any duty of confidentiality except
as expressly set out herein. Our "Chinese Wall" procedures are designed to
control the flow of confidential information between divisions of HSBC, but
in some circumstances it may be necessary and proper to disclose such
information to other divisions in which case it shall be disclosed to such
other divisions which shall then be bound by the confidentiality
undertaking given herein. In addition, disclosure to any of our
professional advisers or sub-agents will be permitted as will disclosure
required by law, and we shall be entitled to disclose any information known
to us, and/or produce any documents, relating to your business or affairs,
at our discretion or at the request of any relevant authority including the
Bank of England, the Department of Trade and Industry, H.M. Treasury, the
Securities and Investments Board, the SFA or any other recognised
investment exchange, the Panel on Takeovers and Mergers or any other
regulatory authority having jurisdiction over you, us or the Transaction.
Where practicable, we will, before making any required disclosure, notify
you in order to provide you with the opportunity to contest such
disclosure.
F
<PAGE>
Except where prohibited by law and applicable regulations, including our
Chinese Wall procedures, we shall be entitled to disclose our role within
the Transaction and to furnish information regarding you to our Related
Companies.
Any advice or opinion, written or oral, provided by us pursuant to these
Terms of Engagement will be solely for your information and assistance in
connection with the Transaction and must be kept confidential by you. It is
not to be used, circulated, quoted or otherwise referred to or publicly
filed or disclosed for any other purpose to any third party, except in each
case with our prior written consent (which consent shall not be
unreasonably withheld or delayed). Any circulation or disclosure within
your Group shall be strictly limited to the members of the Board of
Directors and senior management.
In his Paragraph the term "confidential information" shall not include any
information which:
(i) at the time of disclosure to us is already in the public domain;
(ii) at any time after such disclosure falls into the public domain,
otherwise than as a result of a breach by us of our undertakings;
(iii) was lawfully in our possession prior to such disclosure; or
(iv) was or is received by us from any third party who at the time, so far
as is known by us, was or is not bound by any restrictions or
disclosure by such party.
Whether there is any conflict between this paragraph 9 and any express
terms of any contractual arrangements entered into between you and us
relating to confidentiality, the express terms of such contractual
arrangement shall take precedence over the terms of this paragraph to the
extent of such conflict.
Our duty to keep the confidential information confidential shall expire on
the day falling two years after the date on which these Terms of Engagement
are entered into.
10 Correspondence and papers
All correspondence and papers in our control relating to any services
provided to you shall be our sole property, except for originals of
documents, etc. provided to us by you or on your behalf and in respect of
which we shall be entitled to retain copies.
G
<PAGE>
11 Transactions in investments
All transactions in investments which we undertake for you will be subject
to the Rules of SFA and any other relevant regulatory authority and the
rules and customs of the exchange or market and/or any clearing house
through which the transactions are settled or executed.
12 Authorisation
We are authorised to do anything which we in our absolute discretion
consider necessary or desirable in order (i) to carry out our services
hereunder which may include, if previously approved by you, acting through
agents or sub-agents and (ii) to comply with any applicable legal or
regulatory requirements.
Unless otherwise agreed, you authorise us to rely on any instructions,
notices or requests (whether in writing or not) given (or appearing to be
given) by any director or employee of yours who is reasonably believed by
us to be authorised by you to give such instructions, notices or requests.
13 Exclusion of liability and indemnity
No Claim shall be made against us by you to recover any Losses suffered or
incurred by you in connection with or arising out of the services rendered
or duties performed by us hereunder unless they are material in the context
of the Transaction taken as a whole and to the extent that they arise as a
result of (i) our negligence, bad faith or wilful default or (ii) our
failure to comply with our obligations under these Terms of Engagement.
You shall indemnify us on an after tax basis against all Claims which may
be instituted, made, threatened or alleged against or otherwise involve us,
and against all Losses which may be suffered or incurred by us, in
connection with or arising out of the services rendered or duties performed
by us under these Terms of Engagement including (without limitation) all
Losses which we may incur in investigating, preparing, disputing or
defending, or providing evidence in connection with, any Claim (whether or
not we are an actual or potential party to such Claim) or in establishing
any Claim or mitigating any Losses on your part or otherwise enforcing our
rights under this paragraph 13. This right of indemnity shall be without
prejudice to any rights which we may have at common law or otherwise.
H
<PAGE>
We shall not be entitled to be indemnified in respect of any Claims or
Losses to the extent that they are finally judicially determined to have
arisen as a result of (i) our negligence, bad faith or wilful default
(including the causing of personal injury) or (ii) our failure to comply
with our obligations under these Terms of Engagement.
If we become aware of any Claim relevant for the purposes of this paragraph
13 or any matter which may give rise to a Claim, we shall promptly notify
you thereof giving particulars of the Claim, provided that failure by us to
notify you shall not relieve you from the obligation to indemnify us except
to the extent that you suffer actual prejudice as a result of such failure.
Subject to being indemnified and secured to our reasonable satisfaction by
you against any additional or increased Losses we may suffer or incur as a
result of so doing, and subject to the requirements (if any) of our
insurers, we shall thereafter consult with you regarding our conduct of the
Claim and provide you with such information and copies of such documents
relating to the Claim as you may reasonably request provided that we shall
not be under any obligation to take into account any of your requirements
in connection with such conduct nor to provide you with a copy of any
document which is or may be privileged in the context of the Claim.
You agree that you will not, without our prior written consent, settle or
compromise or consent to the entry of any judgement with respect to any
pending or threatened Claim in respect of which indemnification may be
sought under this paragraph 13 (whether or not we are an actual or
potential party to such Claim) unless such settlement, compromise or
consent includes an unconditional release of us from all liability arising
our of such Claim.
If you enter into any agreement or arrangement with any adviser for the
purpose of or in connection with the Transaction, the terms of which
provide that the liability of the adviser to you or any other person is
excluded or limited in any manner, and we may have joint and/or several
liability with such adviser to you or to any other person arising out of or
in connection with the performance of our duties under this letter, you
shall:
(a) not be entitled to recover any amount from us which, in the absence of
such exclusion or limitation, we would have been entitled to recover
pursuant to the Civil Liability (Contribution) Act 1978;
(b) indemnify us on an after tax basis in respect of any increased
liability to any third party which would not have arisen in the absence
of such exclusion or limitation; and
(c) take such other action as we may require to ensure that we are not
prejudiced as a consequence of such agreement or arrangement.
I
<PAGE>
In this paragraph 13, the expression "we" and "us" and corresponding
expressions shall include HSBC Holdings plc and each of its Related
Companies and we, in receiving such indemnity, are acting for HSBC Holdings
plc and as trustee and agent for each of its Related Companies with the
intent that such indemnity shall be enforceable by HSBC Holdings plc and
each of its Related Companies.
14 Announcements
Neither you nor any of your Related Companies will publish, or permit or
procure the publication of, any announcement, statement or document in
relation to or having any material effect on the Transaction, without our
prior consent (which consent shall not be unreasonably withheld or
delayed).
Except where required by law or the rules of the London Stock Exchange, we
shall not be held responsible for ensuring the truth, accuracy, entirety or
fairness of any announcement, statement, publication or document made by
you, on your behalf or by any of your other advisers in connection with the
Transaction, this being your sole responsibility.
We will not publish or arrange for the publication of any announcement,
statement or document in relation to the Transaction without the authority
of your Board of Directors or a duly appointed committee thereof. We
reserve the right, however, to make any announcement required to comply
with applicable regulations if you do not do so.
We shall be named as your financial adviser in any announcements, circulars
or communications regarding the Transaction in the manner and place in
which it is normal or a requirement for financial advisers to be so named.
Neither you nor any of your Related Companies will publish, or permit or
procure the publication of, any announcement, statement or document which
makes reference to us or our appointment under, or the services provided by
us pursuant to this letter agreement without our prior consent. If for any
reason any such announcement, statement or document is made without our
consent, you acknowledge that we shall be entitled to publish any
announcement, statement or document which we reasonably believe is
appropriate to protect our interests.
You acknowledge that we may, at our option and expense, place an
announcement in such newspapers and periodicals as we may choose following
the public announcement of the Transaction, stating that we have acted as
financial adviser to you in connection with the Transaction.
J
<PAGE>
15 Termination
Either you or we may terminate our appointment under these Terms of
Engagement at any time on 7 days notice in writing to the other party.
We reserve the right at any time and without liability for continuing
obligations to you to terminate these Terms of Engagement forthwith; (a) in
the event that you commit a material breach of the Terms of Engagement; or
(b) you fail to accept our advice on a material matter concerning action to
be taken in respect of or in relation to the Transaction; or (c) if we are
not satisfied that we can continue to advise you, or that we can co-operate
with any of your actions or inactions, in either case without defaulting on
any of our responsibilities under the Code, The Listing Rules or other
legal or regulatory requirements.
Termination will not affect any legal rights or obligations which have
already accrued to, or been incurred by, either of us or any
representations, confirmations or indemnities given by you herein.
16 Assignment
We shall be entitled to transfer all our rights and obligations under these
Terms of Engagement to a Related Company to which substantially all our
assets and business have been or are to be transferred and, from the time
such transfer takes effect, references to us shall be read as references to
such Related Company.
In order that we may execute and carry out our duties properly under these
Terms of Engagement, you agree not to transfer any of your rights and
obligations hereunder to any party without our written consent.
17 Governing Law
The provisions of these Terms of Engagement shall be governed by and
construed in accordance with English law.
We and you irrevocably agree that the Courts of England are to have
exclusive jurisdiction to settle any disputes which may arise out of or in
connection with the provisions of this letter agreement.
You irrevocably submit to the jurisdiction of the Courts of England under
these Terms of Engagement and waive any objection to proceedings in any
such court on the ground of venue or the ground that the proceedings had
been brought in an inconvenient forum.
K
<PAGE>
18 Client Monies
Where any of your monies are held by us they will be credited to an account
designated in your name and will be held by us in our capacity as banker
and not as trustee. As a result, we are not required to hold such monies in
accordance with SFA's client money rules.
19 Miscellaneous
References to "you" in these terms and conditions include, where
appropriate, any member of your Group.
We may in future send you revised terms and conditions to replace these,
but they will only apply in the case of services provided after the date
you receive them and you are of course free to terminate the arrangements
between us is you do not accept the revised terms and conditions. Sending
you revised terms will not affect our respective rights and obligations
which may have arisen beforehand.
Any notice or other communication requiring to be given or served under or
in connection with this Agreement shall be in writing and shall be
sufficiently given or served if delivered or sent to your and our
respective Company Secretaries at your and our registered addresses.
L
<PAGE>
Any such notice or other communication shall be delivered by hand or sent
by courier, fax or prepaid first class post. If sent by courier or fax,
such notice or communication shall conclusively be deemed to have been
given or served at the time of dispatch, in case of service in the United
Kingdom, or on the following Business Day in the case of international
service. If sent by post such notice or communication shall conclusively be
deemed to have been received two Business Days from the time of posting, in
the case of inland mail in the United Kingdom or three Business Days from
the time of posting in the case of international mail.
Definitions
In this letter agreement:
"Business Day" shall mean a day (excluding Saturdays) on which banks
generally are open in London for the transaction of normal banking
business;
"Claims" shall mean all actions, proceedings, investigations, demands,
judgements and awards;
"Group" shall mean you or HSBC (as appropriate) and your/its Related
Companies;
"HSBC" shall mean HSBC Investment Bank plc
"holding company", "subsidiary undertaking" and "associated undertaking"
shall have the same meanings as in the Companies Act 1985;
"Losses" shall mean all losses, liabilities, damages, costs, charges and
expenses; and
"Related Companies" shall mean in respect of any company (the first
company) any company which is for the time being a subsidiary undertaking,
associated undertaking or holding company (whether direct or indirect or
which is in any way allied to or associated with such company) of the first
company or a subsidiary undertaking or associated undertaking (whether
direct, indirect or which is in any way allied to or associated with such
company) of any such holding company and shall include any director,
officer, employee, agent or adviser thereof and "Related Company" shall be
construed accordingly.
M
<PAGE>
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT"), NOR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
MSU Corporation
(a Florida corporation)
6% Convertible Secured Promissory Note due December 31, 2001
Total Note: U.S. $100,000
MSU Corporation, a Florida corporation (the "Corporation"), value
received, promises to pay (subject to the conversion provisions set forth
herein) to the order of _______ (the "Holder"), on December 31, 2001 (the "Due
Date"), upon presentation of this convertible note (the "Note"), One Hundred
Thousand ($100,000) Dollars (the "Principal Amount"). The Note is convertible
into shares of common stock (the "Common Stock") of the Corporation as provided
below in Section 2. Interest on the Principal Amount shall be prepaid in shares
of Common Stock of the Corporation as provided below in Section 1.
The Corporation covenants, promises and agrees as follows:
1. Interest. Interest shall run from January 1, 1999 for the entire
term of the Note and shall be prepaid on January 4, 1999 by the Corporation
issuing to the Holder 24,000 shares of Common Stock for each $100,000 principal
amount of the Note. The number of shares issuable as prepaid interest was
computed based upon an agreed value of the shares of the Corporation's Common
Stock of $.75 per share as follows: $100,000 x 6% = $6,000 in annual interest or
$18,000 for the 3 year term of the Note. $18,000 divided by $.75 = 24,000
shares. The shares of Common Stock representing the prepaid interest shall be
delivered to the Holder at the address set forth in Section 10 below, or at such
other place or places as may be designated in writing by the Holder hereof.
2. Conversion.
2.1. Option to Convert. At maturity, the Holder shall have the
1
<PAGE>
right, at its option, to convert, in whole or in part, subject to the terms and
provisions hereof, the then outstanding balance of the Principal Amount of the
Note into shares of Common Stock of the Corporation at $3.00 per share.
2.2. Exercise of Conversion Right. The conversion right shall be
exercised, if at all, by surrender of the Note to the Corporation at the address
set forth below in Section 10, together with written notice of election executed
by the Holder, which may be in the form which is included with this Note
(hereinafter referred to as the "Conversion Notice") to convert such Note or a
specified portion thereof into shares of Common Stock of the Corporation, the
number of shares of which shall be determined by dividing the dollar amount
being converted by $3.00 per share. The number of shares of Common Stock to be
issued upon conversion shall be subject to adjustment as provided below in
Section 6.
2.3. Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of this Note. In lieu thereof, the Corporation
shall round up to the nearest whole share. In the case of a dispute as to the
calculation of the Conversion Price, the Corporation's calculation shall be
deemed conclusive absent manifest error. In order to convert this Note into full
shares of Common Stock, the Holder shall surrender this Note, duly endorsed, to
the Corporation, together with the Conversion Notice that it elects to convert
the same, the amount of principal to be so converted, and a calculation of the
Conversion Price (with an advance copy of the Note and the notice by facsimile);
provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless either the Note is delivered to the Corporation as provided above, or the
Holder notifies the Corporation that such Note has been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such Note.
The date of conversion (the "Date of Conversion") shall be the date on
which the Conversion Notice is received by the Corporation on behalf of the
Corporation and the person or persons entitled to receive the shares issuable
upon such conversion shall be treated for all purposes as the record Holder or
Holders of such shares on such date.
2.4. Reservation of Shares. The Corporation shall at all times reserve
and keep available, free from preemptive rights, unissued or treasury shares of
Common Stock sufficient to effect the conversion of this Note; and, if at any
time, the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding principal of this
Note, the Corporation will take such corporate action as may be necessary to
increase its authorized but unissued
2
<PAGE>
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
3. Prepayment. The Corporation shall have the right, at any time up to
and including June 30, 1999 to offer to prepay this Note in full. In the event
the Corporation notifies the Holder of its intention to prepay the Note in full,
the Holder shall have the option to convert the Note in whole or in part into a
number of shares of Common Stock, the number of shares to be determined by
dividing the dollar amount to be converted by $3.00 per share with the balance,
if any, to be paid in cash by the Corporation in the event the Holder elects to
convert less than the Principal Amount of the Note.
4. Collateral. The Corporation's obligations hereunder are
collateralized by a pledge of the following: (i) 500,000 shares of common stock
of American Interactive Media Inc. registered in the name of the Corporation by
the Corporation; (ii) 2,000,000 shares of the Corporation by Wynford Holloway,
the Corporation's Chairman; and (iii) 250,000 shares of the Corporation by
William Snowdon, the Corporation's Corporate Secretary.
5. Default.
5.1. Payment of this Note shall, at the election of the Holder, be
accelerated immediately upon the occurrence of any of the following events (a
"Default Event"):
(a) The non-payment by the Corporation when due of principal and
interest as provided in this Note.
(b) If the Corporation (i) applies for or consents in writing to the
appointment of, or if there shall be a taking of possession by, a receiver,
trustee or liquidator for the Corporation of all or substantially all of its
property; (ii) admits in writing its inability to pay its debts as they become
due; (iii) makes a general assignment for the benefit of creditors; (iv) files
any petition for relief under the Bankruptcy Code or any similar federal or
state statute; or (v) has assessed or imposed against it, or if there shall
exist, any general or specific lien for any federal, state or local taxes
against any of its property or assets other than liens for taxes not yet due or
being contested in good faith.
(c) Any failure by the Corporation to issue and deliver shares of
Common Stock as provided herein upon conversion of this Note, in whole or in
part.
Notwithstanding the foregoing, the Corporation shall have fifteen (15)
days from the receipt of a written Notice of Default to cure said Default Event,
and no acceleration of payment hereunder shall be deemed to have occurred until
the thirtieth day after the Corporation's receipt of a written Notice of Default
from
3
<PAGE>
the Holder of this Note. Upon such cure, the terms of this Note
shall continue in effect.
5.2. Each right, power or remedy of the Holder hereof upon the
occurrence of any Default Event as provided for in this Note or now or hereafter
existing at law or in equity or by statute shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Note or now or hereafter existing at law or in equity or by statute, and
the exercise by the Holder of any one or more of such rights, powers or remedies
shall not preclude the simultaneous or later exercise by the Holder hereof of
any or all such other rights, powers or remedies.
6. Anti-Dilution Adjustments. The Conversion Price shall be subject to
adjustment as follows:
(a) In case the Corporation shall at any time subdivide the outstanding
shares of Common Stock issuable upon conversion of the Note, the conversion
price in effect immediately prior to such subdivision shall be proportionately
decreased, and in case the Corporation shall at any time combine the outstanding
shares of Common Stock issuable upon conversion of the Note, the conversion
price in effect immediately prior to such combination shall be proportionately
increased. Any such adjustment shall be effective at the close of business on
the date such subdivision or combination shall become effective.
(b) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of this Note (other than a change in par
value, or from par value to no par value, or from no par value to par value), or
in case of a consolidation or merger of the Corporation with or into another
corporation (other than a merger or consolidation in which the Corporation is
the continuing corporation and which does not result in a reclassification of
outstanding shares of Common Stock of the class issuable upon the conversion of
this Note except where the security holders of the Corporation are entitled to
receive securities of another issuer), or in case of any sale or conveyance to
another corporation of the property of the Corporation as an entirety or
substantially as an entirety, the Corporation or such successor or purchasing
corporation, as the case may be, shall execute an instrument providing that the
Holder of this Note shall have the right thereafter to convert this Note into
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, consolidation, merger, sale, or
conveyance by the Holder of the number of shares of Common Stock of the
Corporation into which this Note might have been converted immediately prior to
such reclassification, consolidation, merger, sale, or conveyance. Such interest
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for herein. The foregoing provisions of
this
4
<PAGE>
Note shall similarly apply to successive reclassification of shares of Common
Stock and to successive consolidations, mergers, sales, or conveyances.
7. Failure to Act and Waiver. No failure or delay by the Holder hereof
to insist upon the strict performance of any term of this Note or to exercise
any right, power or remedy consequent upon a Default Event hereunder shall
constitute a waiver of any such term or of any such breach, or preclude the
Holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Note, the Holder hereof shall not be deemed to waive the right either to
require payment when due of all other amounts payable under this Note, or to
declare a Default Event for failure to effect such payment of any such other
amount.
The failure of the Holder of this Note to give notice of any failure or
breach of the Corporation under this Note shall not constitute a waiver of any
right or remedy in respect of such continuing failure or breach or any
subsequent failure or breach.
8. Consent to Jurisdiction. The Corporation hereby agrees and consents
that any action, suit or proceeding arising out of this Note shall be brought in
any appropriate court in the State of New York, and by the issuance and
execution of this Note the Corporation irrevocably consents to the jurisdiction
of each such court.
9. Transfer/Negotiability. This Note shall be transferred on the books
of the Corporation only by the registered Holder hereof or by its attorney duly
authorized in writing or by delivery to the Corporation of a duly executed
assignment. The foregoing notwithstanding, the Corporation shall not transfer
this Note nor any of the shares of Common Stock issuable upon conversion
hereunder except pursuant to registration under the act or an available
exemption from the registration requirements of the Act. Neither the Corporation
nor its Transfer Agent shall be obligated to effect any such transfer unless it
shall have received an opinion of counsel to the Holder reasonably satisfactory
to the Corporation and its Transfer Agent stating that such removal of the
legend complies with the provisions of the Act. The Corporation shall be
entitled to treat any holder of record of the Note as the holder in fact thereof
and shall not be bound to recognize any equitable or other claim to or interest
in this Note in the name of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of New
York.
5
<PAGE>
10. Notices. All notices and communications under this Note shall be in
writing and shall be either delivered in person or accompanied by a signed
receipt therefor or mailed first-class United States certified mail, return
receipt requested, postage prepaid, and addressed as follows:
if to the Corporation, to:
MSU Corporation
Elder House
526-528 Elder Gate
Central Milton Keynes MK9 1LR
United Kingdom
Attention: Keith Peirson, President
if to the Holder, to:
11. Governing Law. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of New York, or, where
applicable, the laws of the United States, without regard to conflicts of law.
12. Incorporation by Reference. The terms and conditions set forth in
that certain Note Purchase Agreement between the Corporation, the Holder and the
Holder dated as of the date hereof are incorporated herein by this reference,
and any transferee or subsequent holder of this Note or the shares of Common
Stock issued upon conversion thereof shall be subject to and bound by the
provisions of such agreement.
IN WITNESS WHEREOF, the Corporation has caused this Note to be duly
executed as of the 31st day of December 1998.
MSU CORPORATION
By: /s/ Keith Peirson
---------------------------
Keith Peirson, President
Attest
- ------------------------------
William D. Snowdon, Secretary
Secretary
6
<PAGE>
CONVERSION NOTICE
MSU CORPORATION
The undersigned holder (the "Holder") of a 8 %, $100,000
Principal Amount Secured Convertible Promissory Note (the "Note"), hereby elects
to convert U.S. $ of said Note into shares of common stock of MSU Corporation in
accordance with the terms of the Note and a Note Purchase Agreement executed by
the Holder of the Note and accepted by the Corporation. The Holder hereby
directs that any such shares be issued in the name of and delivered to the
Holder or if so specified, to the person or entity named below.
Dated ___________
Name __________________________
Signature __________________________
Address ____________________________
7
<PAGE>
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT"), NOR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
MSU Corporation
(a Florida corporation)
8% Convertible Secured Promissory Note due December 31, 2001
Total Note: U.S. $100,000
MSU Corporation, a Florida corporation (the "Corporation"), value
received, promises to pay (subject to the conversion provisions set forth
herein) to the order of _______ (the "Holder"), on December 31, 2001 (the "Due
Date"), upon presentation of this convertible note (the "Note"), One Hundred
Thousand ($100,000) Dollars (the "Principal Amount"). The Note is convertible
into shares of common stock (the "Common Stock") of the Corporation as provided
below in Section 2. Interest on the Principal Amount shall be prepaid in shares
of Common Stock of the Corporation as provided below in Section 1.
The Corporation covenants, promises and agrees as follows:
1. Interest. Interest shall run from January 1, 1999 for the entire
term of the Note and shall be prepaid on January 4, 1999 by the Corporation
issuing to the Holder 33,334 shares of Common Stock. The number of shares
issuable as prepaid interest was computed based upon an agreed value of the
shares of the Corporation's Common Stock of $.72 per share (the "Agreed Value
Per Share") as follows: $100,000 x 8% = $8,000 in annual interest or $24,000 for
the 3 year term of the Note. $24,000 divided by $.72 = 33,334 shares. The shares
of Common Stock representing the prepaid interest shall be delivered to the
Holder at the address set forth in Section 10 below, or at such other place or
places as may be designated in writing by the Holder hereof.
2. Conversion.
2.1. Option to Convert. At maturity, the Holder shall have the
right, at its option, to convert, in whole or in part, subject to
1
<PAGE>
the terms and provisions hereof, the then outstanding balance of the Principal
Amount of the Note into shares of Common Stock of the Corporation at the Agreed
Value Per Share.
2.2. Exercise of Conversion Right. The conversion right shall be
exercised, if at all, by surrender of the Note to the Corporation at the address
set forth below in Section 10, together with written notice of election executed
by the Holder, which may be in the form which is included with this Note
(hereinafter referred to as the "Conversion Notice") to convert such Note or a
specified portion thereof into shares of Common Stock of the Corporation, the
number of shares of which shall be determined by dividing the dollar amount
being converted by the Agreed Value Per Share. The number of shares of Common
Stock to be issued upon conversion shall be subject to adjustment as provided
below in Section 6.
2.3. Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of this Note. In lieu thereof, the Corporation
shall round up to the nearest whole share. In the case of a dispute as to the
calculation of the Conversion Price, the Corporation's calculation shall be
deemed conclusive absent manifest error. In order to convert this Note into full
shares of Common Stock, the Holder shall surrender this Note, duly endorsed, to
the Corporation, together with the Conversion Notice that it elects to convert
the same, the amount of principal to be so converted, and a calculation of the
Conversion Price (with an advance copy of the Note and the notice by facsimile);
provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless either the Note is delivered to the Corporation as provided above, or the
Holder notifies the Corporation that such Note has been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such Note.
The date of conversion (the "Date of Conversion") shall be the date on
which the Conversion Notice is received by the Corporation on behalf of the
Corporation and the person or persons entitled to receive the shares issuable
upon such conversion shall be treated for all purposes as the record Holder or
Holders of such shares on such date.
2.4. Reservation of Shares. The Corporation shall at all times reserve
and keep available, free from preemptive rights, unissued or treasury shares of
Common Stock sufficient to effect the conversion of this Note; and, if at any
time, the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding principal of this
Note, the Corporation will take such corporate action as may be necessary to
increase its authorized but unissued
2
<PAGE>
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
3. Prepayment. The Corporation shall have the right, at any time up to
and including June 30, 1999 to offer to prepay this Note in full. In the event
the Corporation notifies the Holder of its intention to prepay the Note in full,
the Holder shall have the option to convert the Note in whole or in part into a
number of shares of Common Stock, the number of shares to be determined by
dividing the dollar amount to be converted by the Agreed Value Per Share with
the balance, if any, to be paid in cash by the Corporation in the event the
Holder elects to convert less than the Principal Amount of the Note.
4. Collateral. The Corporation's obligations hereunder are
collateralized by a pledge of the following: (i) 500,000 shares of common stock
of American Interactive Media Inc. registered in the name of the Corporation by
the Corporation; (ii) 2,000,000 shares of the Corporation by Wynford Holloway,
the Corporation's Chairman; and (iii) 250,000 shares of the Corporation by
William Snowdon, the Corporation's Corporate Secretary.
5. Default.
5.1. Payment of this Note shall, at the election of the Holder, be
accelerated immediately upon the occurrence of any of the following events (a
"Default Event"):
(a) The non-payment by the Corporation when due of principal and
interest as provided in this Note.
(b) If the Corporation (i) applies for or consents in writing to the
appointment of, or if there shall be a taking of possession by, a receiver,
trustee or liquidator for the Corporation of all or substantially all of its
property; (ii) admits in writing its inability to pay its debts as they become
due; (iii) makes a general assignment for the benefit of creditors; (iv) files
any petition for relief under the Bankruptcy Code or any similar federal or
state statute; or (v) has assessed or imposed against it, or if there shall
exist, any general or specific lien for any federal, state or local taxes
against any of its property or assets other than liens for taxes not yet due or
being contested in good faith.
(c) Any failure by the Corporation to issue and deliver shares of
Common Stock as provided herein upon conversion of this Note, in whole or in
part.
Notwithstanding the foregoing, the Corporation shall have fifteen (15)
days from the receipt of a written Notice of Default to cure said Default Event,
and no acceleration of payment hereunder shall be deemed to have occurred until
the thirtieth day
3
<PAGE>
after the Corporation's receipt of a written Notice of Default from the Holder
of this Note. Upon such cure, the terms of this Note shall continue in effect.
5.2. Each right, power or remedy of the Holder hereof upon the
occurrence of any Default Event as provided for in this Note or now or hereafter
existing at law or in equity or by statute shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Note or now or hereafter existing at law or in equity or by statute, and
the exercise by the Holder of any one or more of such rights, powers or remedies
shall not preclude the simultaneous or later exercise by the Holder hereof of
any or all such other rights, powers or remedies.
6. Anti-Dilution Adjustments. The Conversion Price shall be subject to
adjustment as follows:
(a) In case the Corporation shall at any time subdivide the outstanding
shares of Common Stock issuable upon conversion of the Note, the conversion
price in effect immediately prior to such subdivision shall be proportionately
decreased, and in case the Corporation shall at any time combine the outstanding
shares of Common Stock issuable upon conversion of the Note, the conversion
price in effect immediately prior to such combination shall be proportionately
increased. Any such adjustment shall be effective at the close of business on
the date such subdivision or combination shall become effective.
(b) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of this Note (other than a change in par
value, or from par value to no par value, or from no par value to par value), or
in case of a consolidation or merger of the Corporation with or into another
corporation (other than a merger or consolidation in which the Corporation is
the continuing corporation and which does not result in a reclassification of
outstanding shares of Common Stock of the class issuable upon the conversion of
this Note except where the security holders of the Corporation are entitled to
receive securities of another issuer), or in case of any sale or conveyance to
another corporation of the property of the Corporation as an entirety or
substantially as an entirety, the Corporation or such successor or purchasing
corporation, as the case may be, shall execute an instrument providing that the
Holder of this Note shall have the right thereafter to convert this Note into
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, consolidation, merger, sale, or
conveyance by the Holder of the number of shares of Common Stock of the
Corporation into which this Note might have been converted immediately prior to
such reclassification, consolidation, merger, sale, or conveyance. Such interest
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the
4
<PAGE>
adjustments provided for herein. The foregoing provisions of this Note shall
similarly apply to successive reclassification of shares of Common Stock and to
successive consolidations, mergers, sales, or conveyances.
7. Failure to Act and Waiver. No failure or delay by the Holder hereof
to insist upon the strict performance of any term of this Note or to exercise
any right, power or remedy consequent upon a Default Event hereunder shall
constitute a waiver of any such term or of any such breach, or preclude the
Holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Note, the Holder hereof shall not be deemed to waive the right either to
require payment when due of all other amounts payable under this Note, or to
declare a Default Event for failure to effect such payment of any such other
amount.
The failure of the Holder of this Note to give notice of any failure or
breach of the Corporation under this Note shall not constitute a waiver of any
right or remedy in respect of such continuing failure or breach or any
subsequent failure or breach.
8. Consent to Jurisdiction. The Corporation hereby agrees and consents
that any action, suit or proceeding arising out of this Note shall be brought in
any appropriate court in the State of New York, and by the issuance and
execution of this Note the Corporation irrevocably consents to the jurisdiction
of each such court.
9. Transfer/Negotiability. This Note shall be transferred on the books
of the Corporation only by the registered Holder hereof or by its attorney duly
authorized in writing or by delivery to the Corporation of a duly executed
assignment. The foregoing notwithstanding, the Corporation shall not transfer
this Note nor any of the shares of Common Stock issuable upon conversion
hereunder except pursuant to registration under the act or an available
exemption from the registration requirements of the Act. Neither the Corporation
nor its Transfer Agent shall be obligated to effect any such transfer unless it
shall have received an opinion of counsel to the Holder reasonably satisfactory
to the Corporation and its Transfer Agent stating that such removal of the
legend complies with the provisions of the Act. The Corporation shall be
entitled to treat any holder of record of the Note as the holder in fact thereof
and shall not be bound to recognize any equitable or other claim to or interest
in this Note in the name of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of New
York.
5
<PAGE>
10. Notices. All notices and communications under this Note shall be in
writing and shall be either delivered in person or accompanied by a signed
receipt therefor or mailed first-class United States certified mail, return
receipt requested, postage prepaid, and addressed as follows:
if to the Corporation, to:
MSU Corporation
Elder House
526-528 Elder Gate
Central Milton Keynes MK9 1LR
United Kingdom
Attention: Keith Peirson, President
if to the Holder, to:
___________________________________
___________________________________
___________________________________
11. Governing Law. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of New York, or, where
applicable, the laws of the United States, without regard to conflicts of law.
12. Incorporation by Reference. The terms and conditions set forth in
that certain Note Purchase Agreement between the Corporation, the Holder and the
Holder dated as of the date hereof are incorporated herein by this reference,
and any transferee or subsequent holder of this Note or the shares of Common
Stock issued upon conversion thereof shall be subject to and bound by the
provisions of such agreement.
IN WITNESS WHEREOF, the Corporation has caused this Note to be duly
executed as of the __ day of December 1998.
MSU CORPORATION
By: /s/ Keith Peirson
--------------------------
Keith Peirson, President
Attest
- ------------------------------
William D. Snowdon, Secretary
Secretary
6
<PAGE>
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT"), NOR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
CORPORATION RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE CORPORATION THAT THIS
NOTE MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
MSU Corporation
(a Florida corporation)
10% Convertible Promissory Note
Due Two Years From The Date Hereof
Total Note: U.S. $100,000
MSU Corporation, a Florida corporation (the "Corporation"), for value
received, promises to pay (subject to the conversion provisions set forth
herein) to the order of ______________________ (the "Holder"), two (2) years
from the date hereof, (the "Due Date"), upon presentation of this convertible
note (the "Note"), One Hundred Thousand ($100,000) Dollars (the "Principal
Amount"). The Note is convertible into shares of common stock (the "Common
Stock") of the Corporation as provided below in Section 2.
The Corporation covenants, promises and agrees as follows:
1. Interest. Interest at the rate of ten (10%) percent per annum shall
be paid semi-annually in arrears from the date hereof until the Corporation's
obligation with respect to the payment of such principal sum shall be discharged
as herein provided. In the event that for any reason whatsoever any interest or
other consideration payable with respect to this Note shall be deemed to be
usurious by a court of competent jurisdiction under the laws of the State of New
York or the laws of any other state governing the repayment hereof, then so much
of such interest or other consideration as shall be deemed to be usurious shall
be held by the Holder as security for the repayment of the principal amount
hereof and shall otherwise be waived.
2. Conversion.
2.1. Option to Convert. The Holder shall have the right, at
its option, to convert, in whole or in part, subject to the terms
and provisions hereof, the then outstanding balance of the
1
<PAGE>
Principal Amount of the Note into shares of Common Stock of the Corporation, the
number of shares to be determined by dividing the outstanding balance of the
Principal Amount of the Note to be converted by $2.00 (the "Conversion Price"),
subject to adjustment as provided below in Section 6.
2.2. Exercise of Conversion Right. The conversion right shall be
exercised, if at all, by surrender of the Note to the Corporation at the address
set forth below in Section 10, together with written notice of election executed
by the Holder, which may be in the form which is included with this Note
(hereinafter referred to as the "Conversion Notice") to convert such Note or a
specified portion thereof into shares of Common Stock of the Corporation, the
number of shares of which shall be determined by dividing the dollar amount
being converted by the Conversion Price, subject to adjustment as provided below
in Section 6.
2.3. Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of this Note. In lieu thereof, the Corporation
shall round up to the nearest whole share. In the case of a dispute as to the
calculation of the Conversion Price, the Corporation's calculation shall be
deemed conclusive absent manifest error. In order to convert this Note into full
shares of Common Stock, the Holder shall surrender this Note, duly endorsed, to
the Corporation, together with the Conversion Notice that it elects to convert
the same, the amount of principal to be so converted, and a calculation of the
Conversion Price (with an advance copy of the Note and the notice by facsimile);
provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless either the Note is delivered to the Corporation as provided above, or the
Holder notifies the Corporation that such Note has been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such Note.
The date of conversion (the "Date of Conversion") shall be the date on
which the Conversion Notice is received by the Corporation on behalf of the
Corporation and the person or persons entitled to receive the shares issuable
upon such conversion shall be treated for all purposes as the record Holder or
Holders of such shares on such date.
2.4. Involuntary Conversion. If at any time during the term of the
Note, the closing market bid price of the Common Stock equals or exceeds $4.00
per share for a period of twenty (20) consecutive trading days as reported on a
national exchange, (if any), NASDAQ or the Over-the-Counter Bulletin Board, the
Note shall automatically be converted, on the last trading day of such period
into a number of shares of Common Stock to be determined by dividing the
outstanding balance of the Principal Amount of the
2
<PAGE>
Note by the Conversion Price; subject to adjustment as provided in Section 6
below.
2.5. Reservation of Shares. The Corporation shall at all times reserve
and keep available, free from preemptive rights, unissued or treasury shares,
shares of Common Stock sufficient to effect the conversion of this Note; and, if
at any time, the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding principal of
this Note, the Corporation will take such corporate action as may be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
3. Prepayment. The Corporation shall have the right, at any time, up to
and including June 30, 2000 to prepay this Note in full. In the event the
Corporation notifies the Holder of its intention to prepay the Note in full, the
Holder shall have the option with thirty days' notice thereof to convert the
Note in whole or in part into a number of shares of Common Stock, the number of
shares to be determined by dividing the dollar amount to be converted by the
Conversion Price, subject to adjustment as provided in Section 6 below, with the
balance, if any, to be paid in cash by the Corporation in the event the Holder
elects to convert less than the Principal Amount of the Note.
4. Collateral. The Corporation's obligations hereunder are
collateralized by a pledge of the following: (i) 500,000 shares of common stock
of American Interactive Media Inc. registered in the name of the Corporation by
the Corporation; (ii) 3,000,000 shares of the Corporation by Wynford Holloway,
the Corporation's Chairman; and (iii) 250,000 shares of the Corporation by
William Snowdon, the Corporation's Corporate Secretary.
5. Default.
5.1. Payment of this Note shall, at the election of the Holder, be
accelerated immediately upon the occurrence of any of the following events (a
"Default Event"):
(a) The non-payment by the Corporation when due of principal and
interest as provided in this Note.
(b) If the Corporation (i) applies for or consents in writing to the
appointment of, or if there shall be a taking of possession by, a receiver,
trustee or liquidator for the Corporation of all or substantially all of its
property; (ii) admits in writing its inability to pay its debts as they become
due; (iii) makes a general assignment for the benefit of creditors; (iv) files
any petition for relief under the Bankruptcy Code or any similar federal or
state statute; or (v) has assessed or imposed against it, or if there shall
3
<PAGE>
exist, any general or specific lien for any federal, state or local taxes
against any of its property or assets other than liens for taxes not yet due or
being contested in good faith.
(c) Any failure by the Corporation to issue and deliver shares of
Common Stock as provided herein upon conversion of this Note, in whole or in
part.
Notwithstanding the foregoing, the Corporation shall have fifteen (15)
days from the receipt of a written Notice of Default to cure said Default Event,
and no acceleration of payment hereunder shall be deemed to have occurred until
the thirtieth day after the Corporation's receipt of a written Notice of Default
from the Holder of this Note. Upon such cure, the terms of this Note shall
continue in effect.
5.2. Each right, power or remedy of the Holder hereof upon the
occurrence of any Default Event as provided for in this Note or now or hereafter
existing at law or in equity or by statute shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Note or now or hereafter existing at law or in equity or by statute, and
the exercise by the Holder of any one or more of such rights, powers or remedies
shall not preclude the simultaneous or later exercise by the Holder hereof of
any or all such other rights, powers or remedies.
6. Anti-Dilution Adjustments. The Conversion Price shall be subject to
adjustment as follows:
(a) In case the Corporation shall at any time subdivide or combine the
outstanding shares of common stock, declare a stock dividend, stock split,
reverse stock split or other similar transaction or reclassify its common stock,
the Conversion Price in effect immediately prior to such transaction shall be
proportionately adjusted to reflect the effect of such transaction. Any such
adjustment shall be effective at the close of business on the date such
transaction shall become effective.
(b) In case of a consolidation or merger of the Corporation with or
into another corporation (other than a merger or consolidation in which the
Corporation is the continuing corporation and which does not result in a
reclassification of outstanding shares of common stock of the class issuable
upon the conversion of this Note and pursuant to which the security holders of
the Corporation are not entitled to receive securities of another issuer), or in
case of any sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety, the Corporation or
such successor or purchasing corporation, as the case may be, shall execute an
instrument providing that the Holder of this Note shall have the
4
<PAGE>
right thereafter to convert this Note into the kind and amount of shares of
stock and other securities and property receivable upon such reclassification,
consolidation, merger, sale, or conveyance by the Holder of the number of shares
of Common Stock of the Corporation into which this Note might have been
converted immediately prior to such reclassification, consolidation, merger,
sale, or conveyance. Such interest shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for
herein. The foregoing provisions of this Note shall similarly apply to
successive reclassification of shares of Common Stock and to successive
consolidations, mergers, sales, or conveyances.
7. Failure to Act and Waiver. No failure or delay by the Holder hereof
to insist upon the strict performance of any term of this Note or to exercise
any right, power or remedy consequent upon a Default Event hereunder shall
constitute a waiver of any such term or of any such breach, or preclude the
Holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Note, the Holder hereof shall not be deemed to waive the right either to
require payment when due of all other amounts payable under this Note, or to
declare a Default Event for failure to effect such payment of any such other
amount.
The failure of the Holder of this Note to give notice of any failure or
breach of the Corporation under this Note shall not constitute a waiver of any
right or remedy in respect of such continuing failure or breach or any
subsequent failure or breach.
8. Consent to Jurisdiction. The Corporation hereby agrees and consents
that any action, suit or proceeding arising out of this Note shall be brought in
any appropriate court in the State of New York, and by the issuance and
execution of this Note the Corporation irrevocably consents to the jurisdiction
of each such court.
9. Transfer/Negotiability. This Note shall be transferred on the books
of the Corporation only by the registered Holder hereof or by its attorney duly
authorized in writing or by delivery to the Corporation of a duly executed
assignment. The foregoing notwithstanding, the Corporation shall not transfer
this Note nor any of the shares of Common Stock issuable upon conversion
hereunder except pursuant to registration under the act or an available
exemption from the registration requirements of the Act. Neither the Corporation
nor its Transfer Agent shall be obligated to effect any such transfer unless it
shall have received an opinion of counsel to the Holder reasonably satisfactory
to the Corporation and its Transfer Agent stating that such removal of the
legend complies with the provisions of the Act. The Corporation shall be
entitled to treat any holder of record of the Note as the holder in fact thereof
and shall not be bound to recognize any
5
<PAGE>
equitable or other claim to or interest in this Note in the name of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of New York.
10. Notices. All notices and communications under this Note shall be in
writing and shall be either delivered in person or accompanied by a signed
receipt therefor or mailed first-class United States certified mail, return
receipt requested, postage prepaid, and addressed as follows:
if to the Corporation, to:
MSU Corporation
Elder House
526-528 Elder Gate
Central Milton Keynes MK9 1LR
United Kingdom
Attention: Wynford P. Holloway, Chairman
if to the Holder, to the address of such Holder as it appears in the
subscription documents delivered by the Holder to the Corporation.
11. Governing Law. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of New York, or, where
applicable, the laws of the United States, without regard to conflicts of law.
(This Space Left Blank Intentionally)
6
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Note to be duly
executed as of the ___ day of _______, 1999.
MSU CORPORATION
By: /s/
--------------------------
Company Secretary
7
<PAGE>
CONVERSION NOTICE
MSU CORPORATION
The undersigned holder (the "Holder") of a 10 %, $100,000
Principal Amount Convertible Promissory Note (the "Note"), hereby elects to
convert U.S. $ of said Note into shares of common stock of MSU Corporation in
accordance with the terms of the Note. Holder hereby directs that any such
shares be issued in the name of and delivered to the Holder or if so specified,
to the person or entity named below.
Dated ____________
Name _____________________
Signature ________________________
Address __________________________
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of MSU Corporation and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,604,504
<SECURITIES> 390,625
<RECEIVABLES> 566
<ALLOWANCES> 0
<INVENTORY> 39,500
<CURRENT-ASSETS> 2,815,027
<PP&E> 134,959
<DEPRECIATION> (159,279)
<TOTAL-ASSETS> 3,340,611
<CURRENT-LIABILITIES> (1,293,758)
<BONDS> 0
0
0
<COMMON> (253,642)
<OTHER-SE> 1,288,211
<TOTAL-LIABILITY-AND-EQUITY> 3,340,611
<SALES> 31,746
<TOTAL-REVENUES> 31,746
<CGS> 53,374
<TOTAL-COSTS> 3,527,335
<OTHER-EXPENSES> 6,189,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,675
<INCOME-PRETAX> (3,495,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,685,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,685,271)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
