0001125282-01-502033.txt : 20011009 0001125282-01-502033.hdr.sgml : 20011009 ACCESSION NUMBER: 0001125282-01-502033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSU DEVICES INC CENTRAL INDEX KEY: 0000798952 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 222748288 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-28622-A FILM NUMBER: 1745045 BUSINESS ADDRESS: STREET 1: 2901 NORTH DALLAS STREET 2: SUITE 460 CITY: PLANO STATE: TX ZIP: 75093 BUSINESS PHONE: 9724737543 MAIL ADDRESS: STREET 1: 2901 NORTH DALLAS PARKWAY STREET 2: SUITE 460 CITY: PLANO STATE: TX ZIP: 75093 FORMER COMPANY: FORMER CONFORMED NAME: CAPITAL ACQUISITION CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MSU CORP DATE OF NAME CHANGE: 19950123 10-K 1 b313844_10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended June 30, 2001 OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to _____________ Commission file number: 033-28622-A MSU DEVICES INC. (formerly MSU Corporation) ------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 22-2748288 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2901 North Dallas Parkway Suite 460 Plano, Texas 75093 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (972) 473-7543 ----------------------------------------------------- (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| State the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. Aggregate market value as of September 10, 2001......... $12,099,868 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $.01 par value, as of September 10, 2001 ... 38,547,868 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents incorporated by reference herein and the Part of the Form 10-K into which the document is incorporated: None 2 ITEM 1. BUSINESS. Overview MSU Devices Inc. (also referred to as "we", "us", the "Company" or "MSU") designs, markets and sells affordable Internet access devices that enable consumer and business end-users to communicate simply and easily by using e-mail and over the World Wide Web via the Internet without the necessity of technical or personal computer knowledge or expertise. When using our products and services, end-users have access to an Internet service provider, e-mail hosting and content in a single, easy to use hardware/software appliance. In the third calendar quarter of 2001, we launched our new Internet access device product, the MSU/Version 5 ("MSU/5") and have begun entering into contracts with distributors (see "Business - Customers"). The MSU/5 will sell in volume for under $200 per device. Industry The Growth In The Internet The Internet is an increasingly significant global electronic mass medium for conducting business, collecting and exchanging information, facilitating communications and providing education and entertainment. International Data Corporation, or IDC, estimates that the number of Internet users worldwide will grow from approximately 142 million at the end of 1998 to approximately 502 million by the end of 2003, representing a compound annual growth rate of 29%. The rapid acceptance of the Internet has created an opportunity for e-commerce transactions such as trading securities, buying goods, purchasing airline tickets and paying bills. According to IDC, the percentage of Internet users buying goods and services on the Internet will increase from approximately 22% in 1998 to approximately 36% in 2003, and the total value of goods and services purchased directly on the Internet will increase from approximately $27.0 billion in 1998 to approximately $842.7 billion in 2003. Advertisers and direct marketers are increasingly using the Internet to locate customers, advertise and facilitate transactions. The Internet allows marketers to interact more effectively with customers and to more easily obtain relevant data about buying patterns, preferences and demands. The value of Internet advertising is enhanced by the ability of advertisers to obtain specific user information and target promotions and advertisements effectively. According to Forrester Research, the total worldwide dollar value of Internet advertising will increase from $3.3 billion in 1999 to $24.1 billion in 2003. Internet content and the number of World Wide Web pages available to consumers are increasing dramatically. According to IDC, the number of Web pages will increase from approximately 925 million at the end of 1998 to over 13 billion by the end of 2003, representing a compound annual growth rate of 70%. We believe the proliferation of content is making it increasingly difficult and time-consuming for users to navigate the Internet and to locate useful and relevant information. Pervasive Computing and Intelligent Computing Devices The widespread use of electronic communications, including the Internet, is enabling networks of businesses and consumers to collaborate, access information and conduct 3 business and personal interactions more effectively. As the number of Internet users grows, so does the diversity of content, services and applications available via the Internet. With this growth, there is an emerging class of devices defined as intelligent computing devices, or information appliances. They feature sophisticated processing power designed for specific computing and communications applications, and may include, among others, the following: Internet access devices used in the home and business; television set-top boxes; handheld and palm-size PCs; gaming systems; handheld industrial data collectors; e-mail appliances; kiosk terminals; navigational devices for cars and trucks; thin clients for corporate computing; web-pads; and e-books. IDC estimates that the worldwide market for intelligent computing devices or information appliances will grow from approximately $2.4 billion in 1999 to approximately $17.8 billion in 2004. Compared to traditional computers, intelligent computing devices are usually less expensive and more adaptable in terms of size, weight, shape and mobility, while still providing sophisticated computing and communications capabilities. Intelligent computing devices are at the root of emerging markets, delivering access to data at the point of use in a wide variety of scenarios, from the factory floor to the mobile workforce to the home. Supermarkets deploy intelligent computing devices as mobile, wireless barcode scanners facilitating inventory control. Factories use intelligent computing devices as remote equipment monitors or sophisticated man-machine interfaces. Cable operators deploy and manage sophisticated intelligent computing devices such as Web-pads and set-top boxes, offering advanced services for the home. Personal Computers and the Personal Computer-Like Experience Today, most people who access the Internet do so using Intel-based personal computers ("PCs") which typically run one of the Windows operating systems developed and sold by Microsoft. The PC platform is the dominant hardware/software configuration for accessing the Internet today because of its near-universal adoption on a worldwide basis as the tabletop or "personal" computer of choice. Almost all Internet-related World Wide Web sites and e-mail programs are tailored for use on PCs first and foremost. While the PC has achieved near universal status as an Internet access device, the search for alternative means of accessing the Internet has continued. Alternative Internet access devices attempt to address principal PC user complaints, including: 1. Ease-of-Use: Given the universal nature of the PC, it must be designed in such a fashion as to appeal to the widest possible number of users. In the calendar year 2000, worldwide PC shipments totaled over 100 million units. From accounting to zoology, the PC accomplishes many tasks using an incredible variety of software and hardware configurations, and thus its near universality. With so many users to appeal to, the PC is by definition harder to use when accessing the Internet than would otherwise be the case if the PC were designed specifically for this task. 2. Lower System Cost: The PC has inherited many features over its nearly 20-year existence and thus must support a number of legacy software and hardware features. In addition, the PC must feature relatively very high-speed processors, large amounts of memory, and other features that are not required for an acceptable Internet experience. 4 We believe that while users of new Internet access devices want easier to use devices and lower overall system costs, they do not want to leave behind the richness and variety of the PC-like Internet experience. This means that, in our opinion, for any new Internet access device to be successful in the marketplace, it must offer a third and critical feature which is: 3. A PC-Like Experience: The PC's near-dominance to date over accessing the Internet has set consumer and business user expectations as to what an Internet experience should look and feel like. Most PC users access the Internet via the World Wide Web using a software application called a "browser". The dominant browser in use today on PCs is the "Internet Explorer" from Microsoft. While having a relatively simple browser was acceptable for experiencing the World Wide Web a few short years ago, this is no longer the case. Today, there are tens of millions of documents on the World Wide Web available to users which exist in many different formats. Reading and downloading such a wide variety of documents and document formats requires the use of increasingly sophisticated software applications called "browser plug-ins". In order to obtain a PC-like experience today, a browser must include browser plug-ins for viewing: o Compound Documents: Acrobat Portable Document Format ("PDF") from Adobe or a suitable clone is needed for viewing the increasing number of compound documents found on the World Wide Web featuring text and graphics; o Multimedia Files: Real Audio/Video from Real Networks or the Windows Media Player from Microsoft is needed for viewing multimedia audio and video files; o Web Animations: Flash from Macromedia is needed for viewing low-bandwidth animations featured on a wide variety of popular World Wide Web sites; and o Java: A Java virtual machine is needed for viewing Java-based applets found on many World Wide Web sites and is also needed if programmers need to program the device using the Java programming language, one of the most popular programming languages used for writing custom software for deployment in Internet-centric applications. Java virtual machines are available from Sun Microsystems, Java's originator, and clone vendors such as Insignia Solutions that specialize in developing Java virtual machines for non-PC hardware. Though there are many other plug-ins, we believe these are the essential plug-ins for experiencing the World Wide Web. 5 Our Strategy - MSU/Version 5 Product Positioning We are engaged in the Internet access device market, and do not participate or compete in other computing markets. Our strategy is to provide highly valued, differentiated products for our targeted consumer and business Internet access device market. We design, market and sell affordable Internet access devices that enable consumers and business end-users to communicate simply and easily by using e-mail and over the World Wide Web via the Internet without the necessity of technical or personal computer knowledge or expertise. Simplicity. Our MSU/5 offers users a new level of simplicity. The device hides the complexities of system configurations, software maintenance and the dial-up process to access the Internet and e-mail. In addition, the MSU/5 has a user-friendly graphical interface with intuitive features and instructions, allowing even novice users to navigate the Internet effectively. Affordability. The MSU/5 is intended to serve as a low-cost programmable Internet access device platform. PC-Like Experience. The MSU/5 provides what we believe is a robust PC-like World Wide Web browsing and e-mail experience, and is programmable using the Java and XML programming languages. The MSU/5 can also be programmed in C++ and Visual Basic, however, we will concentrate on Java and XML before enabling programmers with other languages. The MSU/5's browser supports the most popular software plug-ins including: Java, Flash, Windows Media Player and PDF. The MSU/5 will feature our custom user interface for ease-of-use in connecting to the Internet and will also feature Microsoft Pocket Word and the BSQUARE Spreadsheet Viewer. The MSU/5 will have the capability to be administered remotely by MSU and its partners and customers. Java Programming. By adding full Java capability to the MSU/5, we believe we have produced a superior Internet access device given the extensive use of Java by many of the leading sites on the World Wide Web. With full Java support, our Internet access devices become programmable using the Java programming language. This allows companies to write custom applications for the MSU/5. Given the significant communications support found in the MSU/5, most custom applications written for the device would be communications-centric. Server-Based Computing. The MSU/5 can be used for server-based computing that enables applications to execute 100 percent on a server, and not the terminal device used by the end-user. Using this software from Citrix Systems Inc. or Microsoft Corporation, the MSU/5 establishes a session with a server, allowing users of the MSU/5 and other devices to view and work with an application as if it were running locally. Our new management team intends to spend the next twelve months focusing our resources and sales efforts with respect to our core market: consumers and businesses who require Internet access in order to use e-mail and browse the World Wide Web. In summary, we offer consumers and business users Internet-based e-mail and World Wide Web browsing through devices specifically designed for easy, simple-to-use Internet access. Our mission is to empower consumers and business users to communicate simply and easily over the Internet without necessity of technical or personal computer knowledge or expertise. When using our products and services, end-users have access to an 6 Internet service provider, e-mail hosting and content in a single, easy to use hardware/software appliance. Corporate Restructuring We have been in business since 1994. In the past three years, we have released three versions of our Internet access device, and were working on a fourth version until the first quarter of calendar 2001. In undertaking our business activities since 1994, we realized an accumulated deficit of $32 million. In the fourth calendar quarter of 2000, a group of our stockholders asked Mr. Jean Belanger, who had recently resigned as Vice President, Business Development, Motorola Semiconductor Product Sector in Austin, Texas, to help formulate a new strategic plan for our business. That new strategic vision as described herein was presented to our Board of Directors in January of 2001, following which Mr. Belanger was appointed to the Board of Directors. Following our recent Annual Meeting on June 15, 2001, Mr. Belanger was named Chairman of the Board. Starting in January of 2001, Mr. Belanger began restructuring our activities. In January of 2001, a new management team was recruited headed up by a new President and Chief Executive Officer, Mr. D. Bruce Walter. Subsequently, Mr. Belanger and Mr. Walter recruited the rest of the new management team: Mr. Pritesh Patel, Vice President and Chief Technology Officer, Ms. Patti Brown, Vice President and Chief Financial Officer and Mr. Raymond Dittrich, Vice President Sales and Market Development. Restructuring Changes Implemented January of 2001 to Present: Beginning in January of 2001, our new management team undertook a complete review of our strategic direction. As a result of this review, the Board of Directors adopted the recommendation of the new management team that we remain in the Internet access device business, but undergo several significant changes in strategy. The following major changes have been implemented over the period January of 2001 to June of 2001: o we moved our head office from the United Kingdom to Plano, Texas, a suburb of Dallas; o we implemented a financial restructuring, whereby most of our major liabilities were re-structured and converted into equity, and we completed a $4.5 million convertible bridge loan fundraising (see "Legal Proceedings"); o we reincorporated from the State of Florida to the State of Delaware; o we discontinued all development efforts on the newest version of our Internet access device, MSU/4, and we put a new product plan in its place; o we halted all research and development efforts in the United Kingdom and began an aggressive program of licensing technology from third-party vendors who have greater fiscal and human resources to keep up with the very competitive Internet access market; o we repositioned our target market by marketing the new MSU/5 prototype in the United States and the United Kingdom (previously, we sold the majority of our products in Southern Europe); 7 o we determined that we should continue using an x86-based microprocessor design to facilitate the porting of software to the new MSU/5, however, the new design needed to be at least an order of magnitude faster than previous versions of our product; o we placed a greater emphasis on making the new MSU/5 programmable using the Java programming language. As previously explained, this greatly expands the market for MSU's products in companies where customization using software written specifically for their purposes was a necessity; and o we included software in the MSU/5 to allow the device to be used as a "thin client" whereby all of the logic of an application resides on a server and the communication between the MSU/5 and the server takes place either over the Internet or using an Ethernet-based local area network. Sales and Marketing Prior to the advent of our new MSU/5 Internet access device, our sales were largely in Europe and Asia. Our new management team has refocused our sales and marketing efforts on a worldwide basis. We have built the new MSU/5 to process data faster then previous versions of the product and to provide a more PC-like experience than our previous products. The new management team believes that no Internet technology can survive in the medium-to-long-term unless it is widely adopted in the United States. We have continued to service our existing channels of distribution in Southern Europe and intend to introduce the MSU/5 into these markets in the fourth calendar quarter of 2001. Given our limited resources, sales and marketing efforts are being focused on large volume opportunities. We do not intend to focus on the retail market for the next twelve months unless we can identify a retail partner who would establish a strategic partnership with us. The MSU/5 will sell in volume for under $200 per device. While we expect to expend significant resources in the next twelve months in order to build up our brand name and market awareness, we also intend to sell the MSU/5 on a private label basis. We believe this to be an effective strategy to build up sales volume as fast as possible in order to take advantage of inherent economies of scale. Customers Web 2 U Limited (our wholly owned UK subsidiary) signed a sales and distribution agreement with CPS Broadcast Products B.V. ("CPS") in August of 2001. CPS is one of the Netherlands' leading developers of advanced analogue and digital set-top boxes. Under this agreement, CPS will become the Company's and Web 2 U Limited's distribution partner for South Africa and has agreed to purchase 10,000 MSU/5 devices in the calendar fourth quarter of 2001. The contract calls for a minimum volume of 40,000 in the first year and 60,000 in the second year. As part of this agreement, CPS will have exclusivity in South Africa subject to achievement of these volume parameters. Web 2 U Limited signed a trial agreement with Newhomesdirect.co.uk ("NHD") of Scotland in August of 2001, pursuant to which NHD has agreed to feature the MSU/5 as an available option to its customers. NHD specializes in offering the new homes market three 8 independent, but related services, each of which can be tailored to the specific needs of the purchaser, builder or developer. We signed a trial agreement with the Plano Texas Independent School District ("PISD") in August of 2001. PISD is one of the most advanced school districts in the United States. The district has 59 schools and over 47,000 students. PISD has developed a digital user interface which allows the district's computer network to deliver personalized desktops to any student and staff member on any computer in the district. With the MSU/5 unit, students and parents who have broadband capability at home will be able to connect at high speed or via a 56k modem. The New MSU/Version 5 Internet Access Device Product Specifications The hardware design of the MSU/5 is intended to serve as a low-cost programmable Internet access device platform. The MSU/5 has been designed to provide a high degree of flexibility from the users perspective with regards to narrow or broadband connectivity, various television or computer monitor display options and future hardware upgrade options using PCMCIA and USB enabled peripherals. MSU/5 Hardware Specifications The most important hardware supplier for the MSU/5 is National Semiconductor Corporation. The MSU/5 features eleven separate parts supplied by National Semiconductor, including the National Geode GX1 processor with MMX support that integrates fully accelerated 2D graphics. Along with the processor, other board-level components include National Semiconductor's Geode CS5530A I/O companion device and its fast Ethernet controller. National Semiconductor's Geode microprocessor family is one of the leading processors in the intelligent computing devices market. For instance, the National Geode microprocessor currently has approximately an 85% market share in the thin client market. We chose the Geode microprocessor to power our MSU/5 device because it is an integrated x86 processor optimized for power, performance, and price for the target markets of the MSU/5. With headquarters in Santa Clara, Calif., National Semiconductor reported sales of $2.1 billion for its last fiscal year and has over 10,000 employees worldwide. The hardware specifications for the MSU/5 include: Enclosure: - The MSU/5 enclosure is black with a weighted base for proper balance and solid build, featuring a lens for infrared communication and four LED lights on the front panel. In addition, the front panel will allow access to a Smart card reader, an open PCMCIA slot and a USB connector. The back panel will include video connectors for TV and computer monitors, a USB connector, an Ethernet connector, a dial-up modem telephone jack, a PC ATA/IDE connector, and connectors for audio. Processor: - The MSU/5 will feature the National Semiconductor Geode processor running at 266MHz, plus the companion chip CS5530A. 9 Memory: - The minimum memory configuration for the MSU/5 is 16MB of Flash memory and 64MB of SDRAM. VGA or TV Display: - The MSU/5 will allow users to output their Internet data on either a standard television monitor or a standard computer monitor. By plugging in the supplied cables to the SCART connector on the rear panel, the MSU/5 supports RGB, CVBS or composite and S-Video outputs to the NTSC television format used in the United States and Canada and the PAL television format throughout most of the rest of the world. The MSU/5 also supports standard computer monitors with 800x600 resolution and standard computer flat panels with 800x600 resolution. Keyboard: - The MSU/5 will include a wireless infrared keyboard with a built-in eight directional pointing device for cursor navigation, and will also include a connector on the rear panel to plug in a standard computer industry "PS/2-compatible" keyboard and mouse. LED Indicators: - Four LED-based lights on the front panel will indicate power on or off; any modem activity taking place; any Ethernet-based LAN activity taking place; and if any email messages have been received since the last time messages were read by the user. This means the user will not have to turn the MSU/5 on in order to know if there is email waiting in their mailbox. PCMCIA Slot: - The MSU/5 will support Type III PCMCIA peripherals. PCMCIA is a popular PC industry connector and form factor used to add memory and functionality via PCMCIA cards. One popular PCMCIA-based feature is wireless connectivity using the 802.11b standard. The MSU/5 will not support PCMCIA-based PC peripherals at large as we together with our partners will need to write specific software drivers for any peripherals to be supported by the MSU/5. Modem & Ethernet: - The MSU/5 features a 56k V.90 standard dial-up modem from Conexant Systems, Inc., the world's leading supplier of V.90 dial-up modem chipsets to the PC industry. The MSU/5 also supports standard 10 Megabit per second ("Mbps") and 100 Mbps Fast Ethernet, otherwise known as 10/100 Base-T Ethernet. Most users of advanced broadband services such as cable modems and DSL connect devices in their homes or businesses via standard Ethernet. With support for standard Ethernet, the MSU/5 allows users to connect to the Internet using the 56k V.90 modem included with the device or they can use faster broadband modems that they purchase separately and connect to the MSU/5 via the Ethernet port. Smart Card Reader: - The MSU/5 features an ISO7816 smart card reader using the Gemplus GemCore Lite(TM)chipset. Smart cards are used in Europe especially for financial applications. 10 USB/IDE Connectors: - The PC industry has moved to standard USB connectors for most of its popular peripherals. The MSU/5 features one USB connector on the front panel of the device and one USB connector on the rear panel. We together with our partners will offer support via USB for specific peripherals such as printers. The MSU/5 will not support USB-based PC peripherals at large as we and our partners will need to write specific software drivers for any peripherals to be supported by the MSU/5. In addition to USB, the MSU/5 includes on the rear panel of the device the older standard PC ATA/IDE connector. Audio Support: - The MSU/5 features stereo audio output so users can add standard PC stereo speakers to the device and also supports audio out for stereo headphones as well as standard audio microphone input via a separate connector on the rear panel of the device. Power: - The MSU/5 will always be powered on when plugged in. It will not have a power switch. The MSU/5 features advanced power management capabilities found in most laptop PCs to power down the device into standby mode when it is not in use. This power management approach helps dramatically increase the average useful life of the Flash memory included in the device. MSU/5 Software Specifications We have contracted with BSQUARE Corporation ("BSQUARE"), Bellevue, Washington to provide some of the software components required for the MSU/5. BSQUARE is one of Microsoft's largest Windows CE systems integration partners in terms of supporting the Windows CE operating system and building platforms and applications which original equipment providers like ourselves can use to rapidly deploy products. Since 1994, BSQUARE has worked with Microsoft on Windows CE and has helped many industry leaders bring Windows CE-based products to market including, Dell Computer Corporation, IBM Corporation and Hewlett-Packard Company. In 2000, BSQUARE was Microsoft's Embedded Partner of the Year for Windows CE and had revenues of $63.5 million. Currently, BSQUARE has over 400 employees. BSQUARE adapted the Windows CE operating system to the MSU/5 hardware reference design for a specified non-recoverable engineering fee, and is providing us (on a royalty basis) with software applications developed by third-party vendors including Macromedia Inc., Ansyr Technology Corporation and Insignia Solutions Inc. In addition, BSQUARE has provided us, on a royalty basis, with applications that are written specifically for Windows CE including its Microsoft Excel-compatible spreadsheet application and a client/server application allowing for the remote administration of MSU/5 devices by ourselves as well as our partners and customers. Our adaptation services agreement with BSQUARE was entered into as of August 21, 2001 for an indefinite term. Pursuant to this agreement, we have an obligation to purchase a minimum number of licenses during the term of the agreement. Either party may terminate the agreement upon certain termination events, including material breach and bankruptcy. The agreement may also be terminated upon mutual agreement of the parties. Upon termination, our 11 obligation to purchase the minimum number of licenses remains enforceable. The Windows CE operating system is built around an application programming interface that is consistent with Microsoft's other 32-bit Windows-based operating systems and allows devices to communicate with each other, share information with Windows-based PCs, and connect to the Internet. Microsoft has helped define the Internet experience on the PC and its software browser, Internet Explorer, is used by more people in the world accessing the Internet than any other browser. For the nine months ended March 31, 2001, Microsoft recorded revenues of over $18 billion and employed over 40,000 people, including 16,000 in product research and development. The software specifications for the MSU/5 include: Operating System: - The MSU/5 features the consumer electronics embedded systems version of the Windows operating system, Windows CE 3.0, designed and developed by Microsoft over the past six years. Browser: - Internet Explorer 4.0 ("IE4.0"): The MSU/5 features the world's most popular PC-based software browser for browsing the World Wide Web. IE 4.0 running on Windows CE 3.0 includes support for most of the important Internet standards including: HTML 4.0, Jscript, Caching, Cookie Management, GIF, JPEG, & BMP Formats, and Offline Browsing, and 40- and 128-bit SSL. Browser Plug-ins: - Windows Media Player ("WMP"): The MSU/5 supports streaming and static audio and video media with WMP by Microsoft. We include WMP in the device in lieu of support for Real Audio and Real Video from Real Networks, the other widely used audio and video browser plug-in on the PC, because there is no free version of the Real-based software plug-in for non-PC hardware. WMP supports all the popular streaming and static audio and video standards including: AVI, MIDI, MPEG, MPEG-4, MP3, WAV and WMA. - Macromedia Flash Player 5.0 ("MFP"): Macromedia's MFP is the most widely distributed software on the World Wide Web. MFP 5.0 is distributed by Microsoft, AOL, Netscape, Apple and Intel and thus 96% of online personal computer users can view Macromedia Flash animations in Web sites without having to download MFP 5.0. Macromedia Flash is used across the Internet to design and deliver low-bandwidth animations and presentations and offer scripting capabilities and server-side connectivity. - Ansyr Primer 3.1 PDF Viewer: Adobe's Portable Document Format is the PC industry standard for preparing and viewing large complex documents on the World Wide Web. These files can contain color, graphics, links and navigation features and are used for applications such as user and service manuals, help files, annual reports, and product brochures and data sheets. Ansyr Technology's 12 Primer 3.1 PDF Viewer allows Windows CE-based products to use PDF documents in the same manner they are used on a PC. - Insignia Java Virtual Machine: Sun Microsystems' Java programming language and Java virtual machine technology are synonymous with the World Wide Web and the Internet. Insignia Solutions' Jeode Java Virtual Machine ("EVM") offers complete compatibility with Sun's PersonalJava 1.2 and EmbeddedJava 1.0.3 specifications, which specifications are roughly equivalent to Sun's PC-based implementation of the Java JDK 1.1.8. Insignia's EVM was the first independently developed virtual machine to pass Sun's PersonalJava and EmbeddedJava test suites, thus ensuring full compliance with Sun's specifications. As a result, Insignia's EVM is a Sun-authorized Java virtual machine, which allows us to use the Sun Java logo in marketing and selling the MSU/5. Our substantial commitment to Java ensures that the MSU/5 supports World Wide Web sites that use Java extensively, and that programmers will be able to write custom applications to run on the MSU/5 using the Java programming language. Applications: - MSU Custom User Interface: Certain aspects of the user interface such as the logo, help pages, device settings, and home pages are configurable by the customer. - Microsoft Outlook Express Email Client: standard email client that allows storage and viewing of email on the local machine. - Microsoft Pocket Word: A reduced version of Microsoft Word that will allow customers to edit and update Microsoft Word-based documents. - BSQUARE Spreadsheet Viewer: This spreadsheet application by BSQUARE allows for basic spreadsheet functionality and allows user to edit and update Microsoft Excel-based spreadsheets. Internet Protocols: - The MSU/5 supports dial-up communications via its on-board modem and cable- and DSL-based broadband communications via Ethernet. Over such communications backbones, the MSU/5 supports all the commonly used Internet protocols including: TCP/IP, PPP, SLIP, SNMP, NDIS For LAN, and RDP 5.0. Device Driver Support: - Supports USB and PCMCIA Devices. Drivers will be added for USB Devices (printers, for example) and PCMCIA (storage devices, for example) devices as indicated by the customer. It will also be based on memory availability and driver availability. Thin Client Software: - Citrix Independent Computing Architecture ("ICA") Client: Citrix ICA is used for server-based computing that enables applications to execute 100 percent on a server, and not the terminal device used by the end-user. The client component of ICA establishes 13 a session with a Citrix server, allowing users of the MSU/5 and other devices to view and work with an application as if it were running locally. Citrix ICA transmits screen changes, keystrokes, and mouse movements between client and server over the network. By integrating ICA client software with the Windows CE operating system running on MSU/5, we give software developers "built-in" server-based computing capability. This makes it easier for developers to launch products that are compatible with the server-based computing model, which has been widely adopted by enterprises and Application Service Providers. The benefits of what is called "thin-client" computing include (i) extending the reach of business-critical applications to MSU/5 users over any Internet network connection; (ii) seamlessly providing access to applications running on a Citrix server together with access to local resources like local printers and local drives; (iii) providing a rich user interface while reducing bandwidth consumption and minimizing congestion on corporate Internet-based networks; (iv) reducing the total cost of ownership through centralized application management and the ability to leverage existing computing infrastructure as well as the relatively inexpensive MSU/5; and (v) enhancing data security by keeping all application processing on the server. - Microsoft Remote Display Protocol ("RDP") Client: The Remote Desktop Protocol also allows for the use of "thin clients" in corporate computing but interfaces only with Windows NT-based server applications, and not Windows NT- and UNIX-based server applications which Citrix allows for. Remote Administration: - BSQUARE Remote Device Administrator ("RDA") Client Server Application: The BSQUARE Remote Device Administrator is a client-server application for updating, managing, and monitoring MSU/5 devices in remote locations. When the RDA client is installed in an MSU/5, we together with our partners and customers are then able to: (i) manage multiple MSU/5 devices through a single interface, centrally or from a central location. Companies can push local content and program updates to the MSU/5 devices in the field; (ii) deploy, track and monitor enterprise-wide deployments of custom applications written specifically for deployment on the MSU/5 and initiate or schedule updates to MSU/5 remote devices. Companies can also clone client configurations and push the templates to clients during deployments; (iii) update and create flexible update schedules for clients and groups of clients, including triggered updates. Group devices logically and easily manage each group separately, enabling customers to customize devices based on a group's needs; and (iv) configure, display, set, and modify client configurations, including settings, current operating status, events, and MSU/5 device hardware inventory. MSU/5 devices managed by RDA appear maintenance free to end users, who automatically receive updates even while working in the field. The advanced remote management capabilities in RDA save time and reduce maintenance and support costs for 14 corporate IT departments, Application Service Providers, and Cable and Network Operators. Manufacturing and Purchasing We entered into a contract manufacturing relationship to outsource the hardware design and production of the MSU/5 to BioStar Microtech International Corporation and related subsidiaries in Taipei, Taiwan ("Biostar"). BioStar is one of the leading PC-motherboard manufacturers in Taiwan, with sales in excess of US$180 million in the calendar year 2000. BioStar has manufacturing facilities in Taipei and in the Peoples' Republic of China totaling over 270,000 square feet. Biostar employs over 1,200 people in its two major locations in Taipei and China. BioStar will source all major hardware components for the MSU/5, including processors, memory resources and other components. BioStar utilizes state-of-the-art manufacturing equipment and strong inventory management practices to achieve rapid inventory turnover and maintain reduced inventory levels. Biostar's manufacturing methods provide rapid pass-through of material cost decreases in its products. Our product manufacturing agreement with Biostar was entered into as of August 21, 2001 for a term of one year with automatic one year renewal periods. Either party may terminate the agreement upon certain termination events including material breach and bankruptcy. Biostar may terminate this agreement if we do not order a minimum amount of MSU/5 units annually or if we utilize a third party to manufacture MSU/5 units. Our product design and development agreement was entered into as of June 14, 2001 for a term of one year. Pursuant to the terms of this agreement, we paid Biostar in the aggregate a development fee of $118,000. The Company does not have any material on-going obligations pursuant to the terms of this agreement. We expect that Biostar will be able to obtain the necessary hardware components for the MSU/5 from suppliers in a timely manner to meet our production goals. Most of the components used in the MSU/5 are available from multiple sources; however, certain components are typically obtained from single sources. It is possible that Biostar may experience difficulties in obtaining certain hardware components from time to time, which difficulties could affect Biostar's ability to meet our orders. Management believes that in the event Biostar is unable to meet our orders, the Company will be able in a timely manner to secure another third party to outsource the production of the MSU/5. Technical Support and Customer Service Our distributors and resellers provide front-line technical support for end-users of the prior versions of our products and we intend to arrange for similar support for end-users of our MSU/5 device. Our technical analysts answer technical support calls from distributors and resellers. Our technical support group intends to implement a fax-on-demand system providing installation tips and technical documents to customers via fax. We maintain a home page on the World Wide Web to provide customer support and information. Competition The Internet access marketplace is intensely competitive. Competitive factors include price, product quality and reliability, product availability, credit terms, name recognition, 15 delivery time, and post-sale service and support. With respect to these factors, we may be at a competitive disadvantage against companies with greater financial, technical, product development, manufacturing, or marketing resources. A variety of companies currently offer products that compete directly with our products: o manufacturers and suppliers of other stand-alone Internet appliance platforms including: NetGem SA, Paris, France, with its "Netgem 4.0" Interactive TV Platform; and Sony Corporation with its new "eVilla" Network Entertainment Center; o manufacturers of personal computers, including: Apple Computer Inc., Compaq Computer Corporation, Dell Computer Corporation, Gateway Inc., Hewlett-Packard Company, and IBM Corporation; and o manufacturers of other "thin clients" including: IBM with their NetVista Network Station; Wyse Technology Inc. with their Wyse Winterm thin clients; and Neoware Systems Inc. with their Eon computing appliances. Additionally, the announcement of the release, and the actual release, of products competitive with our existing and future product lines, could cause our existing and potential customers to postpone or cancel plans to purchase any of our existing and future product offerings, which would adversely impact our business, results of operations, and financial condition. As markets for our products continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries, may enter the markets in which we compete and further intensify competition. These competitors and other potential competitors may have significantly greater financial, technical, sales, marketing, support and other resources than we do. There is no assurance that we will be able to establish and maintain a market position in the face of increased competition. Proprietary Rights, Licenses and Trademarks Following the restructuring which took place in the first half of 2001 (see "Business - Restructuring"), we are no longer designing our own custom video processors for data output to television monitors. Our new management team has decided to focus its activities on using off-the-shelf standard video processors in conjunction with our products due to cost reductions available when using standard parts and time-to-market advantages. As a result, our new management team does not believe that we will derive any substantial value from any of our patents related to this previously undertaken custom video processor activity, including the patents listed below. Unless otherwise indicated, all names referred to in this Annual Report on Form 10-K are trademarks and/or registered trademarks of their respective owners. We currently have three patent applications on file with the United States Patent and Trademark Office relating to research and development work carried out with respect to custom video processors by our UK-based subsidiary, Web 2 U Limited. Until 2001, we designed and incorporated our own custom proprietary video processors in our Internet access devices. We have patents and registered trademarks and pending applications including: o Web 2 U Limited in the United Kingdom (Reg. No. 2192548, effective May 19, 2000), China (Reg. No. 1477701, effective November 21, 2000), European Union (Reg. No. 1138221, effective June 8, 2000), Hong Kong (Reg. No.B13772/2000, effective October 16 17, 2000), Singapore (Reg. No. T99/03896D, effective December 20, 2000), Taiwan (App. No. 8023575) dated May 18, 1999, and the United States (App. No. 75/694832) dated April 30, 1999; o Web 2 U logo in the United Kingdom (Reg. No. 2241140, effective February 9, 2001), European Community (App. No. 2077824) dated January 31, 2001, United States (App. No. 76/203920) dated February 1, 2001; o WYNPEG in the United Kingdom (Reg. No. 1572811, effective July 14, 1995), Hong Kong (Reg. No. 06937/1996, effective July 26, 1996), Taiwan (Reg. No. 00708445, effective March 1, 1996); o Slipstream in the United Kingdom (Reg. No. 2121511, effective December 1997); and o ENVOY in the United Kingdom (Reg. No. 2117809, effective November 14, 1997), China (Reg No. 1244930, effective February 7, 1999), Hong Kong (Reg. No. 07060/99, effective June 7, 1999), European Community (Reg. No. 586107, effective January 26, 1999), Taiwan (Reg. No. 816504, effective September 16, 1998) and Singapore (Reg. No. T97/06442I, effective November 30, 1999). Employees As of September 14, 2001, we had a total of 13 full-time employees - three in research and development, three in sales and marketing, and seven in general administration. Of these employees, seven are located in Texas and six in the United Kingdom. Our future success depends in part, on our continuing ability to attract, train and retain highly qualified technical, sales, marketing and managerial personnel. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are good. ITEM 2. PROPERTIES. Our headquarters are located in a leased facility in Plano, Texas, consisting of 3,000 square feet of office space under a two-year lease, which expires in February 2003. This facility houses all functions of the organization, with the exception of a sales office located in the United Kingdom. Our UK facility comprises 2,900 square feet of office space in Central Milton Keynes, England. The lease for this facility expired on March 21, 2001 and we are negotiating a new lease agreement. Management believes that these leased facilities are suitable and adequate for the Company's intended use, although as we grow, further facilities may need to be obtained. ITEM 3. LEGAL PROCEEDINGS. We are currently in the process of finalizing the financial restructuring of our UK-based subsidiary, Web 2 U Limited. Due to insufficient liquidity and product obsolescence associated with the operation of Web 2 U Limited, our Board in March of 2001 approved a plan to restructure our UK operations and settle with outstanding creditors. With the knowledge that MSU Devices Inc. is the largest creditor of Web 2 U Limited and that our new product line of Internet access devices would be designed, developed and manufactured as the result of our development efforts 17 in the United States, the decision was made to seek the court's help in the UK through the issuance of an administration order in an effort to settle with all creditors. On May 15, 2001, Web 2 U Limited filed a company voluntary arrangement (the "CVA") pursuant to Part 1 of The Insolvency Act 1986, as amended (the "Insolvency Act"). The substance of the CVA proposal was as follows: o Claims of preferential creditors (as defined under the Insolvency Act) would be discharged in full in priority to the claims of unsecured creditors; o After the claims of preferential creditors have been satisfied, unsecured creditors whose admitted claims are less than or equal to (pound)2,500 would be paid in full; and o Unsecured creditors whose admitted claims are greater than(pound)2,500 would be issued convertible promissory notes (the "CVA Notes") by the Company for the principal sum of the individual unsecured creditors admitted claim. The principal amount of the CVA Notes will be paid in three equal installments: the first on the third anniversary of the issue date, the second on the fourth anniversary and the third on the fifth anniversary. Interest will accrue on the CVA Notes at a rate of 5% per annum and be payable annually by the Company, with the first interest payment due on the first year anniversary of the issue date. At any time after the Company's stock price closes at $1.25 for five consecutive trading days, the Company will have the option to automatically convert the outstanding balance and accrued and unpaid interest of the CVA Notes into shares of common stock at a conversion rate of one share of common stock per $1.00 owed. The CVA was approved by Web 2 U Limited's creditors at a meeting of those creditors held in the United Kingdom on July 16, 2001. At the time of this filing, the preferential creditor and unsecured creditor claims are under review by the supervisor of the CVA. On August 20, 2001, Web 2 U Limited was discharged from the administration order. Darran Evans, Web 2 U Limited's former President and Chief Executive Officer, resigned on March 1, 2001 and worked through the period of notice given by him until April of 2001. Mr. Evans has since brought a claim against the Company in the High Court of England and Wales for a termination payment of (pound)100,000 which he alleges to be owed to him pursuant to the terms of certain correspondence, together with unpaid salary of approximately (pound)10,000 allegedly due to him. We believe his claim is without merit and we are vigorously defending this claim. Two hearings have so far taken place on the issue of the jurisdiction of the court, the outcome of which is awaited and the issue is not yet resolved. If the Court were to find for Mr. Evans on the issue of jurisdiction, we would have to file a defense and the matter would proceed to trial, commencing in about six months' time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 15, 2001, we held our Annual Meeting of Shareholders. The number of shares of common stock of the Company outstanding at the close of business on the record date for the meeting, May 2, 2001, and entitled to vote at the meeting was 29,256,847. There were represented at the meeting, in person or by duly given proxy, an aggregate of 23,318,001 shares of common stock, representing 79.70% of the total number of shares of common stock 18 outstanding on the record date and entitled to vote at the meeting. At this meeting, the shareholders voted on the following matters: o The election of Jean Belanger, D. Bruce Walter, Jeremy Miles Simpson, Jeffrey Nelson Green, Stephen Walter Coles and Fred Kashkooli as directors. Mr. Belanger was elected by a vote of 23,261,571 in favor of his election and 56,484 votes withheld; Mr. Walter was elected by a vote of 23,261,717 in favor of his election and 56,284 votes withheld; Mr. Simpson was elected by a vote of 23,250,217 in favor of his election and 67,784 votes withheld; Mr. Green was elected by a vote of 23,261,517 in favor of his election and 56,484 votes withheld; Mr. Coles was elected by a vote of 23,257,217 in favor of his election and 60,784 votes withheld; and Mr. Kashkooli was elected by a vote of 23,261,717 in favor of his election and 56,284 votes withheld. o The ratification to the appointment of Moore Stephens Lovelace, P.A. as our independent accountants for the fiscal year ending June 30, 2001. This proposal was ratified by a vote of 23,239,224 votes in favor of the proposal, 21,037 votes against and 57,740 votes withheld. o The amendment to our Certificate of Incorporation to effect an increase to the authorized number of shares of common stock from 50,000,000 shares to 120,000,000 shares. This proposal was approved by a vote of 23,060,929 votes in favor of the proposal, 184,097 votes against and 72,975 votes withheld. o Our reincorporation from the State of Florida to the State of Delaware. This proposal was approved by a vote of 14,984,348 votes in favor of the proposal, 57,320 votes against, 5,460 votes withheld and 8,270,873 not voted. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since May 24, 1995, bid and ask quotations of our common stock have been reported by the Nasdaq OTC Bulletin Board under the symbol "MUCP." The following table sets forth the range of high and low closing bid quotations without adjustment for retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions for the period indicated. RANGE OF BID INFORMATION High Low Fiscal year ended June 30, 2001: Quarter ended June 30, 2001............................. $0.70 $0.22 Quarter ended March 31, 2001............................ $0.69 $0.19 Quarter ended December 31, 2000......................... $1.06 $0.30 Quarter ended September 30, 2000........................ $1.56 $1.00 Fiscal year ended June 30, 2000 Quarter ended June 30, 2000............................. $2.94 $1.34 Quarter ended March 31, 2000............................ $5.00 $2.44 Quarter ended December 31, 1999......................... $3.69 $2.03 Quarter ended September 30, 1999........................ $5.63 $2.94 19 On September 10, 2001, the bid price quoted for our common stock was $0.45 per share. As of September 10, 2001, there were approximately 315 holders of record of our common stock. This does not include stockholders of approximately 15,623,442 shares of common stock held in "street name". Dividend Policy We have never paid any dividends on our common stock, and we do not intend to pay any dividends on our common stock in the foreseeable future. Recent Sales of Unregistered Securities Between October 1, 2000 and June 30, 2001, we issued $4.5 million aggregate principal amount of 10% Convertible Notes (the "10% Notes") at par due one year from the date of issuance in a private placement. The 10% Notes are convertible into shares of common stock at a conversion rate of $0.20 per share. The following persons purchased Notes: -------------------------------------------------------------- -------------------------------------------------------------- 3408256 Canada Inc. David Larkin -------------------------------------------------------------- -------------------------------------------------------------- American Stainless Corp. Paul Lavoie -------------------------------------------------------------- -------------------------------------------------------------- Ronald L. Andrews John B. Leonard, Jr. -------------------------------------------------------------- -------------------------------------------------------------- Michael Ballensky Lloyd Leonard -------------------------------------------------------------- -------------------------------------------------------------- Dale Barker Bruce MacNicol -------------------------------------------------------------- -------------------------------------------------------------- Andrew Best Jamie Massie -------------------------------------------------------------- -------------------------------------------------------------- Brookside Ltd. Donald McFarlane -------------------------------------------------------------- -------------------------------------------------------------- Wendy Bunston McGreen Partnership -------------------------------------------------------------- -------------------------------------------------------------- Timothy Chisholm The Orchards -------------------------------------------------------------- -------------------------------------------------------------- Adams Robert Coles Pictet Bank & Trust Ltd. -------------------------------------------------------------- -------------------------------------------------------------- Jacqueline M. Coles Powder Capital Inc. -------------------------------------------------------------- -------------------------------------------------------------- Stewart Evelyn Coles Bruce Randle -------------------------------------------------------------- -------------------------------------------------------------- Stewart H. Coles Reddline Ventures LLC -------------------------------------------------------------- -------------------------------------------------------------- Walter Coles Harry Reddy -------------------------------------------------------------- -------------------------------------------------------------- Sir Colin R. Corness RM Partners -------------------------------------------------------------- -------------------------------------------------------------- Cornwallis Financial Limited Royal Trust Corp. of Canada in Trust for Account #99480072 -------------------------------------------------------------- re: GWL London Life Growth Equity Fund Darden International -------------------------------------------------------------- -------------------------------------------------------------- Royal Trust Corp. of Canada in Trust for Account #99480027 Davros Investment re: GWL Growth Equity Fund -------------------------------------------------------------- -------------------------------------------------------------- Allan Day Andrew Mark Simpson -------------------------------------------------------------- -------------------------------------------------------------- Ernest B. Evans, Jr. Jeremy Simpson -------------------------------------------------------------- -------------------------------------------------------------- Hines E. Fulk, Jr. Guy P. Smith -------------------------------------------------------------- -------------------------------------------------------------- Jeffrey Green Brian Telfer -------------------------------------------------------------- -------------------------------------------------------------- Oren Heffner Tidewater Overseas Limited -------------------------------------------------------------- -------------------------------------------------------------- Heffner Family Limited Partnership Daniel R. Timberlake -------------------------------------------------------------- -------------------------------------------------------------- Interward Capital Corporation Charles L. Wickham, Jr. -------------------------------------------------------------- -------------------------------------------------------------- Jayvee and Co. R. Mitchell Wickham, Jr. re: AGF Canadian Growth Equity Fund -------------------------------------------------------------- -------------------------------------------------------------- Julius Smith Young, Jr. Jayvee and Co. -------------------------------------------------------------- re: IG AGF Canadian Diversified Growth Fund -------------------------------------------------------------- William Johnston --------------------------------------------------------------
20 On November 15, 1999, we entered into a sales agency agreement with Corstar Business Computing Co., Inc. and McLaughlin International, Inc. ("the Agents") to promote and sell our products. In January of 2001, the Agents agreed to terminate this agreement and any obligations and liabilities of the Company thereunder in exchange for the issuance of 1,300,000 shares of common stock to the Agents and a payment of $15,000 in cash to the Agents. Mark McLaughlin, one of our principal shareholders, is a principal stockholder and officer of the Agents. In June of 2001, Jeremy Simpson (a director of the Company) was issued 67,667 shares of common stock and Dick Phillips was issued 116,000 shares of common stock in payment of unpaid directors' fees of approximately $46,000. In addition, the following creditors of Web 2 U Limited: Luther Pendragon, Microlink, Green Hills Software, Rubenstein Investors, James Chi, Evolution Circuits, SC Carter, Nick Davis, Printed Wiring, Allpack Packaging, and Kestronics were issued 657,717 shares in exchange for the forgiveness of indebtedness in the amount of approximately $164,000 owed to them by Web 2 U Limited. In December of 2000, we entered into an agreement with McFarlane Gordon Inc. ("MGI") pursuant to which MGI agreed to act as our financial advisors. Our Chairman, Jean Belanger is one of the principals of MGI. In May of 2001, we agreed with MGI to terminate the financial advisory agreement with them, including any underlying liabilities and obligations of the Company in exchange for the issuance to MGI and certain of its principals of an aggregate of 2,537,500 shares of common stock, of which 1,873,400 of such shares were issued to Mr. Belanger. In December of 2000 we withdrew our S-1 Registration Statement which was previously filed in August of 2000 pursuant to an obligation made to certain of our investors listed below in connection with a private placement in May of 2000. Pursuant to the terms of the Subscription Agreement, if the S-1 Statement was not effective on or prior to February 1, 2001, we were obligated to issue to those investors an additional amount of common stock equal to 10% of their original investment. As a result of the withdrawal and a decision taken by the Board of Directors to increase the amount of common stock due to such investors to 15% of their original investments, the following investors were issued the following shares of common stock: ----------------------------------------------- -------------------------------- SHAREHOLDER SHARES ISSUED ----------------------------------------------- -------------------------------- 555319 Ontario Ltd. 15,000 ----------------------------------------------- -------------------------------- 814213 Ontario Ltd. 3,750 ----------------------------------------------- -------------------------------- Ronald L. Andrews 15,000 ----------------------------------------------- -------------------------------- Robert Brinkworth 7,500 ----------------------------------------------- -------------------------------- Wendy Bunston 7,500 ----------------------------------------------- -------------------------------- CHW, LLC 15,000 ----------------------------------------------- -------------------------------- Robert Cates 3,750 ----------------------------------------------- -------------------------------- Stephen W. Coles 15,000 ----------------------------------------------- -------------------------------- Walter R. & Jacqueline M. Coles 15,000 ----------------------------------------------- -------------------------------- Allen K. Craven 7,500 ----------------------------------------------- -------------------------------- 21 ----------------------------------------------- -------------------------------- Fred Dalley 7,500 ----------------------------------------------- -------------------------------- Express Cat Inc. 11,250 ----------------------------------------------- -------------------------------- Gerry Gravina 7,500 ----------------------------------------------- -------------------------------- Katherine Green 15,000 ----------------------------------------------- -------------------------------- Alex Grigonis 3,750 ----------------------------------------------- -------------------------------- Harris Optimists Ltd. 11,250 ----------------------------------------------- -------------------------------- Oren Heffner 7,500 ----------------------------------------------- -------------------------------- Heffner Family Trust 15,000 ----------------------------------------------- -------------------------------- Jane C. Hester 2,250 ----------------------------------------------- -------------------------------- Eli Kaufman 15,000 ----------------------------------------------- -------------------------------- Leonard D. Latchman 7,500 ----------------------------------------------- -------------------------------- George W. Liles, Jr. 7,500 ----------------------------------------------- -------------------------------- James Massie 7,500 ----------------------------------------------- -------------------------------- William & Maria McBee 3,750 ----------------------------------------------- -------------------------------- Donald McFarlane 22,500 ----------------------------------------------- -------------------------------- McGreen Partnership 30,000 ----------------------------------------------- -------------------------------- E.L. Morrison Lumber Co., Inc. 3,750 ----------------------------------------------- -------------------------------- John Mulvihill 15,000 ----------------------------------------------- -------------------------------- Derek Nelson 7,500 ----------------------------------------------- -------------------------------- Picter Bank & Trust Limited 30,000 ----------------------------------------------- -------------------------------- Bruce Randle 7,500 ----------------------------------------------- -------------------------------- Simcoe Coach Lines Limited 7,500 ----------------------------------------------- -------------------------------- Jeremy Simpson 22,500 ----------------------------------------------- -------------------------------- Mark Simpson 18,750 ----------------------------------------------- -------------------------------- Luther Slate 7,500 ----------------------------------------------- -------------------------------- Harold Tabone 15,000 ----------------------------------------------- -------------------------------- Charles Wickham, Jr. 26,250 ----------------------------------------------- -------------------------------- Ida Wickham 3,750 ----------------------------------------------- -------------------------------- R. Mitchell Wickham 3,750 ----------------------------------------------- -------------------------------- C.E. Williams, Jr. 30,000 ----------------------------------------------- -------------------------------- Julius Smith Young, Jr. 15,000 ----------------------------------------------- -------------------------------- In March of 2001, we entered into a consultant agreement with our former Chief Executive Officer, Wynford Holloway. Pursuant to the terms of the agreement, we agreed to issue to Mr. Holloway 120,000 shares of common stock. In May of 2001, we offered our then existing convertible promissory note holders the option to convert their notes at $0.25 cents per share. The following holders of certain 10% convertible promissory notes of the Company (the "10% Notes") exercised their right of conversion with respect to these notes and related and accrued interest thereon into approximately 2,682,000 shares of common stock: Daniel Evans, John Koestner, Dennis Metherell, Robert Stearns, George Vallas, Terrance Sims, and John Emtage. The holders of certain 6% convertible promissory notes of the Company exercised their right of conversion with respect to these notes and related and accrued interest thereon into 1,240,000 shares of common stock: Julius Smith Young, Jr., Walter Coles, Stephen Coles, and Heffner Family Trust. Julius 22 Smith Young, Jr. also converted a 10% Note into approximately 364,000 shares of common stock. In July of 2001, David Larkin, Dr. Bruce MacNicol, Don McFarlane, David Sorger, and Jamie Massie purchased $100,000 of the 10% Notes and $25,000 of certain 8% convertible promissory notes of the Company from the original subscribers. These individuals exercised their right of conversion with respect to these notes into 500,000 shares of common stock at a conversion price of $0.25 per share. In July of 2001, Mr. Alan Boss, an 8% convertible promissory note holder, sold 50% of his note for $25,000 and the purchaser, Jamie Massie, thereof exercised his right of conversion with respect to such portion of this note into 100,000 shares of common stock. The issuance of the above securities were intended to be exempt from registration under the Securities Act of 1933 (the "Act") in reliance upon (i) Section 4(2) of the Act; (ii) Regulation D promulgated thereunder; or (iii) Regulation S promulgated thereunder, as transactions by an issuer not involving any public offering. The recipients of securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data are derived from our financial statements. The financial statements for each of the fiscal years in the five-year period ended June 30, 2001 have been audited by Moore Stephens Lovelace, P.A., independent certified public accountants. You should read the following data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those statements included elsewhere in this Report on Form 10-K.
Year Ended June 30 2001 2000 1999 1998 1997 (in thousands, except share data) Income statement data: Total revenue .......................... $ 1,394 $ 905 $ 32 $ 4,179 $ 1,480 Cost of revenues ....................... 3,782 928 53 8 651 (Loss) income from operations .......... (9,698) (4,447) (3,353) 286 (2,113) Net (loss) income ...................... (10,232) (4,906) (9,695) 292 (2,108) Net (loss) income per common share basic and fully diluted ................ $ (0.35) $ (0.19) $ (0.47) $ 0.02 $ (0.13) June 30, 2001 2000 1999 1998 1997 Balance sheet data: Working capital ........................ (3,185) 1,310 1,521 (4,401) (1,556) Cash and cash equivalents .............. 1,280 1,190 2,604 166 859 Total assets ........................... 1,905 4,345 3,341 2,573 2,086 Total current liabilities .............. 4,953 2,660 1,294 4,646 2,677 Long-term debt ......................... -- 505 505 -- 1,830 Total shareholders' equity (deficit) ... (3,048) 1,180 1,542 (2,074) (2,421)
23 Exchange Rates Our subsidiaries, MSU PLC and Web 2 U Limited, conduct a significant amount of their operations in pounds sterling. References to $ in this prospectus are to US dollars and in many instances represent translations of pounds sterling into dollars at specified rates. These translations should not be construed as representations that the pound sterling amounts actually represent those dollar amounts. Unless otherwise stated, the translations of pounds sterling into US 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 US dollar: Ended June 30 Of Period Fiscal Year At End Average Rate(1) High(2) Low(2) 1997 .60 .62 .64 .59 1998 .60 .60 .62 .60 1999 .63 .61 .63 .60 2000 .66 .63 .66 .61 2001 .69 .71 .71 .67 (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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL Overview We design, market and sell affordable Internet access devices that enable consumer and business end-users to communicate simply and easily by using e-mail and over the World Wide Web via the Internet without the necessity of technical or personal computer knowledge or expertise. When using our products and services, end-users have access to an Internet service provider, e-mail hosting and content in a single, easy to use hardware/software appliance. We have been in business since 1994. In the past three years, we have released three versions of our Internet access device. In undertaking our business activities since 1994, we have realized an accumulated deficit of $32 million. In January of 2001, the following management team was recruited by our new President and Chief Executive Officer, Mr. Walter: Mr. Patel, Vice President and Chief Technology Officer, Ms. Brown, Vice President and Chief Financial Officer and Mr. Dittrich, Vice President Sales and Market Development. Beginning in January of 2001, our new management team undertook a complete review of our strategic direction. As a result of this review, the Board of Directors adopted the recommendation of the new management team, which was to (1) remain in the Internet access device business, (2) undergo several significant changes in strategy, and (3) begin restructuring the activities of the Company. In the third calendar quarter of 2001, we launched our new Internet access device product, the MSU/5. The MSU/5 will sell in volume for under $200 per device. 24 The above strategy was in place for only approximately 25% of the 2001 fiscal year. As a result, the management team believes that the Company's operating results are not indicative of the future operating results of the Company. 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, 2001, the Company incurred a net loss of approximately $10,232,000. The Company expects that it is likely to incur net losses into fiscal 2002 as it attempts to further develop, upgrade and market the MSU/5 and to develop its infrastructure to support its operations. The Company is likely to incur net losses beyond 2002 if anticipated revenues from orders for MSU/5 are not realized. Such orders require, without limitation, approval of final production samples, customer acceptance of MSU/5, satisfactory product performance, and the ability of the products to compete successfully in a highly competitive market. The Company believes these assumptions are reasonable; however, should any one of these assumptions fail, the Company could incur net losses beyond 2002 and be unable to continue as a going concern. Results of Operations Revenues Revenues during the years ended June 30, 2001, 2000, and 1999 were approximately $1,394,000, $905,000, and $32,000, respectively. The Company has only recently commenced sales of its new product MSU/5 and consequently, has only a limited number of customers. Sales in the year ended June 30, 2001 of approximately $1,394,000 were to four customers, which were primarily based in the United Kingdom, India, Greece and Australia. Revenues reported during the period ended June of 2001 relate to the sale of the ISP3 product. MSU does not expect to report on-going sales related to this product. Our new management team will spend the next twelve months focusing our resources and sales efforts with respect to our core market: consumers and businesses who need to access the Internet in order to use e-mail and browse the World Wide Web. We successfully launched our new MSU/5 product with the signing of a new distribution agreement with CPS Broadcast B.V. for the distribution of the new MSU/5 product into South Africa. Comparison of revenues for the year ended June 30, 1999 with the year ended June 30, 2000 is not meaningful because in fiscal 1999, apart from the sale of a small number of samples, there were no revenues generated by the Company. A concentration of revenues in such a small number of customers, where the loss of one customer could have a material adverse effect on the business is a risk. The Company is focused on a number of trial opportunities worldwide to increase its customer base. The Company's revenues by geographic region during the years ended June 30 2001, 2000, and 1999 were approximately as follows: 25
------------------------------- ---------------------------- ---------------------------- ---------------------------- Location 2001 ($) 2000 ($) 1999 ($) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Europe........................ 617,611 343,000 2,000 ------------------------------- ---------------------------- ---------------------------- ---------------------------- Asia.......................... 610,289 562,000 17,000 ------------------------------- ---------------------------- ---------------------------- ---------------------------- North America................. 166,480 None 13,000 ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cost of Revenues The cost of revenues for the years ended June 30, 2001, 2000 and 1999 were approximately $3,782,000, $928,000, and $53,000 respectively. The cost of revenues in the year ended June 30, 2001 at 271% of revenues is due to the costs involved with the production of ISP3 and a reserve for obsolescence of the ISP3 product in the amount of $1,920,000. The cost of revenues in the year ended June 30, 2000, at 103% of revenues were significantly higher than expected due to the high costs involved with the initial production run of ISP 2. The cost of revenues in the year ended June 30, 1999, mostly related to the direct production cost of samples which were expensed to the extent the Company considered such cost was not recoverable. As a percentage of revenues, cost of revenues were approximately 168% in 1999. Our new management team is targeting cost of revenues for the next twelve months for the MSU/5 to be approximately 90% of revenues due to initial production costs and lower volumes. Research and Development Expenses Research and development expenses generally consist of expenditure related to the Company's development of its hardware and software. We have excluded all overhead costs other than employee, independent contractor, development tool and prototype costs. All research and development costs have been fully expensed. For the years ended June 30, 2001, 2000, and 1999, research and development costs were approximately $1,111,000, $2,036,000, and $1,556,000, respectively. As a percentage of revenues, research and development expenses were approximately 80% in 2001, 225% in 2000, and 490% in 1999. The fluctuations from period to period 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. The new management team was successful in leveraging outside contractors to assist in the design and development of the MSU/5 at significantly lower costs than in the past. This was achieved through the integration of off-the-shelf software and OEM components, which resulted in lower costs to the Company. The Company entered into a consulting agreement with Dr. Avinash Palaniswamy in March of 2001. Dr. Palaniswamy is providing strategic software development on the MSU/5. The contract terms are $12,500 per month and 12,500 stock options per month from March of 2001 to August of 2001. The Company will pay Dr. Palaniswamy a bonus of $10,000 upon the 26 completion of the project. The Company is currently in negotiating a full-time employment arrangement with Dr. Palaniswamy. Selling, General and Administrative Expenses Selling, general and administrative and other expenses principally consist of the cost of employees (other than those dedicated to research and development), advertising, promotional costs, communication, occupancy costs, and professional fees. Selling general and administrative expenses were approximately $5,542,000, $2,190,000, and $1,544,000 for the years ended June 30, 2001, 2000, and 1999 respectively. The increase in the year ended June 30, 2001 is primarily due to an increase in personnel in the United States and in investment banking and professional fees. The new management team intends to decrease selling, general and administrative expenses as a percent of revenues during the 2002 fiscal year. Depreciation Expense Depreciation is calculated using the straight line method over the estimated useful lives of our depreciable assets, which consist principally of electronics equipment used in the design and testing of our products. Depreciation expense was approximately $71,000, $83,000, and $74,000 for the fiscal years ended June 30, 2001, 2000, and 1999, respectively. Interest Expense Interest expense was approximately $297,000, $113,000 and $158,000 for the fiscal years ended June 30, 2001, 2000, and 1999, respectively. Interest expense in the current year represents interest payable on promissory notes totaling $1,330,000 issued prior to fiscal year 2001, and on the bridge loan promissory notes of $4,500,000 that were issued in the second, third, and fourth quarters of fiscal 2001. The interest expense in 2000 is attributable to promissory notes in the amount of $1,330,000. The interest expense in 1999 is mainly attributable to the interest on a $2.3 million 10% convertible promissory note 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. Non-Operating Income (expense) In the year ended June 30, 2001, the Company expensed approximately $228,000 in deferred financing costs associated with the bridge loan convertible notes during the year. These costs were incurred in connection with the sale of the $4,500,000 10% convertible promissory notes between October of 2000 and July of 2001. In addition, the Company expensed approximately $382,000 in relation to its investment in American Interactive Media which investment the Company has deemed to be unrecoverable. In the year ended June 30, 2000, the Company capitalized and immediately charged to expense approximately $56,000 with respect to common stock sold at less than 27 market value. Similarly, there was a $441,000 discount associated with the issuance of convertible notes during the year. In 1999, MSU recorded an impairment loss on its investment of approximately $2,500,000 in shares of American Interactive Media common stock, which substantially declined in market value. Management believes that the decline in market value is permanent. The Company recorded an additional impairment of approximately $382,000 in fiscal year 2001, which represents an impairment of 100% in the investment. Additionally, during 1999 the Company capitalized and immediately charged to expense approximately $3,670,000 of the discount associated with the issuance of convertible notes during fiscal 1999. Restructuring Charges Due to insufficient liquidity and product obsolescence associated with the operation of the Web 2 U Limited subsidiary, the Board in March of 2001 approved the following actions in accordance with the restructuring plan: 1. Cease active trading in the UK in order to minimize the loss to Web 2 U Limited creditors; 2. Reduce the size of the UK workforce; and 3. Attempt to settle the outstanding creditors. The plan was implemented in March of 2001, and a total of fourteen positions at Web 2 U Limited were eliminated, principally in the Company's management and research development departments. The decision was also made to relocate the accounting system and accounting operations to the U.S. As a result, the Company recorded a restructuring charge of approximately $289,000 in the fiscal year 2001 for the restructuring of the UK operations, which is comprised of involuntary termination benefits and legal fees. On May 15, 2001, Web 2 U Limited filed a company voluntary arrangement (the "CVA") pursuant to Part 1 of The Insolvency Act 1986, as amended (the "Insolvency Act"). The substance of the CVA proposal was as follows: o Claims of preferential creditors (as defined under the Insolvency Act) would be discharged in full in priority to the claims of unsecured creditors; o After the claims of preferential creditors have been satisfied, unsecured creditors whose admitted claims are less than or equal to (pound)2,500 would be paid in full; and o Unsecured creditors whose admitted claims are greater than(pound)2,500 would be issued convertible promissory notes (the "CVA Notes") by the Company for the principal sum of the individual unsecured creditors admitted claim. The principal amount of the CVA Notes will be paid in three equal installments: the first on the third anniversary of the issue date, the second on the fourth anniversary and the third on the fifth anniversary. Interest will accrue on the CVA Notes at a rate of 5% per annum and be payable annually by the Company, with the first interest payment due on the first year anniversary of the issue date. At any time after the Company's stock price closes at $1.25 for five consecutive trading days, the Company will have the option to automatically convert the outstanding 28 balance and accrued and unpaid interest of the CVA Notes into shares of common stock at a conversion rate of one share of common stock per $1.00 owed. The CVA was approved by Web 2 U Limited's creditors at a meeting of those creditors held in the United Kingdom on July 16, 2001. At the time of this filing, the preferential creditor and unsecured creditor claims are under review by the supervisor of the CVA. On August 20, 2001, Web 2 U Limited was discharged from the administration order and the officers and directors of the Company are in control of the operations of Web 2 U Limited. Liquidity and Capital Resources MSU has financed its operations primarily through private sales of unregistered equity and debt securities. For the year ended June 30, 2001, cash used in operating activities of approximately $6,044,000 was mainly attributable to the Company's net operating loss for the year of $10,223,000. Cash flows used in investing activities of approximately $54,000 during such period related primarily to the acquisition of computer equipment. Cash flows from financing activities of approximately $4,067,000 for the year ended June 30, 2001 were primarily attributable to an issue of new convertible bridge loan notes of $4.25 million and to the repayment, in cash, of $150,000 of convertible notes. At June 30, 2001, the Company's principal source of liquidity was approximately $1,280,000 in cash and cash equivalents, which will be available to fund the development and production of the MSU/5 in the calendar fourth quarter of 2001. The Company will need additional funds for working capital in the calendar fourth quarter of 2001. The Company is currently in discussions with underwriters in Toronto, Canada regarding a private placement of approximately $5 million. The terms have yet to be finalized as of the filing of this report. 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 it will be able to continue as a going concern. Market Risk We are exposed to market risk from changes in interest rates that may adversely affect our results of operations and financial conditions. We seek to minimize the risks from these interest rate fluctuations through our regular operating and financing activities. Our policy is not to use financial instruments for trading or other speculative purposes. We are not currently a party to any financial instruments. Goodwill and Intangible Assets None Forward-Looking Statements This annual report contains forward-looking statements about the Company's business, products and projected operating results. When used in this annual report, the words 29 "anticipate", "believe", "estimate", "may", "should", "expect", "plan", "predict", "potential", "continue" or "intend", in addition to the negative of these terms or similar expressions, are generally intended to identify forward-looking statements. Stockholders and potential investors are cautioned that such statements are predictions. All such forward-looking statements involve risks and uncertainties, including, but not limited to, our history of significant operating losses which together with an inability to raise capital could impact on our ability to continue as a going concern; our limited sales history; the acceptance of our product by business and consumer end-users; rapid technological change; the pressures of a competitive industry; our ability to license technology; our ability to anticipate and respond to technological and market changes; our ability to cut costs and realize economies of scale and our dependency upon one third party manufacturer. In light of the significant uncertainties inherent to the forward looking statements included herein, the inclusion of such information should not be regarded as a representation or warranty by us or any other person that our objective and plans will be achieved in any specific time frame, if at all. The Company and management do not intend to update and do not undertake any obligation to update publicly any of the forward-looking statements contained herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. For information concerning this Item, see "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers Certain information as of September 12, 2001 with respect to the executive officers and directors of the Company is set forth below: Name Age Position Jean Belanger.......................... 47 Chairman and Director D. Bruce Walter........................ 58 President and Director Patti J. Brown......................... 35 Vice President and Chief Financial Officer Pritesh M. Patel....................... 36 Vice President and Chief Technology Officer Raymond R. Dittrich.................... 52 Vice President - Sales and Market Development 30 Jeremy Miles Simpson................... 66 Director Fred Kashkooli......................... 59 Director Jeffery Nelson Green................... 57 Director Stephen Walter Coles................... 43 Director Jean Belanger was appointed Vice Chairman of MSU Corporation in January of 2001 and Chairman in June of 2001. Mr. Belanger has been with Reddline Ventures since November of 2000. From September 1999 to October of 2000, Mr. Belanger was Vice President of Business Development of Motorola, Inc.'s Semiconductor Products Sector. Mr. Belanger joined Motorola SPS in 1999 following Motorola's successful acquisition of Metrowerks, Inc. Mr. Belanger was Chairman of Metrowerks from 1991 to 1999 and CEO from 1996 to 1999. Prior to 1991, Mr. Belanger was President and CEO of Micro Temus, Inc., a mainframe software company. From 1986 to 1989, Mr. Belanger was Chairman and CEO of MontRoyal Capital Inc., a high tech start-up venture capital company, and prior to 1986, he was Vice President of Wood Gundy, Inc., an investment banking company. Mr. Belanger obtained a B. Comm. From the University of Ottawa and an M.SC. (Finance) from the London School of Economics. D. Bruce Walter joined MSU as President and CEO in January of 2001. He was formerly President of CompuTrac, Inc., a Dallas-based software company. Prior to that he was Chairman and CEO of RadioMail Corporation in San Mateo, California, an internet communications company. His experience includes ten years with Grid Systems, a manufacturer of portable and handheld computers. Following the sale of Grid Systems to Tandy Corporation, Mr. Walter was a member of Tandy's executive management. Mr. Walter has also served as CEO of Coactive Computing Corporation in San Mateo, California and was with Xerox Corporation for twelve years. Mr. Walter is a graduate of Waynesburg College in Pennsylvania and attended the MBA program at Duguesne University. Patti J. Brown joined MSU as Vice President and Chief Financial Officer of MSU in March of 2001. Prior to joining MSU, from January of 2000 to February of 2001, Ms. Brown was Vice President and CFO of e-talk Corporation, based in Irving, Texas, which was the leader in customer relationship management technology for Fortune 100 call centers. Prior to January of 2001, Ms. Brown held three senior management positions at Associates First Capital Corporation, based in Irving, Texas, and also held senior management positions with Tandem Computers, Incorporated of Cupertino, Ca., Deloitte & Touche, LLP, and Ernst & Young, LLP. Ms. Brown holds a Bachelors of Business Administration degree and a Masters of Professional Accounting degree, from The University of Texas at Austin. Ms. Brown is a Certified Public Accountant in the states of Texas and California, and a member of the AICPA and the Texas State Society of CPA's. Pritesh M. Patel joined MSU as Vice President and Chief Technology Officer in February of 2001. Prior to joining the Company, he was the Engineering Manager of Advanced Technology Group, Atlanta, Georgia. His experience includes six years with Ratio Designlab where he was General Manager, Platform Products. While at RatioLabs, Mr. Patel designed and built the Simpliance Linket, an Internet access device. He has also held engineering positions at CompUSA, American Megatrends, Texas Controls and Micro Logic. Mr. Patel has more than 14 years experience in electronic design, manufacture and sales of technology hardware and software solutions. Mr. Patel holds a Bachelor of Applied Science from ITT Indianapolis, Indiana. 31 Raymond R. Dittrich has been Vice President Sales and Market Development of MSU since January of 2001. From June 1998 to January of 2001, he was Vice President, Business Development of Laser Tech Corporation. Mr. Dittrich was a member of the mergers and acquisition committee of Laser Tech. His experience includes Senior Vice President, Sales and Marketing at American Color; Executive Vice President at VMX, a leader in voice messaging; Vice President at Datapoint Corp a $300 million manufacturer of computers. Mr. Dittrich also held management positions at Phillips Information Systems and Xerox Corp. Mr. Dittrich is a graduate of Fordham University, New York in Marketing Management. Jeremy Miles Simpson MA (Cantab) was appointed Deputy Chairman of MSU effective November 4, 1999 and transferred the Chairman's role to J Belanger at the Annual Shareholders' Meeting on June 15, 2001. 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. Mr. Simpson has held a number of non-executive directorships with smaller growing and developing companies in the UK and Europe. Fred Kashkooli has been an independent management consultant since 1991 and has over thirty 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 and was responsible for design, manufacturing and strategic marketing for analog and digital products. Additionally, Mr. Kashkooli was managing design centers in Singapore, New Jersey, North Carolina and Florida. From 1980 to 1984, Mr. Kashkooli was a director of the microprocessor and memory divisions of GE Intersil. Prior to this he worked ten years at Sygenetics, a corporation engaged in the manufacture of semiconductor chips. Mr. Kashkooli holds a BS in Electrical Engineering from California State University. Jeffrey Nelson Green is Chairman and Chief Executive Officer of Paradigm Capital Inc., which is a Toronto, Ontario based investment company focused on the telecommunications, technology, industrial technology and niche brands areas. Formerly he was Chairman and managing partner of Gordon Capital Corporation, a major investment dealer in Canada until its purchase by HSBC Securities. Stephen Walter Coles is an attorney and Director of the law firm of Brinkley Walser PLLC in North Carolina, specializing in corporate law. Mr. Coles has been with Brinkley Walser since 1981 and has been a partner with the firm since 1983. Each director serves for a term of one year from election or until his successor is elected and qualified. Committees of the Board COMPENSATION COMMITTEE. The Compensation Committee is composed of Messrs. Simpson, Coles and Green. Its functions are to review our general compensation strategy; establish salaries and review benefits programs; review, approve, recommend and administer incentive and compensation plans; and approve certain employment agreements. 32 NOMINATING COMMITTEE. The Nominating Committee is composed of Messrs. Walter, Simpson and Green. Its functions are to solicit recommendations for candidates for the Board of Directors; develop and review background information for candidates; make recommendations to the Board of Directors regarding such candidates; and review and make recommendations to the Board of Directors concerning candidates for directors proposed by stockholders. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation earned during our last three fiscal years by our Chief Executive Officer and the Company's other executive officers receiving in excess of $100,000 in total annual compensation. Although compensation may have been paid in currencies other than U.S. dollars, all amounts set forth in the following table are stated in U.S. dollars. ANNUAL COMPENSATION
Other Annual Fiscal Salary Bonus Compensation Name and Principal Position Year ($) (1) ($) ($)(2) --------------------------- ---- ------- --- ------ Wynford Peter Holloway, CEO (3)............... 2000 181,500 -- 40,972 .............................................. 1999 195,300 -- 38,604 Darren Huw Evans, CEO(4)...................... 2001 81,416 -- 20,007 .............................................. 2000 95,242 -- 4,727 D. Bruce Walter, CEO (5)...................... 2001 120,000 -- -- .............................................. 2000 -- -- -- .............................................. 1999 -- -- --
--------------- (1) All salaries and other annual compensation were paid by Web 2 U Limited, with the exception of the salary paid to D. Bruce Walter. (2) Represents personal benefits in addition to salary. Of Mr. Holloway's personal benefits, the 1999 amount represents $29,295 with respect to a car allowance and $9,309 with respect to contributions to a personal retirement plan; and the 2000 amount represents $27,225 with respect to a car allowance and $13,567 with respect to contributions to a personal retirement plan. Mr. Evans' personal benefits in 2000 represent a car allowance and in 2001 represent a car allowance of $5,428 and contributions to a personal retirement plan of $14,579. (3) Mr. Holloway resigned as Chief Executive Officer in November of 1999. (4) Mr. Evans served as Chief Executive Officer of Web 2 U Limited from November of 1999 to January of 2001. (5) Mr. Walter became President and Chief Executive Officer in January of 2001. Long Term Compensation Other than the employee stock options, which are described below, there were no long-term compensation awards or payouts in any of the fiscal years ended June 30, 2001, 2000, or 1999. 33 Employment Agreements During the third fiscal quarter ended March 31, 2001, we entered into employment agreements with D. Bruce Walter, the new President and Chief Executive Officer, Raymond R. Dittrich, Vice President of Sales and Market Development, Patti J. Brown, Vice President of Finance and Chief Financial Officer, and Pritesh M. Patel, Vice President, Technology and Chief Technology Officer. Effective January of 2001, we entered into an employment agreement with D. Bruce Walter to serve as our President and Chief Executive Officer at an annual base salary of $250,000. As part of the employment contract, Mr. Walter also received stock options to purchase 1,200,000 shares of common stock at an exercise price of $0.60 per share. Of these, options to purchase 600,000 shares vested upon execution of the agreement with the remainder vesting over an eighteen-month period. The options were re-priced to $0.25 per share in May of 2001. The options have a five-year term. Mr. Walter was granted additional options to purchase 300,000 shares at an exercise price of $0.25 per share in April of 2001. Of these, options to purchase 150,000 shares vested upon execution of the agreement with the remainder vesting over an eighteen-month period. These options have a five-year term. Effective January 2001, we entered into an employment agreement with Raymond R. Dittrich to serve as our Vice President of Sales and Market Development at an annual base salary of $180,000. As part of the employment contract, Mr. Dittrich also received stock options to purchase 500,000 shares of common stock with an exercise price of $0.60 per share vesting over 36 months from the execution date of the agreement. These options were re-priced to $0.25 per share in May of 2001 and have a five-year term. Effective February 2001, we entered into an employment agreement with Pritesh Patel to serve as our Vice President of Technology and Chief Technical Officer in consideration for an annual base salary of $150,000. As part of the employment contract, Mr. Patel received stock options to purchase 500,000 shares of common stock with an exercise price of $0.60 per share vesting over 36 months from the execution date of the agreement. These options were re-priced to $0.25 per share in May 2001 and have a five year term. The agreement also provided for reimbursement of relocation expenses incurred for Mr. Patel's relocation to Dallas, Texas. Effective March 2001, we entered into an employment agreement with Patti Brown to serve as our Vice President of Finance and Chief Financial Officer at an annual base salary of $150,000. As part of the employment contract, Ms. Brown received stock options to purchase 500,000 shares of common stock with an exercise price of $0.60 per share vesting over 36 months from the execution date of the agreement. These options were re-priced to $0.25 per share in May 2001 and have a five year term. Each of the agreements with Mr. Walter, Mr. Dittrich, Mr. Patel, and Ms. Brown contains a non-competition clause, restricting the employee from soliciting our customers and employees and from holding an interest in a competing firm during employment and for a specified period of years thereafter. By correspondence dated August 6 and November 10, 1999, we entered into an employment agreement with Darran H. Evans to serve as our Chief Executive Officer of Web 2 U Limited at an annual base salary of approximately (pound)75,000, subject to annual increases within the discretion of the Board of Directors. As part of the employment contract, Mr. Evans also received stock 34 options to purchase 300,000 shares of common stock at a price equal to the market value of the common stock at the date of the grant. In April 2001, Mr. Evans resigned as President and CEO of Web 2 U. Mr. Evans has since brought a claim in the High Court of England and Wales for a termination payment of (pound)100,000 which he alleges to be owed to him pursuant to the terms of certain correspondence, together with unpaid salary of approximately (pound)10,000 allegedly due to him. We are vigorously defending this claim. Effective January 1997, we entered into an employment agreement with Richard H. Phillips to serve as our Financial Director at an annual base salary of (pound)60,000, subject to annual increases at the discretion of the Board of Directors. As part of the employment agreement, Mr. Phillips also received stock options to purchase 100,000 shares of common stock at a price equal to the market value of the common stock at the date of the grant. On March 1, 1998, the Board of Directors and Mr. Phillips agreed to reduce his time commitment to the Company, at a reduced annual salary of $30,000. In June of 2001, an agreement was reached with Mr. Phillips in connection with the completion of his term on the Board of Directors, which called for payment of $16,974 in salary through March 31, 2001, and payment of expenses through the issuance of 116,000 shares of common stock. Stock options in the amount 150,000 remained valid and held by Mr. Phillips as of March 31, 2001. Compensation of Directors Directors are reimbursed for all reasonable expenses in attending each Board Meeting. Effective April 2001, we entered into an employment agreement with Jean Belanger to serve as our Chairman of the Board of Directors at an annual base salary of $200,000. As part of the employment agreement, Mr. Belanger received stock options to purchase 1,500,000 shares of common stock with an exercise price of $0.25 per share. Options to purchase 750,000 shares vested upon execution of the agreement with the remainder vesting over an eighteen-month period. The options have a five-year term. The agreement contains a non-competition clause, restricting Mr. Belanger from soliciting our customers and employees and from holding an interest in a competing firm. In March of 2001, Mr. Holloway's term on the Board of Directors ended and a compromise agreement was reached which called for payment of (pound)30,000 and up to (pound)2,500 in legal expenses. In addition, as part of the settlement, we are in the process of finalizing with Mr. Holloway the grant of an option to acquire 1,500,000 shares of common stock at an exercise price of $1.00. Additionally, a consulting arrangement was reached with Mr. Holloway which required payment of (pound)45,000 and issuance of 120,000 shares of common stock upon execution of the agreement. Annual payments of (pound)71,200 are to be provided to Mr. Holloway during the term of the agreement which expires February 28, 2005. The agreement contains a non-competition clause restricting Mr. Holloway from soliciting our customers and employees and from holding an interest in a competing firm. Jeremy Miles Simpson received annual compensation of $35,000 during his term as Chairman of the Board of Directors. In June 2001, Mr. Simpson completed his term as Chairman of the Board of Directors and a settlement agreement was reached which provided for the payment of $26,000 and the issuance of 40,000 shares of common stock compensation for this services as a director and Chairman for fiscal year 2001. Additionally, a settlement was reached with Mr. Simpson in connection with prior year director compensation owed by the Company by the issuance of 67,667 shares of common stock. Options to purchase 597,903 shares of common 35 stock remained outstanding as of March 31, 2001. In May of 2001, directors Jeremy Miles Simpson, Jeffrey Nelson Green, Stephen Walter Coles and Fred Kashkooli were each granted options to purchase 250,000 shares of our common stock at an exercise price of $0.25 per share, expiring May of 2006. Stock Option Grant Table The following table sets forth certain information concerning options granted to the named executive officers named in the "Annual Compensation" table during our fiscal year ended June 30, 2001:
Percent of total options Number of granted to Potential realizable securities employees Market value at assumed underlying in the Exercise price on annual rates of stock options fiscal or base date of Expiration appreciation for Name granted period (1) price (2) grant (3) date option term (4) ---- ------- ---------- --------- --------- ---- --------------- 5% 10% -- --- D. Bruce Walter, 1,500,000 33.9% $0.25 $0.25 02/01/06 $480,000 $600,000 President and CEO
(1) The total number of options granted to our employees in the fiscal year ended June 30, 2001 was 4,425,000 at an average weighted exercise price of $0.25 per share. The Company granted stock options to purchase 2,500,000 shares of the Company's common stock at $0.25 per share to non-executive directors of the Company during fiscal 2001. (2) The exercise price per share of options granted reflects a re-pricing of the options on May 1, 2001 from $0.60 per share. (3) Market price on grant date is equal to the fair market value of the options on May 1, 2001, reflecting the date we re-priced the options. (4) As required by the rules of the Securities and Exchange Commission, potential values stated are based on the assumption that our common stock will appreciate in value from the date of the grant to the end of the option term at annualized rates of 5% and 10%, respectively, and therefore are not intended to forecast possible future appreciation, if any, in the price of the common stock. 36 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, 2001. No such officers exercised their options during the Company's fiscal year ended June 30, 2001. June 30, 2001 Option Values
Number of Unexercised Options at Value of Unexercised In-the-Money Options at -------------------------------- -------------------------------------------- Fiscal Year End (#) Fiscal Year End Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- D. Bruce Walter, 750,000 750,000 $412,500 $412,500 President and CEO Wynford Holloway, former 470,000 -- 258,000 -- President and CEO Darren Evans, former President -- -- -- -- and CEO
We have a Compensation Committee made up of four members of the Board of Directors. During fiscal 2001, our directors and executive officers participated in deliberations at meetings of the Board of Directors concerning executive officer compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The table below sets forth certain information concerning the beneficial ownership of our common stock as of September 12, 2001, by (i) each person known by us to be the beneficial owner of more than 5% of our common stock, (ii) each of our named executive officers, (iii) each of our directors, and (iv) all of our 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.
Amount and Nature of Beneficial Ownership ----------------------------------------- Address of Beneficial Owner Percentage Name of Beneficial Owner Holding .5% Amount of Common Stock (%) ------------------------ ----------- ---------------------- --- Wynford Peter Holloway........... Elder House, 526-528 Elder Gate Central Milton Keynes MK9 1LR ENGLAND 6,240,777 (1)(2) 3) 16.0 William Derek Snowdon............ 667,277 (3) 2.0 Jeremy Miles Simpson............. C/0 MSU Devices Inc. 1,846,948 (3) 5.0 2901 North Dallas Parkway Suite 460, Dallas Texas 75093 Richard Horby Phillips........... 266,229 (3) 0.1 Darran Huw Evans................. 6,049 (3)(4) Jeffrey Nelson Green............. 438,890 (4) 1.0 Stephen Walter Coles............. 470,290 (3)(4) 1.0 Fred Kashkooli................... 141,283 (3) 0.4 C/0 MSU Devices Inc. 2901 North Dallas Parkway Suite 460, Dallas Texas Jean Belanger.................... 75093 2,831,733 (3) 7.0 D. Bruce Walter.................. 1,025,000 (3) 3.0 Raymond R. Dittrich.............. 97,222 (3) 0.3 Patti J. Brown................... 76,389 (3) 0.2 Pritesh M. Patel................. 97,222 (3) 0.3 Peter Brian Weber and Vivian George Bines as Trustees for 48 The Parade, Cardiff The Holloway Settlement.......... CF2 3AB, ENGLAND 1,962,444(2)(3) 13750 US 281 North #660 Mark W McLaughlin................ San Antonio, Texas 78232 4,033,547 All directors and officers as a Group 7,024,977 (3)(4) 18.2
* Less than one percent. 37 (1) Includes 4,170,777 shares held of record by Mr. Holloway and 1,962,444 shares owned by The Holloway Settlement. Pursuant to an unwritten agreement and understanding, Mr. Holloway has voting and dispositive power with respect to the shares held by The Holloway Settlement. (2) The Holloway Settlement 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 has voting and dispositive powers with respect to the shares held by the Settlement. (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 ---- ------------- Jeremy Miles Simpson 13,890 Jeffrey Nelson Green 13,890 Fred Kashkooli 13,890 Stephen Walter Coles 13,890 Jean Belanger 83,333 D. Bruce Walter 83,333 Raymond R. Dittrich 27,778 Patti J. Brown 27,778 Pritesh M. Patel 27,778 (4) Excludes the following shares issuable pursuant to options which are not currently exercisable or are not exercisable within 60 days. Name No. of Shares ---- ------------- Jeremy Miles Simpson 361,120 Jeffrey Nelson Green 361,120 Fred Kashkooli 111,120 Stephen Walter Coles 111,120 Jean Belanger 3,068,086 D. Bruce Walter 483,325 Raymond R. Dittrich 402,778 Patti J. Brown 423,611 Pritesh M. Patel 402,778 38 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information regarding options to purchase common stock issued to directors and officers see "Executive Compensation". Since April of 1999, the law firm of Hugh James Ford Simey, Solicitors, has regularly rendered legal services to us as counsel. W. D. Snowdon, one of our former directors and executive officers, is a partner of Hugh James Ford Simey, Solicitors. We paid approximately $33,000 in legal fees to Hugh James Ford Simey during fiscal year 2001. Between September of 1994 and March of 1995, Mr. Phillips, one of our former directors and executive officers, provided consulting services to us for which we paid $16,974 in fiscal year 2001. In December of 2000, we entered into an agreement with MGI, pursuant to which they agreed to act as our financial advisors. Our Chairman, Jean Belanger is one of the principals of MGI. In May of 2001 we agreed with MGI to terminate the financial advisory agreement with them in exchange for the issuance to MGI and certain of its principals an aggregate of 2,537,500 shares of common stock, of which 1,873,400 such shares were issued to Mr. Belanger. In March of 2001, we entered into a consultant agreement with our former Chief Executive Officer, Wynford Holloway. Pursuant to the terms of the settlement we agreed to engage Mr. Holloway as a consultant until February 28, 2005 for an annual fee of (pound)71,200 and the issuance to Mr. Holloway of 120,000 shares of common stock. In addition as part of the settlement we are in the process of finalizing with Mr. Holloway the grant of an option to acquire 1,500,000 shares of common stock at an exercise price of $1.00. Mr. Holloway's option would expire on February 28, 2003. On November 15,1999, we entered into a sales agency agreement with the Agents to promote and sell our products. In December of 2000, the Agents agreed to terminate this agreement in exchange for the issuance to the Agents of 1,300,000 shares of common stock. Mark McLaughlin, one of our principal shareholders, is a principal stockholder and officer of the Agents. In June of 2001, we issued Jeremy Simpson 67,667 shares of common stock in payment of unpaid director's salary. As of June 30, 2001, MSU has issued an aggregate principal amount of approximately $4,500,000 of 10% convertible promissory notes due one year from the date of issuance in a private placement. Jean Belanger, Jeremy Simpson and Jeffrey Nelson Green purchased promissory notes in the principal amount of $505,283 , $50,000 and $50,000, respectively. The notes are convertible into our common stock at the earlier of (i) our next equity round financing or (ii) the maturity date, at a conversion price of $0.20 per share, subject to adjustment in certain events. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements The following financial statements are filed as a part of this report:
Page Report of Independent Public Accountants.................................................... F-1 Consolidated Financial Statements: Balance Sheets as of June 30, 2001 and 2000............................................ F-2 Statements of Operations for the years ended June 30, 2001, 2000, and 1999............. F-3 Statements of Stockholders' Equity for the years ended June 30, 2001, 2000 and 1999.... F-4 Statements of Cash Flows for the years ended June 20, 2001, 2000 and 1999.............. F-5 Notes to Consolidated Financial Statements............................................. F-6
2. Financial Statement Schedules Information with respect to this Item regarding the financial statement schedule is contained on page F-1 of this Annual Report on Form 10-K. (b) Reports on Form 8-K: May 31, 2001 Item 5, Item 7. August 7, 2001 Item 5. (c) 3. Exhibits The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission. The Company shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request. Exhibit Number Exhibit Title -------------- ------------- 2.01(1) Certificate of Ownership and Merger as filed in the Office of the Secretary of the State of Delware by MSU Corporation and MSU Acquisition Corporation on July 16, 2001. 2.01.1(1) Board Resolutions of MSU Corporation dated June 30, 2001. 2.02(1) Articles of Merger as filed with the Secretary of the State of Florida by MSU Corporation and MSU Acquisition Corporation on July 17, 2001. 2.02.1(1) Agreement and Plan of Merger by and between MSU Corporation and MSU Acquisition Corporation dated as of June 30, 2001. 2.02.1.1(1) Certificate of Incorporation of MSU Acquisition Corporation filed with the Delaware Secretary of State on June 27, 2001. 2.02.1.2(1) By-Laws of MSU Acquisition Corporation, as adopted June 27, 2001. 3.01(1) Certificate of Incorporation of MSU Acquisition Corporation filed with the Delaware Secretary of State on June 27, 2001. 40 3.02(1) By-Laws of MSU Acquisition Corporation, as adopted June 27, 2001. 10.01 Adaptation Services Agreement, dated August 21, 2001 (as amended), among BSQUARE Corporation, MSU Devices Inc. and Web 2 U Limited. (Confidential Treatment) 10.02 Product Manufacturing Agreement, dated August 21, 2001, between MSU Devices Inc. and Biostar Microtech Int'l Corporation. (Confidential Treatment) 10.03 Employment Agreement, dated April 1, 2001, between MSU Devices Inc. and Jean Belanger. 21.01(2) Subsidiaries of the registrant. 99.01(1) Press Release dated June 18, 2001. ---------- (1) Incorporated by reference to the Form 8-K filed on August 7, 2001. (2) Incorporated by reference in the exhibits to the Form 10-K for the fiscal year ended June 30, 1997, filed on September 25, 1997. POWER OF ATTORNEY The Registrant and each person whose signature appears below hereby appoint each of D. Bruce Walter and Jean Belanger as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to this Annual Report on Form 10-K which amendments may make such changes in this Report as the attorney-in-fact acting in the premises deems appropriate and to file any such amendment to this Report with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 14, 2001 MSU DEVICES INC. By:/s/ D. Bruce Walter --------------------------------- D. Bruce Walter President, Chief Executive Officer and Director 41 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: September 14, 2001 By:/s/ D. Bruce Walter --------------------------------- D. Bruce Walter President, Chief Executive Officer and Director /s/ Jean Belanger ------------------------------------ Jean Belanger Chairman of the Board and Director ______________, 2001 /s/ Jeremy Miles Simpson ------------------------------------ Jeremy Miles Simpson Director ______________, 2001 /s/ Fred Kashkooli ------------------------------------ Fred Kashkooli Director ______________, 2001 /s/ Jeffery Nelson Green ------------------------------------ Jeffery Nelson Green Director ______________, 2001 /s/ Stephen Walter Coles ------------------------------------ Stephen Walter Coles Director ______________, 2001 /s/ Patti J. Brown ------------------------------------ Patti J. Brown Chief Financial Officer ______________, 2001 Chief Accounting Officer 42 MSU DEVICES, INC. (FORMERLY MSU CORPORATION) AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2001, 2000 and 1999 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 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors MSU Devices, Inc. (Formerly MSU Corporation) Plano, Texas We have audited the accompanying consolidated balance sheets of MSU Devices, Inc. (formerly MSU Corporation) and subsidiaries as of June 30, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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 Devices, Inc. (formerly MSU Corporation) and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 limited customer 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 7, 2001 F-1 MSU DEVICES, INC. (FORMERLY MSU CORPORATION) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and 2000 ASSETS CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of the consolidated financial statements. F-2 - F-5 MSU DEVICES, INC. (Formerly MSU Corporation) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and 2000
ASSETS 2001 2000 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 1,280,238 $ 1,990,207 Accounts receivable 3,513 345,363 Inventory -- 1,166,347 Other receivables 265,000 -- Prepaid expenses and other 218,795 468,143 ------------ ------------ TOTAL CURRENT ASSETS 1,767,546 3,970,060 EQUIPMENT, net of accumulated depreciation of $296,605 and $225,645 in 2001 and 2000, respectively 137,129 155,884 INVESTMENTS -- 218,981 ------------ ------------ TOTAL ASSETS $ 1,904,675 $ 4,344,925 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Convertible bridge loans $ 3,894,670 $ -- Convertible bridge loans - related party 605,283 -- Unamortized discount, net (1,598,840) -- ------------ ------------ 2,901,113 -- Bank overdraft -- 18,835 Current portion of long-term debt 195,000 825,000 Related-party advances payable -- 125,140 Accounts payable and accrued liabilities 1,856,555 1,691,095 ------------ ------------ TOTAL CURRENT LIABILITIES 4,952,668 2,660,070 LONG-TERM DEBT -- 505,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $0.01 par value; 120,000,000 shares authorized; 38,547,868 and 29,051,202 shares issued and outstanding at June 30, 2001 and 2000, respectively 385,479 290,512 Additional paid-in capital 26,441,566 22,076,718 Stock subscription receivable -- (145,000) Accumulated other comprehensive income 1,789,017 389,207 Accumulated deficit (31,664,055) (21,431,582) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (3,047,993) 1,179,855 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,904,675 $ 4,344,925 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-2 MSU DEVICES, INC. (Formerly MSU Corporation) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS June 30, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ REVENUES $ 1,394,380 $ 904,695 $ 31,746 EXPENSES Cost of revenues 3,782,052 928,255 53,374 Restructuring of UK operations 288,965 -- -- Selling, general and administrative 5,542,498 2,190,296 1,543,740 Research and development 1,110,847 2,036,450 1,555,918 Depreciation 70,960 83,267 74,082 Interest expense 296,943 112,935 157,675 ------------ ------------ ------------ TOTAL EXPENSES 11,092,265 5,351,203 3,384,789 ------------ ------------ ------------ OPERATING LOSS (9,697,885) (4,446,508) (3,353,043) NON-OPERATING INCOME (EXPENSE) Interest income 76,292 37,998 4,693 Amortization of discount on convertible notes (228,406) (441,251) (3,670,000) Impairment loss on carrying value of investments (382,474) -- (2,524,375) Conversion loss on issuance of common stock under market -- (55,788) (142,546) ------------ ------------ ------------ TOTAL NON-OPERATING EXPENSE, NET (534,588) (459,041) (6,332,228) ------------ ------------ ------------ NET LOSS $(10,232,473) $ (4,905,549) $ (9,685,271) ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.35) $ (0.19) $ (0.47) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 29,083,000 25,793,000 20,550,000 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 MSU DEVICES, INC. (Formerly MSU Corporation) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) Years Ended June 30, 2001, 2000 and 1999
Common Stock Comprehensive $0.01 Par Value Additional Stock Income --------------------------------- Paid-In Subscription (Loss) Shares Amount Capital Receivable --------------- --------------- --------------- --------------- --------------- Balance - June 30, 1998 $ -- 16,590,237 $ 165,902 $ 5,287,790 $ -- 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 -- -- -- -- Reclassification of Change in Market Value of Investments Available for Sale to Account for Permanent Impairment 696,500 -- -- -- -- Discount on Convertible Notes Issued -- -- -- 3,670,000 -- Net Loss (9,685,271) -- -- -- -- --------------- --------------- --------------- --------------- --------------- Comprehensive Loss $ (8,889,997) =============== Balance - June 30, 1999 $ -- 25,364,262 253,642 17,854,174 (148,750) Issuance of Common Shares -- 3,686,940 36,870 3,781,293 -- Charge for Discount on Convertible Notes Issued -- -- -- 441,251 -- Collection of Stock Subscription Receivable -- -- -- -- 3,750 Translation Adjustments 443,880 -- -- -- -- Change in Market Value of Investments Available for Sale (163,493) -- -- -- -- Net Loss (4,905,549) -- -- -- -- --------------- --------------- --------------- --------------- --------------- Comprehensive Loss $ (4,625,162) =============== Balance - June 30, 2000 $ -- 29,051,202 290,512 22,076,718 (145,000) Issuance of Common Shares -- 9,148,166 91,482 2,118,255 -- Cancellation of Stock Subscription -- (145,000) (1,450) (143,550) 145,000 Issuance of 15% Penalty Shares -- 493,500 4,935 231,945 -- Other -- -- -- (16,675) -- Discount on Convertible Bridge Loan Notes Issued -- -- -- 1,827,246 -- Issuance of Options to Contractors and Repricing of Options -- -- -- 347,627 -- Reclassification of Change in Market Value of Investments Available for Sale to Account for Permanent Impairment 163,493 -- -- -- -- Translation Adjustments 1,236,317 -- -- -- -- Net Loss (10,232,473) -- -- -- -- --------------- --------------- --------------- --------------- --------------- Comprehensive Loss $ (8,832,663) =============== Balance - June 30, 2001 38,547,868 $ 385,479 $ 26,441,566 $ -- =============== =============== =============== =============== Accumulated Other Total Comprehensive Shareholders' Accumulated Income Equity Deficit (Loss) (Deficit) --------------- --------------- --------------- Balance - June 30, 1998 $ (6,840,762) (686,454) (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 98,774 Reclassification of Change in Market Value of Investments Available for Sale to Account for Permanent Impairment -- 696,500 696,500 Discount on Convertible Notes Issued -- -- 3,670,000 Net Loss (9,685,271) -- (9,685,271) --------------- --------------- --------------- Comprehensive Loss Balance - June 30, 1999 (16,526,033) 108,820 1,541,853 Issuance of Common Shares -- -- 3,818,163 Charge for Discount on Convertible Notes Issued -- -- 441,251 Collection of Stock Subscription Receivable -- -- 3,750 Translation Adjustments -- 443,880 443,880 Change in Market Value of Investments Available for Sale -- (163,493) (163,493) Net Loss (4,905,549) -- (4,905,549) --------------- --------------- --------------- Comprehensive Loss Balance - June 30, 2000 (21,431,582) 389,207 1,179,855 Issuance of Common Shares -- -- 2,209,737 Cancellation of Stock Subscription -- -- -- Issuance of 15% Penalty Shares -- -- 236,880 Other -- -- (16,675) Discount on Convertible Bridge Loan Notes Issued -- -- 1,827,246 Issuance of Options to Contractors and Repricing of Options -- -- 347,627 Reclassification of Change in Market Value of Investments Available for Sale to Account for Permanent Impairment -- 163,493 163,493 Translation Adjustments -- 1,236,317 1,236,317 Net Loss (10,232,473) -- (10,232,473) --------------- --------------- --------------- Comprehensive Loss Balance - June 30, 2001 $ (31,664,055) $ 1,789,017 $ (3,047,993) =============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. F-4 MSU DEVICES, INC. (Formerly MSU Corporation) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS June 30, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(10,232,473) $ (4,905,549) $ (9,685,271) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 70,960 83,267 74,082 Amortization of discount on convertible notes and deferred costs 228,406 441,251 3,670,000 Impairment loss on carrying value of investments 382,474 -- 2,524,375 Non-cash expense related to grants of stock purchase options 347,625 -- 98,438 Issuance of stock for services and settlements 1,158,202 -- 172,213 Issuance of stock for relief of interest 122,313 32,001 153,049 Conversion loss on issuance of common stock under market -- 55,788 142,546 Non-cash revenue related to sale of license -- -- -- (Increase) decrease in accounts receivable, net 312,669 (362,016) (566) (Increase) decrease in inventories 1,087,146 (1,184,650) (40,749) (Increase) decrease in prepaid expenses and other 249,600 (306,923) (87,737) Increase in accounts payable and accrued liabilities 354,009 739,473 304,852 Increase (decrease) in related-party accounts and advances payable (125,140) (46,548) 163,000 ------------ ------------ ------------ TOTAL ADJUSTMENTS 4,188,264 (548,357) 7,173,503 ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (6,044,209) (5,453,906) (2,511,768) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of equipment, net (54,338) (110,768) (106,628) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayments of) borrowings under short-term credit facilities, net (17,556) 19,774 -- Proceeds from issuance of convertible promissory notes 3,629,670 900,000 4,175,000 Repayment of convertible promissory notes (150,000) -- (326,939) Proceeds from issuance of note payable -- -- 75,000 Proceeds from issuance of convertible promissory notes to related party 605,283 -- 77,200 Repayment of note to related party -- (20,291) (18,250) Issuance of common stock -- 3,580,374 1,013,650 Collection of subscription receivable -- 3,750 -- ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 4,067,397 4,483,607 4,995,661 EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,321,181 466,770 61,199 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (709,969) (614,297) 2,438,464 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,990,207 2,604,504 166,040 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,280,238 $ 1,990,207 $ 2,604,504 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-5 MSU DEVICES, INC. (Formerly MSU Corporation) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2001, 2000 and 1999 NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS Organization and Basis of Presentation In October 1994, MSU Devices, Inc. (formerly MSU Corporation and formerly Capital Acquisition Company) ("MSU"/the "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 originally based in the United Kingdom, which owns all of the capital stock of Web 2 U Limited, formerly MSU UK Limited (see Note 13). MSU has historically operated primarily through Web 2 U Limited, which has been principally engaged in the design and development of software computer chips and chipsets for use in high-volume consumer electronic products and in the sale of set-top-boxes that were used for Internet access. The activity of MSU's U.S. operations has not been significant since its inception; however, in January 2001, the Board of Directors reorganized the operations of the Company by hiring a new executive management team and relocating the principal offices from the United Kingdom to Plano, Texas, a suburb of Dallas. The new management team was charged with improving the technology of the Company's product and establishing a sales presence in the U.S. All development and sales of existing products were halted, and all resources were focused on the development of the fifth generation ("V5") of the Company's Internet Access Device (see Note 3). The consolidated financial statements include the accounts of MSU, MSU Plc., and Web 2 U Limited (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, 2001, 2000 and 1999, the Company generated net losses of approximately $10,232,000, $4,906,000 and $9,685,000, respectively, and expects to incur net losses in fiscal 2002 as it attempts to develop, upgrade and market its product and to develop its infrastructure to support operations. At June 30, 2001, the Company had an accumulated deficit of approximately $31,664,000 and a negative working capital ratio. Additionally, the Company has had recurring negative cash flows from operations and currently has no active customers (see Note 11). These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. F-6 NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS (Continued) Significant Risks (Continued) Management's plans with regard to these matters include increased cash flows from operations through sales of its newly developed V5 proprietary Internet Access Device in respect of which commercial production has commenced, 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 further its infrastructure and organization to support its enhanced operations as funds become available. However, there can be no assurance that management will be successful in the implementation of its plans. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents include all highly liquid investments convertible into known amounts of cash with an original maturity, when purchased, of three months or less. Investments Investments consisted 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 4). These investments were accounted for as available for sale securities. Consequently, the unrealized holding loss on these securities was reported as a separate component of shareholders' equity, unless a determination was made that the holding loss was other than temporary. If the holding loss was determined to be permanent, the loss was recognized in the year such a determination was made. Equipment Equipment is comprised of computer hardware and software and is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the equipment, generally three to five 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, and their components. During the year ended June 30, 2001, the entire amount of inventory was expensed due to the obsolescence of version 2 and version 3 and due to the Company's decision to only market and sell the new V5 product in the future (see Note 3). F-7 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 6). Revenue Recognition Revenues primarily consist of sales of Internet Access Devices and are recognized when the products are shipped to customers. Deferred Financing Costs The costs attributable to the issuance of certain convertible promissory notes, including discounts, are generally deferred and amortized over the term of the notes. The new 10% convertible notes mature from October 2001 through June 2002 (see Notes 9 and 10). 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 Loss Per Share During the fiscal year ended June 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," 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, warrants 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 2001, 2000 and 1999 because their effect would have been anti-dilutive. As a result, both basic and diluted earnings per share for 2001, 2000 and 1999 were calculated based on approximately 29,083,000, 25,793,000 and 20,550,000 weighted average common shares outstanding during the years, respectively. 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. F-8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 financial institutions and receivables. The Company primarily maintains its cash in bank deposit accounts in the United States and the United Kingdom, which, at any time, may exceed federally insured limits, or may not be insured at all. 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. Management believes that credit risk with respect to accounts receivable is mitigated by the creditworthiness of the customer. Financial instruments reflected in the Company's balance sheets at June 30, 2001 and 2000 include cash and cash equivalents, receivables, subscription receivable, notes payable, and other borrowings. The carrying amount of cash and cash equivalents, receivables, 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 long-term notes payable. 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 reclassifications were made to the 2000 and 1999 financial statements to conform to the 2001 presentation. NOTE 3 - RESTRUCTURING OF WEB 2 U A restructuring charge of approximately $289,000 was recorded during fiscal 2001 for the restructuring of the Company's UK operations, which is comprised of involuntary termination benefits and legal fees associated with the restructuring. In addition to the restructuring charges, inventory, which was comprised of Version 2 and Version 3 Internet Access Devices, in the amount of approximately $1.9 million was expensed and included in cost of revenues due to obsolescence and due to the Company's determination to focus all sales efforts on the Company's new V5 product. F-9 NOTE 3 - RESTRUCTURING OF WEB 2 U (Continued) A winding up petition was filed against Web 2 U Limited, pursuant to the Insolvency Act of 1986, on April 3, 2001 by Eurodis HB Electronics Limited in the High Court of Justice in the United Kingdom. A notice of support by another creditor was filed in April 2001. Web 2 U Limited voluntarily petitioned the High Court in London for an administration order in order to settle its current outstanding liabilities with all creditors on an equitable basis. The order was granted on May 15, 2001 (see Note 13). NOTE 4 - 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 the carrying value of investments of approximately $2,500,000 in the accompanying financial statements. During the year ended June 30, 2001, trading of AIM's shares was halted; consequently, the Company recorded an impairment loss on the remaining investment in AIM of approximately $219,000, along with approximately $163,000 of unrealized loss in the AIM investment. NOTE 5 - RELATED-PARTY TRANSACTIONS The Company has received services from law firms in which a former director of the Company was employed. Amounts charged to operations for these legal services during the years ended June 30, 2001, 2000 and 1999, approximated $33,000, $80,000, and $115,000, respectively. In the fiscal year ended June 30, 2000, the Company had received services from a marketing joint venture corporation, one member of which is an entity primarily owned by a significant shareholder of the Company. Expenses related to these services incurred in the fiscal years ended June 30, 2001 and 2000, were approximately $202,000 and $138,000, respectively. In December 2000, the relationship between the Company and the marketing joint venture corporation was terminated, and the Company agreed to satisfy the outstanding liability of $340,000 through the payment of $15,000 cash and the issuance of 1.3 million shares of stock at $0.25 per share. As of June 30, 2001, a payable in the amount $15,000 to the marketing joint venture had not been paid. Three directors of the Company were issued 10% convertible bridge loan notes (see Note 9) totaling approximately $605,000 during the year ended June 30, 2001. These notes carry a one-year term and are convertible to one share of common stock per $0.20 loaned to the Company. F-10 NOTE 5 - RELATED-PARTY TRANSACTIONS (Continued) In May 2001, 1,873,400 shares of the Company's common stock valued at approximately $375,000 were issued to a director of the Company as part of a payment for fees and the termination of an agreement with an investment banking firm, that the director was a member of, that performed services for the Company. Amounts due under related party notes, advances and payables as of June 30, 2001 and 2000, amounted to approximately $605,000 and $125,000, respectively. The June 30, 2001 balance consists of approximately $605,000 of convertible bridge loan notes held by three directors (see Note 9). The June 30, 2000 balance consists of $125,000 due to directors for unpaid salaries. In June 2001, a director of the Company was issued 67,667 shares of common stock and a former director of the Company was issued 116,000 shares of common stock in payment of unpaid director's salary. The former director was also paid approximately $17,000 in cash for consulting services performed for Web 2 U. NOTE 6 - INCOME TAXES As of June 30, 2001, 2000 and 1999, the Company had a U.S. net operating loss carryforward of approximately $5.9 million, $2.7 million and $2.5 million, respectively, available to offset future taxable income. The net operating loss carryforward expires through the year 2021. Under U.S. federal tax laws, certain changes in ownership of a company may cause a limitation on future utilization of these loss carryforwards. Deferred tax assets resulting from the Company's U.S. income tax loss carryforwards were approximately $2.2 million, $1.1 million and $1 million at June 30, 2001, 2000 and 1999, respectively. The Company has established a valuation allowance to fully offset all U.S. deferred tax assets and carryforwards, as their future realization is uncertain. As of June 30, 2001, 2000 and 1999, the Company's subsidiaries had a United Kingdom net operating loss carryforward of approximately $15.5 million, $14.5 million and $7.2 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 $4.7 million, $4.3 million and $2.1 million at June 30, 2001, 2000 and 1999, respectively. The Company has established a valuation allowance to fully offset all foreign deferred tax assets and carryforwards, as their future realization is uncertain. F-11 NOTE 7 - SHAREHOLDERS' EQUITY 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 statement of changes in shareholders' equity (deficit). During the year ended June 30, 2000, the Company issued, in private transactions, an aggregate of 3,686,940 shares of unregistered common stock in exchange for net consideration of approximately $3,818,000. Approximately $3,440,000 was received in cash for the issuance of 3,393,250 shares of common stock at the time of the transactions. Accrued interest payable approximating $32,000 was relieved through the issuance of 16,190 shares of common stock. Convertible notes payable in the amount of approximately $150,000 were converted into 75,000 shares of common stock and stock options representing 202,500 shares of stock were exercised for an aggregate exercise price of approximately $141,000 during the year ended June 30, 2000. Conversion cost of securities issued below market during the fiscal year ended June 30, 2000, approximated $55,000, substantially all of which was as a result of related-party transactions, and was recorded as additional paid-in capital in the accompanying statement of changes in shareholders' equity (deficit). During the year ended June 30, 2001, the Company issued, in private transactions, an aggregate of 9,641,666 shares of unregistered common stock. 3,940,000 shares were issued as a result of the conversion of $985,000 of notes payable. Approximately 369,000 shares were issued to relieve approximately $122,000 in accrued interest on those notes. Approximately, 4,839,000 shares were issued to creditors, primarily of Web 2 U, and former directors and employees to satisfy approximately $1.1 million in payables to these parties. 493,500 shares were issued as a penalty to the Company resulting from the Company's failure to complete an S-1 registration of shares of common stock issued for cash during the year ended June 30, 2000. As a result of the Company's failure to complete the registration of the shares within 180 days of issuance, the Company was penalized an amount of shares equal to 15% of the total number of shares issued. In addition, a stock subscription receivable in the amount of $145,000 was cancelled, along with 145,000 shares of common stock (see Note 8). In June 2001, at the annual shareholder's meeting, the shareholders of the Company approved a resolution to increase the number of authorized shares of common stock from 50,000,000 to 120,000,000. F-12 NOTE 8 - 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-dilutive 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 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, subsequently amended to $0.75 per share (which have been exercised as of June 30, 2000), and to the bridge loan noteholders for 60,000 shares of the Company's common stock exercisable at $3.00 per share through February 2002. In July 1997, the Company granted options to nine of its employees to acquire an aggregate of 50,000 shares of the Company's common stock at an exercise price of $3.56 per share. The option 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. Since the grant date to June 30, 2001, options underlying 45,000 shares 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, which were exercised in the fiscal year ended June 30, 2000. The remaining options expired three years after their date of issuance. 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 were immediately exercisable and expire in February 2003. 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. These options were exercised at an exercise price of $1.00 per share upon which a stock subscription receivable was taken. The stock subscription was cancelled, along with the 145,000 shares, during the year ended June 30, 2001. 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. The options are exercisable in equal amounts in September 1998 and 1999 and expire in September 2003. Options relating to 300,000 shares were canceled in the fiscal year ended June 30, 2000. F-13 NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued) 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 were exercisable immediately, to purchase 1,000,000 shares of the Company's common stock for consideration of $500,000. These warrants expire in October 2003. 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 10) in the fiscal year ended June 30, 1999, two directors of the Company offered as security for the loan an aggregate of 3,250,000 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 were immediately exercisable and were canceled in the fiscal year ended June 30, 2000. 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 were immediately exercisable and expire in January 2004. In January 1999, the Company issued options to a consultant to purchase 112,500 shares of the Company's common stock at an exercise price of $1.50 per share. These options were immediately exercisable and expire in January 2004. Pursuant to an employment agreement, in August 1999, the Company granted options to a director to acquire an aggregate of 301,000 shares of the Company's common stock at an exercise price of $3.38 per share. All of these options were cancelled as of June 30, 2001 due to the termination of the director's relationship with the Company. In August 1999, the Company issued options to a consultant to purchase 100,000 shares of the Company's common stock at an exercise price of $1.50 per share. These options were immediately exercisable and expire in February 2004. In connection with a November 1999 sales agency agreement, the Company issued warrants to the parties involved to purchase 100,000 shares of common stock at $3.00 per share. These warrants were immediately exercisable and expire in November 2004. Pursuant to an employment agreement dated November 1999, the Company granted options to two directors to acquire an aggregate of 300,000 shares of the Company's common stock at an exercise price of $2.75 per share. These options are exercisable in equal amounts in November 2000, 2001 and 2002. The options expire five years after their date of issuance. In December 1999, the Company granted options to an employee to acquire 100,000 shares of the Company's common stock at an exercise price of $2.50 per share. These options are exercisable in November 2000 and expire in November 2002. In January 2000, the Company granted options to an employee to acquire 60,000 shares of the Company's common stock at an exercise price of $3.13 per share. These options are exercisable in January 2001 and expire in January 2003. F-14 NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued) In connection with a licensing agreement signed by the Company in January 2000, the Company issued a warrant, which is exercisable through January 15, 2001, to purchase 3.5% of the then outstanding shares (calculated on a fully diluted basis) of the Company's common stock at an exercise price of $2.55. This agreement was terminated in May 2001, and the warrant was cancelled. In connection with the private placement of 750,000 shares of its common stock in January and February 2000, the Company issued warrants, which were exercisable immediately, to purchase 300,000 shares of the Company's common stock for consideration of $900,000. These warrants expire in May 2001. In March and April 2000, the Company granted options to a director to acquire an aggregate of 107,900 shares of the Company's common stock at an exercise price of $3.00. These options were immediately exercisable and expire with respect to 80,000 shares in May 2001 and 27,900 in December 2001. 80,000 shares of this grant lapsed in May 2001 when they were not exercised. In connection with the private placement of 3,290,000 shares of its common stock in May and June 2000, the Company issued warrants, which were exercisable immediately, to purchase 3,290,000 shares of the Company's common stock for consideration of $9,870,000. These warrants expired in May 2001. In May 2001, four directors of the Company were granted options to acquire 1,000,000 shares of common stock at an exercise price of $0.25 per share. 500,000 of the options became exercisable immediately, and the remaining 500,000 options will become exercisable at rate of approximately 28,000 per month over the following 18 months. The options will expire in May 2006. In February 2001, an officer of the Company was granted options to acquire 1,200,000 shares of the Company's common stock at $0.60 per share. 600,000 shares became exercisable immediately, and the remaining 600,000 will become exercisable in equal monthly installments over the following 18 months. In May 2001, the options were re-priced to $0.25 per share resulting in the recognition by the Company of approximately $200,000 of stock compensation expense. The options will expire in February 2006. In April 2001, a director and an officer of the Company were granted options to purchase 1,800,000 shares of common stock. 900,000 shares became exercisable immediately, and the remaining 900,000 shares will become exercisable at a rate of 50,000 shares per month over the following 18 months. The options will expire in April 2006. Between February and March 2001, three employees of the Company were granted options to acquire 1,500,000 shares of the Company's common stock at $0.60 per share. The options vest and become exercisable monthly over 36 months from the grant date. In May 2001, the options were re-priced to $0.25 per share resulting in the recognition by the Company of approximately $25,000 in stock compensation expense. The options will expire between February and March 2006. In May 2001, employees of the Company were granted 1,425,000 options to purchase the Company's common stock at $0.25 per share. The options vest and become exercisable monthly over 36 months from the grant date. As of June 30, 2001, 550,000 options had been cancelled due to termination of employment. F-15 NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued) Between May and June 2001, consultants were issued options to purchase 97,500 shares of common stock at $0.25 per share. The options became exercisable immediately and will expire between May and June 2006. In May 2001, 600,000 warrants, which were exercisable immediately, were issued to purchase shares of common stock at $0.60 per share as part of a settlement agreement with a firm that provided investment banking services to the Company. The warrants will expire in May 2004. Compensation expense recorded for stock options and warrants granted in the years ended June 30, 2001, 2000 and 1999, approximated $348,000, $-0-, and $98,000, respectively, and is included in selling, general and administrative expenses. Activity related to the Company's stock options and warrants during the years ended June 30, 1999, 2000 and 2001, was as follows:
Outstanding Options and Warrants ------------------------------------------------------- Weighted Average Number of Shares Exercise Price -------------------------- ---------------------------- 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 Grants 6,351,320 $2.85 Exercises (202,500) $0.69 Cancellations (1,504,000) $0.59 -------------------------- June 30, 2000 10,089,323 $2.34 Grants 7,922,500 $0.29 Exercises -- -- Cancellations (6,542,420) $2.69 -------------------------- June 30, 2001 11,469,403 $0.72 ========================== Options exercisable at June 30, 2001 6,980,861 $1.01 ========================== ============================
F-16 NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued) The range of exercise prices for stock options and warrants outstanding at June 30, 2001, was $0.25 to $5.00. The following table summarizes information about stock options and warrants outstanding at June 30, 2001:
Outstanding Options and Warrants ---------------------------------------------------------------------- Weighted Average Number Average of Contractual Weighted Average Range of Exercise Prices Shares Life (in years) Exercise Price ------------------------------- ----------------------- ---------------------- ----------------------- $0.25 to $2.99 10,914,003 3.7 $0.60 $3.00 to $5.00 555,400 1.2 $3.13 ----------------------- 11,469,403 3.6 $0.72 =======================
Exercisable Options and Warrants ---------------------------------------------------------------------- Weighted Average Range of Exercise Prices Number of Shares Exercise Price ------------------------------- ---------------------- ----------------------- $0.25 to $2.99 6,425,461 $0.83 $3.00 to $5.00 555,400 $3.13 ---------------------- 6,980,861 $1.01 ======================
SFAS No. 123, "Accounting for Stock-Based Compensation" 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 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 and certain directors for services 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, 2001, 2000 and 1999 reported below, has been estimated at the dates of grant using the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999 ----------------- ---------------- ----------------- Expected life (in years) 5 5 5 Risk-free interest rate 7% 8.0% 7.5% Volatility 132% 128% 131% Dividend yield 0.0% 0.0% 0.0%
The Black-Scholes option-pricing 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 may not necessarily provide a reliable single measure of the fair value of its options. F-17 NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is approximately as follows:
2001 2000 1999 ----------------- ---------------- ------------------ Pro forma net loss $ (11,390,530) $ (6,892,658) $ (11,259,000) Pro forma loss per share $(0.39) $(0.27) $(0.55)
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 9 - 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, 2001, there were no overdraft borrowings outstanding under this arrangement. During the year ended June 30, 2001, the Company issued approximately $4.5 million of 10% convertible bridge loan notes, of which approximately $605,000 was issued to related parties. The notes were issued from October 2000 until June 30, 2001 and mature one year from the issue date. Interest will accrue until the maturity date, at which time, if the note has not been converted, it will be paid to the noteholder, along with the outstanding principal balance. The notes are convertible into shares of common stock at the rate of one share of common stock for each $0.20 of principal and accrued interest converted. The noteholders may convert at the earlier of the closing of a qualified financing by the Company or the repayment date. 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. Since the conversion price of these notes was below the market price of the Company's common stock at the date of issuance, a discount relating to this beneficial conversion feature of approximately $1,827,000 was recorded in the year ended June 30, 2001, of which approximately $228,000 had been amortized as of June 30, 2001. NOTE 10 - LONG-TERM DEBT 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 of the Company, 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. F-18 NOTE 10 - LONG-TERM DEBT (Continued) 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 of the Company, 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. During January 2001, the Company offered the noteholders the opportunity to convert their notes at a rate of $0.25 per share. This offer was good until May 24, 2001, and it resulted in the conversion of $310,000 of 6% notes to common stock during the year ended June 30, 2001. In May 1999, the Company issued $3,670,000 of 10% convertible promissory notes (the "May 1999 10% Notes"). Interest was payable on these notes quarterly. The May 1999 10% Notes were collateralized by certain assets of the Company and two directors of the Company 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 May 1999 10% Notes principal converted. Proceeds received by the Company from the issuance of the May 1999 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 May 1999 10% Notes, this discount was fully amortized as of June 30, 1999. The Company executed 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 principal balance of $75,000 outstanding at June 30, 2000, is unsecured and was due at June 30, 2000. During January 2001, the Company offered the holders of the $75,000 note the opportunity to convert the note at a rate of $0.25 per share. This offer was good until May 24, 2001, and it resulted in the conversion of the $75,000 note, plus accrued interest, to common stock during the year ended June 30, 2001. In 1999, the Company received loans in the amount of approximately $40,000 from the Trust (see Note 11). The loans are unsecured, bear no interest, and were repaid in the fiscal year ended June 30, 2000. In January and February 2000, the Company issued $750,000 of 10% convertible promissory notes (the "new 10% Notes"). Interest is payable on these notes semi-annually. The new 10% Notes 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 new 10% Notes principal converted. Proceeds received by the Company from the issuance of the new 10% Notes, net of offering costs, approximated $704,000. 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 approximately $291,000 was recorded in the year ended June 30, 2000. Due to the automatic conversion feature of the new 10% Notes, this discount was fully amortized upon issuance of the notes and appears in the accompanying fiscal 2000 statement of F-19 NOTE 10 - LONG-TERM DEBT (Continued) operations. During January 2001, the Company offered the noteholders the opportunity to convert their notes at a rate of $0.25 per share. This offer was good until May 24, 2001, and it resulted in the conversion of all of the new 10% notes, plus accrued interest, to common stock during the year ended June 30, 2001. Long-term debt consists of the following at June 30, 2001 and 2000:
2001 2000 --------------- --------------- Convertible 10% promissory notes, interest payable semi-annually, maturing December 31, 2000, collateral-ized by assets of the Company, convertible into shares of the Company's common stock at a rate of one share for each dollar of note principal converted $ -- $ 750,000 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 175,000 175,000 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 20,000 330,000 Unsecured, noninterest-bearing notes payable, no specified date for repayment -- 75,000 --------------- --------------- 195,000 1,330,000 Less current portion (195,000) (825,000) --------------- --------------- Total long-term debt $ -- $ 505,000 =============== ===============
Maturities on long-term debt obligations are as follows:
Year Ending June 30, Principal ------------------- -------------- 2002 $ 195,000
Cash paid for interest was approximately $-0-, $47,000 and $-0- during the fiscal years ended June 30, 2001, 2000 and 1999, respectively. F-20 NOTE 11 - COMMITMENTS AND CONTINGENCIES Leases The Company leases office space at its headquarter outside of Dallas, Texas, and in the UK at Milton Keynes. The operating lease for the U.S. headquarters was entered into in February 2001 and will expire in February 2003. The UK office is currently leasing space on a month-to-month basis under an operating lease that terminated in March 2001. In the UK, the Company had also leased office and laboratory space at another location under an operating lease that expired in December 2000. Future minimum rental payments and service charges required under the leases at June 30, 2001, are approximately $60,000 and $40,000 for the fiscal years 2002 and 2003, respectively. For the years ended June 30, 2001, 2000 and 1999, rent expense totaled approximately $109,000, $192,000 and $115,000, respectively. Pension Plan Web 2 U has a pension plan for the benefit of its Web 2 U 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, 2001, 2000 and 1999, Web 2 U made contributions of approximately $47,000, $65,000 and $54,000 to the plan, respectively. Employment Agreements The Company has entered into employment agreements with certain officers of the Company. Some employment agreements also provide for severance in the event the individual is terminated. Contracts During the fiscal year ended June 30, 2000, the Company entered into a sales agency agreement with a joint venture corporation (the "Agent"), one member of which is an entity primarily owned by a significant shareholder of the Company, to promote and sell the Company's products. Under the agreement, the Company had agreed to pay the Agent a fee of $25,000 per month plus a commission per unit of product sold. The Company, as additional consideration, had issued warrants to purchase 100,000 shares of the Company's common stock for an exercise price of $3.00 and had also agreed to issue additional warrants based upon the sales of the Company's products. This agreement was terminated in December 2000, and the Company agreed to satisfy the outstanding payable amount through the payment of $15,000 in cash and the issuance of 1,300,000 shares of common stock valued at $325,000. In January 2000, Web 2 U signed a licensing agreement with an Indian joint venture company to manufacture and sell Web 2 U's products in India, Bangladesh, Nepal, and Sri Lanka. Under this agreement, Web 2 U would receive a license fee per unit of product produced and would sell components used in the manufacture to the joint venture company. As part of this agreement, the Company and the joint venture company had received options to purchase shares in the other, in the amount of 3.5% of the outstanding capital stock of each company, at the time of exercise. In May 2001, this agreement was automatically cancelled, under the terms of the contract, when Web 2 U was placed in administration. F-21 NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued) Contracts (Continued) In June 2000, the Company entered into a contract manufacturing agreement with a UK company, which provides for the manufacture of the Company's products. As part of the agreement, the Company had been required to issue a standby letter of credit to the UK company in the amount of $1,500,000, which was to expire in May 2002. The standby letter of credit was collateralized by a $1,500,000 cash deposit of the Company. This agreement and letter of credit were terminated in April 2001. In March 2001, the Company signed a consulting agreement with a former officer/director of the Company, whereby, in exchange for consulting services, the Company would pay approximately 6,000 British Pounds per month for four years. Based upon exchange rates as of June 30, 2001, this equates to approximately $8,500 per month. The Company also issued to the consultant 120,000 shares of the Company's common stock. In April 2001, the Company signed an agreement with a consultant to provide software development services to the Company. Under the contract, the consultant will be paid $12,500 per month for five months. At the end of the contract, the Company will pay the consultant $10,000. In addition, the consultant will be granted 12,500 options to purchase the Company's common stock per month during the term of agreement. In June 2001, the Company signed a product design and development agreement with a contract manufacturer having a term of one year. Under the agreement, the Company makes fixed payments to the manufacturer for services related to the design and development of the Company's V5 product. 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, 2001, 2000 and 1999 were generated from a small number of customers. Management does not expect to generate future sales from these customers. The Company presently has only one supplier manufacturing Internet Access Devices. Should the supplier cease production, the Company could be adversely affected. The Company's revenue, by geographical region, during the years ended June 30, 2001, 2000 and 1999, were approximately as follows:
Location 2001 2000 1999 ------------------------------- --------------- ------------- ------------- Europe $ 618,000 $ 343,000 $ 2,000 Asia 610,000 562,000 17,000 North America 166,000 -- 13,000 --------------- ------------- ------------- $ 1,394,000 $ 905,000 $ 32,000 =============== ============= =============
Trust As of June 30, 2001 and 2000, 1,962,444 and 2,724,444 shares of the Company's common stock were held by a trust (the "Trust"). The Settlor is the previous chairman of the Company and the beneficiaries are substantially all of the employees of the Company, including the Settlor. During the years ended June 30, 2001 and 2000, the Company made no contributions to the Trust. F-22 NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued) Other 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 that it was not liable for the claim. 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. In May 2001, a former CEO of the Company brought a claim against the Company in the amount of (pound)110,000 for unpaid wages and a termination payment. Based upon exchange rates at June 30, 2001, the claim represents an amount of approximately $156,000. The Company is actively contesting this claim. Management has established a reserve that is reflected in the financial statements for this claim that Management deems is appropriate. However, due to the uncertainty of the outcome of the claim, management will continue to evaluate the appropriateness of the reserve. In May 2001, 2,537,500 shares of the Company's common stock were issued to an investment banking firm, of which a director of the Company was a member (see Note 5), as payment for services performed by the firm during the year ended June 30, 2001 for the Company. In addition, 600,000 warrants to purchase the Company's common stock were issued (see Note 8) and a payable related to unreimbursed travel expenses was recorded in the amount of approximately $28,000. As of June 30, 2001, the payable was unpaid. NOTE 12 - REGISTRATION OF SHARES In August 2000, the Company filed a Registration Statement on Form S-1 under the Securities Act of 1933, for the purpose of registering approximately 9,339,000 shares of common stock, of which approximately 3,468,000 shares of common stock had been previously issued to certain existing shareholders of the Company. Approximately 464,000 shares underlie the conversion rights of certain convertible notes and approximately 5,406,000 shares are represented by stock options and warrants previously issued by the Company. In December 2000, the Company chose to withdraw the registration statement. NOTE 13 - SUBSEQUENT EVENTS A settlement was reached with Web 2 U's significant creditors in July 2001, in which the significant creditors will be issued 5% convertible promissory notes for amounts due to them with five-year terms, interest payable annually and with repayments of principal commencing after three years. The Company will have the right to convert the notes at $1.00 per share in the event that the Company's stock trades closes at or above $1.25 per share for five consecutive business days. Web 2 U successfully emerged from administration on August 20, 2001. Going forward, Web 2 U will be primarily a sales office for the Company with responsibilities for Europe, Africa and Asia. F-23 NOTE 13 - SUBSEQUENT EVENTS (Continued) In July 2001, the Company changed its name from MSU Corporation to MSU Devices, Inc. and reincorporated in the State of Delaware. The Company was previously a Florida Corporation. In August 2001, the Company signed an agreement with a contract manufacturer to commercially manufacture the V5 device. The contract carries a term of one year, and the Company is committed to purchase a minimum number of units over the term of the contract. In August 2001, the Company signed an agreement with a contract software developer to purchase a minimum number of software licenses relating to the Company's V5 device. In addition, the contract software developer will assist the Company in the development of software on a project basis. F-24 EX-10.01 3 b313844ex_10-01.txt ADAPTION SERVICES AGREEMENT EXHIBIT 10.01 ADAPTATION SERVICES AGREEMENT BSQUARE CORPORATION with MSU Devices Inc. and Web 2 U Ltd This Adaptation Services Agreement ("Agreement") dated as of August 21, 2001 ("Effective Date") is made and entered into between BSQUARE CORPORATION, a Washington corporation ("BSQUARE"), and MSU Devices Inc., a Delaware corporation and Web 2 U Ltd, a United Kingdom corporation and a wholly owned subsidiary of MSU Devices Inc. (jointly and severally referred to as "MSU or "COMPANY"). 1. RECITALS. 1.1 Microsoft Corporation ("MS") has developed a computing operating system/applications platform software known as "Windows CE" for use in certain types of computing devices. 1.2 BSQUARE has developed a suite of software tools and programs developed for the x86 microprocessor ("CE Xpress Kit"). COMPANY desires to use the BSQUARE Deliverables in accordance with the terms of this Agreement. The BSQUARE Deliverables are a derivative work of the CE Xpress Kit. The BSQUARE Deliverables are used in connection with Microsoft's Platform Builder product (separately licensed by COMPANY). 1.3 COMPANY plans to develop a computing device that incorporates Windows CE and a Derivative of the BSQUARE Deliverables and desires to obtain certain custom adaptation and development services from BSQUARE for use in connection therewith. 2. DEFINITIONS. 2.1 "BSQUARE Deliverables" shall mean the BSQUARE deliverables identified in the Statement of Work and shall also include the documentation required to be provided by BSQUARE as stated in the Statement of Work. 2.2 "BSQUARE Services" shall mean engineering services to be provided by BSQUARE in the development of deliverables identified in the Statement of Work. 2.3 "COMPANY Device" shall mean a computing device designed or assembled by or for COMPANY that incorporates Windows CE. 2.4 "Derivative" shall mean any modification, enhancement, translation, or adaptation of, or anything generated or derived using, a BSQUARE Deliverable or a Derivative. 1 2.5 "Initial Device" shall mean the COMPANY Device designed or assembled by COMPANY which meets the Initial Device specifications set forth in Exhibit B and is licensed by MSU to use Windows CE and a Derivative of the BSQUARE Deliverables. 2.6 "OEM Agreement" shall mean the separate royalty license and distribution agreement in which Microsoft directly or indirectly, licenses to COMPANY the right to distribute Microsoft Windows CE and various Microsoft applications for Windows CE with a COMPANY Device. 2.7 "Royalty Bearing Device" shall mean a COMPANY Device for which a royalty has been or is to be paid pursuant to Section 6.2. 2.8 "Statement of Work" shall mean the OEM Windows CE Adaptation And Application Integration for the MSU/V5 Internet Access Device Statement of Work attached as Exhibit A. 2.9 "Third Party Element(s)" shall mean those BSQUARE Deliverables, or portions thereof which are incorporated pursuant to licenses with third parties, either through BSQUARE or COMPANY. 2.10 "Final Deliverables" means the final deliverables specified in Section 3.1 of the Statement of Work as being provided at the Final Delivery milestone. 3. STATEMENT OF WORK AND SCHEDULE. BSQUARE agrees to provide COMPANY with the BSQUARE Services substantially in accordance with the Statement of Work. BSQUARE and COMPANY shall each use good faith and commercially reasonable efforts to perform their respective obligations specified in the Statement of Work to enable compliance with the schedule set forth in the Statement of Work. BSQUARE shall not be responsible for delays occurring due to COMPANY action or inaction or delay in providing information or equipment requested by BSQUARE, and the schedule shall be adjusted commensurately with such delays. 4. BSQUARE DELIVERABLES AND LICENSE. 4.1 BSQUARE shall use good faith and commercially reasonable efforts to deliver the BSQUARE Deliverables according to the schedule contained in the Statement of Work. BSQUARE may distribute further versions of the BSQUARE Deliverables to COMPANY throughout the term of this Agreement as and when determined by BSQUARE. If BSQUARE provides COMPANY with an updated version of any BSQUARE Deliverable during the term of this Agreement, then upon acceptance of the updated version it shall be a BSQUARE Deliverable for purposes of this Agreement. COMPANY shall use commercially reasonable efforts to integrate the updated version of that BSQUARE Deliverable and cease use of the prior version within ninety (90) days of receipt. 2 4.2 License: 4.2.1 Grant of License. Subject to the sterms and conditions of this Agreement and COMPANY obtaining any necessary third party licenses for the Third Party Elements as specified in Section 3.6 of the Statement of Work, and only to the extent permitted acts are also permitted by COMPANY's license for the Microsoft Platform Builder Product and COMPANY's OEM Agreement, BSQUARE grants to COMPANY the following non-exclusive, non-transferable, world-wide, revocable for material breach, licenses: 4.2.2 BSQUARE Deliverables and Derivatives: With regard to the BSQUARE Deliverables and Derivatives, a site license for a single COMPANY site, to i) make copies thereof, but only in quantities reasonably necessary; ii) make modifications, changes and enhancements to the source code format BSQUARE Deliverables solely for purposes of development of Royalty Bearing Devices; and iii) use the BSQUARE Deliverables and Derivatives solely to generate binary code ("Generated Binary") solely for use on Royalty Bearing Devices. COMPANY may permit Web 2 U Ltd. to access the BSQUARE Deliverables and Derivatives from an additional site provided that (i) such access is via a secure network connection and (ii) COMPANY complies with the provisions of Section 11.4.2. 4.2.3 Generated Binary: With regard to the Generated Binary, a worldwide license to make copies of and install the Generated Binary on Royalty Bearing Devices only, and to display, market and distribute the Royalty Bearing Devices directly and/or through COMPANY's various marketing channels. Updated Generated Binary may also be distributed to licensed end users of Royalty Bearing Devices for use only on such Royalty Bearing Devices. 4.3 Restrictions: 4.3.1. The BSQUARE Deliverables may include third party code which is restricted to use on the x86 microprocessor chip referenced in Exhibit A ("Processor"). COMPANY shall not use the BSQUARE Deliverables or Derivatives except in connection with the Processor and shall not distribute the Generated Binary except bundled with a Royalty Bearing Device containing a Processor and licensed for Windows CE. 4.3.2 Derivatives. It is agreed that BSQUARE is not granted any rights in any modifications, changes or enhancements made by COMPANY to the BSQUARE Deliverables and COMPANY shall have no obligation to provide such to BSQUARE. However, if such modifications, changes or enhancements are provided to BSQUARE, then BSQUARE shall not be limited in its use of residuals (as defined in Section 11.6.4) gained by it as a result of exposure to such code or information, notwithstanding any confidentiality agreement to the contrary. COMPANY's use of any modified, changed or enhanced versions of the source code shall be subject to the same restrictions as set forth in Section 4.2.1. 4.3.3 Subsequent Transfers. Subject to Section 16, COMPANY shall not assign, license, sublicense, transfer, or distribute the BSQUARE Deliverables or Derivatives, except in the form of the Generated Binary incident to the sale of a completed Royalty Bearing Device where the BSQUARE Deliverables or Derivatives are a part of such Royalty Bearing Device. 3 4.3.4 Single Site. Except as set forth in Section 4.2.2, this license limits use of the BSQUARE Deliverables and Derivatives (other than the Generated Binary) to a single COMPANY site. Unless COMPANY has notified BSQUARE in writing of the location of an alternative site, such site shall be the COMPANY facility located at the address specified in Section 17, Notices. This license can be extended to additional sites for a fee of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per site. Upon written notice to BSQUARE of the location of such additional site and payment of such fee, the license shall be so extended. 4.4 The parties acknowledge that additions and deletions to the BSQUARE Deliverables and Initial Device may need to be made from time to time. Accordingly, the parties agree to review the exhibits to this Agreement from time to time, and to amend the exhibits to reflect mutually agreed changes, if any. 4.5 BSQUARE agrees to make available to COMPANY reasonable support and maintenance services for the BSQUARE Deliverables installed on Initial Device only ("Support Services") at the level specified in the support agreement attached hereto as Exhibit D. 5. DEVELOPMENT AND TESTING. BSQUARE may from time to time receive suggestions, feedback or other information from COMPANY concerning the BSQUARE Deliverables. Unless otherwise agreed in writing by the parties prior to any such disclosure by COMPANY, any suggestions, feedback or other disclosures made by COMPANY are and shall be entirely voluntary on COMPANY's part. BSQUARE shall be free to use COMPANY's suggestions, feedback or other information regarding the BSQUARE Deliverables in the further development and adaptation of the BSQUARE Deliverables and other BSQUARE products, without obligation of any kind to COMPANY. All such developments shall be the sole and exclusive property of BSQUARE. 6. COMPENSATION. 6.1 Service and Product Compensation: COMPANY agrees to pay to BSQUARE the fees identified on Exhibit C. 6.2 Royalty Compensation: COMPANY shall pay to BSQUARE a royalty for every unit of a device manufactured or distributed by COMPANY that incorporates or uses a Generated Binary or any portion of the BSQUARE Deliverables or a Derivative; or ii) incorporates any code separately prepared by or on behalf of COMPANY that includes any functionality that is comparable to any portion of the BSQUARE Deliverables, unless COMPANY can prove it has developed the functionality independent of the BSQUARE Deliverables, Derivatives and Generated Binary. Within thirty days following the close of the previous month, COMPANY shall submit to BSQUARE a report ("Royalty Report") which details 4 the number of such Royalty Bearing Devices manufactured. In a given month, in the event more units of Royalty Bearing Devices have been manufactured in excess of those for which it has prepaid a royalty, COMPANY shall submit payment, along with its Royalty Report, for such additional units within five days of the close of the previous month. In the event COMPANY has distributed all 100,000 units for which it has prepaid a royalty, COMPANY must contact BSQUARE to make arrangements for prepaying additional royalties prior to distributing such additional units. The royalty payment obligation shall survive the term of this Agreement and shall continue so long as COMPANY is selling COMPANY Devices containing any portion of the BSQUARE Deliverables or Derivatives thereof. 6.2.1 Royalty Table: The following table will be used to calculate the royalty payment: Royalty Per Unit in (US$) inclusive of royalties for Third Party Elements licensed through BSQUARE Units which are in accordance with Exhibit E. -------------------------------------------------------------------------------- o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] 6.2.2 Royalty Commitments. Upon contract execution, COMPANY agrees to remit a royalty payment of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] to BSQUARE for 20,000 units based on the Royalty Table set forth in Section 6.2.1. COMPANY commits to purchase and pay for 80,000 additional units commencing on the date BSQUARE delivers the Final Deliverables to COMPANY as follows: On a monthly basis, COMPANY shall pay BSQUARE runtime royalties for 6667 units. 6.2.3 RDA Server License. The prepaid royalty payment specified in Section 6.2.2 includes two (2) copies of BSQUARE's RDA Server 3.0 product which is provided pursuant to the end user license agreement attached hereto as Exhibit F. Notwithstanding the terms of Exhibit F, for RDA Server 3.0 licenses purchased pursuant to this Agreement, BSQUARE waives the purchase requirement for the client access licenses ("CALs") to the extent such CALs are used to manage COMPANY Devices provided that such CALs are limited to version 3.0. Notwithstanding the terms of Exhibit F, in no event shall any RDA Server licenses purchased pursuant to this Agreement be assignable or otherwise transferable by COMPANY except as set forth in Section 16. As COMPANY deploys its Device, COMPANY shall purchase additional licenses for RDA Server on an as-needed basis at a license fee of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per copy. 6.2.4 Third Party Elements COMPANY shall comply with the terms and conditions for the Third Party Elements as set forth in Exhibit E with respect to the rights and obligations set forth in this Agreement. 6.3 Audit Rights: COMPANY agrees to keep adequate, accurate records of the amounts due hereunder and all underlying transactions. BSQUARE shall have the right to audit all such records of COMPANY reasonably related to COMPANY's use of the BSQUARE Deliverables and the COMPANY Devices, to ensure that proper records are being kept and to verify all reports and payments due hereunder. The cost of such audit will be borne by BSQUARE, unless a material 5 discrepancy indicating that additional payments are due BSQUARE is discovered, in which case the cost of the audit will be borne by COMPANY. A discrepancy shall be deemed material if it involves payment or adjustment of more than five percent of reported royalties. Any additional payments shown to be due as a result of the audit will be paid promptly by COMPANY, along with interest on such amounts from the date originally due, upon conclusion of the audit. An audit may only be conducted on BSQUARE's behalf by an independent third party auditor with a minimum of ten days notice during normal business hours no more than once each calendar year. The independent auditor shall execute an appropriate confidentiality agreement prior to beginning its audit. 6.4 Reimbursable Expenses. COMPANY shall reimburse BSQUARE for those reasonable and documented expenses incurred by BSQUARE in the performance of its obligations pursuant to the Statement of Work, whether or not such items are specifically referred to in the Statement of Work. 6.5 Taxes/Duties. The prices and charges set forth in this Agreement, including exhibits, shall be exclusive of all charges for all applicable sales, excise, value added, use or other taxes and any custom or duty charges associated with the BSQUARE Deliverables, the BSQUARE Services or this Agreement. Such taxes, customs and duties shall be the sole responsibility of COMPANY. 6.6 Gross-up Provision. Any and all payments by COMPANY under this Agreement shall be made free and clear of, and without reduction for, withholding taxes or any other present or future taxes, levies, imposts, deductions, charges or withholdings. If COMPANY shall be required under any applicable law to deduct any tax from or in respect of any amount payable under this Agreement, (i) the sum payable hereunder shall be increased as may be necessary so that after making all required deductions (including deductions applicable to the additional amounts payable under this sentence), BSQUARE receives an amount equal to the sum it would have received had no such deductions been made, (ii) COMPANY shall make the required deductions, and (iii) COMPANY shall pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable law. 6.7 Interest. Any amounts not paid by COMPANY when due will bear interest at the rate of 1.5% per month, which interest will accrue and be compounded monthly and be added to the amount due BSQUARE. 7. OWNERSHIP OF INTELLECTUAL PROPERTY. 7.1 BSQUARE Deliverables. BSQUARE Deliverables shall be owned by BSQUARE, including all copyrights, trade secrets, patents and other intellectual property contained in the BSQUARE Deliverables. 7.2 Windows CE. COMPANY acknowledges and agrees that COMPANY must enter into a separate license agreement in order to use Windows CE and that this Agreement grants COMPANY no rights to Windows CE or the CE Xpress Kit. 6 7.3 BSQUARE Rights. COMPANY shall not undertake any action that could interfere with or diminish BSQUARE's right, title or interest in BSQUARE's registered trademarks or product names of products included in the Final Deliverable. However, with respect to new BSQUARE trademarks, trade names or product names not in use at the time of this Agreement ("New BSQUARE Marks"), the above restriction shall not restrict COMPANY from taking reasonable actions to protect its own trademarks, trade names or product names which it placed in use prior to the date the New BSQUARE Marks were placed in use. COMPANY shall not use or display any logo of BSQUARE (including, without limitation, any stylized representation of BSQUARE's name) in its materials or packaging, except as provided by separate written agreement with BSQUARE. COMPANY shall not use or imitate the trade dress of BSQUARE products. 8. TERM OF AGREEMENT. The term of this Agreement shall be effective from the Effective Date until the effective date of any termination under Section 9. 9. DEFAULT AND TERMINATION. 9.1 Events of Default. A party shall be in default under this Agreement (a "Default") if such party: (a) materially fails to perform or comply with any provision of this Agreement; or (b) becomes insolvent, enters bankruptcy, reorganization, composition or other similar proceedings under applicable laws, whether voluntary or involuntary, or admits in writing its inability to pay its debts, or makes or attempts to make an assignment for the benefit of creditors. 9.2 Termination upon Default. The non-defaulting party may terminate this Agreement effective upon written notice to the defaulting party (a) for breaches of Sections 7, 9.1(b), or 11; or (b) for breaches of any other provision of this Agreement if the defaulting party has received two or more previous notices of default during the term of this Agreement (whether or not such previous defaults have been cured). In all other cases, termination shall be effective thirty days after notice of termination to the defaulting party if the defaults have not been cured within such thirty-day period. 9.3 Termination by Mutual Agreement. This Agreement may be terminated by mutual written agreement signed by the parties. Such agreement must address, at a minimum, payment of fees for BSQUARE Services performed through the date of termination. 9.4 Force Majeure. BSQUARE shall not be in Default for failure to deliver any BSQUARE Deliverable pursuant to Section 4.1, if such failure was the result of events outside of BSQUARE's control, including but not limited to, acts of God, fire, labor disputes, actions of any governmental agency or shortage of materials or labor, however, BSQUARE shall take all reasonable steps to avoid or remove such causes of non-performance and shall promptly continue performance hereunder whenever such causes are removed. 9.5 Survival of End User License. COMPANY end user licenses to use the Generated Binary on Royalty Bearing Devices which have been granted in accordance with this Agreement during its term shall survive termination of this Agreement. 7 10. OBLIGATIONS UPON TERMINATION. Upon termination of this Agreement, unless otherwise provided in an agreement pursuant to Section 9.3, Sections 6, 7, 10, 11, 14, 15, 16, 17, 18, 19 and any accrued payment obligations under this Agreement shall survive. 11. CONFIDENTIAL INFORMATION AND CONFIDENTIAL MATERIALS. 11.1 "Confidential Information" means non-public information, whether disclosed orally or in tangible media, that the disclosing party designates as being confidential, (which for the purposes of the Agreement means protected from disclosure and used only in accordance with the provisions set forth in 11.4 below) or which under the circumstances surrounding disclosure would be recognized by a reasonable business person as needing to be treated as confidential, or which under accepted industry practices for that type of information is generally treated as confidential. "Confidential Information" includes, without limitation, information relating to released or unreleased software or hardware products of the disclosing party, the marketing or promotion of any disclosing party product, the disclosing party's business policies or practices, and information received from others that the disclosing party is obligated to treat as confidential. Without limitation all source code and related documentation of the BSQUARE Deliverables shall be deemed BSQUARE Confidential Information. Confidential Information disclosed to the receiving party by any subsidiary of the disclosing party or its agents is covered by this Agreement. Confidential Information initially disclosed in oral form must be reduced in writing and sent to the receiving party within thirty calendar days after the initial disclosure in order to qualify for protection for the full five-year period set forth in Section 11.4.1. If not so reduced to writing, the protective period for Confidential Information disclosed in oral form shall be six months. 11.2 Confidential Information shall not include any information that: (i) is or subsequently becomes publicly available without the receiving party's breach of any obligation owed the disclosing party; (ii) became known to the receiving party prior to the disclosing party's disclosure of such information to the receiving party; (iii) became known to the receiving party from a source other than the disclosing party without an obligation of confidentiality, other than by the breach of an obligation of confidentiality owed to disclosing party; or (iv) is independently developed by the receiving party. 11.3 "Confidential Materials" shall mean all tangible materials containing Confidential Information, including without limitation written or printed documents and computer disks or tapes, whether machine or user readable. 11.4 Restrictions 11.4.1 For five years following the date of its disclosure by the disclosing party to the receiving party, the receiving party shall take reasonable security precautions, at least as great as the precautions it takes to protect its own similar confidential information, not to disclose any 8 Confidential Information to third parties, except to the receiving party's consultants, contractors or temporary workers as provided below, and shall use such Confidential Information only for the purposes specified by the disclosing party prior to or in connection with such disclosure. However, the receiving party may disclose Confidential Information in accordance with judicial or other governmental order, provided the receiving party shall give the disclosing party reasonable notice prior to such disclosure and shall comply with any applicable protective order or equivalent. 11.4.2 The receiving party may disclose Confidential Information or Confidential Material only to the receiving party's employees, consultants or temporary workers on a need-to-know basis for the purposes and subject to the restrictions specified in this Section 11.4. The receiving party will have executed or shall execute appropriate written agreements with its employees and consultants, contractors or temporary workers sufficient to enable it to comply with all the provisions of this Agreement. Notwithstanding anything to the contrary herein, COMPANY shall not disclose Confidential Information to any competitor of BSQUARE even if such competitor is a consultant, contractor or temporary worker of COMPANY. It shall be COMPANY's obligation to contact BSQUARE for information if it is unable to make such determination accurately. 11.4.3 Confidential Information and Confidential Material may be disclosed, reproduced, summarized or distributed only in pursuance of the receiving party's business relationship with the disclosing party, and only as otherwise provided hereunder. 11.4.4 The receiving party may not reverse engineer, decompile or disassemble any software disclosed to the receiving party, unless permitted by separate agreement, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. 11.5 Rights and Remedies 11.5.1 The receiving party shall notify the disclosing party immediately upon discovery of any unauthorized use or disclosure of any Confidential Information or Confidential Materials, or any other breach of this Agreement by the receiving party, and will cooperate with the disclosing party in every reasonable way to help the disclosing party regain possession of the Confidential Information and Confidential Materials and prevent its further unauthorized use. 11.5.2 Upon termination of the Agreement, the receiving party shall return all originals, copies, reproductions and summaries of Confidential Information or Confidential Materials at the disclosing party's request, or certify to the destruction of the same. 11.5.3 The receiving party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure of Confidential Information and that the disclosing party shall be entitled, without waiving any other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. 9 11.5.4 The disclosing party may visit the receiving party's premises, with reasonable prior notice and during normal business hours, to review the receiving party's compliance with the terms of this Agreement. 11.6 Miscellaneous 11.6.1 All Confidential Information and Confidential Materials are and shall remain the property of the disclosing party except to the extent otherwise specifically provided pursuant to this Agreement. By disclosing information to the receiving party, the disclosing party does not grant any express or implied right to the receiving party to or under the disclosing party's patents, copyrights, trademarks, or trade secret information. 11.6.2 All Confidential Information and Confidential Materials are provided "as is" and without warranty of any kind except to the extent specified in Section 12. 11.6.3 Any software and documentation provided under this Agreement is provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of The Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software Restricted Rights at 48 C.F.R. 52.227-19, as applicable. 11.6.4 The terms of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. Further, either party shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means information in non-tangible form, which may be unintentionally retained by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Confidential Information purposefully retained or intentionally retained (e.g. through an effort to memorize) shall not be considered "residuals". Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. 11.6.5 The recipient's obligations concerning use and disclosure of Confidential Information are governed solely by the terms and conditions of this Agreement and any applicable patent, copyright law(s) or trade secret law(s). 12. REPRESENTATIONS, WARRANTIES AND COVENANTS. 12.1 BSQUARE Deliverables. Subject to COMPANY's compliance with all the terms and conditions of the Agreement, Initial Device's compliance with the specifications set forth in Exhibit B, and the exclusive remedy provided for in Section 13 below, BSQUARE warrants to COMPANY only that the Final Deliverables, as delivered by BSQUARE and properly installed and operated on Initial Device will materially conform to the specifications set forth in the Statement of Work for a period of ninety days from delivery to COMPANY. 10 12.2 Representations and Warranties of the Parties. Each of the parties represents, warrants and covenants as follows and acknowledges that the other party is relying on such representations, warranties and covenants in entering into this Agreement: 12.2.1 it has the status, capacity and authority to enter into this Agreement and that as of the date hereof it is unaware of any facts which would prevent it from performing its obligations under this Agreement; 12.2.2 its execution and delivery of this Agreement and its performance of the covenants and agreements herein contained are not limited or restricted by and are not in conflict with or a violation of any law, regulation, decree, judgment or contract agreement or other instrument to which it is a party or by which it is bound. This Section is not intended to address intellectual property infringement issues which are specifically covered elsewhere in this Agreement. 12.3 BSQUARE Representations and Warranties. BSQUARE represents, warrants and covenants as follows and acknowledges that COMPANY is relying on such representations, warranties and covenants in entering into this Agreement: 12.3.1 as of the Effective Date of this Agreement, it has no knowledge of any infringement claims with respect to the BSQUARE Deliverables; 12.3.2 it shall perform its obligations under this Agreement in a conscientious, diligent and efficient manner and such obligations shall be performed by BSQUARE personnel who are competent and qualified to perform their responsibilities; 12.3.3 no portion of any BSQUARE Deliverable contains or shall contain any disabling mechanism designed to prevent its use including any clock, timer, counter, computer virus, worm, software lock, drop dead device, Trojan-horse routine, trap door, time bomb or any other codes or instructions that may be used to access, modify, replicate, distort, delete, damage or disable such content, any operating system software or hardware on which any BSQUARE Deliverable is operated or displayed, COMPANY's software, COMPANY's computer systems or other software or hardware except as specifically designed into the BSQUARE Deliverable and of which COMPANY has actual knowledge. This provision shall not apply to any Third Party Elements; 12.3.4 it has entered into agreements with the third party licensors listed on Exhibit E that authorize BSQUARE to grant the licenses set forth Section 4. To the extent that such third party licensors have provided BSQUARE with an indemnification or warranty for intellectual property infringement with respect to such third party code, in the event of a covered claim, BSQUARE shall exercise commercially reasonable efforts to obtain the benefits of such indemnification or warranty from such third party licensors on behalf of COMPANY. 11 12.4 Survival. All representations, warranties or covenants of BSQUARE shall survive the execution of this Agreement and, except as any one or more of them may be amended in writing by the parties, shall continue throughout the term of this Agreement. 13. EXCLUSIVE REMEDY. Except for the limited refund remedy specified below and the indemnification obligation set forth in Section 15.1, COMPANY's exclusive remedy for any breach of warranty and BSQUARE's sole obligation under the warranty and is to correct, repair or replace any such BSQUARE Deliverable during the warranty period. If (i) a BSQUARE Final Deliverable fails to pass the acceptance testing procedures which have been agreed upon in writing by the parties (ii) it is in breach of the warranty set forth in section 12.1 and (iii) such failure or breach is a result of the quality of Services performed by BSQUARE and not as a result of the Third Party Elements, then, upon BSQUARE's failure, after three attempts, to correct, repair or replace the portion of the BSQUARE developed code causing the non-compliance (such portion is referred to as the "Defective Code"), BSQUARE will, upon COMPANY's request, refund that portion of the hourly Service fees paid by COMPANY for the development of the Defective Code. In the event of any such refund, all of COMPANY's licenses and rights with respect to the Defective Code shall terminate, COMPANY shall certify that it has destroyed all copies of all or any portion of the Defective Code, and COMPANY agrees that it will not use the Defective Code or any information relating to the Defective Code for any purpose whatsoever. 14. LIMITATION OF LIABILITY AND REMEDY. 14.1 EXCEPT AS PROVIDED IN SECTION 12, THE BSQUARE DELIVERABLES AND SUPPORT SERVICES ARE PROVIDED TO COMPANY "AS IS" WITHOUT WARRANTY OF ANY KIND AND THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF THE BSQUARE DELIVERABLES, SUPPORT SERVICES AND BSQUARE SERVICES IS ASSUMED BY COMPANY. BSQUARE DISCLAIMS ALL WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT OF INTELLECTUAL PROPERTY, WITH RESPECT TO THE BSQUARE DELIVERABLES, SUPPORT SERVICES AND BSQUARE SERVICES. 14.2 EXCEPT FOR A BREACH OF SECTION 11 AND BSQUARE'S OBLIGATIONS UNDER SECTION 15.1, IN NO EVENT SHALL BSQUARE BE LIABLE FOR DAMAGES EXCEEDING THE FEES RECEIVED BY BSQUARE UNDER SECTION 6. NEITHER PARTY SHALL HAVE ANY LIABILITY FOR ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR SPECIAL DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE; ARISING OUT OF THIS AGREEMENT, THE SUPPORT SERVICES, THE BSQUARE SERVICES OR DELIVERABLES, OR THE USE OF OR INABILITY TO USE THE BSQUARE DELIVERABLES AND ANY 12 DERIVATIVES THEREOF, EVEN IF THE PARTY INCURRING SUCH DAMAGES HAS ADVISED THE OTHER PARTY OF THE POSSIBILITY OF SUCH DAMAGES, AND INCLUDING UNDER ANY CLAIM OF NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY. THE FOREGOING SENTENCE SHALL NOT APPLY TO ANY DAMAGES (a) ARISING FROM BREACHES OF THE CONFIDENTIALITY PROVISIONS OF THIS AGREEMENT, OR (b) ARISING FROM INFRINGEMENT OF BSQUARE'S OR COMPANY'S INTELLECTUAL PROPERTY RIGHTS. 15. INDEMNIFICATION. 15.1 BSQUARE Indemnification: Subject to the below conditions, BSQUARE will defend or settle any suit or proceeding brought against COMPANY based upon a claim that those BSQUARE Deliverables which are distributed by COMPANY and used for their intended purpose in accordance with this Agreement constitute an infringement of third party copyrights or trade secrets. Notwithstanding the above, this indemnification shall not apply to any claim if the use of the BSQUARE Deliverable alone and not in combination with any other product would not be infringing, or (ii) the claimed infringement arises out of third party materials or code to be integrated into the BSQUARE Deliverable pursuant to the Statement of Work. BSQUARE shall have the foregoing obligations provided that: (i) BSQUARE is notified promptly in writing of such claim; (ii) BSQUARE controls the defense or settlement of the claim; and (iii) COMPANY cooperates reasonably and gives all necessary authority, information and assistance (at BSQUARE's expense). BSQUARE will pay all damages and costs finally awarded against COMPANY, but BSQUARE will not be responsible for any costs, expenses or compromise incurred or made by COMPANY without BSQUARE's prior written consent. If the use of such BSQUARE Deliverables is permanently enjoined as a result of an indemnified claim, BSQUARE will exercise reasonable commercial efforts to (i) procure for COMPANY the right to continue using such respective BSQUARE Deliverable or (ii) replace the same with non-infringing BSQUARE Deliverables or modify such BSQUARE Deliverable so that it becomes non-infringing. In the event BSQUARE is unable to provide the remedies set forth in subparagraphs (i) and (ii) of the foregoing sentence, BSQUARE shall refund a pro-rata portion of the development fees paid to BSQUARE to develop the portion of the infringing code specifically enjoined based on a twenty-four (24) month amortization schedule which shall commence upon the date of delivery of the Final Deliverables. Notwithstanding the above, BSQUARE shall not be responsible for indemnification of COMPANY for claimed infringements to the extent such claimed infringements are caused by compliance by BSQUARE with design documentation, specifications or instructions provided by COMPANY or arising out of characteristics of the platform (hardware or software) which the BSQUARE Deliverable is to operate on or communicate with; or COMPANY's failure to promptly implement updates to BSQUARE Deliverables made available by BSQUARE. 13 Without limitation, if BSQUARE's Interface Composer (previously known as EmbeddedDesktop) product is included within the Statement of Work, COMPANY shall be responsible for ensuring that options it elects in connection with the BSQUARE Interface Composer element of the deliverables do not result in a user interface which infringes a third party's intellectual property rights. THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATION OF BSQUARE AND THE EXCLUSIVE REMEDY OF THE INDEMNIFIED PARTY WITH RESPECT TO ANY ALLEGED OR ACTUAL INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE BSQUARE DELIVERABLES. 15.2 COMPANY Indemnification: Except to the extent that a claim is subject to indemnification pursuant to Section 15.1, and subject to the below conditions, COMPANY will defend or settle any suit or proceeding brought against BSQUARE based upon: 15.2.1 a claim that any product which includes all or any portion of the BSQUARE Deliverables or any Derivative thereof constitutes an infringement of third party copyrights or trade secrets, or 15.2.2 the use, distribution and sale of the BSQUARE Deliverables or any Derivative thereof, or 15.2.3 the failure of COMPANY to implement any updates to the BSQUARE Deliverables delivered by BSQUARE, or 15.2.4 suits and claims brought against BSQUARE by any third party for COMPANY's breach of warranty to such third party, or 15.2.5 personal injury or product liability suits and claims arising out of use of the BSQUARE Deliverables or any Derivatives of them. COMPANY shall name BSQUARE as an additional insured on its personal injury and product liability insurance policies. COMPANY shall have the foregoing obligations provided that: (i) COMPANY is notified promptly in writing of such claim; (ii) COMPANY controls the defense or settlement of the claim; and (iii) BSQUARE cooperates reasonably and gives all necessary authority, information and assistance (at COMPANY's expense). COMPANY will pay all damages and costs finally awarded against BSQUARE, but COMPANY will not be responsible for any costs, expenses or compromise incurred or made by BSQUARE without COMPANY's prior written consent. 14 THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATION OF COMPANY AND THE EXCLUSIVE REMEDY OF THE INDEMNIFIED PARTY WITH RESPECT TO ANY ALLEGED OR ACTUAL INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE INDEMNIFIED ITEMS. 16. ASSIGNMENT. COMPANY shall not assign this Agreement without BSQUARE's prior written consent which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns. Notwithstanding anything in this Agreement to the contrary, BSQUARE may at any time during the term of this Agreement or thereafter use third party contractors to assist BSQUARE with any of its obligations under this Agreement; provided, however, BSQUARE shall enter into written agreement(s) with such third parties imposing an obligation of confidence on such third parties with respect to the BSQUARE Deliverables. 17. NOTICES. All notices, authorizations, and requests in connection with this Agreement shall be deemed given (i) three business days after deposit in the U.S. mail, postage prepaid, certified or registered, return receipt requested; or (ii) upon delivery, if sent by air express courier, charges prepaid; and addressed as follows (or to such other address as the party to receive the notice or request so designates by written notice to the other). If to COMPANY: If to BSQUARE: MSU Corporation BSQUARE CORPORATION 2901 N. Dallas Parkway, Suite 460 3150 - 139th Ave., SE, Suite 500 Plano, Texas 75093 Bellevue, WA 98005 USA Facsimile: (972) 473-7805 Facsimile: (425) 519-5998 Attention: Bruce Walter Attention: William Baxter With Copies to: With a Copy to: Torys Office of the General Counsel 237 Park Avenue BSQUARE CORPORATION New York, N.Y. 10017-3142 3150 - 139th Ave., SE, Suite 500 Facsimile: (212) 682-0200 Bellevue, WA 98005 USA Attention: Geoff Gilbert Web 2 U Ltd. Elder House 526 Eldergate Central Milton Keynes MK9 1LR England 15 18. EXPORTS. Each party agrees that it will not export or re-export, or knowingly permit the re-export of, any BSQUARE Deliverables or any Derivative to any country, person, entity or end-user contrary to U.S. export controls. Without limiting the generality of the foregoing, each specifically agrees not to export or re-export, or knowingly permit the re-export of, any BSQUARE Deliverables (a) to any country to which the U.S. has embargoed or restricted the export of goods or services, which include, but are not necessarily limited to, those countries listed in Country Groups D:1 or E:2 of the Export Administration Regulations, 15 C.F.R. Pt. 740 (Supp. No. 1), or to any national of any such country who the party knows intends to transmit or transport the BSQUARE Deliverables to such country; (b) to any end-user who the party knows will use the BSQUARE Deliverables in the design, development or production of nuclear, chemical or biological weapons; or (c) to any end-user who has been prohibited from engaging in export transactions with U.S. persons under applicable U.S. laws. 19. GENERAL. 19.1 This Agreement, including the exhibits hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous communications. It shall not be modified except by a written agreement signed on behalf of each party by their respective duly authorized representatives. This Agreement does not constitute an offer and shall not be legally binding until executed by both parties hereto. 19.2 BSQUARE and COMPANY are independent contractors and shall so represent themselves to all third parties. Neither party has the right to bind the other in any manner whatsoever and nothing in this Agreement shall be construed as creating a partnership, joint venture or agency relationship or as granting a franchise. 19.3 If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement shall remain in full force and effect. 19.4 No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. 19.5 Each party shall, at its own expense, promptly obtain and arrange for the maintenance of all non-U.S. government approvals, if any, as may be necessary for its performance under this Agreement. 19.6 This Agreement may be executed in two or more counterparts, all of which shall constitute but one and the same instrument. 16 19.7 If a dispute arises between the parties regarding the terms of this Agreement and COMPANY and BSQUARE are unable to resolve such dispute, the parties shall each appoint a senior level executive to meet in person and attempt to resolve any such disagreement over a thirty-day period. The thirty-day resolution period shall begin ten days after delivery of notice by either party invoking this resolution procedure. If the dispute is not resolved by the end of such thirty-day period, either party may thereafter proceed with legal action. 19.8 This Agreement and all matters relating to this Agreement shall be construed and controlled by the laws of the State of Washington, and the parties each consent to jurisdiction and venue in the state and federal courts sitting in the State of Washington. 19.9 If either BSQUARE or COMPANY employs attorneys to litigate any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs, including such costs and fees as may be incurred on appeal or in bankruptcy proceedings. 19.10 Any action for breach of this Agreement or any claim related to this Agreement or its subject matter must be commenced within one year of accrual of such cause of action. 19.11 Purchase Orders. COMPANY, for its own convenience and internal tracking, may use purchase order(s). No terms and conditions contained in any such purchase order will in any way be construed to affect this Agreement, or any Exhibits or Amendments to this Agreement, or Work Statements, or Additional Work Statements, or in any way bind BSQUARE. 19.12 Press Release. After any new product announcement by COMPANY for any product incorporating the results of the work performed by BSQUARE, BSQUARE may issue a press release describing its role in the development of the product. Such press release shall be subject to approval by COMPANY, which approval shall not be unreasonably withheld. If COMPANY has not disapproved a press release within five business days after submission, it shall be deemed approved and BSQUARE may distribute it to the press. 20. EXHIBITS. The following Exhibits are part of this Agreement, and are incorporated into this Agreement in their entirety by this reference: Exhibit A Statement of Work Exhibit B Initial Device Specifications Exhibit C Payment Exhibit D Support Agreement Exhibit E Third Party Element Additional Terms & Conditions Exhibit F BSQUARE End User License Agreement for RDA Server 3.0 17 IN WITNESS WHEREOF, the parties have executed this Agreement dated as of the date first set forth above. BSQUARE COMPANY COMPANY BSQUARE CORPORATION MSU CORPORATION WEB 2 U LTD. /s/ Brian V. Turner /s/ D. Bruce Walter /s/ Chris Green By: Brian V. Turner By: D. Bruce Walter By: Chris Green Its: President/ COO Its: President/ CEO Its: Managing Director 18 EXHIBIT A [LOGO] MSU Devices Inc. Windows(R)CE Adaptation and Application Integration for the MSU/V5 Internet Access Device Statement of Work 8/17/01 Revision: 1.6 Submitted by: BSQUARE Corporation 3150 139th Ave. S.E., Suite 500 Bellevue, WA 98005-4081 (425) 519-5900 (Voice) (425) 519-5999 (Fax) To: MSU Devices Inc. 2901 North Dallas Parkway Suite 460 Plano, TX 75093 Attn: Pritesh M. Patel Telephone: 972.473.6859 -------------------------------------------------------------------------------- IMPORTANT: This document is intended only for the use of the individual or entity to which it is addressed, and contains information which is confidential and proprietary. If the reader of this document is not the intended recipient, or the employee or agent responsible for delivering the document to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this document is strictly prohibited. If you have received this document in error, please notify the sender immediately and return the original document. -------------------------------------------------------------------------------- 19 Revision History -------------------------------------------------------------------------------- Revision Date By Purpose ================================================================================ 1.0 7/10/01 Mark Plagge Initial Release 1.1 7/11/01 Mark Plagge Update ICA Client Information 1.2 7/13/01 Mark Plagge Updated SOW per Customer Comments 1.3 7/24/01 Mark Plagge Updated per Customer Visit 1.4 7/31/01 Mark Plagge Updated per Customer Comments 1.5 8/15/01 Mark Plagge Updated per Customer Comments 1.6 8/17/01 Mark Plagge Updated per Customer Comments -------------------------------------------------------------------------------- 20 Contents 1. Definitions..........................................................21 2. Executive Summary....................................................21 3. Development..........................................................21 3.1. Timeline / Overview................................................21 3.2. BSQUARE Deliverables...............................................23 3.2.1. Phase 1.......................................................23 3.2.2. Phase 2.......................................................24 3.2.3. Final Delivery................................................25 3.2.4. Product Documentation.........................................25 3.2.5. Adaptation Source Kit.........................................26 3.3. MSU Deliverables...................................................26 3.4. Assumptions and External Dependencies..............................26 3.4.1. Project Delays................................................26 3.4.2. Specification Changes.........................................26 3.4.3. Project Assumptions...........................................27 3.4.4. Project Exclusions............................................27 3.5. Intellectual Property Ownership....................................27 3.6. Third Party Licenses...............................................28 3.7. Reporting..........................................................28 4. Quality Assurance....................................................28 4.1. Understanding The Quality Assurance Process........................28 4.2. Test Documentation.................................................28 4.3. Test Methodology...................................................29 4.4. How BSQUARE Tests..................................................29 4.5. Benefits Of BSQUARE Testing........................................29 4.6. Problem Tracking Methodology.......................................29 4.7. Understanding Problem Report Status................................30 4.8. Specifying Bug Disposition (Severity and Priority).................31 4.8.1. Severity Guidelines...........................................31 4.8.2. Priority Guidelines...........................................32 4.9. Testing Exclusions.................................................33 4.10. Acceptance Criteria................................................33 4.10.1. Acceptance Criteria for an Intermediate Milestone.............33 4.10.2. Acceptance Criteria for the Final Delivery....................33 21 1. Definitions -------------------------------------------------------------------------------- BSQUARE BSQUARE Corporation MSU MSU Devices Inc. Device MSU Version 5 Device targeted for the Windows CE adaptation based on the x86 microprocessor Windows(R)CE Embedded WIN32 operating system from Microsoft Corporation Develop BSQUARE will develop new software Adapt BSQUARE will adapt existing BSQUARE-owned software to the target hardware Integrate BSQUARE will integrate and/or modify existing software owned by MSU or a third party -------------------------------------------------------------------------------- 2. Executive Summary This Statement of Work provides a comprehensive view of the Windows CE platform adaptation, BSQUARE application adaptation, and third party application integration work for the MSU Device. The adaptation work will cover all aspects of engineering including development and test. The BSQUARE platform adaptation, and application work will be fully tested and suitable for production release on the MSU Device. The final product for the adaptation will consist of the following major components: 1. o Windows CE 3.0 Adaptation run time binary for the Device. 2. o Adaptation Source Kit 3. o As-Built Documentation 3. Development 3.1 Timeline / Overview
---------------------------------------------------------------------------------------------- Date Milestone Deliverable Responsible ---------------------------------------------------------------------------------------------- 8/20/01 Hardware 1 Delivery of one Final Revision Device MSU for Quality Assurance ---------------------------------------------------------------------------------------------- 8/20/01 Business 1 Signed Contract MSU / BSQUARE ----------------------------------------------------------------------------------------------
22
---------------------------------------------------------------------------------------------- Date Milestone Deliverable Responsible ---------------------------------------------------------------------------------------------- BSQUARE ---------------------------------------------------------------------------------------------- 8/20/01 Delivery 1 Delivery of Phase 1 and Phase 2 Tasks BSQUARE supported by the Reference Device. Delivery will not be Quality Assurance tested. ---------------------------------------------------------------------------------------------- 8/20/01 MSU Delivery Delivery of the Hewlett Packard software MSU and one printer to support USB printing from the MSU Device. ---------------------------------------------------------------------------------------------- 8/29/01 Phase 1 First Software Delivery * BSQUARE ---------------------------------------------------------------------------------------------- 9/7/01 Phase 2 Second Software Delivery* BSQUARE ---------------------------------------------------------------------------------------------- 9/15/01 Final Delivery Fully Tested Windows CE and all required BSQUARE device drivers running on the MSU Device, final Adaptation source kit for the platform adaptation for the MSU Device. TCK certification testing for Insignia JVM and Macromedia Flash begins here and the work will be addressed in a separate Statement of Work. ----------------------------------------------------------------------------------------------
* See 3.2 for Deliverables Details 3.2. BSQUARE Deliverables o Phases 1-2 Delivery: Interim Code Deliveries. o Final Code for MSU Device: Final, fully tested binary for the MSU Device. o Product Documentation: Product documentation to allow MSU to install, use, maintain, modify, and extend BSQUARE-developed adaptation software and device drivers. o Adaptation Source Kit: An Adaptation Kit containing source code for all custom platform adaptation software and device drivers developed during this adaptation for the MSU Device. The Adaptation Kit will also contain the binary files for the adapted BSQUARE applications and integrated third party applications for the MSU Device. 23 3.2.1. Phase 1 o Integrate Loader: BSQUARE will integrate the National loader to support the Device BIOS. o Adapt BSQUARE OAL: BSQUARE will adapt its MediaGXm/5530 OAL layer onto the Device. o Adapt Super I/O Chip Driver: BSQUARE will adapt its driver to initialize the 97317 Super I/O chip on the Device. o Adapt Support for Buses: BSQUARE will adapt support for PCI bus, I2C via GPIO bus, and USB OHCI controller bus onto the Device. Limited bus action can be used during initialization of I2C peripherals. o Adapt Serial Port Driver: BSQUARE will adapt support for a 16550 compatible serial port on the Device. o Adapt MediaGX Display: BSQUARE will adapt support for a MediaGX display controller with a 5530 companion chip on the Device. BSQUARE will provide a binary image to MSU for 1024 x 768, 800 x 600 and 640 x 480 resolutions. o Adapt Audio Out Support: BSQUARE will adapt audio out support for a MediaGX audio controller with 5530 companion chip onto the Device. Audio out with AD1919, LM4548, and AK4532 CODEC will be supported. o Adapt Audio In Support: BSQUARE will adapt audio in support for a Media GX audio controller onto the Device. o Adapt Keyboard Driver: BSQUARE will adapt its standard PS/2 PC keyboard driver and USB keyboard driver as optional inputs to the Device. The hardware will turn IR keyboard events into standard PS/2 events. o Adapt Standard Mouse Driver: BSQUARE will adapt its standard mouse driver and USB mouse driver as optional inputs to the Device. The hardware will turn IR keyboard events into standard PS/2 events. o Adapt Network Driver: BSQUARE will adapt its network driver to support the 83815 network chip onto the Device. o Develop Data Persistence Capability: BSQUARE will develop the capability to persist and restore registry keys for the Device. o Adapt IDE Hard Disk Support: BSQUARE will adapt support for an IDE hard disk with programmed I/O onto the Device. o Adapt Modem BSQUARE will adapt support for the Rockwell modem chipset on the Device. o Develop Image Compression: BSQUARE will develop support to compress the image for loading and unloading onto the Device. 24 3.2.2. Phase 2 o Develop display support for TV Out: BSQUARE will develop support for PAL and NTSC output that is compatible with an FS450 TV encoder onto the Device. The delivery of this item is contingent upon the execution of a licensing and distribution agreement with Focus Enhancements. o Adapt PCMCIA Driver: BSQUARE will adapt its driver to support the Intel 82365 compatible PCMCIA controller onto the Device. o Develop General Purpose I/O (GPIO) Support: BSQUARE will develop software for the GPIO that supports the following LED functions: o Power / IR Receive - This LED turns on when power is given to the device and will blink while receiving signals from the IR keyboard. This LED will blink while the Device is in standby mode. o Email - When the user has received new email this LED will flash. o Modem - This LED turns on when the Modem is activated and flashes while receiving and transmitting data through its connection. o Ethernet - This LED turns on when the Ethernet connection is live and will flash while transmitting and receiving data through its connection. o Adapt BSQUARE Applications: BSQUARE will adapt the BSQUARE iWin product, BSQUARE Remote Device Updater (RDU) client, and BSQUARE Spreadsheet onto the Device. BSQUARE's bSpreadsheet product is being provided to MSU as is and is not covered under the acceptance and warranty sections of this Agreement o Integrate Third Party Applications: BSQUARE will integrate Insignia JVM, Macromedia Flash 5, Citrix ICA Client and Ansyr PDF viewer onto the Device. o Integrate Microsoft Applications: BSQUARE will integrate Microsoft Pocket Word, Internet Explorer, Media Player, Pocket Inbox, and RDP Client onto the Device. o Develop OS Builds: BSQUARE will develop OS builds for Spanish, Italian, Chinese, French, German, and Brazilian Portuguese. o Integrate USB Printer Support BSQUARE will integrate USB printer support onto the Device. MSU will provide the Hewlett Packard printer software and printer that will allow BSQUARE to perform the integration and Quality Assurance testing. 3.2.3. Final Delivery o BSQUARE will perform final Quality Assurance testing and bug regression of the task items outlined in Sections 3.2.1 and 3.2.2 for the Device. 25 o BSQUARE will return all MSU provided hardware within 5 working days of final delivery, except for one Initial Device, which will be sent back at the end of the warranty and support period. This hardware unit will be used to investigate issues that may arise during acceptance,warranty and support. 3.2.4. Product Documentation BSQUARE will provide a Functional Specification including: o Installation README o All Custom API's and associated Function Descriptions o Any changes to Microsoft API's o All I/O Controls o All Device Names Final documentation will be provided to MSU with the Final Delivery. 3.2.5. Adaptation Source Kit BSQUARE will provide to MSU an Adaptation Kit containing source code for all custom platform adaptation software and device drivers developed during this adaptation for the MSU Device. The Adaptation Kit will also contain the binary files for the adapted BSQUARE applications and integrated third party applications for the MSU Device. 3.3. MSU Deliverables MSU will be responsible for delivery of the following to BSQUARE per the timeline in Section 3.1: o Device and upgrades/replacements o System and Device specifications o Device Usage Models (Used by the BSQUARE QA engineers to develop test scenarios) o Equipment necessary to create the proper development and test environment/infrastructure o Hewlett Packard printer driver, application, and one printer 3.4. Assumptions and External Dependencies In planning the project schedule and deliverables, BSQUARE is dependent upon schedules and deliverables that are beyond BSQUARE's control. The assumptions and dependencies upon which the plan is based are documented here. 3.4.1. Project Delays The fee quoted to MSU for performance of this work assumes that all deliverables provided by MSU or any third party 26 contracted by MSU, including hardware, software, design documentation, and any written instructions, will be delivered to BSQUARE per the schedule in Section 3.1, and will be complete, accurate, and fully functional. Work performed by BSQUARE which is caused by late, incomplete, inaccurate or non-functional MSU deliverables as described in Section 3.3, will be treated as additional billable work and will be invoiced with each project milestone. Should BSQUARE be unable to make scheduled progress on the MSU project due to late, incomplete, inaccurate or non-functional MSU deliverables, the resulting project delays will result in a day-for-day slip in the project schedule, will be treated as additional billable work and will be invoiced with each project milestone. 3.4.2. Specification Changes BSQUARE has defined its Deliverables based on the system requirements and hardware specifications available at the issue of this Statement of Work. Changes to the hardware, system requirements or Deliverables, described in Section 3.2, made after the most current release of this Statement of Work must be evaluated by BSQUARE on a case-by-case basis and may be determined to be outside the scope of the Agreement. Should MSU make a significant change in the specification during the course of performing the work, BSQUARE will provide to MSU a Change of Scope (COS) proposal detailing: o Additions and/or reductions in the scope of work o Net change in the fees charged for the work o Net change in the schedule of BSQUARE Deliverables MSU shall have 30 days in which to accept the proposed COS. Should MSU not accept the proposed COS within 30 days, BSQUARE will complete the work as defined in the most current Statement of Work. 3.4.3. Project Assumptions o Hardware is similar to the hardware provided to BSQUARE for the Temporary Purchase Order portion of this project o Stable, functional hardware capable of booting a Windows CE image at the start of the project o MSU to provide complete hardware documentation prior to start of the project including schematics and address/IO mapping o IDE Connector and compatible hard disk will be provided by MSU o Sufficient memory on the target to accommodate the entire OS image with Applications o Keyboard and mouse through the IR port are PS/2 compatible o FS450 timing settings are available from Focus o Standard PC BIOS is properly configured and initialized on the platform hardware for running a Windows CE image 27 o Replacement hardware units will be available in the event that hardware is damage at delivery or becomes unusable during the course of development and quality assurance testing o MSU's build environment is Windows 2000 3.4.4. Project Exclusions o Any application development work beyond the integration effort of BSQUARE and third party applications stated in Section 3.2.2 o USB peripheral drivers for cameras and scanners o Localization of applications. Only OS localization is included o Development, integration, or adaptation of a Smart Card driver for the Gemplus chipset o TCK (certification) testing for Insignia JVM and certification testing for Macromedia Flash 5 will be addressed in a separate Statement of Work 3.5. Intellectual Property Ownership INTENTIONALLY DELETED. 3.6. Third Party Licenses MSU shall obtain sufficient licenses for the following third party software products to authorize BSQUARE to perform its obligations under this Agreement: o Microsoft Windows(R) CE 3.0 o Microsoft Windows(R) CE Platform Builder o Citrix ICA Client o Focus Enhancements FS-450 o Hewlett Packard Printer Driver 3.7. Reporting During development and testing, BSQUARE will provide MSU with regular status report each Monday on a weekly basis. 4. Quality Assurance 28 4.1. Understanding The Quality Assurance Process Quality Assurance (QA) testing at BSQUARE is driven by test documentation, test methodology, and problem tracking. Test documentation ensures that the QA process is thought out in advance and not invented spontaneously. This provides for the greatest efficiency when the QA testing begins, and provides for metric extraction and subsequent analysis. The combination of automated and manual testing ensures reliable, repeatable results in the minimum length of time. Problem tracking is provided using a combination of software tools and a process that ensures all known problems are recorded and the current status of those problems is well communicated. 4.2. Test Documentation BSQUARE writes test documentation in accordance with the IEEE 829 standard. Using this industry-standard format ensures that the test documentation is complete and follows generally accepted QA processes. Test documentation written by BSQUARE is divided (according to the standard) into three parts: o Test Plan: Contains information about the test environment, equipment, testers, schedules, test areas and test exclusions. This document is available to MSU. o Test Design Specification: Summarizes the tests that will be run and describes what the test measures. This document is available to MSU. o Test Report Summary: Lists every test case that has been run and the Pass/Fail results of the test. This document is available to MSU. 4.3. Test Methodology BSQUARE employs rigorous automated and manual methods to evaluate Device quality, performance, and ease of use. BSQUARE's CEValidator automated test tool allows early and frequent tests. BSQUARE begins testing as soon as possible - often as soon as MSU's hardware is delivered. This allows problems to be found and fixed early in the development cycle. Our experience, as well as historical data from our industry, indicates that products tested early in the development life cycle are more likely to be higher quality and often have more efficient completion schedules than products tested late in the development cycle. 4.4. How BSQUARE Tests A detailed test plan for the project is written and followed by our QA engineering team. The test plan indicates which standard test areas are to be included and describes project-specific and real-world test scenarios. It contains general information about the test equipment and the test environment. Testing exclusions are also clarified in the test plan. BSQUARE uses its CEValidator test tool, enhanced by custom extensions specific to the unit under test, to run automated test suites. Many standard tests, developed through years of experience testing CE devices, are run repeatedly to monitor Device quality and identify bugs introduced during the course of development. Our automated test suites include system stress-testing routines as well as feature-and-function tests. 4.5. Benefits Of BSQUARE Testing The benefits of extensive Windows CE experience are cumulatively included as BSQUARE upgrades the test suites. This means that current projects are automatically tested for problems found in past projects. Our QA process is constantly expanding in both depth and breadth. 29 4.6. Problem Tracking Methodology BSQUARE maintains a comprehensive project-specific database of all problem reports gathered from all sources, along with their history and current status. This database is the cornerstone of BSQUARE's process for evaluating and prioritizing problem reports and scheduling and verifying bug fixes. The following flow diagram illustrates the BSQUARE problem reporting and tracking process. -------------------- ---------------------- QA creates new bug BSQUARE/Customer report and specifies: Triage meetings Assignee Assignment, Priority, confirm Assignment, Resolves and Severity Priority, and Severity: Bug -------------------- ---------------------- | | ^ | | | Bug status = Resolved Originator Bug Status = Fail | withdraws | ________|________ bug | | | | | Bug Fails Bug Passes | |<------------ Regression Regression | Testing Testing | | --------------------- ------------------- | End of Bug Life Cycle <--- QA checks bug again <--------- Bug Status = Verified before RTM --------------------- ------------------- BSQUARE's work is based on Microsoft's Windows CE operating system, and the OS can affect the quality of any product that uses it. Bugs found in Windows CE are not BSQUARE defects, but they are added to the problem tracking database and reported to Microsoft. BSQUARE then supports Microsoft's efforts on behalf of our customer to resolve OS bugs. Problem reports from the customer are logged in the defect database and are thoroughly investigated by QA. If they can be reproduced, they are classified in the database as new bugs. If they cannot be reproduced, the person who reported the problem is notified, they remain in the database and BSQUARE will re-test for them during final regression tests. Feature requests by the customer are also added to the problem tracking database, but are not considered Device defects. Some of the enhancement requests are trivial and easy to implement. Others may require a Change of Scope before they can be implemented. 30 4.7. Understanding Problem Report Status Problem reports are designated in the bug tracking database to be in one of the following states: New A problem has been identified by or reported to QA and added to the database by an "originator." The originator is ultimately responsible for verifying that the problem has been resolved. Assigned An individual has been designated to investigate and, if possible, resolve the reported problem. Generally, problem reports are assigned to BSQUARE development engineers to investigate and resolve. However a problem report can be assigned to any person on the project. A documentation problem, for example, will probably be assigned to a technical writer. Investigated The investigator has determined that the item is not really a problem at all, it is too complex to fix for the current release, or it cannot be reproduced. Postponed The problem does exist but will be resolved later than the current milestone, or in a subsequent project. Resolved A problem report is resolved when its assignee: 19 o Reports that the problem has been fixed 20 o Cannot reproduce the problem 21 o Determines it is a duplicate of another problem 22 o Decides the report describes a situation that is working as designed 23 o Proposes that the problem not be fixed When a bug has been resolved, ownership returns to the originator to be verified. Its state will change to: Verified Problem originator concurs with the resolution proposed by the assignee. or Failed Problem originator disagrees with the proposed resolution. Generally this occurs when the originator tests the system containing the purported fix and finds that it is not fixed. 4.8. Specifying Bug Disposition (Severity and Priority) "Severity" and "Priority" are often confused. In its simplest form, Severity describes the seriousness of the bug and Priority describes the order in which bugs should be fixed. For example, a common Severity category is "Has Workaround." Note that this category describes the effect of the bug on the user -- that is, the user can work around the problem. A typical Priority category, on the other hand, is "Must Fix", which indicates the urgency to fix the bug. The person who initially logs the bug, typically the QA engineer, determines its Severity. The QA engineer also suggests a Priority, but this Priority is ultimately determined by MSU, Program Management, Development, and QA. MSU and BSQUARE agree to negotiate in good faith on the proper Priority classification of all bugs. 31 BSQUARE provides customers with reports of all bugs. 4.8.1. Severity Guidelines Severity relates to what users would experience when encountering the bug and how it affects their use of the Device. Because QA engineers and technical writers are often the first "users" of the Device, they are in the best position to understand and explain the Severity of the bugs they find. However, in some cases, the Severity may be reclassified after consultation with MSU and other BSQUARE project team members. Following are the Severity categories with brief descriptions: Severity 1 - Blocks Use There is no way to use the feature and there is no workaround. Until the bug is fixed, the feature is unavailable. This kind of bug can also cause the loss of data or lock up the Device. For example, if the Device hangs or crashes when trying to save a file, it is a Severity 1 bug. Severity 2 - Has Workaround The bug is noticeable but the user can cause the Device to work as intended. For example, there may be no way to save a file to a different directory from within the application, but the user can use Explorer to move the file after it has been saved wherever the system requires. Failure to meet performance requirements is also classified as Severity 2. Severity 3 - Visible Only The bug is not really a problem, it just causes awkward functionality. For example, a dialog box with no Cancel button forces the user to Close the box instead. This Severity can also include bugs that do not affect the operation of the Device but may affect its visual appearance. For example, a typo on a menu item or an extra line of pixels in a dialog box is a Severity 3 bug. Severity 4 - Enhancement This is not a bug. It is a place to capture Device enhancement requests. 4.8.2. Priority Guidelines Priority indicates how important it is to fix the bug. In addition, Priority is used by BSQUARE engineers to determine which bugs to fix first. Bugs with high Priority have been determined to significantly impact the marketability or salability of the Device. Following are the Priority categories with brief descriptions: Priority 1 - Must Fix This bug must be fixed before shipping the Device. This bug significantly impacts the Device's potential sales because the Device hangs, loses data, or fails to meet critical performance criteria. For example, choosing the "Save As" menu option hangs the Device. Priority 2 - Should Fix This is a noticeable bug but it does not significantly impact the Device's potential sales. The user of the Device will probably see this bug, but there are straightforward ways to avoid or mitigate its effects. For example, program settings are not saved when the application is exited but they can be saved from a "Save Settings" option. 32 Priority 3 - Minor This bug may or may not be visible to the user-- often the user does not even notice it. For example, an operation is expected to take 15 seconds to complete, and there is no progress bar. 4.9. Testing Exclusions BSQUARE shall not be responsible for testing/verifying the following: o Testing or debugging of MSU supplied drivers or third party applications. o Anything we will include in the BSQUARE Deliverable but is not testable due to lack of hardware, test environment, insufficient specification, or ill-defined usage model. 4.10. Acceptance Criteria Often, there are unresolved defects when it is time for the product to ship. It is important to describe the acceptance criteria for BSQUARE's deliverables. The following lists define the maximum number of problems that may exist in an interim delivery and in the final delivery. 4.10.1. Acceptance Criteria for an Intermediate Milestone BSQUARE will run as many tests as possible -- both hardware and software -- given the current state of the project. All open problem reports against the software will be reviewed. The following are the acceptance criteria for an interim release: o There will be no problems of Priority "Must Fix." o There will be no more than 4 problems of Priority "Should Fix." o There will be no more than 20 problems of Priority "Minor." 4.10.2. Acceptance Criteria for the Final Delivery BSQUARE will run all automated tests and execute all test procedures in the product's Test Plan. All open problem reports against the software will be reviewed. The following are the acceptance criteria for a final release: o There will be no problems of Priority "Must Fix." o There will be no more than 1 problem of Priority "Should Fix." o There will be no more than 10 problems of Priority "Minor." 33 EXHIBIT B INITIAL DEVICE SPECIFICATIONS 1. Model : ENVOY 2. Hardware chips : o CPU NS - Geode GX1 266/300 MHz or faster. o Companion I/O NS - CS5530A o Memory DIMM w/ 64MB SDRAM o PCI Devices : > 10/100M Ethernet NS - DP83815 > Contorlless Modem Conexant - RP56D > PCMCIA TI - TI1410 w/ Type III Slot. o Audio AC97 Codec - LM4546 o TV-out Focus - FS450 o IDE Primary - Master --> 16MB DOM type. Slaver --> 16MB CF Card. Secondary Reserved for CD-ROM o Super I/O NS - PC97317 o COM1 Smart-Card Reader Gemplus - MC100 w/ IC100 o PS/2 IR Keyboard/Mouse Forward - AZ158+00 o I/O Ports USB x2, Scart x1, RJ45 x1, RJ11 x1, VGA DB-15 Port, Audio Jack x1, SCSI II Connector (IDE Interface), PCMCIA x1, IR-Receiver Module x1. o System Indicator LED x4, o LED 1 ( Red ) Off System off. Steady-on System On. Blinking Keyboard key-stroke o LED 2 ( Green ) Off Modem Inactive On Modem Active o LED 3 ( Red ) Off No more new mails On You got new Mails o LED 4 ( Green ) Off LAN Inactive On LAN Active o BIOS Award 34 EXHIBIT C PAYMENT 1. Services. COMPANY shall pay BSQUARE for BSQUARE's and its contractor's time in rendering the Services at a development rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour; a quality assurance rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour and a documentation rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour. Such hourly rates shall be billed for meetings, phone conferences and all matters directly connected with BSQUARE's performing the Services, except the billing therefor. Should the parties agree to accelerate the delivery of Services, the parties shall agree upon a modified rate reflecting any increase in BSQUARE's efforts or difficulties in meeting such accelerated delivery. 2. Should COMPANY request additional services from BSQUARE, in excess of the agreed scope of Services hereunder, COMPANY agrees to pay BSQUARE at a minimum hourly rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour, in accordance with the hourly-rate billing policy herein, unless otherwise agreed to in writing. Notwithstanding the foregoing, BSQUARE is not hereby obligated to perform any additional services and these provisions do not constitute an option on BSQUARE's additional services, but rather establish minimum compensation therefor. 3. Products. Prior to delivery of the final Deliverables, COMPANY shall pay BSQUARE for the following products: iWin Information Appliance Design Kit for Windows CE 3.0 o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] Remote Device Updater for Windows CE o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] Adaptation Source Kit o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] ------------------------------------------------------ PRODUCT TOTAL o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission]
4. Services. BSQUARE received a prepayment from COMPANY in the amount of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] on June 28, 2001 for Services rendered June 27, 2001 through July 3, 2001. BSQUARE received a second prepayment in the amount of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] on July 25, 2001 for Services rendered July 5 through July 27. Upon contract execution, COMPANY shall remit an additional payment in the amount of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] for Services. Thereafter, COMPANY shall pay BSQUARE accrued Service Fees on a monthly basis but in any event prior to delivery of the Final Deliverable. Should COMPANY make any additional prepayments prior to execution of this Agreement, then such prepayment amount will be deducted from the amount owed hereunder. BSQUARE may terminate services effective immediately if any payment is past due. 35 EXHIBIT D SUPPORT AGREEMENT FOR ADAPTATION SERVICES 1. SUPPORT LEVEL. This Support Agreement is an Exhibit to and is incorporated into an Adaptation Services Agreement between BSQUARE and the COMPANY (the "Agreement"). During the Term of this Support Agreement, BSQUARE shall provide the following Basic Support Package as selected below unless COMPANY chooses not to purchase the Basic Support Package by checking Support Declined below (or if COMPANY elects to purchase a different Support Package as indicated below). Support shall be provided for the BSQUARE Deliverables ("BSQUARE Product") described in the Agreement. The fee for support shall be as indicated below, provided that if COMPANY purchases support at the time the Agreement is executed, a discount of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] will be applied to the applicable Support Fee.
Support Package (check and Term Support Hours Support Fee initial one Package) ----------------------------------------------------------------------------------------------------------------------- X Basic 90 days 20 o [This confidential portion of the exhibit has been --- omitted and filed separately with the Securities and Exchange Commission] Standard 180 days 50 o [This confidential portion of the exhibit has been --- omitted and filed separately with the Securities and Exchange Commission] Extended 365 days 100 o [This confidential portion of the exhibit has been --- omitted and filed separately with the Securities and Exchange Commission] Extended Plus 365 days 300 o [This confidential portion of the exhibit has been --- omitted and filed separately with the Securities and Exchange Commission]
The Support Package indicated above will be purchased unless COMPANY specifically declines by initialing the "Support Declined" box below. _____ SUPPORT DECLINED COMPANY has elected to increase the number of Support Hours provided during the Term as follows: -------------------------------------------------------------------------------- Additional Support Hours Additional Support Fee -------------------------------------------------------------------------------- N/A hours $ N/A ----- -------- -------------------------------------------------------------------------------- Additional hours of support may be available subject to agreement between the parties. BSQUARE shall provide the number of Support Hours indicated above, by telephone or electronic mail support between the hours of 9:00 a.m. and 5:00 p.m., Pacific Time, Monday through Friday, excluding BSQUARE standard holidays. BSQUARE will make reasonable efforts to acknowledge the support call within one business day. BSQUARE shall make available its designated technical staff to assist with COMPANY's questions and to assist COMPANY in solving problems. 36 1.1 Support shall commence on the Final Delivery date as defined in the Statement of Work. At the time of execution of the Agreement, COMPANY may choose to have support commence up to ninety (90) days after such Final Delivery Date, and must communicate that choice to BSQUARE in writing; however, this option is no longer available after execution of the Agreement. If a Support Package is purchased after the Final Delivery Date, support shall commence upon the effective date of any amendment to the Agreement that provides for the purchase of such Support Package. The day support commences is the "Support Date." 2. RESPONSE. 2.1 Support Levels. During the Term of this Support Agreement, BSQUARE shall provide the following support levels in response to requests from COMPANY: (a) Level 1. Level 1 support is defined as problem characterization. The problem will be identified and logged. In addition, relevant data for further analysis will be gathered. If the problem characteristics match an existing problem report, the resolution to the problem will be provided. (b) Level 2. Level 2 support requires in-depth analysis of the problem environment and often requires examination of the relevant source code. Level 2 support is only provided for BSQUARE components. (c) General Questions. BSQUARE will provide responses to general questions if they are within the ability of the Level 1 technical support personnel and if BSQUARE elects, in its sole discretion, to provide a response to such questions. 2.2 Resolutions. Resolutions to a support request, at BSQUARE's option, are: (a) User-error/configuration error correction; (b) Bug fix or patch provided; (c) Work-around provided; or (d) Explanation provided when a Fix or work-around is not available. 2.3 Components. BSQUARE will support the following components, at the specified levels of support, if applicable to the BSQUARE Product provided under the Agreement: (a) BSQUARE-developed custom adaptation source code (Levels 1 and 2); (b) Microsoft Windows CE components (Level 1 only); 37 (c) Third Party Elements (Level 1 only). If BSQUARE has source code for a Third Party Element, BSQUARE shall exercise commercially reasonable efforts to provide Level 2 support. Such support shall be contingent on COMPANY first identifying and notifying BSQUARE of the Error in accordance with BSQUARE's reporting procedures. 3. UPDATES. During the Term of this Support Agreement, BSQUARE shall make available to COMPANY, upon COMPANY request, at no additional charge, applicable BSQUARE Product patches and bug fixes. 4. COMPANY'S RESPONSIBILITIES. 4.1 Backup Materials. COMPANY shall provide BSQUARE with copies of such hardware, programs, reports and materials as may be reasonably requested by BSQUARE to enable BSQUARE to duplicate any problems identified in the BSQUARE Product, to confirm that the problem is caused by BSQUARE, and to attempt to correct the problem. 4.2 Modifications. In connection with all support, COMPANY shall inform BSQUARE of any modifications made by COMPANY to the BSQUARE Product, in such detail as BSQUARE may reasonably request. BSQUARE shall not be responsible for maintaining COMPANY-modified portions of the BSQUARE Product or for maintaining portions of the BSQUARE Product affected by COMPANY modifications. 4.3 Other Products. COMPANY shall be responsible for installation, maintenance and use of hardware, other software and equipment not furnished by BSQUARE. 5. LIMITATIONS ON BSQUARE'S OBLIGATIONS. BSQUARE shall have no responsibility under this Support Agreement for: (a) any new programming, adaptation services or features requested by COMPANY; (b) supplies, accessories, or media; (c) limitations or problems or providing any workarounds of Microsoft Windows CE; (d) Errors or defects caused by neglect, misuse, or accidental damage to the BSQUARE Product; (e) modifications, corrections, or workarounds performed by a person not authorized by BSQUARE; (f) third-party applications; (g) support for tools other than those authored by BSQUARE; (h) development system problems (both hardware and software); (i) device hardware problems; (j) Host/Target synchronization components; (k) application development support; or (l) support in excess of the Support Hours elected in Section 1. 6. TERM. This Support Agreement shall commence upon the Support Date. Support shall continue for the number of calendar days indicated for the Support Package selected in Section 1, above (the "Term"). Any unused Support Hours shall expire at the end of the Term. 7. FEES. 7.1 Amount; Payment. BSQUARE shall invoice the COMPANY for the Support Fee upon execution of the Agreement as follows: 38
Support Fee Payment Terms o [This confidential portion of the exhibit has been 100% on Effective Date omitted and filed separately with the Securities and Exchange Commission] o [This confidential portion of the exhibit has been 60% on Effective Date; and 40% within 90 days. omitted and filed separately with the Securities and Exchange Commission]
The Effective Date shall be the Effective Date pursuant to the Agreement. If support is added by amendment to the Agreement, the Effective Date shall be the Effective Date of such amendment. 7.2 Due Date; Interest. Except to extent prepaid, the Support Fee is due and payable thirty days from the date of BSQUARE's invoice. Interest will be charged on past due amounts at the rate of 1.5% per month, which interest will accrue and be compounded monthly and be added to the amount due BSQUARE. In the event any amounts due hereunder are not paid within thirty days of the date of BSQUARE's invoice, BSQUARE may suspend support until such overdue amounts are paid, with no refund or extension of Term for any such period of nonsupport. 7.3 Taxes. COMPANY shall pay all sales and other taxes, however designated, which are levied or imposed upon transactions contemplated under this Support Agreement. Without limiting the foregoing, COMPANY shall promptly pay to BSQUARE an amount equal to any such taxes actually paid or required to be collected or paid by BSQUARE. 7.4 Gross-up Provision. Any and all payments by COMPANY under this Agreement shall be made free and clear of, and without reduction for, withholding taxes or any other present or future taxes, levies, imposts, deductions, charges or withholdings. If COMPANY shall be required under any applicable law to deduct any tax from or in respect of any amount payable under this Agreement, (i) the sum payable hereunder shall be increased as may be necessary so that after making all required deductions (including deductions applicable to the additional amounts payable under this sentence), BSQUARE receives an amount equal to the sum it would have received had no such deductions been made, (ii) COMPANY shall make the required deductions, and (iii) COMPANY shall pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable law. 8. CONFIDENTIALITY. All changes, additions, and enhancements shall be subject to the same protections and restrictions applicable to the BSQUARE Product under the terms of the Agreement. 9. GENERAL. Without limiting the applicability of any other provisions of the Agreement, THE DISCLAIMERS OF WARRANTY, LIMITATIONS OF LIABILITY AND REMEDIES PROVIDED IN THE AGREEMENT SHALL APPLY FULLY TO ALL SERVICES AND DELIVERABLES PROVIDED UNDER THIS SUPPORT AGREEMENT. 10. DEFINITIONS. 39 10.1 Unless defined otherwise herein, capitalized terms used herein shall have the same meanings as set forth in the Agreement. 10.2 "Error" means an error or malfunction in the BSQUARE Product which affects the use thereof, except for any Error resulting from COMPANY's misuse, alteration or damage of the BSQUARE Product. 10.3 "Fix" means the repair or replacement of object or executable code version of the BSQUARE Product to remedy an Error. 10.4 "Support Hours" shall mean time expended by BSQUARE personnel during the Term in communicating, evaluating, researching, analyzing, resolving and responding to COMPANY inquiries. Fractional hours shall be rounded up to the next 1/2 hour. 40 EXHIBIT E THIRD PARTY ELEMENTS ADDITIONAL TERMS AND CONDITIONS The runtime royalties for the products set forth on this Exhibit E are included in Section 6.2.1 of the Adaptation Services Agreement. CITRIX SYSTEMS, INC., SOFTWARE The following additional terms are included in the Adaptation Services Agreement as a result of the inclusion of certain code from Citrix Systems, Inc., ("Citrix Software"). These terms do not limit the other terms of the Adaptation Services Agreement. 1. Notwithstanding anything to the contrary in the Agreement, COMPANY may not distribute the BSQUARE Deliverables that include Citrix Software unless it has entered into a license agreement with Citrix ("Citrix License"). 2. Notwithstanding anything to the contrary in the Agreement, licenses for the BSQUARE Deliverables that include Citrix Software are granted only to the extent that permitted acts are also permitted by COMPANY's Citrix License. INSIGNIA SOLUTIONS, INC. The following additional terms are included in the Adaptation Services Agreement as a result of the inclusion of certain code from Insignia Solutions Inc. These terms do not limit the other terms of the Adaptation Services Agreement. In case of direct conflict, the terms of this Exhibit shall prevail with respect to Jeode Technology and the terms of the Adaptation Services Agreement shall prevail in all other cases. 1. Definitions: a. "Jeode Technology" means JeodeRuntime plus related software development tools marketed under the name "Jeode" as licensed to COMPANY on Windows CE and/or Windows NT operating systems. b. "JeodeRuntime" means, in whole or in part, Insignia's proprietary implementation of Sun's PersonalJava (pJava) specifications in effect as of the effective date of this Agreement for the Java virtual machine plus related embedded class libraries. 2. License Restriction. The BSQUARE Deliverables incorporating the Jeode Technology are licensed as a single product. Its component parts may not be separated. 41 3. No Source Code. COMPANY receives no rights to receive any source code for Jeode Technology. 4. INTENTIONALLY DELETED. 5. Reports. Reporting for the Jeode Technology shall be as follows: COMPANY will, within thirty days (30) days of the last day of the previous month, deliver to BSQUARE a report. Such report must, on a product for product basis for the preceding month, state the number of copies of JeodeRuntime units distributed by COMPANY. All reports shall be certified as complete and correct and signed by a duly authorized officer or director of COMPANY. 6. INTENTIONALLY DELETED. 7. Audit Rights. In the event a report is not received by BSQUARE within thirty (30) days of the previous month, BSQUARE shall notify COMPANY and COMPANY shall have fifteen (15) days from notification by BSQUARE to deliver said report. If COMPANY fails to cure within the fifteen (15) day period, BSQUARE will have the right to audit COMPANY and COMPANY shall be responsible for all costs and fees associated with such audit. 8. Ownership of Intellectual Property. Jeode Technology shall be owned by Insignia or its suppliers, including all copyrights, trade secrets, patents and other intellectual property contained in the Jeode Technology. 9. Trademark Usage. COMPANY shall not undertake any action that could interfere with or diminish Insignia's right, title or interest in Insignia trademarks, Insignia trade names or Insignia product names. COMPANY agrees not to remove, obscure, or alter any notice of patent, copyright, trade secret, trademark or other proprietary right related to the Jeode Technology. 10. NO WARRANTY. THE JEODE TECHNOLOGY AS DELIVERED UNDER THIS AGREEMENT IS PROVIDED "AS IS," AND INSIGNIA AND BSQUARE EXCLUDE ALL TERMS, WARRANTIES, AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THAT THE JEODE TECHNOLOGY IS FREE OF DEFECTS, MERCHANTABLE, SATISFACTORY, FIT FOR A PARTICULAR PURPOSE, TITLE FREE, AND NON-INFRINGING OF INTELLECTUAL PROPERTY. INSIGNIA AND BSQUARE DO NOT WARRANT THAT THE JEODE TECHNOLOGY WILL MEET COMPANY'S REQUIREMENTS OR THAT ITS USE WILL BE UNINTERRUPTED OR ERROR FREE. 11. LIMITATION OF LIABILITY. INSIGNIA'S LIABILITY TO COMPANY FOR CLAIMS RELATING TO THE JEODE TECHNOLOGY, WHETHER FOR BREACH OR IN TORT, SHALL BE LIMITED TO THE NET AMOUNT RECEIVED BY INSIGNIA PURSUANT TO THIS AGREEMENT WITHIN THE PRECEDING TWELVE (12) MONTHS. IN NO EVENT WILL INSIGNIA BE LIABLE FOR ANY DAMAGES RELATING TO THE JEODE TECHNOLOGY THAT HAS BEEN MODIFIED BY ANY PARTY EXCEPT INSIGNIA TO THE EXTENT THAT ANY CLAIMS RELATE TO SUCH MODIFICATION. IN NO 42 EVENT WILL INSIGNIA BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), HOWEVER IT ARISES AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT INSIGNIA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY. 12. Indemnity. Notwithstanding anything to the contrary contained in this Agreement, neither BSQUARE nor Insignia shall have any liability in connection with infringement claims arising out of the use of the Jeode Technology. 13. Certification. COMPANY may not distribute any Insignia Royalty Bearing Devices until such Insignia Royalty Bearing Devices have been certified by BSQUARE. NOTE ON JAVA TECHNOLOGY. Jeode Technology contains support for programs written in Java programming language. Java Technology is not fault tolerant and is not designed, manufactured or intended for use or resale as on-line control equipment in hazardous environments requiring fail-safe performance, such as in the operation of nuclear facilities, aircraft navigation or communication systems, air traffic control, certain medical devices, or weapons systems, in which the failure of Java Technology could lead directly to death, personal injury, or severe physical or environmental damage. Insignia and BSQUARE disclaim any express or implied warranties for any such use. ANSYR TECHNOLOGY CORPORATION The following additional terms are included in the BSQUARE Services Agreement ("Agreement") as a result of the inclusion of Primer 2.3 for Windows CE ("Primer Software"). These terms do not limit the other terms of the Adaptation Services Agreement. In case of direct conflict, the terms of this exhibit shall prevail with respect to the Primer Software and the terms of the Adapation Services Agreement shall prevail in all other cases. 1. License. COMPANY may distribute and sublicense the Primer Software to third parties in conjunction with the sale of COMPANY's Device. COMPANY must distribute the Primer Software pursuant to a written license agreement (shrinkwrap or click-wrap forms are acceptable) which contain the following minimum sublicense terms: 1.1 Restrictions. COMPANY's licensees may not reverse engineer, decompile, disassemble or otherwise attempt to discover the source code to the software except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. 43 1.2 No Warranty. COMPANY'S LICENSORS MAKE NO WARRANTY OF ANY KIND, EITHER EXPRESS, IMPLIED, OR STATUTORY REGARDING THE SOFTWARE. CUSTOMER'S LICENSORS EXPRESSLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS REGARDING THE PRODUCTS, AND ANY WARRANTY OTHERWISE ARISING OUT OF ANY PROPOSAL, SPECIFICATION OR SAMPLE. 1.3 Limitation of Liability. IN NO EVENT SHALL COMPANY'S LICENSORS BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, LOSS OF PROFITS, REVENUE, LOSS OF BUSINESS, LOSS OF DATA OR LOSS OF USE, IRRESPECTIVE OF WHETHER SUCH LICENSORS HAVE ADVANCE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. THE PARTIES AGREE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES WERE AN ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER THIS AGREEMENT. 2. No Warranty. NEITHER BSQUARE NOR ANSYR MAKE WARRANTIES OF ANY KIND, WHETHER EXPRESS, IMPLIED, OR STATUTORY REGARDING THE PRIMER SOFTWARE. BSQUARE AND ANSYR EXPRESSLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS REGARDING THE PRIMER SOFTWARE, AND ANY WARRANTY OTHERWISE ARISING OUT OF ANY PROPOSAL, SPECIFICATION OR SAMPLE. 3. Limitation of Liability. IN NO EVENT SHALL BSQUARE OR ANSYR BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, LOSS OF PROFITS, REVENUE, LOSS OF BUSINESS, LOSS OF DATA OR LOSS OF USE, IRRESPECTIVE OF WHETHER BSQUARE OR ANSYR HAVE ADVANCE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. 4. INTENTIONALLY DELETED. 5. Reporting Obligations. Reporting of the distribution of the Primer Software shall be in accordance with Section 6.2 of the Agreement. Such report shall indicate the number of units of Primer Software duplicated, reproduced and distributed during each month and shall be delivered no later than 30 days following the end of the previous month. Unless otherwise stated in the report, it will be assumed that the Primer Software is included in all units reported pursuant to Section 6.2. 6. End User Documentation. BSQUARE may supply COMPANY with end user documentation for the Primer Software. Modifications to such documentation are not permitted. Ownership of such documentation, remains with Ansyr. 44 7. Intellectual Property. COMPANY shall not alter, remove, obscure, or modify any copyright or other proprietary or protective notices on the Primer or BSQUARE products. MACROMEDIA, INC. The following additional terms are included in the Adaptation Agreement ("Agreement") as a result of the inclusion of certain code from Macromedia, Inc., ("Macromedia Software"). These terms do not limit the other terms of the Agreement. In case of direct conflict, the terms of this Exhibit E will control with respect to the Macromedia Software and the Agreement will control with respect to all other terms. 1. Notwithstanding anything to the contrary in the Agreement, COMPANY will only receive a binary version of the Macromedia Software. 2. COMPANY's right to use and sublicense the Macromedia Software is restricted to the following platforms: o CE 3.0: Intel Arm, StrongArm and x86; MIPS, Hitachi SH-3 and SH-4; and Motorola Power PC processors 3. Certification. 3.1 COMPANY may not distribute any Royalty Bearing Devices that include the Macromedia Software ("Macromedia Royalty Bearing Device") until such Device has been certified by BSQUARE or by COMPANY. If COMPANY elects to certify its own product(s), BSQUARE will supply COMPANY with a suite of certification software from Macromedia. COMPANY shall provide the results of certification tests to BSQUARE and COMPANY grants permission for BSQUARE to provide such test results to Macromedia. 3.2 COMPANY understands and agrees that Macromedia, in the exercise of its reasonable discretion, may elect to certify the Macromedia Royalty Bearing Device regardless of the test results provided to Macromedia. In such event, COMPANY agrees to provide Macromedia with a reasonable number of such Devices for testing. Macromedia agrees to comply with COMPANY's standard confidentiality restrictions with respect to such Devices. 4. COMPANY must distribute the Macromedia Royalty Bearing Devices under terms and conditions no less restrictive than the Macromedia End User License Agreement ("Macromedia EULA") attached as Exhibit E-1. 5. COMPANY must place the following statements in the copyright area of: (i) The on-line documentation regarding the Macromedia Software and the Macromedia Royalty Bearing Device; (ii) The end user license agreement, or equivalent, that COMPANY uses; (iii) The "About Box" or similar notice page of the Macromedia Software and the Macromedia Royalty Bearing Device; and 45 (iv) Any other document related to the Macromedia Software and Macromedia Royalty Bearing Device that contains copyright information: o "Contains Macromedia FlashTM Player technology by Macromedia, Inc., Copyright(C)1995-2001 Macromedia, Inc. All rights reserved. o Macromedia, Flash and Macromedia Flash are trademarks or registered trademarks of Macromedia, Inc. in the United States and internationally." 6. Trademarks and Marketing. 6.1 BSQUARE grants COMPANY a non-exclusive, non-transferable, revocable sublicense to use "Macromedia," "Flash" and "Macromedia Flash" together will Macromedia's logos (collectively, the "Macromedia Trademarks") only in conjunction with Macromedia Royalty Bearing Devices. COMPANY receives no right, title or interest in or to the Macromedia Trademarks and all goodwill arising from use of the Macromedia Trademarks will inure to the benefit of Macromedia. 6.2 COMPANY shall use the Macromedia Trademarks only as specified in the Macromedia Trademark Usage Guidelines, currently located at the following URL's: o Trademarks: www.macromedia.com/help/copyright.html o Logos: www.macromedia.com/style_guide/logos/flash_enabled/ as they may be amended from time to time by Macromedia in its sole discretion. 6.3 COMPANY agrees to adopt any new logos and guidelines at its earliest convenience, for example, at the next revision of the Macromedia Software. 6.4 COMPANY shall include a statement ("Attribution Text") substantially similar to the following in its marketing materials for Macromedia Royalty Bearing Devices: "This product features the Macromedia FlashTM Player technology. For further information on the Macromedia Flash Player, visit http://www.macromedia.com/software/flash/about/." 6.5 COMPANY shall use the Macromedia Flash Enabled logo on any Macromedia Royalty Bearing Device packaging. 6.6 In the event that COMPANY has a web page that describes the feature set of a Macromedia Royalty Bearing Device, COMPANY shall display the Macromedia Flash Enabled logo and the Attribution Text with, if possible a hyperlink to the URL listed in the Attribution Text. 6.7 COMPANY shall highlight that a Macromedia Royalty Bearing Device supports playback of Macromedia Flash technology in the developer area of COMPANY's web site, in its Software Development Kits (SDKs), Content Development Kits (CDKs) or equivalent, if any. Such references should include a hyperlink to http://www.macromedia.com/software/flash/about/ for further information on Macromedia Flash Player technology. 46 6.8 COMPANY grants to Macromedia a non-exclusive, worldwide, non-transferable license to use COMPANY's corporate logos and the logos is uses on the Macromedia Royalty Bearing Device, if any, solely in conjunction with promotion of Macromedia Royalty Bearing Device(s) ("COMPANY Trademarks"). Macromedia is not granted any right, title or interest in the COMPANY Trademarks and any goodwill arising from Macromedia's use of such Company Trademarks will inure to the benefit of COMPANY. COMPANY permits Macromedia to use the COMPANY Trademarks and a description of Macromedia Royalty Bearing Device(s) on Macromedia's web site and for use in Macromedia's marketing and promotional materials including, but not limited to, press releases, event presentations, web site announcements, reviewers' guides, advertisements, product datasheets, product packaging and developer kits. 6.9 COMPANY shall not delete or in any manner alter the copyright, Macromedia Trademarks or other proprietary rights notices of Macromedia (and it licensors, if any) appearing on or within the Macromedia Software. 7. Reports. Reporting shall be as follows: COMPANY shall, within thirty days (30) days following the end of the previous month, deliver to BSQUARE a royalty report. The royalty report must, on a product for product basis for the preceding month, state the number of copies of Macromedia Royalty Bearing Devices licensed by COMPANY. All reports shall be certified as complete and correct and signed by a duly authorized officer or director of COMPANY. 8. NO WARRANTY. THE MACROMEDIA SOFTWARE AS DELIVERED UNDER THIS AGREEMENT IS PROVIDED "AS IS," AND MACROMEDIA AND BSQUARE EXCLUDE ALL TERMS, WARRANTIES, AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THAT THE MACROMEDIA SOFTWARE IS FREE OF DEFECTS, MERCHANTABLE, SATISFACTORY, FIT FOR A PARTICULAR PURPOSE, TITLE FREE, AND NON-INFRINGING OF INTELLECTUAL PROPERTY. MACROMEDIA AND BSQUARE DO NOT WARRANT THAT THE MACROMEDIA SOFTWARE WILL MEET COMPANY'S REQUIREMENTS OR THAT ITS USE WILL BE UNINTERRUPTED OR ERROR FREE. 9. LIMITATION OF LIABILITY. MACROMEDIA'S LIABILITY TO COMPANY FOR CLAIMS RELATING TO THE MACROMEDIA SOFTWARE, WHETHER FOR BREACH OR IN TORT, SHALL BE LIMITED TO THE NET AMOUNT RECEIVED BY MACROMEDIA PURSUANT TO SECTION 7 OF THIS EXHIBIT C WITHIN THE PRECEDING TWELVE (12) MONTHS. IN NO EVENT WILL MACROMEDIA BE LIABLE FOR ANY DAMAGES RELATING TO THE MACROMEDIA SOFTWARE THAT HAS BEEN MODIFIED BY ANY PARTY EXCEPT MACROMEDIA TO THE EXTENT THAT ANY CLAIMS RELATE TO SUCH MODIFICATION. IN NO EVENT WILL MACROMEDIA BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS 47 AGREEMENT (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), HOWEVER IT ARISES AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT MACROMEDIA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY. 10. Indemnity. Notwithstanding anything to the contrary contained in this Agreement, neither BSQUARE nor Macromedia shall have any liability in connection with infringement claims arising out of the use of the Macromedia Software. 48 EXHIBIT E-1 END USER LICENSE AGREEMENT Please read this document carefully before proceeding. This Agreement licenses the software to you and contains warranty and liability disclaimers. By installing the software, you are confirming your acceptance of the software and agreeing to become bound by the terms of this Agreement. 1. Definitions (a) "Product" means the Software and any related documentation, models and multimedia content (such as animation, sound and graphics), and all related updates supplied by Licensor. (b) "Software" means the software program covered by this Agreement, and all related updates supplied by Licensor. 2. License This Agreement allows you to: (a) Use the Product on a single device or appliance. (b) Make one copy of the Product in machine-readable form solely for backup purposes. You must reproduce on any such copy all copyright notices and any other proprietary legends found on the original. (c) Certain rights are not granted under this Agreement, but may be available under a separate agreement. If you would like to enter into a site or network license, please contact Licensor. 3. Restrictions You may not make or distribute copies of the Product, or electronically transfer the Product from one computer, device or application to another or over a network. You may not decompile, reverse engineer, disassemble, or otherwise reduce the Software to a human-perceivable form. You may not modify, sell, rent, transfer, resell for profit, distribute or create derivative works based upon the Product or any part thereof. You will not export or reexport, directly or indirectly, the Product into any country prohibited by the United States Export Administration Act and the regulations there under. 4. Ownership The foregoing license gives you limited rights to use the Product. You do not become the owner of, and Licensor and its suppliers retain title to, the Product, and all copies thereof. All rights not specifically granted in this Agreement, including Federal and International Copyrights, are reserved by Licensor and its suppliers. 5. Limited Warranty (a) LIMITED WARRANTY. Licensor warrants that, for a period of ninety (90) days from the date of delivery (as evidenced by a copy of your receipt): (i) when used with a recommended hardware configuration, the Software will perform in substantial conformance with the documentation supplied with the Software; and (ii) that the physical media on which the Software is furnished will be free from defects in materials and workmanship under normal use. 49 (b) NO OTHER WARRANTY. EXCEPT AS SET FORTH IN THE FOREGOING LIMITED WARRANTY, LICENSOR AND ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, OR OTHERWISE INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ALSO, THERE IS NO WARRANTY OF NONINFRINGEMENT, TITLE OR QUIET ENJOYMENT. IF APPLICABLE LAW IMPLIES ANY WARRANTIES WITH RESPECT TO THE SOFTWARE, ALL SUCH WARRANTIES ARE LIMITED IN DURATION TO NINETY (90) DAYS FROM THE DATE OF DELIVERY. No oral or written information or advice given by Licensor, its dealers, distributors, agents or employees shall create a warranty or in any way increase the scope of this warranty. (c) SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE OTHER LEGAL RIGHTS THAT VARY FROM STATE TO STATE. (d) Your exclusive remedy under this section is to return the Software to the place you acquired it, with a copy of your receipt and a description of the problem. Licensor will use reasonable commercial efforts to supply you with a replacement copy of the Software that substantially conforms to the documentation, provide a replacement for defective media, or refund to you your purchase price for the Software, at its option. Licensor shall have no responsibility if the Software has been altered in any way, if the media has been damaged by accident, abuse or misapplication, or if the failure arises out of use of the Software with other than a recommended hardware configuration. 6. Limitation of Damages (a) NEITHER LICENSOR NOR ITS SUPPLIERS SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOSS (INCLUDING DAMAGES FOR LOSS OF BUSINESS, LOSS OF PROFITS, OR THE LIKE), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE, EVEN IF LICENSOR OR ITS REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME STATES DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. The limited warranty, exclusive remedies and limited liability set forth above are fundamental elements of the basis of the bargain between Licensor and you. You agree that Licensor would not be able to provide the Software on an economic basis without such limitations. (b) LICENSOR'S AND ITS SUPPLIERS' TOTAL LIABILITY TO YOU FOR ACTUAL DAMAGES FOR ANY CAUSE WHATSOEVER WILL BE LIMITED TO THE AMOUNT PAID BY YOU FOR THE SOFTWARE THAT CAUSED SUCH DAMAGE. 7. Government end users (USA only) RESTRICTED RIGHTS LEGEND The Macromedia Software is "Restricted Computer Software." Use, duplication, or disclosure by the U.S. Government is subject to restrictions as set forth in this Agreement and as provided in DFARS 50 227.7202-1(a) and 227.7202-3(a) (1995), DFARS 252.227-7013 (OCT 1988), FAR 12.212(a)(1995), FAR 52.227-19, or FAR 52.227-14, as applicable." 51 EXHIBIT F BSQUARE END USER LICENSE AGREEMENT for RDA Server 3.0 IMPORTANT-READ CAREFULLY: This End User License Agreement ("EULA") is a legal agreement between you (either an individual or a single entity) and BSQUARE CORPORATION ("Manufacturer") the manufacturer of RDA Server ("SOFTWARE"). The SOFTWARE includes computer software, the associated media, any printed materials, and any "online" or electronic documentation. By installing, copying or otherwise using the SOFTWARE, you agree to be bound by the terms of this EULA. If you do not agree to the terms of this EULA, the Manufacturer is unwilling to license the SOFTWARE to you. In such event, you may not use or copy the SOFTWARE and you should contact the Manufacturer. SOFTWARE LICENSE. The SOFTWARE is protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The SOFTWARE is licensed, not sold. GRANT OF LICENSE. This EULA grants you the following rights: * Software. You may install and execute the SOFTWARE on a single computer system (System). You may use the SOFTWARE only to manage the number of separate computer devices for which you have valid client access licenses and for which the SOFTWARE is designed. * Back-up Copy. You may make a single copy of the SOFTWARE for use solely for archival purposes with the System. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS. * Limitations on Reverse Engineering, Decompilation and Disassembly. You may not reverse engineer, decompile, or disassemble the SOFTWARE, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. * Single System. The SOFTWARE is licensed for installation and execution on a single System. * Rental. You may not rent or lease the SOFTWARE. * Software Transfer. You may permanently transfer all of your rights under this EULA only as part of a sale or transfer provided you retain no copies, you transfer all of the SOFTWARE (including all component parts, the media, any upgrades or backup copies, and this EULA), and the recipient agrees to the terms of this EULA. If the SOFTWARE is an upgrade, any transfer must include all prior versions of the SOFTWARE. 52 * Termination. Without prejudice to any other rights, Manufacturer may terminate this EULA if you fail to comply with the terms and conditions of this EULA. In such event, you must destroy all copies of the SOFTWARE and all of its component parts. COPYRIGHT. All title and copyrights in and to the SOFTWARE (including but not limited to any images, photographs, animations, video, audio, music, text and "applets," incorporated into the SOFTWARE), the accompanying printed materials, and any copies of the SOFTWARE, are owned by BSQUARE CORPORATION or its suppliers. You may not copy the printed materials accompanying the SOFTWARE. All rights not specifically granted under this EULA are reserved by BSQUARE CORPORATION. LIMITED WARRANTY. * Limited Warranty. Manufacturer warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety days from the date of receipt. Any implied warranties on the SOFTWARE are limited to ninety days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. * Customer Remedies. Manufacturer's and its suppliers' entire liability and your exclusive remedy shall be, at Manufacturer's option, either (a) return of the price paid, or (b) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to Manufacturer with a copy of your receipt. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty days, whichever is longer. If Manufacturer elects to return the price paid, then you must follow the Software Transfer procedures above (other than the requirement that recipient agree to this EULA), with transfer being to Manufacturer. * No Other Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THE LIMITED WARRANTY SECTION ABOVE, THE SOFTWARE IS PROVIDED TO THE END USER "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK OF THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. * No Liability for Consequential Damages. NEITHER MANUFACTURER NOR MANUFACTURER'S SUPPLIERS SHALL BE HELD TO ANY LIABILITY FOR ANY DAMAGES SUFFERED OR INCURRED BY THE END USER (INCLUDING, BUT NOT LIMITED TO, GENERAL, SPECIAL, 53 CONSEQUENTIAL OR INCIDENTAL DAMAGES INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION AND THE LIKE), ARISING FROM OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE. SOME STATES/JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. * Attorney's Fees. IN THE EVENT ANY PARTY TO THIS EULA SEEKS ASSISTANCE OF LEGAL COUNSEL TO ENFORCE THIS EULA OR TO MAINTAIN OR DEFEND ANY CAUSE OF ACTION ARISING OUT OF OR RELATED TO THIS EULA, THEN THE PREVAILING PARTY IN ANY SUCH ACTION, DEMAND, ARBITRATION OR DEFENSE SHALL BE ENTITLED TO RECOVER FROM THE OTHER SAID PREVAILING PARTY'S REASONABLE ATTORNEY'S FEES INCURRED, TOGETHER WITH COSTS AND EXPENSES. U.S. GOVERNMENT RESTRICTED RIGHTS. The SOFTWARE and documentation are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software-Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is BSQUARE CORPORATION /3150 - 139th Avenue SE, Suite 500/Bellevue WA 98005-4081. This EULA is governed by the laws of the State of Washington, United States of America. This warranty gives you specific legal rights, and you may also have other rights which vary from state to state or jurisdiction to jurisdiction. Should you have any questions concerning this EULA, please contact the Manufacturer. 54 AMENDMENT NUMBER 1 TO ADAPTATION SERVICES AGREEMENT BETWEEN BSQUARE CORPORATION and MSU Devices Inc. and Web 2 U Ltd. This Amendment Number 1 ("Amendment") to the Adaptation Services Agreement ("Agreement") made and entered into August 21, 2001, between BSQUARE Corporation ("BSQUARE") and MSU Devices Inc. and Web 2 U Ltd. (jointly and severally referred to as "MSU or COMPANY"), is entered into as of this 21st day of August, 2001. The project covered by the Agreement prior to this Amendment is referenced in this Amendment as the "Development Project." The parties desire to add an additional certification project to be performed in accordance with the Agreement. The new project is referred to as the "Certification". The Agreement is amended as follows: 1. For purposes of the Certification, references to the Exhibit A Statement of Work shall refer to Exhibit A-1 and Exhibit A-2 of this Amendment, and references to Exhibit C Fees shall refer to Exhibit C-1 of this Amendment. For greater certainty, no additional royalties shall be payable in respect of the Certification. 2. Commencement of Services. Provided that the Final Delivery under the Development Project has occurred and that COMPANY is not in default of any of its obligations under the Agreement or this Amendment, BSQUARE shall commence the Certification on September 15, 2001 and use all reasonable efforts to complete by September 29, 2001. 3. Separate Efforts. Work performed under the Certification shall be considered separate from work performed under the Development Project except to the extent that the Certification requires completion of certain work under the Development Project. Except as provided above, disputes with respect to one project shall not excuse performance related to other projects unless the dispute relates to payment for work performed. 4. Separate Liability Limitations. The liability limitation provisions in the Agreement will be separate for each project. 1 5. Except as expressly altered by this Amendment, all terms of the Agreement remain in full force and effect with regard to all Projects. Except as specifically set forth in this Amendment, the terms and conditions of the Agreement shall apply independently to each project. BSQUARE CORPORATION MSU Devices Inc. /s/ Brian V. Turner /s/ D. Bruce Walter ------------------------- ------------------------- By Brian V. Turner By D. Bruce Walter Its President/ COO Its President / CEO Web 2 U Ltd. /s/ Chris Green ------------------------- By Chris Green Its Managing Director 2 Exhibit A-1 [LOGO] MSU Devices Inc. Sun TCK (Technology Compatibility Kit) First-Pass Certification Testing for Insignia pJava (Personal Java) JVM version 1.9 Running on the MSU/V5 Internet Access Device T&M Statement of Work August 20, 2001 Revision: 1.0 Submitted by: BSQUARE Corporation 3150 139th Ave. S.E., Suite 500 Bellevue, WA 98005-4081 (425) 519-5900 (Voice) (425) 519-5999 (Fax) To: MSU Devices Inc. 2901 North Dallas Parkway Suite 460 Plano, TX 75093 Attn: Pritesh M. Patel Telephone: 972.473.6859 3 -------------------------------------------------------------------------------- IMPORTANT: This document is intended only for the use of the individual or entity to which it is addressed, and contains information, which is confidential and proprietary. If the reader of this document is not the intended recipient, or the employee or agent responsible for delivering the document to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this document is strictly prohibited. If you have received this document in error, please notify the sender immediately and return the original document. -------------------------------------------------------------------------------- 4 Revision History -------------------------------------------------------------------------------- Revision Date By Purpose ================================================================================ 1.0 8/20/01 Mark Plagge Initial Release SOW -------------------------------------------------------------------------------- 5 Contents 1. Definitions............................................................7 2. Executive Summary......................................................7 3. Development............................................................7 3.1. TIMELINE / OVERVIEW..................................................7 3.2. BSQUARE CERTIFICATION TESTING........................................8 3.2.1. Final Delivery..................................................8 3.3. MSU DELIVERABLES.....................................................8 3.4. ASSUMPTIONS AND EXTERNAL DEPENDENCIES................................8 3.4.1. Project Delays..................................................9 3.4.2. Specification Changes...........................................9 6 1. Definitions BSQUARE BSQUARE Corporation MSU MSU Devices Inc. Device MSU Version 5 device targeted for the Certification Testing based on the x86 microprocessor Windows(R)CE Embedded WIN32 operating system from Microsoft Corporation 2. Executive Summary BSQUARE will perform Sun TCK (Technology Compatibility Kit) Certification Testing for Insignia pJava (Personal Java) JVM version 1.9 running on the MSU Device in accordance with the JVM certification requirements. 3. Development 3.1. Timeline / Overview
Approximate Date Milestone Deliverable/Event Responsible ------------------------------------------------------------------------------------------------- 8/20/01 Proposal Statement of Work BSQUARE 9/15/01 Hardware 1 BSQUARE will use 2 of the final hardware MSU Devices that were delivered for the adaptation work for the TCK Certification Testing. In the event that MSU makes any changes to the hardware provided to BSQUARE during the adaptation, MSU will provide 2 new final hardware Devices to BSQUARE that will be used for TCK Certification Testing. 9/15/01 Software 1 Begin TCK Certification Testing BSQUARE Software 1 + 10 First Pass TCK Certification Testing pass complete. BSQUARE Working Days Certification Delivery of certification results. Testing Complete * See 3.2 for deliverable details.
7 3.2. BSQUARE Certification Testing o BSQUARE will perform Sun TCK Certification Testing for Insignia pJava JVM version 1.9 running on the MSU Device. If the JVM integration on the MSU Device passes Certification Testing, there will be no further action taken by BSQUARE other than logging and reporting the results to MSU. o If the Certification Testing fails, BSQUARE will communicate to MSU the test(s) that were unsuccessful. In the event of such failure, BSQUARE shall not be responsible for modifying the Device software or hardware unless specifically requested to do so by MSU. o If so requested by MSU, BSQUARE will attempt to correct the possible causes of failure to pass Certification Testing and will repeat the testing. If the Certification Testing still fails after the second pass, at MSU's request the above steps will be repeated with BSQUARE performing additional Certification Test passes with every modification until the MSU Device containing the JVM passes Certification Testing. o This Statement of Work includes only the one Certification Test pass. BSQUARE will provide a separate cost estimate and schedule for any failure resolution(s) and any subsequent Certification Test passes. If MSU agrees to additional work and/or additional test passes, this will be included in an amendment to the Agreement as a Change of Scope. 3.2.1. Final Delivery o BSQUARE will provide MSU with a written Certification Test Report Summary based on the TCK test results. If the MSU Device passes Certification Testing, BSQUARE will also submit the results to Sun for approval. 3.3. MSU Deliverables MSU will be responsible for delivery of the following to BSQUARE per the timeline in Section 3.1: o Two MSU Devices - BSQUARE will use 2 of the final hardware Devices that were delivered for the adaptation work for the TCK Certification Testing. In the event that MSU makes any changes to the hardware provided to BSQUARE during the adaptation, MSU will provide 2 new final hardware Devices to BSQUARE that will be used for TCK Certification Testing. o Device version number. 3.4. Assumptions and External Dependencies In planning the project schedule and deliverables, BSQUARE is dependent upon schedules and deliverables that are beyond BSQUARE's control. The assumptions and dependencies upon which the plan is based are documented here. 3.4.1. Project Delays The fee quoted to MSU for performance of this work assumes that all deliverables provided by MSU or any third party contracted by MSU, including hardware, software, design documentation, and any written instructions, will be delivered to BSQUARE per the schedule in Section 3.1, and will be complete, accurate, and functional. Work performed by BSQUARE 8 which is caused by late, incomplete, inaccurate, non-functional or non-conforming MSU deliverables as described in Section 3.3, will result in a day-for-day slip in the project schedule and will be treated as additional billable work invoiced at the hourly rate set forth in Exhibit C-1 of the Agreement. 3.4.2. Specification Changes BSQUARE has defined its Deliverables based on the system requirements and hardware specifications available at the issue of this Statement of Work (SOW), as provided to BSQUARE. Changes to the hardware, system requirements or Deliverables, described in Section 3.3, made after the most current release of this SOW will not be included, and will not change the scope of this project. Should MSU wish to add additional testing beyond what is covered in this SOW (Section 3.2) during the course of performing the work; BSQUARE will provide to MSU a Change of Scope (COS) proposal detailing: o Additions in the scope of work, including test failure resolution o Net change in the fees charged for the work o Net change in the schedule of BSQUARE Deliverables MSU shall have up to 5 business days after delivery of the revised SOW in which to accept the proposed COS. Should MSU not accept the proposed COS within those 5 business days, BSQUARE will complete the work as defined in the most current SOW. 9 Exhibit A-2 [LOGO] MSU Devices Inc. Macromedia Flash Player 5.0 First-Pass Certification Testing for the MSU/V5 Internet Access Device T&M Statement of Work August 20, 2001 Revision: 1.0 Submitted by: BSQUARE Corporation 3150 139th Ave. S.E., Suite 500 Bellevue, WA 98005-4081 (425) 519-5900 (Voice) (425) 519-5999 (Fax) To: MSU Devices Inc. 2901 North Dallas Parkway Suite 460 Plano, TX 75093 Attn: Pritesh M. Patel Telephone: 972.473.6859 10 -------------------------------------------------------------------------------- IMPORTANT: This document is intended only for the use of the individual or entity to which it is addressed, and contains information, which is confidential and proprietary. If the reader of this document is not the intended recipient, or the employee or agent responsible for delivering the document to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this document is strictly prohibited. If you have received this document in error, please notify the sender immediately and return the original document. -------------------------------------------------------------------------------- 11 Revision History -------------------------------------------------------------------------------- Revision Date By Purpose ================================================================================ 1.0 8/20/01 Mark Plagge Initial Release SOW -------------------------------------------------------------------------------- 12 Contents 1. Definitions...........................................................14 2. Executive Summary.....................................................14 3. Development...........................................................14 3.1. TIMELINE / OVERVIEW.................................................14 3.2. BSQUARE CERTIFICATION TESTING.......................................15 3.2.1. Final Delivery.................................................15 3.3. MSU DELIVERABLES....................................................15 3.4. ASSUMPTIONS AND EXTERNAL DEPENDENCIES...............................16 3.4.1. Project Delays.................................................16 3.4.2. Specification Changes..........................................16 13 4. Definitions ================================================================================ BSQUARE BSQUARE Corporation MSU MSU Devices Inc. Device MSU Version 5 device targeted for the Certification Testing based on the x86 microprocessor Windows(R) CE Embedded WIN32 operating system from Microsoft Corporation ================================================================================ 5. Executive Summary BSQUARE will perform Macromedia Flash Certification Testing for Flash Player version 5.0 running on the MSU Device in accordance with the Macromedia certification requirements. 6. Development 6.1. Timeline / Overview
Approximate Date Milestone Deliverable/Event Responsible ================================================================================================= 8/20/01 Proposal Statement of Work BSQUARE 9/15/01 Hardware 1 BSQUARE will use 2 of the final hardware MSU Devices that were delivered for the adaptation work for the Flash Player version 5.0 Certification Testing. In the event that MSU makes any changes to the hardware provided to BSQUARE during the adaptation, MSU will provide 2 new final hardware Devices to BSQUARE that will be used for Flash Player version 5.0 Certification Testing. 9/15/01 Software 1 Begin Flash Player version 5.0 BSQUARE certification testing Software 1 + 10 First Pass Flash Player version 5.0 Certification BSQUARE Working Days Certification Testing pass complete. Delivery of Testing Complete certification results. ==================================================================================================
* See 3.2 for deliverable details. 14 6.2. BSQUARE Certification Testing o BSQUARE will perform Macromedia Flash Player Certification Testing for Flash Player version 5.0 running on the MSU Device in accordance with the Macromedia certification requirements. If the Flash Player integration on the MSU Device passes Certification Testing, there will be no further action taken by BSQUARE other than logging and reporting the results to MSU. o If the Certification Testing fails, BSQUARE will communicate to MSU the test(s) that were unsuccessful. In the event of such failure, BSQUARE shall not be responsible for modifying the Device software or hardware unless specifically requested to do so by MSU. o If so requested by MSU, BSQUARE will attempt to correct the possible causes of failure to pass Certification Testing and will repeat the testing. If the Certification Testing still fails after the second pass, at MSU's request the above steps will be repeated with BSQUARE performing additional Certification Test passes with every modification until the MSU Device containing the Flash Player passes Certification Testing. o This Statement of Work includes only the one Certification Test pass. BSQUARE will provide a separate cost estimate and schedule for any failure resolution(s) and any subsequent Certification Test passes. If MSU agrees to additional work and/or additional test passes, this will be included in an amendment to the Agreement as a Change of Scope. 6.2.1. Final Delivery o BSQUARE will provide MSU with a written Certification Test Report Summary based on the Macromedia Flash Player Certification Testing test results. 6.3. MSU Deliverables MSU will be responsible for delivery of the following to BSQUARE per the timeline in Section 3.1: o Two MSU Devices - BSQUARE will use 2 of the final hardware Devices that were delivered for the adaptation work for the Flash Player version 5.0 Certification Testing. In the event that MSU makes any changes to the hardware provided to BSQUARE during the adaptation, MSU will provide 2 new final hardware Devices to BSQUARE that will be used for Flash Player version 5.0 Certification Testing. o Device version number. 6.4. Assumptions and External Dependencies In planning the project schedule and deliverables, BSQUARE is dependent upon schedules and deliverables that are beyond BSQUARE's control. The assumptions and dependencies upon which the plan is based are documented here. 6.4.1. Project Delays The fee quoted to MSU for performance of this work assumes that all deliverables provided by MSU or any third party contracted by MSU, including hardware, software, design 15 documentation, and any written instructions, will be delivered to BSQUARE per the schedule in Section 3.1, and will be complete, accurate, and functional. Work performed by BSQUARE which is caused by late, incomplete, inaccurate, non-functional or non-conforming MSU deliverables as described in Section 3.3, will result in a day-for-day slip in the project schedule and will be treated as additional billable work invoiced at the hourly rate set forth in Exhibit C-1 of the Agreement. 6.4.2. Specification Changes BSQUARE has defined its Deliverables based on the system requirements and hardware specifications available at the issue of this Statement of Work (SOW), as provided to BSQUARE. Changes to the hardware, system requirements or Deliverables, described in Section 3.3, made after the most current release of this SOW will not be included, and will not change the scope of this project. Should MSU wish to add additional testing beyond what is covered in this SOW (Section 3.2) during the course of performing the work; BSQUARE will provide to MSU a Change of Scope (COS) proposal detailing: o Additions in the scope of work, including test failure resolution o Net change in the fees charged for the work o Net change in the schedule of BSQUARE Deliverables MSU shall have up to 5 business days after delivery of the revised SOW in which to accept the proposed COS. Should MSU not accept the proposed COS within those 5 business days, BSQUARE will complete the work as defined in the most current SOW. 16 EXHIBIT C-1 DEVELOPMENT FEES AND PAYMENT SCHEDULE 1. Services. COMPANY shall pay BSQUARE for BSQUARE's and its contractor's time in rendering the Services at a certification rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour for Services provided pursuant to Exhibit A-1 and o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour for Services provided pursuant to Exhibit A-2. Such hourly rates shall be billed for meetings, phone conferences and all matters directly connected with BSQUARE's performing the Services, except the billing therefor. 2. Should COMPANY request additional services from BSQUARE, in excess of the agreed scope of Services hereunder, COMPANY agrees to pay BSQUARE at a minimum hourly rate of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per hour, in accordance with the hourly-rate billing policy herein, unless otherwise agreed to in writing. Notwithstanding the foregoing, BSQUARE is not hereby obligated to perform any additional services and these provisions do not constitute an option on BSQUARE's additional services, but rather establish minimum compensation therefor. 3. Payment. COMPANY shall pay BSQUARE a prepayment in the amount of o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] on or before September 13, 2001 but in any event prior to delivery of the Final Deliverable under the Development Project. Thereafter, COMPANY shall pay BSQUARE accrued Service Fees on a monthly basis. BSQUARE may terminate services effective immediately if any payment is past due. 17 EX-10.02 4 b313844ex_10-02.txt PRODUCT MANUFACTURING AGREEMENT EXHIBIT 10.02 Product Manufacturing Agreement ------------------------------- This Product Manufacturing Agreement (this "Agreement") is entered into as of July 26, 2001 (the "Effective Date"), by and among MSU DEVICES INC., ("MSU") located at 2901 N. Dallas Parkway, Suite 460, Plano, TX 75093, USA, BIOSTAR MICROTECH INT'L CORPORATION, ("BIOSTAR") located in 2FL, 108-4, Min-Chuan Road, Hsin-Tien City, Taipei Hsien, Taiwan. WHEREAS, BIOSTAR is engaged in the design, and manufacture of internet access devices; WHEREAS, pursuant to the Product Design & Development Agreement (the "Product Design & Development Agreement") entered into as of June 14, 2001 by and among MSU and BIOSTAR and HIGH MATRIX CORP., MSU has engaged BIOSTAR AND HIGH MATRIX to develop MSU's Internet Access Device (the "IAD") based on the specifications set out herein; WHEREAS, MSU wishes to engage BIOSTAR to manufacture the IAD; NOW THEREFORE in consideration of the mutual covenants contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows: 1. PRODUCTION 1.1 MSU agrees that, subject to the terms and conditions of Section 3.1, BIOSTAR shall be the preferred manufacturer of the IAD. BIOSTAR shall be responsible for the production of the IAD from sample run to mass production all in accordance with the specifications and requirements set out in the Product Design and Development Agreement conforming to IPC-A-610 Class 2 workmanship standards and quality standards based on ANSI/ASQC Q900Z-1004 quality systems. 1.2 During the term of this Agreement MSU shall provided BIOSTAR with written proposed orders (the "Proposed Orders"). The Proposed Orders shall include the number of IADs to be manufactured, any specifications or requirements which are different than those set out in Section 1.1, the required delivery date and a designated location where the IADs are to be delivered. 1.3 Subsidiaries designated in writing by MSU from time to time, shall have the right to perform and have the benefit of any part of this Agreement or to discharge any of its obligations under all or part of this Agreement. Notwithstanding any such sub-contracting, MSU shall at all times remain liable to BIOSTAR for all of its obligations under this Agreement and for the acts and omissions of any such Subsidiaries as if they were its own. 1.4 Notwithstanding the foregoing, MSU can seek an alternate manufacturer if BIOSTAR cannot deliver the IAD according to the terms set out in Section 3.1. 2. NAMED CUSTOMER LIST During the term of this Agreement, BIOSTAR (and it's Affiliates) shall be precluded from designing, developing or manufacturing any internet appliances similar to or which compete with the IAD on behalf of any Named Customer (as defined below) or an Affiliate or a Subsidiary of a Named Customer. MSU shall provide BIOSTAR from time to time with a written list of a maximum of seven Persons (the "Named Customers"). Initially the Named Customers shall include: NetSite Communications Ltd., Tandy Corporation/Radio Shack, Rent America, uDataNet Corporation, PowerOne Corporation and Office Depot Corporation. In the event that MSU wishes to amend or add to the Named Customers, MSU will provide written notice to BIOSTAR of the amendment or addition, provided however in no event shall the new added Named Customers be with Persons with which BIOSTAR currently has a signed contract and the number of Persons that make up the Named Customers be greater than seven Persons, and provided further however that a Named Customer cannot be an existing customer of BIOSTAR on the Effective Date. BIOSTAR hereby confirms that none of the initial Named Customers are existing customers of BIOSTAR. For purposes of this Agreement, (i) "Person" shall mean any individual, corporation, partnership, limited liability company, limited liability partnership, firm, joint venture, association, joint-stock company, unincorporated organization, trust, trustee, executor, administrator or other legal personal representative, regulatory body or agency, government or governmental agency, authority or other entity howsoever designated or constituted, (ii) an "Affiliate" of a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified, and (iii) a "Subsidiary" is a Person whom the Named Customer own more than 50% interest in. Any failure by BIOSTAR to comply with the requirements of this paragraph shall result in expense and damage to MSU. MSU has genuinely pre-estimated that it will suffer losses equal to o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per Internet appliance or unit manufactured and delivered to a Named Customer its Affiliates or Subsidiaries. In the event that BIOSTAR (or it's Affiliates) fails to comply with the provisions of this 2 paragraph, they will pay the o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] per Internet appliance delivered to the Named Customer, its Affiliates or Subsidiaries within ten days of such delivery. BIOSTAR recognizes that the prohibitions contained in this paragraph shall be a critical component of the business operation of MSU. BIOSTAR acknowledges that the sums referred to above represent a genuine pre-estimate of the loss to be incurred by MSU and is not a penalty. BIOSTAR further acknowledges that the sums referred to in this paragraph represent the liability of BIOSTAR for the failure to comply with this paragraph only, and shall not serve to limit the liability of BIOSTAR for breach of any other obligation under this Agreement. 3. QUOTATION 3.1 BIOSTAR covenant that the price per IAD unit (the "Unit Price") shall be o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] FOB Factory and that such price shall remain in effect until August 15, 2001. After August 15, 2001, in the event MSU shall deliver a Proposed Order, BIOSTAR shall prepare and deliver to MSU a written notice (the "Bid") which (i) is in accordance with the specified terms set forth in the Proposed Order, (ii) is at a Unit Price which is the same or lower than that reasonably to be anticipated from any qualified third party, (iii) shall contain a statement that in BIOSTAR's reasonable judgment they have the capability to satisfy the requirements of MSU for the manufacture and supply of the IAD's as set out in the Proposed Order, and (iv) shall take into account any price reductions or increases at the time of the preparation of the Bid in the then prevailing market price for Memory (as defined below); provided that in the event that the Unit Price is greater than o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] MSU shall have the right to seek a competing manufacturer and have the IAD manufactured with that manufacturer. In the event that a Bid complies with (i), (ii), (iii) and (iv) of the preceding sentence, within 5 Business Days of the receipt of the Bid, MSU shall provid written notice (a "Confirmation Notice") to BIOSTAR accepting the Bid and formally requesting the manufacture of the number of IADs according to the specifications set out in the Bid. 3.2 The price of Memory is included in the Unit Price specified in the preceding paragraph; provided that the Unit Price is subject to be changed (even after BIOSTAR has provided MSU with the Bid) upon presentation to MSU of reasonable evidence that the current market price of Memory has changed to a price which is either o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] higher or lower then the current market price of Memory reflected in the preparation of the Bid. BIOSTAR shall provide MSU with written notice of any adjustment in the Unit Price within seven (7) Business Days of the receipt of a Confirmation Notice. In no event shall the Unit Price be adjusted under this Section 3.2 after the 3 expiration of the seven (7) Business Day period following the receipt by BIOSTAR of a Confirmation Order. 3.3 As the Unit Price offered by BIOSTAR herein is based upon the assumption that MSU will manufacture under this Agreement one hundred and twenty thousand (120,000) IAD units on an annual basis, MSU shall use its reasonably commercial efforts to issue Proposed Orders for an aggregate amount of one hundred and twenty thousand (120,000) IAD units each whole year during the term of this Agreement so that BIOSTAR can negotiate with source vendors to reduce various costs associated with the IAD. 4. DELIVERY BIOSTAR covenant that the first five thousand (5,000) IADs manufactured pursuant to this Agreement shall be delivered by the October 1, 2001 provided that the enclosure of the units can be made available no later than September 15 2001. The next fifteen thousand (15,000) IADs (after the delivery of the first five thousand (5,000) IADs) manufactured pursuant to this Agreement shall be delivered to the destination port designated by MSU in the Proposed Order no later than eight (8) weeks after the receipt of the first Confirmation Order. Thereafter BIOSTAR covenants that the IADs manufactured pursuant to this Agreement shall be delivered to the destination port designated by MSU in the Proposed Order no later than eight (8) weeks after the receipt of any Confirmation Order. BIOSTAR acknowledges and agrees that title to the IADs manufactured pursuant to this Agreement shall pass to MSU upon delivery to the destination port designated by MSU in the Proposed Order or Confirmation Notice, as applicable. MSU, provided it is acting reasonably, may reject IADs which, (a) have been materially damaged prior to delivery by BIOSTAR, or (b) do not meet, in all material respects, the specifications provided by MSU and more specifically set out in the Product Design & Development Agreement or a Proposed Order (the "Rejected Products"). MSU will notify BIOSTAR in writing of Rejected Products within forty-five (45) calendar days of their delivery and will return Rejected Products to BIOSTAR within a further ten (10) calendar days. With respect to any Rejected Product, MSU will be entitled to the rights and remedies set out in Section 7 with respect to defective IAD. 4 5. PAYMENT TERMS for MASS PRODUCTION Within ten (10) Business Days of the receipt by BIOSTAR of a Confirmation Order, MSU will wire transfer half of the cost of the Memory component to BIOSTAR to secure the component price (the "Memory Advance Amount"). All payments for IADs manufactured hereunder pursuant to a Confirmation Notice shall be paid within 30 days from the date the IADs were delivered to MSU as specified in the Confirmation Notice. Within five (5) Business Days of the execution of this Agreement by both parties, MSU shall pay to BIOSTAR by wire transfer of immediately available funds o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission], which amount shall represent a "good faith" attempt on the part of MSU to provide BIOSTAR with funds to reduce their costs of manufacturing. BIOSTAR acknowledges that MSU has prior to the execution of this Agreement advanced BIOSTAR o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] to ensure delivery of the prototype of the IAD under the Product Design & Development Agreement prior to July 26, 2001. Within five (5) Business Days of the receipt by BIOSTAR of a Confirmation Order, MSU shall deliver to BIOSTAR a letter of credit issued upon a major bank in the United States to secure payments of amounts due hereunder, in an amount equal to the amount payable for the IADs set out in such Confirmation Order less the Memory Advance Amount. 6. Mechanical Design and Tooling Charge and Payment Terms 6.1 In addition to the manufacturing fees per unit as set out either in section 3 or any Bid or any Confirmation Notice, MSU agrees to pay BIOSTAR o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] for the ID design, mechanical design and tooling (the "ID Mechanical Design Fee"). BIOSTAR shall use its reasonable commercial efforts to have LiteOn refund the ID Mechanical Design Fee. 6.2 MSU agrees that the ID Mechanical Design Fee shall be paid by wire transfer of immediately available funds in three installments as follows: (1) Within three (3) Business Days of the execution of this Agreement by both parties, MSU shall pay by wire transfer o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] to BIOSTAR; (2) Within three (3) Business Days of the receipt of written notice from BIOSTAR of the completion of the ID tooling, MSU shall pay by wire transfer o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] to BIOSTAR; and 5 (3) Within three (3) Business Days of the receipt of written notice from BIOSTAR of the successful completion of the mechanical design and tooling test, MSU shall pay by wire transfer o [This confidential portion of the exhibit has been omitted and filed separately with the Securities and Exchange Commission] to BIOSTAR. For purposes of this Agreement, "Business Day" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in The City of New York. 7. WARRANTY 7.1 BIOSTAR warrants, that: (a) the IAD will be free from defects in workmanship for an initial period of six (6) months from the date on which the IADs are delivered to MSU (the "Full Warranty Period"), (b) the IAD's electrical components will be free from defects in workmanship for an initial period of twelve (12) months from the date on which the IADs are delivered to MSU (the "Electrical Component Warranty Period"), (c) the Products will be assembled and supplied in accordance with the terms of the Product Design and Development Agreement, and the terms set out in Section 1.1 herein and (d) the services hereunder, if any, will be performed in a workmanlike manner. Any IAD that does not meet the warranty described in this Section is referred to herein as a "defective IAD", and the failure is herein called a "defect". 7.2 With respect to defects in workmanship, for the Full Warranty Period, all the IADs with defects will be, at the option of BIOSTAR, which option shall be exercised on commercially reasonable grounds, and at BIOSTAR's cost, repaired or replaced, or MSU shall be refunded or credited the unit price of the defective IAD; provided that for the six month period following the Full Warranty Period all the IADs with defects will be repaired by BIOSTAR at BIOSTAR's cost but such costs shall exclude any labor costs of BIOSTAR associated with the repair of the defective IAD. During the Electrical Component Warranty Period, any defect that is related to the IAD's electrical components will be, at the option of BIOSTAR, which option shall be exercised on commercially reasonable grounds, and at BIOSTAR's cost, repaired or replaced, or MSU shall be refunded or credited the unit price of the defective IAD. 7.3 All returned IADs shall include documentation describing the nature of the defect. MSU will pay for the return of the defective IAD to BIOSTAR's designated premises in Los Angeles, USA (or if the IADs are in Europe, Hilden, Germany). BIOSTAR will pay for the redelivery of the repaired or replaced to a location designated in writing by MSU. 6 7.4 NOTWITHSTANDING ANY OTHER PROVISION HEREOF, NOTHING IN THIS AGREEMENT IN ANY WAY LIMITS OR EXCLUDES to BIOSTAR'S LIABILITY FOR DEATH OR PERSONAL INJURY ARISING FROM ITS NEGLIGENCE NOR ANY LIABILITY FOR BREACH OF ANY TERM IMPLIED BY STATUTE TO THE EXTENT THAT SUCH IMPLIED TERMS CANNOT BY LAW BE LIMITED OR EXCLUDED. 7.5 DISCLAIMER; LIMITATION OF LIABILITY FOR DEFECTIVE PRODUCTS. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, AND SUBJECT TO ANY RIGHTS MSU OR ITS CUSTOMERS MAY HAVE UNDER LAW THAT CANNOT BE EXCLUDED UNDER THIS AGREEMENT, BIOSTAR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, REGARDING THE PRODUCTS AND COMPONENTS, THEIR MERCHANTABILITY OR THEIR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE PROVIDED HEREIN, BIOSTAR'S SOLE AND EXCLUSIVE LIABILITY AND MSU'S SOLE AND EXCLUSIVE REMEDY FOR DEFECTIVE PRODUCTS DURING THE WARRANTY PERIOD SHALL BE AS SET FORTH IN SECTION 7. 8. CONFIDENTIALITY 8.1 BIOSTAR acknowledges that (i) all of the engineering data sheets and specification list which MSU submitted to BIOSTAR for engineering purpose and (ii) all of the design related data sheets created by BIOSTAR for this specific project, constitute valuable confidential information of MSU and shall form part of the Confidential Information as defined below. 8.2 Each party agrees that all confidential information (whether oral, written or digital) it obtains from the other party under this Agreement, including, without limitation, technology, trade secrets, patent applications, and business, technical and financial information ("Confidential Information") is Confidential Information of the disclosing party (the "Disclosing Party"). The receiving party (the "Receiving Party") agrees to (i) keep the Disclosing Party's Confidential Information confidential and not disclose the Disclosing Party's Confidential Information to any third party without the prior written consent of the Disclosing Party, (ii) use the Disclosing Party's Confidential Information only as necessary to perform its obligations under this Agreement, (iii) use at least the same degree of care in keeping the Disclosing Party's Confidential Information confidential as its uses for its own confidential information of a similar nature, and (iv) limit access to the Disclosing Party's 7 Confidential Information to its officers, directors, agents, professional advisors, contractors and employees who have a need to have access to the Confidential Information to perform their employment obligations. 8.3 The Receiving Party may use or disclose the Disclosing Party's Confidential Information to the extent such use or disclosure is reasonably necessary to comply with this Agreement, applicable governmental regulations or court order, provided that the Receiving Party provides reasonable advance written notice to the Disclosing Party of any such disclosure, uses its reasonable efforts to secure confidential treatment of the Disclosing Party's Confidential Information prior to disclosure (whether through protective orders or otherwise) and discloses only the minimum amount of information necessary to comply with such requirements. 8.4 Notwithstanding anything else in this Agreement to the contrary, the obligations contained in this Section 8 are to remain in effect perpetually. 8.5 The foregoing agreements and covenants set forth in this paragraph will be construed as being an agreement independent of any other provisions in this Agreement. The existence of any claim or cause of action of a party against the other party, whether predicated on this Agreement or otherwise, shall not constitute a defence to the enforcement by that party of any of the covenants and agreements of this paragraph. Each of the parties hereto acknowledge that its failure to comply with the provisions of this paragraph will cause irreparable harm to the other party which cannot be adequately compensated for in damages, and accordingly acknowledges that the other party will be entitled, in addition to any other remedies available to it, to interlocutory and permanent injunction relief to restrain any anticipated, present or continuing breach of this Agreement. 8.6 The obligations contained in section 8.5 shall not apply, however, to any information which: a) the Receiving Party can demonstrate, is already in the public domain or becomes available to the public through no breach by the Receiving Party of this Agreement; b) was in the Receiving Party possession prior to receipt from the Disclosing Party as proven by its written records; c) is independently developed by the Receiving Party as proven by its written records; d) is approved for release by the written agreement of the Disclosing Party. 8 9. TERM and TERMINATION 9.1 This Agreement shall commence as of the Effective Date and shall continue in effect for a period of one (1) year, unless terminated earlier pursuant to this Agreement. If either party fails to notify the other party in writing one (1) month prior to the expiration of this Agreement, this Agreement shall be deemed to extend for one (1) more year automatically. 9.2 This Agreement may be terminated by either party immediately upon the occurrence of any of the following events: (1) if the other party breaches any material provision of this Agreement and fails to cure such breach within thirty (30) days after receiving written notice from the non-breaching party describing such breach; or (2) if the other party seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within ninety (90) days). 9.3 BIOSTAR may terminate this Agreement if (i) MSU fails to place Proposed Orders for an aggregate amount of one hundred and twenty thousand IADs (120,000) within one year of the Effective Date; and (ii) except as set out in Section 1.3, MSU violated the provision of Section 1.1 by authorizing another company to manufacture the IAD, notwithstanding BIOSTAR's compliance with Section 3.1. 10. GOVERNING LAW AND JURISDICTION 10.1 This agreement shall be governed by and construed in accordance with the laws of the state of New York. 10.2 If a party hereto shall default (and shall not have cured such default within any applicable cure periods provided for herein) in any of its obligations under this Agreement, the aggrieved party may proceed to protect and enforce its rights in accordance with paragraph 10.3, whether for the specific performance of any term contained in this Agreement or for an injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of such Party or to take any one or more of such actions. 9 10.3 All disputes, disagreements, controversies, questions or claims arising out of or relating to this Agreement, including with respect to its formation, execution, validity, application, interpretation, performance, breach, termination or enforcement ("Disputes"), shall be determined by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules then in effect, provided that: (i) any hearing in the course of the arbitration shall be held in English in New York, New York; (ii) the number of arbitrators shall be one, and the arbitrator shall be selected by the parties to the arbitration (the "parties"), provided that if the parties cannot agree on the arbitrator, Judicial Arbitration and Mediation Services shall select the arbitrator; (iii) prior to the appointment of the arbitrator, the parties may apply to the courts for interim relief. A request for interim relief by a party to a court shall not be considered to be incompatible with this paragraph 10.3 or as a waiver of this provision; (iv) any award or determination of the arbitrator shall be final and binding on the parties and there shall be no appeal on any ground, including, for greater certainty, on the ground of alleged errors of law; (v) the arbitrator shall not, without the written consent of all parties, retain any expert; (vi) an arbitrator may apportion the costs of the arbitration, including the reasonable fees and disbursements of the parties, between or among the parties in such manner as the arbitrator considers reasonable; (vii) judgement on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof; (viii) all awards for the payment of money shall include prejudgment and postjudgment interest calculated in accordance with the CPLR; and (ix) all matters in relation to the arbitration shall be kept confidential to the full extent permitted by law, and no individual shall be appointed as an arbitrator unless he or she agrees in writing to be bound by this dispute resolution provision. 10 10.4 No remedy referred to herein is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to any Party. No express or implied waiver by any Party of any default shall be a waiver of any future or subsequent default. 11. INDEMNIFICATION Each party ("Indemnifying Party") shall indemnify, defend and hold harmless the other party, and its officers, directors, employees and agents ("Indemnified Party"), from and against all loss, harm and liability, including, without limitation, all costs, damages, settlements, claims, suits and expenses incurred by any Indemnified Party arising out of any claim that Indemnifying Party's products, materials, instructions, intellectual property or technology infringes any third party's intellectual property rights; provided that the Indemnified Party provides the Indemnifying Party with prompt written notice of any claim for which it seeks indemnification under this Section 11, the Indemnifying Party shall have sole control of the defense and any settlement of any such claim, and the Indemnifying Party shall reasonably cooperate and provide reasonable assistance in connection with the defense or settlement of any such claim. 12. GENERAL PROVISIONS. 12.1 Amendment and Waiver. Except as expressly provided herein, no provision of this Agreement may be amended or waived without the prior written consent of the parties hereto. No waiver of any provision of this Agreement shall constitute a waiver of any other provision nor shall any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided. The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. 12.2 Assignment. Neither party may transfer or assign (i) this Agreement or (ii) the rights or obligations under this Agreement (by operation of law or otherwise), without the prior written consent of the other party, except that no such consent shall be required for any assignment of this Agreement or all (but not less than all) of the rights or obligations under this Agreement, provided that such assignment is made to a person who prior to or concurrently with the assignment acquires, in any manner including in the course of realization of a pledge or other security interest, all or substantially all of the assets and business of such party; and provided further that the assignee, including the lender or other obligee, agrees in writing with the non assigning party that it is bound by the obligations of the assignor contained in 11 this Agreement. The terms and conditions of this Agreement shall bind and inure to each party's respective successors and permitted assigns. 12.3 Severability. If any provision of this Agreement is held to be illegal or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable and the parties shall engage in good faith negotiations to replace the provision declared invalid or unenforceable with an enforceable provision, the economic and commercial effect of which comes as close as possible to that of the invalid or unenforceable provision that it replaces. 12.4 Relationship of Parties. The parties hereto expressly understand and agree that the other is an independent contractor in the performance of each and every party of this Agreement and is solely responsible for all of its employees and agents and its labor costs and expenses arising in connection therewith. The parties are not partners, joint venturers or otherwise affiliated and neither has any right or authority to bind the other in any way. 12.5 Use of Name. EITHER PARTY SHALL NOT USE OR APPROPRIATE THE OTHER PARTY'S COMPANY NAME, BRAND NAME, OR DIRECTOR'S OR EMPLOYEE'S NAME UNLESS OTHERWISE OBTAIN THE OTHER PARTY'S PRIOR WRITTEN CONSENT OR LICENSE. 12.6 Force Majeure. Except in connection with payment obligations, neither party shall be liable or responsible to the other nor be deemed to have defaulted under or breached this Agreement for any failure or delay in the performance of any or all of its obligations under this Agreement caused by or resulting from Force Majeure or delay in acting by any governmental authority or the other party hereto for so long as such circumstances exist and continue to prevent that party's performance. Each of the parties agrees to give notice immediately to the other upon becoming aware of a Force Majeure event. MSU shall have the right to terminate this Agreement with immediate effect by serving written notice on BIOSTAR where a Force Majeure event causes a failure or delay in BIOSTAR's performance of any or all of its obligations hereunder in a material manner for a period longer than 60 days. For purposes of this Agreement, "Force Majeure" shall mean acts of God and the public enemy; the elements; fire; typhoon; accidents; vandalism; sabotage; breakdowns or accident to equipment; power failure; failure, delay or disruption of transportation facilities; any laws, orders, rules, regulations, acts or restraints of any government or governmental body or authority, civil or military, including 12 the orders and judgments of courts; and any other cause of any kind whatsoever not reasonably within the control of a party hereto. 12.7 Remedies. Except as otherwise expressly stated in this Agreement, the rights and remedies of a party set forth herein with respect to failure of the other to comply with the terms of this Agreement (including, without limitation, rights of full termination of this Agreement) are not exclusive, the exercise thereof shall not constitute an election of remedies and the aggrieved party shall in all events be entitled to seek whatever additional remedies that may be available in law or in equity. 12.8 Headings. Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. 12.9 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 12.10 Additional Documents and Acts; Time of Essence. Each party agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms and conditions of this Agreement and the transactions contemplated by this Agreement. Time is of the essence of this Agreement. 12.11 Entire Agreement. The parties agree that this Agreement and the Product Design and Development Agreement, together with any exhibits hereto and thereto, constitutes the entire understanding and agreement with respect to the subject matter hereof and supersedes all prior proposals, oral or written, all negotiations, conversations, promises or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the Effective Date first set forth above. For and On Behalf of: For and On Behalf of BIOSTAR MSU DEVICES INC. MICROTECH INT'L CORP. By: /s/ Jiasen Wang By: /s/ Pritesh M. Patel ------------------------------------ ------------------------------- Name: Jiasen Wang Name: Pritesh M. Patel Title : Vice President/ IA Division Title: Vice President/ C.T.O. EX-10.03 5 b313844ex_10-03.txt EMPLOYMENT AGREEMENT EXHIBIT 10.03 MSU Corporation THIS AGREEMENT dated March 15, 2001, by and between MSU Corporation, a Florida corporation ("MSU" or "Company") and Jean Belanger, resident of Austin, Texas ("Executive"). In consideration of the promises and the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. Subject to the terms and conditions herein, MSU hereby employs Executive as Chairman of the Board, with the powers and duties customarily assigned to such position. The Board of MSU may assign other duties from time to time. 2. The term of employment shall be three years, commencing on the date of this Agreement. 3. Executive shall receive the following compensation: a. Executive's salary shall be $200,000/year, payable in equal monthly installments; b. MSU will grant Options to purchase 1,200,000 shares of MSU common stock. The exercise price shall be $0.60/share. Of these, 600,000 shall vest upon signing subject to regulatory and Board approvals and 33,333 shall vest on the first day of each month, commencing on April 1, 2001, for a period of 18 consecutive months. The options shall have a three-year term; c. Executive will be entitled to four weeks of paid vacation in each calendar year; and d. Executive will participate in any incentive compensation plan, pension or profit sharing plan, medical plan, and other benefits maintained by MSU for its executives generally. 4. MSU shall reimburse Executive for all reasonable out-of-pocket expenses incurred by him in the performance of his duties including, but not limited to, reasonable transportation, accommodation, entertainment and other expenses incurred on behalf of Company. 5. Executive agrees to devote in good faith his full business time and best efforts to his services to Company and agrees to travel to the extent necessary to perform such duties. 6. MSU or Executive shall have the right to terminate Executive's employment by serving 30 days written notice of his or its 1 desire to terminate the employment relationship, subject to the provisions of paragraph 7 below permitting MSU to immediately discharge Executive for cause. Upon termination, MSU shall pay Executive three months severance pay. 7. Company shall have the right to terminate Executive's employment immediately for cause upon the occurrence of any of the following events: a. Executive's death or legal incapacity; b. Executive's failure to perform his services for a period of at least ninety (90) consecutive days because of any physical or mental health impairment, subject to applicable laws; c. MSU's cessation of business; d. Conduct which would give adequate ground for termination for cause include, but are not limited to: - Committing a material breach of any duties, including, but not limited to, Executive's repeated failure/refusal to diligently perform the provisions of this Agreement; or - Conduct in a manner tending to bring Company into disrepute; or - Being guilty of dishonesty and other acts of misconduct in rendering of services on behalf of Company; or - Being convicted of any criminal felony or misdemeanor other than one which does not affect Company's reputation or Executive's position with the Company; or - Refusing or neglecting to comply with any lawful orders or directions given to Executive by MSU's Board of Directors; or - Committing an act of gross misconduct, gross negligence or willful malfeasance during the course of Executive's employment. 8. Upon termination, Executive shall be entitled to receive all compensation hereunder accrued and unpaid as of the date of termination. 9. This Agreement shall be binding upon, and shall inure to the benefit of, MSU and Executive, and their respective successors/assigns. MSU shall have the right to assign the rights hereunder to any successor in interest, whether by merger or sale of assets or otherwise. 10. On the termination of Executive's employment, howsoever caused, he must return to MSU all property belonging to MSU in his possession and must not retain or take any copies thereof without the prior written consent of Company's Board of Directors. 11. Executive warrants that the execution of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement that he is bound to, or a party to. 12. Company is engaged in designing and selling Internet appliances. Executive acknowledges that Company's business is highly specialized and the documents and information regarding the MSU's activities are highly confidential and constitute trade secrets. Executive acknowledges and agrees that his services rendered to Company have a value to Company and he has access to trade secrets and confidential information belonging to the Company, the loss of which cannot adequately be compensated by damages in an action at law. 2 13. During the term of Executive's employment, and following the termination of his employment with the MSU, howsoever caused, Executive shall not use for any purpose or disclose to any person or entity any confidential information acquired during the course of employment with MSU. The term "confidential information" as used in this Agreement includes, but is not limited to, records, lists and knowledge of the MSU's customers, methods of operation, processes, and trade secrets, as they may exist from time to time. 14. During the term of Executive's employment with MSU and for a period of one (1) year from the termination of his employment with MSU, howsoever caused, Executive will not directly or indirectly, own, manage, operate, control, be employed by, perform services for, consult with, solicit business for, participate in, or be connected with the ownership, management, operation or control of any business which performs services materially similar or competitive with those provided by MSU in the State of Texas. 15. During the term of Executive's employment with Company and for a period of one (1) year from the termination of his employment with Company, howsoever caused, Executive shall not, either on Executive's own account or for any person, firm, partnership, corporation or other entity (a) solicit, interfere with, or endeavor to cause any employee of Company to leave his or her employment; or (b) induce or attempt to induce any such employee to breach his or her employment agreement with Company. 16. During the term of Executive's employment with the Company and for a period of one (1) year from the termination of his employment, howsoever caused, Executive shall not solicit, induce, or attempt to induce any past or current customer of the Company with whom he has worked (a) to cease doing business in whole or in part with or through Company, or (b) to do business with any other person, firm, partnership, corporation or other entity which performs services materially similar or competitive with those provided by Company. 17. Executive acknowledges and agrees that Company will suffer irreparable injury if Executive breaches any of his obligations under paragraphs 13, 14, 15 and 16 above. Accordingly, in addition to all of the remedies otherwise available to Company, including but not limited to, recovery from Executive of damages and reasonable attorneys' fees incurred in the enforcement of this Agreement, Company shall have the right to injunctive relief to restrain and enjoins any actual or threatened breach of the provisions of paragraphs 13, 14, 15 and 16 of this Agreement. All of the Company's remedies for breach of this Agreement shall be cumulative and the pursuit of one remedy shall not be deemed to exclude any other remedies. 18. Executive has read the provisions hereof and agrees that the restrictions set forth herein are fair and reasonable and are reasonably required for the protection of the interests of MSU. 19. In the event of a violation by Executive of any of the provisions contained in paragraph 13, 14, 15 and 16 of this Agreement, the term of each and every covenant so violated shall be automatically extended for a period of one (1) year from the date on which Executive permanently ceases such violation, or for a period of one (1) year from the date of entry by a court of competent jurisdiction of a final order or judgment enforcing such covenant, whichever period is longer. 3 20. It is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Texas, except its conflict of law rules, which are deemed to be inapplicable herein. All disputes concerning the application or enforcement of this Agreement shall, if necessary, be tried in a court of competent jurisdiction in the State of Texas or the United States District Court for the Northern District of Texas. The parties hereby consent to the personal jurisdiction of the courts of the State of Texas and the United States District Court for the Northern District of Texas. 21. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity or enforceability of any one or more of the other provisions hereof. 22. This Agreement contains the entire agreement and understanding by and between the Company and Executive with respect to the covenants contained herein, and no representations, promises, agreements or understandings, written or oral, not herein contained shall be of any force or effect. No change or modification hereof shall be valid or binding unless the same is in writing and signed by both parties. No valid waiver of any provision shall be deemed a waiver of any other provision of this Agreement at such time or will be deemed a valid waiver of such provision at any other time. IN WITNESS WHEREOF, Company and Executive have duly executed this Agreement as of the day and year first written above. MSU Corporation Executive By: /s/ D. Bruce Walter By: /s/ Jean J. Belanger --------------------------- ---------------------------- Name: D. Bruce Walter Name: Jean J. Belanger Date: April 1, 2001 Date: April 1, 2001 --------------------------- ----------------------------