<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
CENSTOR CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
June 28, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Censtor Corp. (the "Company") to be held on July 11, 1996 at the principal
offices of the Company, Suite 270, 2105 Hamilton Avenue, San Jose, California
95125, at 11 a.m., local time. In addition to electing directors and ratifying
the appointment of independent auditors, the Shareholders will be considering
and acting upon a proposal to approve the sale of the Company's research and
development operations, including the assets and contracts related thereto, and
the grant of a non-exclusive license to the Company's intellectual property,
including the Company's rights in patents, technology and software, pursuant to
the terms and conditions of the Agreement for Purchase and Sale of Assets, dated
as of March 29, 1996, by and between Read-Rite Corporation ("Read-Rite") and the
Company (the "Proposed Transaction").
Details of the Proposed Transaction and the other proposals and other
important information concerning the Company appear in the accompanying Proxy
Statement. Please give this material your careful attention.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED TRANSACTION IS IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE
FOR THE PROPOSAL TO APPROVE THE PROPOSED TRANSACTION. CERTAIN SHAREHOLDERS OF
THE COMPANY HOLDING A MAJORITY OF THE VOTING SHARES OF CAPITAL STOCK OF THE
COMPANY HAVE GRANTED READ-RITE AN IRREVOCABLE PROXY TO VOTE THEIR SHARES IN
FAVOR OF APPROVING THE PROPOSED TRANSACTION.
YOUR VOTE IS VERY IMPORTANT TO THE COMPANY.
As a condition to consummating the Proposed Transaction, the Proposed
Transaction must be approved by the affirmative vote of holders of at least a
majority of the outstanding shares of the Company's Common Stock and Preferred
Stock voting together as a single class. Therefore, it is important that your
shares be represented at the Annual Meeting, whether or not you are able to
attend. Accordingly, please complete, sign and date the accompanying blue form
of PROXY and return it in the enclosed prepaid envelope as soon as possible. If
you attend the Annual Meeting, you may vote in person if you wish, even if you
previously returned your proxy. Your prompt cooperation will be greatly
appreciated.
Sincerely,
/s/ Russell M. Krapf
--------------------
Russell M. Krapf
President & CEO
<PAGE> 3
CENSTOR CORP.
__________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 11, 1996
TO THE SHAREHOLDERS OF CENSTOR CORP.
Notice is hereby given that the Annual Meeting of Shareholders (the
"Annual Meeting") of Censtor Corp. (the "Company") will be held at the principal
offices of the Company, Suite 270, 2105 Hamilton Avenue, San Jose, California
95125, on July 11, 1996 at 11 a.m., local time, to consider and vote upon the
following proposals:
1. To elect five (5) directors to serve for the ensuing year and
until their successors are elected;
2. To ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June
30, 1996;
3. To approve the sale of the Company's research and development
operations, including the assets and contracts related
thereto, and the grant of a non-exclusive license to the
Company's intellectual property, including the Company's
rights in patents, technology and software, pursuant to the
terms and conditions of the Agreement for Purchase and Sale of
Assets, dated as of March 29, 1996, by and between Read-Rite
Corporation ("Read-Rite") and the Company and the transactions
contemplated thereby (collectively, the "Proposed
Transaction"); and
4. To transact such other business as may properly come before
the Annual Meeting and any adjournment thereof.
The close of business on May 31, 1996 has been fixed as the record date
for the determination of Shareholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment or postponement thereof. Shareholders are not
entitled to dissenters' rights under California General Corporation Law in
connection with the Proposed Transaction. A complete list of Shareholders
entitled to vote at the Annual Meeting will be available for inspection by
Shareholders at the offices of the Company during the Company's ordinary
business hours beginning ten days prior to the Annual Meeting for any purpose
germane to the Annual Meeting.
Accompanying this Notice of Annual Meeting and Proxy Statement (or
recently mailed to you) are: (i) the Company's 1995 Annual Report, which
consists of the Company's Form 10-K for the year ended June 30, 1995, as amended
by the Company's Form 10-K/A Amendment No. 2 dated December 13, 1995, (ii) a
letter to the Shareholders from the President, (iii) the Company's Form 10-Q for
the quarter ended March 31, 1996 and (iv) the form of proxy card to be returned
in the enclosed envelope.
By Order of the Board of Directors
/s/ Sabine Austin
-------------------
Sabine Austin
Assistant Secretary
San Jose, California
June 28, 1996
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY MAIL THE ENCLOSED BLUE FORM OF PROXY IN THE RETURN ENVELOPE PROVIDED.
ANY PERSON GIVING A PROXY MAY REVOKE IT AT ANY TIME, AND SHAREHOLDERS WHO ARE
PRESENT AT THE MEETING MAY WITHDRAW THEIR PROXIES AND VOTE IN PERSON.
<PAGE> 4
CENSTOR CORP.
SUITE 270, 2105 HAMILTON AVENUE
SAN JOSE, CALIFORNIA 95125
(408) 298-8400
__________
PROXY STATEMENT
__________
ANNUAL MEETING OF SHAREHOLDERS
JULY 11, 1996
THIS PROXY STATEMENT IS FURNISHED TO THE HOLDERS OF COMMON STOCK AND
PREFERRED STOCK OF CENSTOR CORP. (THE "COMPANY" OR "CENSTOR") IN CONNECTION WITH
THE SOLICITATION BY THE BOARD OF DIRECTORS OF THE COMPANY OF PROXIES IN THE FORM
ENCLOSED TO BE VOTED AT AN ANNUAL MEETING OF SHAREHOLDERS OF THE COMPANY TO BE
HELD AT THE COMPANY'S OFFICES, SUITE 270, 2105 HAMILTON AVENUE, AT 11 A.M. ON
JULY 11, 1996 (THE "ANNUAL MEETING"). THIS PROXY STATEMENT AND THE ACCOMPANYING
FORM OF PROXY ARE BEING MAILED TO THE SHAREHOLDERS ON OR ABOUT JUNE 28, 1996 AND
THE COMPANY IS BEARING THE COST OF THIS SOLICITATION.
PURPOSE OF THE MEETING
At the Annual Meeting, the Shareholders of the Company (the
"Shareholders") will be asked to consider and act upon the following proposals:
1. To elect five (5) directors to serve for the ensuing year and
until their successors are elected;
2. To ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June
30, 1996;
3. To approve the sale of the Company's research and development
operations, including the assets and contracts related
thereto, and the grant of a non-exclusive license to the
Company's intellectual property, including the Company's
rights in patents, technology and software, pursuant to the
terms and conditions of the Agreement for Purchase and Sale of
Assets, dated as of March 29, 1996 (the "Asset Sale
Agreement"), by and between Read-Rite Corporation
("Read-Rite") and the Company and the transactions
contemplated thereby (collectively, the "Proposed
Transaction"); and
4. To transact such other business as may properly come before
the Annual Meeting and any adjournment thereof.
VOTING RIGHTS
Shareholders of record of the Company as of the close of business on
May 31, 1996 have the right to receive notice of and to vote at the Annual
Meeting. On May 31, 1996, the Company had issued and outstanding 24,291,151
shares of capital stock entitled to vote, consisting of 9,303,344 shares of
Common Stock, 6,617,299 shares of Series A Preferred Stock and 8,370,508 shares
of Series B Preferred Stock. Each share of Common Stock, Series A Preferred
Stock and Series B Preferred Stock is entitled to one vote. For action to be
taken at the Annual Meeting, the majority of the shares entitled to vote must be
represented at the meeting in person or by proxy.
While the Company's Restated Articles of Incorporation authorize the
holders of the Company's Series B Preferred stock voting as a separate class to
elect one member of the Company's Board of Directors, to date, the holders of
the Series B Preferred Stock have not chosen to do so. Therefore, the holders of
Preferred Stock and Common Stock, voting together as a single class, will elect
all the members of the Board of Directors.
<PAGE> 5
Every Shareholder voting for the election of directors may cumulate
such Shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
Shareholder's shares are entitled, or distribute the Shareholder's votes on the
same principle among as many candidates as the Shareholder thinks fit, provided
that votes cannot be cast for more than the number of directors to be elected.
However, no Shareholder shall be entitled to cumulate votes unless such
candidate's name has been placed in nomination prior to the voting and the
Shareholder, or any other Shareholder, has given notice at the meeting prior to
the voting of his or her intention to cumulate his or her votes.
Consummation of the Proposed Transaction requires the affirmative vote
of a majority of the shares of Common Stock and Preferred Stock voting together
as a single class. Certain Shareholders of the Company have granted Read-Rite an
irrevocable proxy to vote their shares in favor of approving the Proposed
Transaction. The Shareholders who granted such proxies currently, in aggregate
hold common equivalent voting shares that exceed 14 million and represent
approximately 58% of the total outstanding common equivalent voting shares of
the Company. If such shares are voted by Read-Rite in accordance with the proxy,
approval of the Proposed Transaction is virtually guaranteed.
PROXIES
Proxies for use at the Annual Meeting are being solicited by the Board
of Directors of the Company from its Shareholders.
Shares represented by properly executed proxies received by the Company
will be voted at the Annual Meeting in accordance with the instructions thereon.
Shares represented by executed proxies received by the Company with no
instructions will be voted in favor of all proposals set forth in the Notice of
Meeting. The Company intends to include abstentions as present or represented
for purposes of establishing a quorum for the transaction of business.
Abstentions are counted as votes against a proposal for purpose of determining
whether or not a proposal has been approved.
Any person giving a proxy in the form accompanying this Proxy Statement
has the power to revoke it at any time before its exercise by (i) filing with
the Assistant Secretary of the Company a signed written statement revoking his
or her proxy or (ii) submitting an executed proxy bearing a date later than that
of the proxy being revoked. A proxy may also be revoked by attending the Annual
Meeting and voting in person. Attendance at the Annual Meeting will not by
itself constitute the revocation of a proxy.
No persons have been authorized to give any information or to make any
representations other than those contained in this Proxy Statement in connection
with the solicitation of proxies and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any other person. This Proxy Statement does not constitute the solicitation
of a proxy in any jurisdiction to any person to whom it is not lawful to make
any such solicitation in such jurisdiction. The delivery of this Proxy Statement
does not, under any circumstances, create an implication that there has been no
change in the affairs of the Company since the date hereof or that the
information herein is correct as of any time subsequent to its date.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO READ-RITE
HAS BEEN PROVIDED BY READ-RITE AND THE COMPANY DOES NOT WARRANT THE ACCURACY OR
COMPLETENESS OF INFORMATION RELATING TO READ-RITE.
The approximate date on which this Proxy Statement is being mailed to
the Company's Shareholders is June 28, 1996. This Proxy Statement is accompanied
by (a) the form of proxy card to be signed and returned in the enclosed
envelope, (b) a letter to the Shareholders from the President and (c) Notice of
Annual Meeting. The 1995 Annual Report of the Company, which consists of the
Company's Form 10-K for the year ended June 30, 1995, as amended by the Form
10-K/A Amendment No. 2 dated December 13, 1995 and the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1996 have been recently
mailed to you.
2
<PAGE> 6
FORWARD LOOKING STATEMENTS
The statements in this Proxy Statement that relate to future plans,
events or performance are forward-looking statements. Actual results could
differ materially due to a variety of important factors, including for example,
Read-Rite's ability to perform under the terms of the Proposed Transaction, the
Company's ability to develop its portfolio of licenses, failure of the Company's
licensees to perform under existing or future licenses, the development of
competing technology and the risks associated with protecting the Company's
intellectual property rights from adverse claims. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
3
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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SUMMARY OF PROXY STATEMENT........................................................................................4
PROPOSAL 1: ELECTION OF DIRECTORS................................................................................9
Board Meetings and Committees...........................................................................10
Director Compensation.................................................................................. 10
Summary Compensation Table..............................................................................11
Option Grants in Last Fiscal Year...................................................................... 12
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values...................... 13
Certain Relationships and Related Transactions......................................................... 13
Security Ownership of Directors, Executive Officers and Certain Shareholders........................... 14
Report of the Board of Directors on Executive Compensation..............................................17
Performance Chart.......................................................................................18
Compliance with Section 16(a) of the Exchange Act.......................................................18
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................................................ 19
PROPOSAL 3: THE PROPOSED TRANSACTION........................................................................... 20
General ...............................................................................................20
Background............................................................................................. 20
Purchase Price......................................................................................... 24
Assets to be Sold and Retained by the Company.......................................................... 24
Intellectual Property to be Retained for Licensing by the Company...................................... 25
Unaudited Pro-Forma Financial Data......................................................................25
Dispute Resolution......................................................................................30
Shareholder Approval................................................................................... 30
Certain Information Concerning Read-Rite............................................................... 30
Opinion of Financial Advisor........................................................................... 31
Interest of Management in the Transaction...............................................................33
Effect on Employees.....................................................................................33
Application of Sale Proceeds............................................................................33
Estimated Use of Proceeds...............................................................................34
Investor Notes to be Repaid.............................................................................34
Certain Federal Income Tax Consequences.................................................................34
Recommendation of the Board of Directors................................................................34
Representations and Warranties..........................................................................36
Covenants...............................................................................................36
Conditions to the Proposed Transaction..................................................................36
Termination of the Proposed Transaction.................................................................36
Conduct of Business Prior to the Closing................................................................37
Expenses ...............................................................................................37
AVAILABLE INFORMATION............................................................................................38
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................38
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS.....................................................................39
</TABLE>
APPENDIX
APPENDIX A - ASSET SALE AGREEMENT
APPENDIX B - OPINION OF VON GEHR INTERNATIONAL
i
<PAGE> 8
SUMMARY OF PROXY STATEMENT
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in, and attached as
exhibits to, this Proxy Statement.
DATE, TIME AND PLACE OF An Annual Meeting of Shareholders of Censtor
ANNUAL MEETING OF Corp., a California corporation (the "Company"),
SHAREHOLDERS will be held on July 11, 1996 at 11 a.m., local
time, at the Company's principal executive
offices, Suite 270, 2105 Hamilton Avenue, San
Jose, California 95125.
PURPOSE OF THE MEETING At the Annual Meeting, the Shareholders of the
Company will be asked to (i) elect directors,
(ii) ratify and appoint Ernst & Young LLP as
independent auditors, and (iii) approve the
Proposed Transaction.
PROPOSAL 1:
ELECTION OF DIRECTORS
CURRENT BOARD The board currently consists of the
following seven (7) members, (four of whom have
been nominated for reelection): James A. Cole,
Garrett A. Garrettson, B. Kipling Hagopian, Edwin
V.W. Zschau, Paul R. Low, Richard C.E. Morgan and
Russell M. Krapf.
NOMINEES Pursuant to a Board resolution, the
number of Directors shall be reduced to five (5)
as of the date of the Annual Meeting. The five
(5) nominees are James A. Cole, Garrett A.
Garrettson, B. Kipling Hagopian, Edwin V.W.
Zschau and Russell M. Krapf.
PROPOSAL 2:
APPOINTMENT OF INDEPENDENT AUDITORS
CURRENT AUDITORS Ernst & Young LLP were appointed as the
Company's independent auditors for its fiscal
year ending June 30, 1995, and the Board of
Directors has appointed Ernst & Young LLP as the
Company's independent auditors for its fiscal
year ending June 30, 1996, pending Shareholder
ratification.
PROPOSED AUDITORS The Shareholders are asked to ratify
appointment of Ernst & Young LLP as the
independent auditors for fiscal year ending June
30, 1996.
PROPOSAL 3:
THE PROPOSED TRANSACTION
IN GENERAL The Asset Sale Agreement (included in
Appendix A to the Proxy Statement), if approved
by the Shareholders, provides for the transfer by
the Company to Read-Rite of the Company's
research and development operations, including
the hiring of 84 Censtor employees, the sale of
certain of the Company's physical assets and the
Company's rights and obligations under contracts
related thereto, on the closing date described in
the Asset Sale Agreement (the "Closing").
Additionally, as a condition to consummation of
the Asset Sale Agreement, the Company and
Read-Rite will enter into a license agreement
(the "License Agreement"), pursuant to which the
Company will grant a non-exclusive irrevocable
world-wide license to Read-Rite covering the
Company's intellectual property, including the
Company's rights in patents, technology and
software.
4
<PAGE> 9
The Company is not selling any of its assets
relating to the technology, patents, know-how or
any of its proprietary information. The Company
will retain ownership of the technology and
related patents developed during the past
fourteen (14) years through the investment of
$97.3 million in equity and debt financing
through March 31, 1996. After the consummation of
the Proposed Transaction, the Company will no
longer have technology development operations or
the obligation to fund such operations. Such
funding has recently required the Company to
expend approximately $1.0 million per month; this
represents two-thirds of the Company's total cash
requirements. The Company currently owns 16
domestic patents, 10 foreign patents, has applied
for an additional 10 patents and intends, through
its own in-house patent attorney, to convert the
remainder of its intellectual property into
licensable patents and to develop royalty income
from its licensees during the next several years.
The Company is not selling any assets necessary
to continue such licensing operations.
Historically all of the Company's revenues have
been derived from the grant of licenses. See
"Proposal 3: The Proposed Transaction -
Background" (pages 20-24).
REQUIRED VOTE The Asset Sale Agreement requires that the
Proposed Transaction be approved by the
affirmative vote of at least the majority of the
outstanding shares of the Company's Common Stock
and Preferred Stock voting together as a class.
Certain Shareholders of the Company have granted
Read-Rite an irrevocable proxy to vote their
shares in favor of approving the Proposed
Transaction; these Shareholders are: Brentwood
Associates, Aeneas Venture Corporation,
Wolfensohn Partners, J.P. Morgan, Morgenthaler
Ventures, New Enterprise Associates, Advanced
Technology Associates, Nippon Enterprise
Development Corporation, Spectra Enterprise
Associates and Richard E. Cottrell. In aggregate,
such Shareholders' common equivalent voting
shares exceed 14 million and represent
approximately 58% of the total outstanding common
equivalent voting shares of the Company. If
Read-Rite votes in accordance with these proxies,
approval of the Proposed Transaction is virtually
guaranteed.
RECOMMENDATION OF THE The Board of Directors of the Company has
BOARD OF DIRECTORS approved the Proposed Transaction because it
believes it to be fair and in the best interests
of the Company and Shareholders. The Board of
Directors unanimously recommends that
Shareholders vote "FOR" approval of the Proposed
Transaction. In recommending that Shareholders
approve the Proposed Transaction, the Board of
Directors has considered various factors
including the cash and non-cash consideration
offered by Read-Rite, the historical and current
financial condition and results of operations of
the Company, the future prospects of the
Company's business and technology, the opinion of
the Company's financial advisors, the likelihood
of consummating the Proposed Transaction, the
compatibility of the physical assets being
transferred and the non-exclusive license with
the operations of Read-Rite, and the effect of
the Proposed Transaction on the Company's
employees and customers. See "Proposal 3: The
Proposed Transaction - Recommendation of the
Board of Directors" (pages 34-36) and "Proposal
3: The Proposed Transaction -- Background" (pages
20-24).
TERMS OF THE PROPOSED Pursuant to the Asset Sale Agreement, Read-Rite
TRANSACTION will purchase most tangible physical assets of
the Company related to the Company's research and
development operations, and Read-Rite will assume
certain of the Company's existing contracts and
the Company's liabilities thereunder, including
the Company's lease obligation related to its
facilities at 530 Race Street, San Jose,
5
<PAGE> 10
California and all the Company's equipment lease
obligations totaling $934,000 (as of March 31,
1996). Tangible physical assets being sold
(including leased equipment) have a net book
value of $1.3 million or 99% of total tangible
physical assets (excluding intangible assets,
such as proprietary technology, which comprise
the majority of the total assets) of the Company
as of March 31, 1996. As of February 5, 1996, 84
of the 89 employees of the Company became
employees of Read-Rite for the purposes of
operating the physical assets to be sold to
Read-Rite and developing the technology to be
licensed to Read-Rite (the "Transferred
Employees").
The terms of the Proposed Transaction require
Read-Rite to pay an aggregate purchase price of
$9,025,000 (subject to a maximum of $2.4 million
in potential downward adjustments at the
Closing), up to $6,525,000 of which (subject to
the same maximum of $2.4 million in potential
downward adjustments at the Closing) will be paid
to the Company at the Closing, (the "Initial
Payment"), and up to $2,500,000 of which will be
paid to the Company between November 15, 1996 and
nine months after the Close ($250,000 on November
15, 1996, $250,000 on December 13, 1996, the
remaining $2.0 million nine months after the
Close) (the "Final Payment") (such amounts
include payment for granting of the license
pursuant to the License Agreement). The Initial
Payment is subject to reduction in an amount
equal to (a) 50% of the amount outstanding March
29, 1996 under a promissory note in the principal
amount of $900,000 in favor of Read-Rite, plus
(b) 50% of certain employee compensation expenses
accrued or paid by Read-Rite through March 29,
1996, plus (c) 50% of accrued but unpaid expenses
of the Company from February 2, 1996 through
March 29, 1996, less (d) certain prepaid expenses
of the Company outstanding on March 29, 1996,
less (e) certain expenses of the Company incurred
through the Closing, including accounting, legal
and other expenses related to the Proposed
Transaction ("Seller Expenses"). Seller Expenses
are defined and discussed in greater detail in
the section entitled "Proposal 3: The Proposed
Transaction -- Purchase Price" (page 24). The
downward adjustments to the purchase price
through March 29, 1996 are estimated to be
$857,000. It is anticipated that potential
downward adjustments will not exceed $2.0 million
through the Closing; if potential downward
adjustments exceed $2.4 million the Company will
seek new Shareholder approval for the Proposed
Transaction.
The Final Payment is subject to reduction for any
claims by Read-Rite for damages in the event the
Company breaches the Asset Sale Agreement or
License Agreement.
In addition, Read-Rite will lend to the Company
up to $1,550,000 to finance the Company's
operations and certain ongoing business expenses
through the Closing ("Bridge Notes"). Amounts
borrowed from Read-Rite under the Bridge Notes
that are used to pay, or are accrued for,
expenses after March 29, 1996 and before the
Closing related to the assets and contracts
transferred to Read-Rite (including for example,
equipment lease payments, building rent,
utilities and other related expenses) will be
forgiven as of the Closing. As of May 31, 1996
the balance owing on the Bridge Notes is $
1,300,000, excluding interest. It is anticipated
that the Company will require the entire
$1,550,000 of the Bridge Notes to be drawn down
by the Close.
Of the net proceeds from the Proposed
Transaction, the Company expects to use
approximately $ 6.5 million to pay down
obligations estimated to be due as of the Closing
including $2.0 million in escrow for payment to
Denki Kagaku Kogyo Co., Ltd. ("Denka") by July
31, 1996, and $1.0 million plus accrued
6
<PAGE> 11
interest, at 11%, for payment of obligations to
certain Shareholders who have loaned the Company
operating funds, of which $546,675, plus accrued
interest, is due at the Closing and the remainder
due nine months after the Closing. The remainder
of the proceeds, if any, will be used for general
working capital purposes with respect to the
Company's remaining business operations. The
Company has no present intention to pay any
dividend to Shareholders or to otherwise
distribute to its Shareholders any proceeds
received from the Proposed Transaction.
OPINION OF FINANCIAL
ADVISER The Company's financial advisor, Von Gehr
International, has rendered a written opinion
that the consideration to be received by the
Company in the Proposed Transaction is fair from
a financial standpoint. A copy of the opinion
appears as Appendix B and should be read in its
entirety. See "Proposal 3: The Proposed
Transaction -- Opinion of Financial Advisor"
(pages 31-33).
CONDITIONS OF THE
PROPOSED TRANSACTION Consummation of the Proposed Transaction is
subject to approval by the Shareholders and to a
number of other conditions, including: (a) all
representations and warranties made by each party
in the Asset Sale Agreement being true and
correct, and all agreements, covenants and
conditions required to be performed under the
Asset Sale Agreement having been performed, as of
the Closing, (b) each party's receipt at the
Closing of certain closing certificates and legal
opinions, (c) the absence of any pending or
threatened legal action to enjoin the Proposed
Transaction, and (d) consent from certain
existing licensees of the Company to the
essential terms of the License Agreement. All
necessary consents from licensees have been
received by the Company.
Read-Rite's obligations under the Asset Sale
Agreement are contingent upon Read-Rite and the
Company consummating the License Agreement.
EFFECTIVE TIME OF THE
TRANSACTION The Proposed Transaction is anticipated to be
consummated within ten business days following
Shareholder approval and satisfaction or waiver
of each condition precedent described in the
Asset Sale Agreement.
TERMINATION OF THE ASSET
SALE AGREEMENT At any time prior to the Closing, the Asset Sale
Agreement may be terminated under certain
circumstances, including the following: (a) if a
court prohibits the Proposed Transaction, (b) by
mutual written consent of Read-Rite and the
Company, (c) by the Company if there has been a
material breach on the part of Read-Rite in its
representations, warranties or covenants, subject
to a right to cure, and (d) by Read-Rite if there
has been a material breach on the part of the
Company in its representations, warranties or
covenants, subject to a right to cure. If
terminated in accordance with (a) or (b),
Read-Rite and the Company shall enter into a
limited license agreement (the "Limited License
Agreement") pursuant to which the Company shall
grant a perpetual, non-exclusive license to
Read-Rite covering the Company's rights to
certain technology and software, for a one-time
fee of $2.0 million. If terminated in accordance
with (c), Read-Rite will forgive certain
obligations of the Company and the Company and
Read-Rite (if elected by Read-Rite) shall enter
into the Limited License Agreement for a one time
fee of $2.0 million. If terminated in accordance
with (d), the Company and Read-Rite shall enter
into the Limited License Agreement for no fee and
the Company must repay certain obligations to
Read-Rite.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES For tax purposes, the Company will recognize
income or gain as a result of the Proposed
Transaction. Notwithstanding, the Company has
determined that it will not have to pay any
income tax related to the Proposed Transaction
because any income or gain will be offset by
current year tax net operating loss or prior
7
<PAGE> 12
year net operating loss carry forwards. The
Proposed Transaction will not have any federal
income tax consequences to the Shareholders.
PLANS FOR BUSINESS
ACTIVITY After shareholder approval, the Company intends
to perfect the remainder of its proprietary
technology through patent protection and the
Company intends to execute new royalty bearing
licenses. The Company plans to monitor its
current and future licensees and collect
royalties when due. See "Proposal 3: The Proposed
Transaction -- Background" (pages 20-24).
NO DISSENTERS' RIGHTS Under California General Corporation Law, the
holders of Common Stock and Preferred Stock are
not entitled to dissenters' rights in connection
with the Proposed Transaction. Although
dissenters' rights are not available, the
Company's officers and directors are bound by
their fiduciary obligations to the Company and
its Shareholders and are subject to legal action
for any breach of such obligations.
SELECTED FINANCIAL DATA Certain audited and unaudited consolidated
financial information regarding the Company is
contained in the Company's 1995 Annual Report
(which consists of the Annual Report on Form 10-K
for the year ended June 30, 1995, as amended, by
the Form 10-K/A Amendment No. 2 dated December
13, 1995, and the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 1996
and pro-forma financial statements, all of which
accompany or are included in this Proxy
Statement, or have been mailed recently to you.
8
<PAGE> 13
PROPOSAL 1:
ELECTION OF DIRECTORS
A board of five (5) directors is to be elected at the Annual Meeting.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them to elect as many of the nominees named below as can be elected by votes
represented by such proxies. Five (5) of such nominees (Messrs. Cole,
Garrettson, Hagopian, Zschau and Krapf), are presently directors of the Company.
In the event that any of the nominees shall become unavailable the proxy holders
will vote in their discretion for a substitute nominee. It is not expected that
any nominee will be unavailable. The term of office of each person elected as a
director will continue until the next Annual Meeting of Shareholders or until
his successor has been duly elected and qualified.
The names of the nominees, and certain information about them, are set
forth below:
<TABLE>
<CAPTION>
Name Age Position with Censtor Director Since
- ------------------------------ ------ ---------------------------------------- ------------------
<S> <C> <C> <C>
James A. Cole (1) 53 Director October 1992
Garrett A. Garrettson (1) 52 Director February 1993
B. Kipling Hagopian 54 Director November 1981
Edwin V.W. Zschau (1) 56 Director December 1995
Russell M. Krapf 48 Director, President and Chief Executive April 1996
Officer of the Company
</TABLE>
(1) Member of the Compensation Committee.
JAMES A. COLE joined the Company's Board of Directors in October 1992
and was appointed a member of the Compensation Committee on April 2, 1996. Since
1986, Mr. Cole has been the Managing General Partner of Spectra Enterprise
Associates, and a Partner of New Enterprise Associates, both private venture
capital partnerships. Mr. Cole is also a director of Gigatronics, Inc.,
Spectrian Corp. and Vitesse Semiconductor Corp., all public companies. From 1972
to 1984, he served as co-founder, Executive Vice-President and Director of
Amplica, Inc., a leading supplier of microwave integrated circuit components and
subsystems for the defense and commercial communications industries. Mr. Cole
served in marketing and sales management positions for several companies. Mr.
Cole is a graduate of the University of California Graduate School of Management
at Los Angeles.
GARRETT A. GARRETTSON is President and CEO of Spectrian Corporation.
Dr. Garrettson is the past President and CEO of Censtor Corp.; he resigned from
Censtor in April 1996. He joined the Company in February 1993 as a member of the
Board of Directors, President and Chief Operating Officer, and became Chief
Executive Officer in April 1993. He was also appointed a member of the
Compensation Committee on April 2, 1996. Dr. Garrettson served as Vice President
of Product Strategy and Engineering at Seagate Technology, Inc. beginning in
August 1990, and served as Vice President of Engineering and Product Line
Management at Imprimis Technology for four years beginning in 1986. Prior to
that, Dr. Garrettson worked at Hewlett-Packard Laboratories for thirteen years
where he was Laboratory Director. Dr. Garrettson attended Stanford University
where he earned B.S. and M.S. degrees in Engineering Physics, and a Ph.D. in
Mechanical Engineering (Nuclear), after which he served four years in the U.S.
Navy as Professor of Physics in the Naval Post Graduate School.
B. KIPLING HAGOPIAN joined the Company's Board of Directors in November
1981 and became Chairman in 1993. Mr. Hagopian is also a member of the Board of
Directors of Performance Semiconductor Corporation. In 1972, Mr. Hagopian
founded Brentwood Associates, one of the largest high technology venture capital
investment companies
9
<PAGE> 14
in the United States, and has been a General Partner since that time. Mr.
Hagopian received his B.A. and M.B.A. from the University of California at Los
Angeles.
EDWIN V.W. ZSCHAU is a Senior Lecturer of Business Administration at
Harvard University. Dr. Zschau was appointed to the Company's Board of Directors
in December 1995; he was subsequently appointed to the Company's Compensation
Committee in April 1996. Prior to Harvard University, he was General Manager of
the IBM Storage Systems Division from April 1993 until July 1995. Prior to that,
he served as Chairman and CEO of Censtor Corporation from July 1988 to April
1993. Before joining Censtor, Dr. Zschau was a General Partner of Brentwood
Associates, a venture capital firm, and prior to that he served two terms in the
U.S. House of Representatives from January 1983 until January 1987. Dr. Zschau
has an A.B. degree from Princeton University and M.B.A., M.S. and Ph.D. degrees
from Stanford University. He serves as a Director of GenRad, Inc. and Identix
Incorporated.
RUSSELL M. KRAPF is President and Chief Executive Officer of the
Company and was appointed to the Board of Directors on April 19, 1996 to replace
Dr. Hamilton who resigned effective April 1, 1996. Mr. Krapf joined Censtor in
February 1988 as Executive Vice President and became President in March 1991. He
subsequently left the Company February 1992 to become the President of one of
the Company's component partners and rejoined the Company in August 1993 as
Senior Vice President. Prior to joining Censtor, Mr. Krapf was Chairman,
President and Chief Executive Officer of Lapine Technology, (which developed and
marketed 3.5 inch hard disk drives). During 1984 - 1985, Mr. Krapf was President
and Chairman of Grenex, Inc. a manufacturer of thin film media which was
acquired by Seagate. In 1983, Mr. Krapf was President of Kearney Magnetics, a
manufacturer of 5.25 inch disk media. Between 1974 and 1983, he held management
positions in the rigid disk business of Memorex and Nashua Corporation. For the
past five years, Mr. Krapf has been a director (also serving three years as
President) of IDEMA, a disk drive trade association. Mr. Krapf has a B.S. in
Engineering Science from Florida State University and an M.B.A. from Boston
University.
BOARD MEETINGS AND COMMITTEES
During the period July 1, 1994 through June 30, 1995, the Company held
twelve (12) Board of Directors meetings, including five (5) telephonic Board of
Directors Meetings. During the period July 1, 1995 through December 31, 1995,
the Company held twenty-two (22) Board of Directors meetings, including twenty
(20) telephonic Board of Directors meetings. No incumbent director participated
in fewer than 75% of the total number of meetings of the Board and all
committees of the Board on which he served that were held during the period he
served on the Board or such committees.
The Compensation Committee did not meet in fiscal year 1995. The
function of the Compensation Committee is to review, and to recommend to the
Board, management compensation and to administer the Company's stock option
plans. During fiscal year 1995, the Board as a whole reviewed and approved
management compensation issues and administered the Company's stock option
plans.
The Board does not have a nominating or audit committee.
DIRECTOR COMPENSATION
Employee directors receive no additional compensation for service on
the Board of Directors. Dr. Zschau, a non-employee director, who has been a
consultant to the Company and who will receive a total of $75,000 of
compensation for work performed between December 1, 1995 and March 31, 1996,
will receive cash compensation for attending meetings (commencing in April 1996)
of the Board of Directors, consisting of $1,000 for each meeting of the Board
which he attends in person and $500 for each telephonic board meeting in which
he participates. Messrs. Cole and Hagopian are reimbursed for reasonable
out-of-pocket expenses incurred in connection with the attendance at Board
meetings. Non-employee directors are entitled to participate in the Company's
1990 Stock Plan. During the fiscal year ended June 30, 1995, 50,000 options were
granted to non-employee directors.
10
<PAGE> 15
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company for
the year ended June 30, 1995 to the Chief Executive Officer and each of the
other most highly compensated executive officers of the Company whose total
compensation exceeded $100,000:
<TABLE>
<CAPTION>
Name and Principal Year Annual Compensation Long-Term All Other
Position ---- Salary Bonus Compensation Compensation(3)
- -------- ------ ----- Securities Underlying ---------------
Option(#)(1)(2)
---------------
<S> <C> <C> <C> <C> <C>
Garrett A. Garrettson 1995 $250,480 $ 775 300,000 $ 912
Chief Executive Officer 1994 250,000 --- --- 1,056
1993 83,654 --- 480,224 352
Robert D. Hempstead 1995 161,290 40,000 200,000 746
Vice President, Head 1994 110,381 25,000 75,330 427
Research and 1993 --- --- --- ---
Development
Russell M. Krapf 1995 166,730 26,650 100,000 775
Sr. Vice President 1994 174,952 14,425 94,161 707
1993 --- --- --- ---
David M. Kowalski(4) 1995 153,847 28,000 100,000 730
Chief Financial 1994 163,788 26,250 160,075 667
officer, 1993 --- --- --- ---
Vice President,
Administration, Secretary
</TABLE>
- -----------------------------
(1) The stock options granted to the named officers vest as to 1/48 of the
shares per month at the end of each month after the date of grant;
provided, however, that in certain cases options are not first
exercisable until six months after the date of grant. The options are
exercisable at a price of $0.40 per share and expire ten years from the
date of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
(3) Reflects premiums paid by the Company on behalf of the named officers
for term life insurance with benefits payable to beneficiaries
designated by the officers.
(4) Mr. Kowalski resigned his position with the Company effective August
11, 1995.
11
<PAGE> 16
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options to each of the Company's executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 1995. Shown are the
hypothetical gains or "option spreads" that would exist for the respective
options. These gains are based on the assumed rates of annual compound stock
price appreciation of 5% and 10% from the date the option was granted over the
full option term.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
------------------------------------------------ at Assumed Annual Rates
of Stock Price
Appreciation for
Option Term
--------------------------
Name Number of % of Total Exercise or Expiration 5%($) 10%($)
---- Securities Options Base Price Date -------- --------
Underlying Granted to $/Share ----------
Options Employees in -----------
Granted (#) Fiscal Year
----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Garrett A. 300,000 20.33% $0.40 10/05/04 $75,467 $191,249
Garrettson
David M. 100,000 6.78% $0.40 10/05/04 $25,156 $63,750
Kowalski
Russell M. 100,000 6.78% $0.40 10/05/04 $25,156 $63,750
Krapf
Robert D. 200,000 13.56% $0.40 10/05/04 $50,312 $127,499
Hempstead
</TABLE>
12
<PAGE> 17
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth for each executive officer named in the
Summary Compensation Table above information regarding the fiscal year-end value
of unexercised options for each such person. No named executive officer
exercised options in the last fiscal year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 1995 Year-End at 1995 Year-End(1)
----------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Garrett A. 329,355 450,869 0 0
Garrettson
David M. 91,335 168,740 0 0
Kowalski
Russell M. 57,861 136,300 0 0
Krapf
Robert D. 58,443 216,887 0 0
Hempstead
</TABLE>
- -----------------------------
(1) The option exercise price of $0.40 per share was equal to the fair
market value of the underlying Common Stock as of June 30, 1995.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into the following transactions with its
officers and directors since July 1, 1994:
In September 1990, Harold J. Hamilton, a retired executive officer and
a past director of the Company, exercised stock options as to 244,821 shares of
the Company's Common Stock and, in lieu of payment to the Company for such
exercise, Mr. Hamilton delivered to the Company a promissory note in the
principal amount of $71,500. The note, the total principal amount of which is
still outstanding, was subsequently amended to change the interest rate,
currently bears interest at the rate of 5.38% per annum and is due September 21,
2000.
In September 1990, Edwin V.W. Zschau, a current director of the
Company, exercised stock options as to 283,092 shares of the Company's Common
Stock and in lieu of payment to the Company for such exercise, Dr. Zschau
delivered to the Company a promissory note in the principal amount of $82,500.
The note, the total principal amount of which is still outstanding, was
subsequently amended to change the interest rate, currently bears interest at
the rate of 5.38% per annum and is due April 23, 1997.
The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by California law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
In December 1995, Edwin V.W. Zschau, a current director of the Company,
entered into a one year consulting agreement with the Company, whereby the
Company would pay Dr. Zschau $7,500 per month for up to three days service per
month to help develop and implement the Company's financing strategy as well as
for
13
<PAGE> 18
participation as a member of the Company's Board of Directors. Dr. Zschau
subsequently worked 30 days on behalf of the Company during the period December
1995 through March 1996, culminating with the Company entering into a Letter of
Intent with Read-Rite. The Company's Board agreed to modify this agreement to
pay Dr. Zschau $75,000 for the 30 days of work through March 31, 1996, and to
terminate any future payments for consulting on financial strategy issues. Dr.
Zschau will be paid for attendance at Board of Director's meetings (See
"Director Compensation".)
On January 31, 1996 and subsequently amended on April 2, 1996, the
Company's Board of Directors approved a six month performance bonus
(approximately $137,500) to be paid semi-monthly commencing April 23, 1996, for
Garrett A. Garrettson. Dr. Garrettson has resigned as President and Chief
Executive Officer effective April 22, 1996. See "Proposal 1: Election of
Directors" (pages 9-10).
Additionally, certain shareholders that beneficially own more than 5%
of the Company's capital stock have made loans to the Company in the first
calendar quarter of 1996. Fifty percent of the principle balances of these loans
plus accrued interest on that portion will be repaid from the proceeds received
by the Company at the Closing of the Proposed Transaction, while the remainder
plus accrued interest on the remaining portion will be repaid nine months after
the Closing of the Proposed Transaction as discussed on page 34 of the Proxy
Statement. The shareholders who have made loans to the Company and who own more
than 5% of the Company's capital stock include Wolfensohn Partners, Brentwood
Associates and New Enterprise Associates. The principal balances are $186,700,
$211,000 and $169,000 respectively. The annual interest rate for these loans is
11%.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal Shareholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding shares of Common Stock and
Preferred Stock (on an as if converted basis) as of March 31, 1996 by (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers, and (iv) all
directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
14
<PAGE> 19
<TABLE>
<CAPTION>
Preferred Stock (1) Common Stock Totals (2)
------------------- ------------ ----------
Number of Percent
Number of Percent Number of Percent Common of Common
Shares of Class Shares of Class Equivalents Equivalents
Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Owned Owned Owned Owned Owned Owned
------------ ------------ ------------ ------------ ------------ ------------
Name of Owner
-------------
<S> <C> <C> <C> <C> <C> <C>
Brentwood Associates(3) .......... 1,298,244 8.66% 3,438,593 34.19% 4,736,837 18.91%
11150 Santa Monica Boulevard
Suite 1200
Los Angeles, CA 90025
Aeneas Venture Corporation(4) .... 2,938,225 19.60% 0 0 2,938,225 11.73%
600 Atlantic Avenue
26th Floor
Boston, MA 02210-2203
Wolfensohn Partners L.P.(5) ...... 413,172 2.76% 1,066,211 10.60% 1,479,383 5.91%
599 Lexington Avenue
New York, NY 10022
J.P. Morgan Investment(6) ........ 363,796 2.43% 1,060,244 10.54% 1,424,040 5.69%
60 Wall Street
New York, NY 10260-0060
New Enterprise Associates(7) ..... 1,424,590 9.50% 0 0 1,424,590 5.69%
1119 St. Paul Street
Baltimore, MD 21202
Morgenthaler Venture Partners(8) . 314,669 2.10% 798,830 7.94% 1,113,499 4.45%
700 National City Bank Building
Cleveland, OH 44114
Fujitsu Limited .................. 0 0 784,682 7.80% 784,682 3.13%
1015 Kamikodanaka
Nakahara-ku, Kawasaki-shi
Kanagawa-ken 211
Japan
Garrett A. Garrettson(9) ......... 0 0 503,943 5.01% 503,943 2.01%
B. Kipling Hagopian(10) .......... 1,298,244 8.66% 3,438,593 34.19% 4,736,837 18.91%
Harold J. Hamilton(11) ........... 0 0 307,583 3.06% 307,583 1.23%
Russell M. Krapf(12) ............. 0 0 226,195 2.25% 226,195 *
Paul R. Low(13) .................. 0 0 18,144 * 18,144 *
Richard C.E. Morgan(14) .......... 413,172 2.76% 1,075,627 10.70% 1,488,799 5.94%
James A. Cole(15) ................ 1,424,590 9.50% 0 0 1,424,590 5.69%
David M. Kowalski(16) ............ 0 0 0 0 0 0
Robert D. Hempstead(17) .......... 0 0 98,596 * 98,596 *
0 0 283,092 2.81% 283,092 1.13%
Edwin V.W Zschau(18) .............
All directors and executive
officers as a group(10
persons)(19)...................... 3,136,006 20.92% 5,951,773 59.18% 9,087,779 36.29%
</TABLE>
15
<PAGE> 20
- -------------------------------
* Less than one percent.
(1) Includes Series A Preferred and Series B Preferred. Preferred Stock is
reflected on an as-converted to Common Stock basis. As of March 31,
1996, each share of Series A and Series B Preferred converts into one
share of Common Stock.
(2) Reflects Preferred Stock (on an as-converted to Common Stock basis) and
Common Stock combined.
(3) Includes: 1,257,196; 2,366,978; 875,764; and 236,899 shares held
respectively by Brentwood Associates II, Brentwood Associates III,
Brentwood Associates IV and Evergreen II, L.P., of which 229,289;
429,253; 60,002, and 43,343 shares, respectively, are shares of the
Company's Series A Preferred, and 108,494; 222,972; 82,519; and 22,372
shares, respectively, are shares of the Company's Series B Preferred.
Mr. Hagopian, the Chairman and a Director of the Company is a General
Partner of Brentwood Associates. Mr. Hagopian disclaims beneficial
ownership of the shares owned by Brentwood Associates.
(4) Includes 2,678,141 shares of the Company's Series A Preferred and
260,084 shares of the Company's Series B Preferred.
(5) Includes 273,116 shares of the Company's Series A Preferred and 140,056
shares of the Company's Series B Preferred. Richard C.E. Morgan, a
Director of the Company, is a General Partner of Wolfensohn Partners
L.P. Mr. Morgan disclaims beneficial ownership of the shares held by
Wolfensohn Partners L.P.
(6) Includes 223,796 shares of the Company's Series A Preferred and 140,000
shares of the Company's Series B Preferred.
(7) Includes 1,274,853 and 149,737 shares held respectively by New
Enterprise Associates V ("NEA") and Spectra Enterprise Associates
("Spectra"), of which 1,071,256 and 131,788 shares, respectively, are
shares of the Company's Series A Preferred and 203,597 and 17,949
shares, respectively, are shares of the Company's Series B Preferred.
NEA and Spectra are independent partnerships; however, the General
Partners of Spectra are also General Partners of NEA. James A. Cole, a
Director of the Company, is a Partner of NEA and the Managing General
Partner of Spectra. Mr. Cole disclaims beneficial ownership of the
shares owned by NEA and Spectra.
(8) Includes 332,352 and 784,335 shares held respectively by Morgenthaler
Venture Partners and Morgenthaler Venture Partners II.
(9) Includes 503,943 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(10) Includes shares beneficially owned or held of record by entities
associated with Brentwood Associates, as described in footnote 3 above.
Mr. Hagopian is a General Partner of Brentwood Associates. Mr. Hagopian
disclaims beneficial ownership of such shares.
(11) Includes (i) 282,144 shares held in trust for the benefit of Dr.
Hamilton, which were purchased with a Promissory note to the Company in
the amount of $71,500 secured by the shares, (ii) 5,648 shares held by
Dr. Hamilton's two children, as to which shares he disclaims beneficial
ownership, and (iii) 19,791 shares subject to stock options which are
exercisable within 60 days of March 31, 1996.
(12) Includes 114,457 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(13) Includes 18,144 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
16
<PAGE> 21
(14) Includes shares beneficially owned or held of record by Wolfensohn
Partners L.P., as described in footnote 5 above. Mr. Morgan is a
General Partner of Wolfensohn Partners L.P. Mr. Morgan disclaims
beneficial ownership of such shares.
(15) Includes shares beneficially owned or held of record by NEA and Spectra
as described in footnote 7 above. Mr. Cole is a Partner of NEA and the
Managing General Partner of Spectra. Mr. Cole disclaims beneficial
ownership of these shares.
(16) Mr. Kowalski's vesting expired in August 1995 and his exercise period
expired in February 1996.
(17) Includes 98,596 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(18) Includes 283,092 shares held in the name of Zschau Family Charitable
Trust. These shares were purchased with a promissory note to the
Company in the amount of $82,500 secured by the shares.
(19) Includes 754,931 shares subject to stock options exercisable within 60
days of March 31, 1996. See Notes 9, 11, 12, 13, 16 and 17. Also
includes 7,650,226 shares which may be deemed to be beneficially owned
by certain directors and officers. See Notes 10, 14, 15 and 18.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During fiscal 1995, executive compensation issues were reviewed by the
Board of Directors, all of whom, with the exception of the President & CEO, were
not employees of the Company. The President & CEO, Dr. Garrettson, presented
compensation issues and proposals to the Board for all the executive officers
with the exception of himself. The Chairman, Mr. Hagopian, presented proposals
with respect to the compensation of the President & CEO to the other members of
the Board of Directors during regularly scheduled board meetings.
Compensation for the Company's executive officers, with the exception
of the President & CEO was established by the Board of Directors to consist of
salary, bonus and stock options. Compensation for the President & CEO was
established by the Board to consist of salary and stock options. In 1994, the
Board had adopted a bonus plan for the executive officers (other than the
President & CEO) to insure a close link between compensation and the achievement
of corporate goals and objectives. The Board had previously adopted an employee
stock option plan to retain qualified executives by providing long-term
incentives. Typically, new executives are offered a combination of salary, bonus
and a grant of stock options as part of their initial employment package.
During 1993, the Internal Revenue Code of 1986 was amended to include a
provision that denies a deduction to publicly held corporations for compensation
paid to "covered employees" (defined as the chief executive officer and the next
four most highly compensated officers as of the end of the taxable year) to the
extent that compensation paid to any "covered employee" exceeds $1 million in
any taxable year of the corporation beginning after 1993. Certain
"performance-based" compensation qualifies for an exemption from the limits on
deductions. It is the Company's policy to qualify compensation paid to its top
executives for deductibility in order to maximize the Company's income tax
deductions, to the extent that so qualifying the compensation is not
inconsistent with the Company's fundamental compensation policies. Based on the
Internal Revenue Service's proposed regulations and compensation paid to the
Company's "covered employees" for the 1995 taxable year, all compensation paid
by the Company in 1995 to such covered employees was deductible to the Company.
The Company has determined that stock options are an important
incentive for attracting and retaining qualified personnel, including
executives.
With respect to corporate performance criteria, management presents to
the Board a set of corporate goals for a subsequent period, generally 12 months,
with specific goals for each of four quarters within this
17
<PAGE> 22
period. These goals establish benchmarks for assessing overall corporate
performance. Given the dynamic nature of the new magnetic head development
process, progress toward the achievement of corporate goals is reviewed with the
Board periodically together with a description of any change in circumstances
that management believes may warrant an update to or revisions to these goals.
The major goals for 1995 were to produce working prototypes of magnetic heads
for disk drive manufacturers and the closing of an interim round of financing to
support operations.
The above corporate goals are used to set individual goals for the
executive officers. The President and CEO meets quarterly with the Board of
Directors to establish and/or monitor individual goals, which are subject to
adjustment based on revised corporate goals, individual performance, and to a
lesser extent, general economic conditions. Goals of the President & CEO are set
and reviewed quarterly by the Board of Directors based on corporate goals and
individual performance. Factors and criteria upon which the President & CEO's
compensation was based included attainment of financing, development of
prototype magnetic recording heads and prosecution of the Company's patent
portfolio.
Periodic salary adjustments for executives are considered annually and
salary adjustments may be awarded on the basis of increased responsibilities of
individual executives over a period of time or the outstanding performance of
individual executives as exhibited by achievement of individual and corporate
goals and consistently high standards in the execution of duties, as presented
by the President & CEO to the Board. Company performance as a whole, measured in
part against the above goals, is a major consideration in the Board's decision
to award any salary increases and, to a lesser extent, the Board also considers
general economic conditions and trends. Bonuses are awarded to the executives
(other than the President & CEO) solely based on achievement of pre-established
goals approved in advance by the Board of Directors.
During 1995, the executive officers' salaries, other than the President
& CEO, were increased 5-7%. The salary of the President & CEO was increased 10%,
and had not been adjusted for the previous two years. All these increases were
considered and approved by the members of the Board of Directors who were not
employees of the Company.
Generally, the non-employee members of the Board of Directors met with
the President & CEO to discuss the performance of the other executive officers
and of the Company as a whole. The non- employee members of the Board then met
in the absence of the President & CEO to discuss the performance of the
President & CEO.
In summary, the Board believes that it has established a program for
compensation of the Company's executives which is fair and which aligns the
financial incentives for executives with the interests of the Company's
shareholders.
During 1995, no executive officer of the Company served on the board of
directors or compensation committee of another company that had an executive
officer serve on the Company's Board of Directors.
PERFORMANCE CHART
A Performance Chart is not included because there is no established
public market for the Company's stock.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a class of a registered class of the
Company's equity securities, to file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission and the
National Association of Securities Dealers.
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<PAGE> 23
Such officers, directors and ten percent Shareholders are also required by
Securities and Exchange Commission rules to furnish the Company with copies of
all Section 16(a) forms that they file.
Based solely on its review of copies of such reports received or
written representations from certain reporting persons, the Company believes
that, during the fiscal year ended June 30, 1995, there has been no failure by
any of its officers, directors or ten percent Shareholders to file on a timely
basis any reports required by Section 16(a).
PROPOSAL 2:
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP, the Company's
independent auditors, to audit the Company's consolidated financial statements
for its fiscal year ending June 30, 1996, and further recommends that
Shareholders vote for ratification of such appointment. In the event of a
negative vote on such ratification, the Board of Directors will reconsider its
selection. The Board of Directors recommends that Shareholders vote "FOR"
approval and ratification of such selection.
A representative of Ernst & Young LLP is expected to be available at
the Annual Meeting to make a statement if such representative desires to do so
and to respond to appropriate questions.
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<PAGE> 24
PROPOSAL 3:
THE PROPOSED TRANSACTION
GENERAL
Pursuant to the terms of the Asset Sale Agreement, the Company will
sell to Read-Rite most of its physical assets and assign its rights and
obligations to Read-Rite under its existing contracts related to its research
and development operations, including its lease agreement for its facilities at
530 Race Street, San Jose, California and its other lease agreements.
The Company is not selling any of its assets relating to the
technology, patents, know-how or any of its proprietary information.
Consummation of the Asset Sale Agreement is conditioned upon the Company and
Read-Rite executing the License Agreement, which provides that the Company will
grant to Read-Rite a non-exclusive license covering the Company's intellectual
property, including the Company's rights in patents, technology and software.
The Company will retain ownership of the technology and related patents
developed during the past fourteen (14) years at a cost of $97.3 million in
equity and debt financing through March 31, 1996. The Company currently owns 16
domestic patents, 10 foreign patents, has an additional 10 U.S. patent
applications pending and intends, through its in-house patent attorney, to
convert the remainder of its intellectual property into licensable patents and
to develop royalty income from its licensees during the next several years.
The Company is not selling any assets necessary to continue such
licensing operations. The detailed terms of, and conditions to, the Proposed
Transaction are contained in the Asset Sale Agreement. The statements made in
this Proxy Statement with respect to the terms of the Proposed Transaction and
related transactions are qualified in their entirety by reference to the more
complete information set forth in the Asset Sale Agreement, a copy of which is
attached to this Proxy Statement as Appendix A and which is incorporated herein
by reference.
BACKGROUND
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from flying
perpendicular to contact perpendicular and most recently to longitudinal contact
recording technology. To date, the Company's principal source of revenue has
been license fees from disk drive manufacturers. While the Company's license
agreements typically provide for on-going royalty payments by the licensees
based upon sales of products incorporating the Company's technology, to date
none of the Company's licensees has commercialized products using the Company's
technology and the Company has received no recurring royalty revenue. The
Company has not been profitable in any fiscal period since inception and as of
March 31, 1996 had an accumulated deficit of $106.1 million. There can be no
assurance that the Company will achieve or sustain significant revenues or
profitability in the future.
Since 1989, Censtor's primary strategy has been to develop critical
enabling technologies for the disk drive industry, protect those technologies
with a portfolio of patents as well as carefully protecting its proprietary
know-how, and to license its technology to disk drive manufacturers. Last year
Censtor attempted to provide, via its subsidiary, Contact Recording Technology,
Inc., ("CRT") an assured low cost source of heads to those licensees so that
products embodying the technology could be shipped in volume. The Company's goal
was to establish its technology as a main stream choice for high capacity disk
drives in general and small form factor disk drives in particular. As recently
as December 1995, Censtor's operating plans for 1996 calendar year called for
continued development of contact longitudinal recording technology and
improvements to the head/disk interface to reduce wear and improve storage
performance as well as delivering sample components in evaluation quantities to
existing and prospective licensees.
During 1994 and 1995, Censtor developed a contact longitudinal head and
head-disk interface technology that enabled the Company to sell three additional
licenses to hard disk drive manufacturers, which generated interest among
several licensees in using the technology. Censtor worked diligently during 1995
to obtain financing from venture capital investors to secure the funds necessary
to complete the product engineering of Censtor's contact recording heads and to
put those components into volume production through CRT. The Company projected
1996 cash requirements totaling $35 - 40 million to complete the development and
to implement initial manufacturing operations. This amount
20
<PAGE> 25
consisted of $10 - 15 million in new equity and $25 million in new equipment
lease (debt) financing. The Company attempted throughout calendar year 1995 to
secure financing for such new manufacturing operations. In so doing, Company's
management and Board of Directors expended a substantial amount of time and
effort attempting to secure this financing. During this time, Silicon Valley
Bank loaned the Company $1.0 million based on the expression of confidence by
existing investors that they would invest $1.0 million. The Company was not
successful in its efforts to raise the necessary equity financing from existing
investors. Most existing venture capital investors could not invest new funds
since these older partnerships had no remaining uninvested funds.
The Company received a non-binding offer for a portion of the necessary
equity financing in December 1995 from a venture capital firm that had not
previously invested in the Company. The firm subsequently elected not to make
the investment. The main reasons cited by this and other potential new investors
were their assessment of high financial risk, high future requirements for
additional equity financing and the possibility that the Company would not be
able to implement volume manufacturing quickly enough to satisfy potential
customer requirements. The Company was therefore unable to attract enough
venture capital to develop manufacturing operations.
On January 2, 1996 existing investors loaned the Company $1.0 million
(referenced in the footnotes to the Financial Statements contained in the
Company's 10-K/A Amendment No. 2), that they had previously committed. This
enabled the Company to continue operations until an alternative could be
obtained. The Company subsequently drew down on a weekly basis the entire $1.0
million.
The Board of Directors held weekly telephonic Board of Directors
Meetings (starting in the third calendar quarter of 1995) which included
interested large Shareholders or their advisors, in which various financing
alternatives were discussed. Large investors (other than members of the Board of
Directors) who attended many of these meetings included representatives from
Morgenthaler Partners, Advanced Technology Ventures, Nippon Enterprise
Development Corporation, New Enterprise Associates and Paine Webber, Inc.
Alternatives including investment from U.S. venture capital companies, the sale
of new licenses, seeking investment from U.S. investment firms as well as in
Japan, Singapore and Taiwan and offering the sale of equity in the Company or
its manufacturing subsidiary to several magnetic head component manufacturing
and disk drive manufacturing companies. The Company's management team, as well
as the Board of Directors and large investors, pursued these alternatives
through telephone calls and domestic and international meetings over a period of
seven months. The Company approached its existing manufacturing partners, Daido
Steel, Marubeni, and Kabool to request them to increase their financial support
through additional investment. After several direct meetings with executives
from these three partners by mid January 1996 these partners declined to provide
additional direct investment to Censtor or its subsidiary (CRT). The Company was
not able to secure a firm commitment from any of these alternatives.
In addition to the magnetic head and disk drive manufacturing companies
mentioned elsewhere, the Company held initial discussions with Pacven Walden
Management Co.; Allen Patricof & Co.; Helix Investments; U.S. Venture Partners;
Mohr Davidow Ventures; Integral Capital Partners; Burr, Egan, Deleage & Co.;
Singapore Technologies; Vertex Management (Singapore); Seagate; Silmag (France);
Economic Development Board of Singapore; Paine Webber; JAFCO (Japan); Arthur
Rock and Co.; G.E. Capital and others. Ultimately, these firms were not
interested in making an investment in the Company or its manufacturing
subsidiary.
The delay and ultimate inability to attract sufficient equity from new
sources caused the Company to delay making the investments needed for both pilot
production and volume production of Censtor heads. At the same time, prospective
customers had shifted their implementation plans for Censtor's components from
niche market products to mainstream products, leading them to focus on
established high volume head manufacturers for their component supply rather
than the Company.
In order to put Censtor's technology into high volume manufacturing in
1996, the Company also investigated modifying its planar head transducer design
and fabrication processes to produce a high density head using a pseudo-contact
slider (a flying head having a tail containing the recording element which drags
or intermittently contacts the media). Because of the Company's inability to
obtain the necessary financing to support this modification, the Company
abandoned this modification effort, (since the necessary equipment and technical
employees had been transferred to Read-Rite as part of the Proposed Transaction,
the Company does not currently plan to develop manufacturing or production
operations).
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<PAGE> 26
These and other considerations led the Censtor Board of Directors in
early January 1996 to approve a major change in Censtor's business strategy and
to restructure its operations consistent with that new strategy. The Company
began in early January to concentrate its efforts to seek investment from its
licensees and potential customers. After meetings with top management at Maxtor
and Western Digital, Company management decided it should seek a business
relationship with established magnetic recording head suppliers. Western Digital
suggested to Read-Rite, a large independent manufacturer of magnetic recording
heads, that it should negotiate a business relationship with Censtor. The
Company's management and Board of Directors also contacted Silmag, AMC and FDK
(Japan) as alternative partners to Read-Rite. Solomon Brothers investment
bankers assisted in a business proposal to AMC whereby AMC would invest in or
buy Censtor or its manufacturing subsidiary. By the end of January 1996, no
positive interest was indicated by magnetic head manufacturing companies other
than Read-Rite, and the Company began negotiations with Read-Rite in January
1996.
The meetings between Read-Rite and Censtor commenced on Monday, January
8, 1996 during which Dr. Garrettson, then President & CEO of the Company and
Cyril Yansouni, Chairman & Chief Executive Officer of Read-Rite met to discuss a
proposal that Dr. Garrettson had presented by telephone several days earlier.
Elements of the proposal that were made by telephone included the grant by the
Company of a non exclusive license to use the Company's technology, the hiring
of the Company's engineering employees and the purchase (or assumption of
leases) of the Company's equipment utilized by the engineers to conduct product
and process development and prototype manufacturing. No other specific details
were presented until the Letter of Intent was negotiated and subsequently signed
by Read-Rite and the Company on February 2, 1996 (discussed below in detail).
After this meeting, Mr. Yansouni considered whether Read-Rite would be
interested in pursuing a business relationship with the Company. The Company and
Read-Rite held a subsequent meeting by telephone on Friday, January 12, 1996
attended by Dr. Garrettson, Russell Krapf (then Senior V.P. of the Company), Ed
Zschau, a member of the Company's Board of Directors along with Cyril Yansouni
and Rex Jackson, V.P. & General Counsel, both from Read-Rite. During this
telephonic meeting, Read-Rite expressed interest in negotiating a business
relationship whereby Read-Rite, although not willing to make a direct investment
in Censtor or its manufacturing subsidiary, was interested in acquiring most of
the physical assets and key employees of the Company. After further discussion
regarding Censtor's obligations and Read-Rite's valuation of the Company's
intellectual property, Read-Rite expressed an interest in licensing the
Company's technology, hiring the Company's Research and Development employees
and purchasing the specific equipment necessary to develop and manufacture
samples of magnetic heads incorporating the Company's technology. From January
15-28, 1996, Read-Rite and the Company held almost daily meetings, and the
Company was in daily contact with members of the Company's Board of Directors to
further evaluate a potential transaction and to negotiate terms of a proposed
transaction.
On January 26, 1996, the Company held a telephonic Board of Directors
Meeting; the entire Board of Directors was present as well as representatives
from large investors including Paine Webber, New Enterprise Associates and
Nippon Enterprise Development, and in addition the Company's senior management,
Russell Krapf and Wil Cochran, consultant. The Company's outside counsel,
Michael G. Taylor of Wilson Sonsini Goodrich & Rosati also attended the meeting
by telephone. First the Board was notified by Dr. Garrettson that Read-Rite had
decided to proceed with negotiations with the Company. The board reviewed the
status of the Read-Rite negotiations as well as discussed the lack of any other
offers from any source and the Company's immediate need for a cash infusion to
sustain operations. The Board of Directors discussed that they had authorized by
resolution at the January 19, 1996 Board of Directors meeting, duly voted and
approved, for the Company's management and Ed Zschau, member of the Board, to
negotiate the Proposed Transaction. Dr. Garrettson gave further details of the
Company's position including that the Company was insisting that Read-Rite
assume all debt obligations on all physical assets of the company, thereby
significantly reducing the Company's cash requirements going forward.
The negotiations between the Company and Read-Rite led to a Letter of
Intent being signed on February 2, 1996, the material terms of which included
the grant by the Company of a non-exclusive license to use the Company's
technology, the hiring of the Company's engineering employees and the purchase
(or assumption of leases) of the Company's equipment utilized by the engineers
to conduct product and process development and prototype manufacturing. After
further negotiations regarding representations and warranties, assumption of the
Company's leaselines by Read-Rite, Read-Rite loans to the Company to fund its
operations until the Close, personnel matters relating to the transferred
employees to Read-Rite, negotiations regarding the non-exclusive license for use
of the
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<PAGE> 27
Company's intellectual property and other matters, the Company entered
into the Asset Sale Agreement on March 29, 1996 with Read-Rite. The Proposed
Transaction was reviewed by the Advisor (Von Gehr International, an independent
investment banking firm) to confirm its fairness to the Company and its
Shareholders.
Certain key elements of the proposed transaction are as follows:
- Read-Rite hired Censtor's product development team as of
February 5, 1996.
- Read-Rite will assume, as of the Closing, Censtor's lease
obligations for the building and equipment (approximately
$934,000 as of March 31, 1996) and will purchase the used
equipment (with a net book value of approximately $125,601 as
of March 31, 1996) that Censtor owns.
- Censtor will continue to pay the expenses in support of patent
prosecution and licensing activities.
- Read-Rite will have a non-exclusive paid-up license to
Censtor's technology invented prior to the date of the Closing
(know-how and patents, including patents from applications
that are pending or that may be filed in the future) to
manufacture or sell products to any customers world-wide.
- Censtor will retain ownership of all of its patents and
know-how existing as of the Closing and will continue to be
able to sell non-exclusive licenses to this intellectual
property to any company world-wide. Censtor will not have a
license to improvements to the technology that Read-Rite
invents.
- Censtor will continue to have reasonable access to former
Censtor employees for the purpose of prosecuting patents on
Censtor's inventions.
- For the intellectual property license and the used equipment,
Read-Rite will pay Censtor a total of approximately $9.0
million in four installments (see "Purchase Price" below).
Denka holds approximately $14.3 million of the Company's preferred and
convertible debt including accrued interest of $4.3 million as of March 31,
1996. In an unrelated transaction dated February 22, 1996, Denka and the Company
have entered into two agreements entitled "Amendment to Terms of Debentures" and
"Fifth Amendment to Manufacturing License Agreement" (collectively, the
"Amendments"). In the Amendment to Terms of Debentures, the Company is obligated
to pay $2.0 million against the outstanding accrued interest by July 31, 1996
and use its best efforts consistent with good business practices, subject to
certain conditions, to pay the remaining outstanding principal and accrued
interest on September 30, 1996. Notwithstanding the amounts paid, any remaining
interest shall be forgiven, on September 30, 1996. Additionally, in
consideration of executing and delivering the Fifth Amendment to Manufacturing
License Agreement, Denka has agreed to forgive the remaining principal balance
(due in September 1997 and January 1998) in return for increasing from 1% to 5%
Denka's portion of the royalties Censtor may receive from its present and future
licenses through the year 2001, and subject to the repayments above. An analysis
was performed by the Company that compared the amount of debt to be forgiven by
Denka with the amount of the increased royalty sharing that would be paid by the
Company to Denka. Based on the results of the analysis, the Amendments were
deemed to be in the interest of the Company by the Board of Directors.
As a result of the negotiations with Read-Rite and Denka, Censtor has
the opportunity to eliminate approximately $18.0 million in short and long term
obligations by using $6.5 million of the anticipated proceeds from the Proposed
Transaction to modify and partially satisfy obligations to Denka and to continue
operating as a licensing company with a patent portfolio that the Company
intends to grow in size, relevance and value. Removal of the obligations to
Denka, which are senior to the preferred stock, has been an essential part of
management's strategy to maximize Shareholder return from future licensing
revenues, since the interest being accrued on such obligations would be a
significant drain on future earnings.
Prior to the Proposed Transaction, the Company has licensed its
technology on a non-exclusive basis to six companies for use in disk drives and
has signed a letter of intent with an additional licensee. These licenses have
so far returned the Company approximately $22.0 million in license fees and
non-refundable advance payments. The Company intends to focus its future
business after consummation of the Proposed Transaction on creating royalties
from
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<PAGE> 28
these existing licenses and to negotiate new licenses with the remaining
companies in the disk drive industry based on the technology that the Company
has previously developed.
Although the Read-Rite license diminishes the scope of Censtor's
licensing opportunity, it may increase royalties for the Company's licensing
program because the license to Read-Rite may make it possible for Read-Rite to
bring products, based on Censtor technology, to market in high volume without
Censtor having to make the investment to do so. By doing this, the Company's
technology has a higher probability of being available in larger volume products
in the market place. Other magnetic head manufacturers may want to license the
Company's technology as a competitive response to Read-Rite.
PURCHASE PRICE
The terms of the Proposed Transaction require Read-Rite to pay an
aggregate purchase price of $9,025,000 (subject to a maximum of $2.4 million in
potential downward adjustments at the Closing), up to $6,525,000 of which
(subject to the same $2.4 million in potential downward adjustments at the
Closing) will be paid to the Company on the Closing, subject to certain
adjustments (the "Initial Payment"), and up to $2,500,000 (to be made in three
payments, $250,000 on November 15, 1996, $250,000 on December 13, 1996 and $2.0
million nine months after Closing) (the "Final Payment") (such amounts include
payment for granting of the license pursuant to the License Agreement). The
Initial Payment is subject to reduction in an amount equal to (a) 50% of the
amount outstanding as of March 29, 1996 under a promissory note in the principal
amount of $900,000 in favor of Read-Rite, plus (b) 50% of certain employee
compensation expenses accrued or paid by Read-Rite through March 29, 1996, plus
(c) 50% of accrued but unpaid expenses of the Company from February 2, 1996
through March 29, 1996, less (d) certain prepaid expenses of the Company
outstanding on March 29, 1996, less (e) certain expenses of the Company incurred
through the Closing, including accounting, legal and other expenses related to
the Proposed Transaction ("Seller Expenses"). The adjustment to the Initial
Payment is estimated to be $857,000 as of March 29, 1996; the total adjustment
as of the Closing to the Initial Payment is forecast to be approximately $2.0
million. If the adjustment exceeds $2.4 million (20% variance), the Company will
secure a new shareholder vote on the Proposed Transaction. Seller Expenses are
limited in that they include legal and accounting fees, patent filing and
maintenance fees, salaries and benefits, workers' compensation expenses, certain
accrued interest and amounts owed to Read-Rite and they must adhere to generally
accepted accounting principles consistently applied and be subject to the mutual
review and agreement of Read-Rite and the Company.
The Final Payment is subject to reduction for amounts held back by
Read-Rite for damages in the event the Company breaches the Asset Sale Agreement
or License Agreement.
In addition, Read-Rite will loan to the Company up to $1,550,000 to
finance the Company's operations and certain ongoing business expenses through
the Closing (the "Bridge Notes"). Amounts borrowed from Read-Rite under the
Bridge Notes that are used to pay, or are accrued for, expenses after March 29,
1996 and before the Closing, related to the Assets and contracts being
transferred to Read-Rite (including for example, equipment lease payments,
building rent, utilities and other related expenses) will be forgiven as of the
Closing.
ASSETS TO BE SOLD AND RETAINED BY THE COMPANY
The assets of the Company to be sold to Read-Rite are non-income
producing and consist of all machinery, tooling, most of the computer hardware,
software and other equipment and most furnishings, furniture, office supplies,
leasehold improvements, fixtures and other tangible property of the Company
related to the Company's research and development operations; prepaid expenses
related to the contracts to be assumed by Read-Rite; copies of all books,
records, accounts, correspondence and production records related to the assets
to be sold and the business related to the assets to be sold to Read-Rite;
copies of all manufacturing and technical documentation related to the assets to
be sold to Read-Rite or used by the Company in the conduct of the business
related to the assets to be sold to Read-Rite; and all other assets of the
Company which are not expressly retained by the Company. Assets retained by the
Company include the Company's cash or cash equivalents; all know-how,
intellectual property, copyrights, trade secrets, patents and patent
applications, that are owned, controlled, acquired or otherwise licensable by
the Company.
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<PAGE> 29
INTELLECTUAL PROPERTY TO BE RETAINED FOR LICENSING BY THE COMPANY
Censtor will retain ownership of the intellectual property it has
developed over the years, including issued and pending patents, trade secrets,
software, know-how and trademarks. The Company currently owns approximately 16
United States patents and 10 foreign patents relating to the magnetic data
storage industry, with 10 domestic and numerous foreign patent applications
forthwith. Due in part to the Company's pioneering work in technologies such as
contact recording, it is believed that certain patents and/or patent
applications in the patent portfolio may have significance for the hard disk
drive industry.
Read-Rite will be granted, as a part of the Proposed Transaction, a
non-exclusive license to the intellectual property as detailed in this document.
If Read-Rite is successful in volume production and sales of products
incorporating the Company's technology, the licensing value of the Company's
Intellectual Property may increase, as other entities may emulate Read-Rite and
move into technological areas covered by the Company's patents. The Company
hopes that may promote royalty payments by the Company's existing licensees as
well as encouraging the sale of new licenses. Moreover, divestiture of
manufacturing and sales operations by the Company may possibly strengthen the
Company's licensing position by reducing the need for cross-licensing and
decreasing the threat of an infringement countersuit upon enforcement of the
Company's patents.
UNAUDITED PRO-FORMA FINANCIAL DATA
The following unaudited pro forma condensed balance sheet at March 31,
1996, and unaudited pro forma condensed statements of operations for the year
ended June 30, 1995 and the nine months ended March 31, 1996 give pro forma
effect to the estimated financial effects of the Asset Sale Agreement (the
"Agreement") with Read-Rite. The pro forma condensed balance sheet as of March
31, 1996 gives pro forma effect to the Agreement as if such transactions were
consummated on that date. The pro forma condensed statements of operations for
the year ended June 30, 1995 and the nine months ended March 31, 1996, present
the results of operations of Censtor as if the Agreement occurred on July 1,
1994. The pro forma information is based on the historical financial statements
of Censtor giving effect to the assumptions and adjustments set forth in the
accompanying notes.
The unaudited pro forma condensed financial data have been
prepared by Censtor management and are not necessarily indicative of how the
Company's balance sheet and results of operations would have been presented had
the transaction with Read-Rite actually been consummated at the assumed dates,
nor are they necessarily indicative of the presentation of the Company's balance
sheet and results of operations for any future period. The unaudited pro forma
condensed financial data should be read in conjunction with the financial
statements and related notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations incorporated herein by reference.
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<PAGE> 30
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1995
-----------------------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
--------------- ------------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues - license fees $ 3,515,472 $ (2,182,139) A, F $1,333,333
Costs and expenses:
Research and development 11,448,501 (11,448,501) A --
Selling, general and administrative 2,846,235 (1,046,235) A 1,800,000
--------------- ------------- ----------
Total expenses 14,294,736 (12,494,736) 1,800,000
--------------- ------------- ----------
Operating loss (10,779,264) 10,312,597 (466,667)
Interest and other income 173,379 -- B 173,379
Interest and other expense (1,132,525) 402,484 C (730,041)
Minority interest in loss of subsidiary 81,650 -- 81,650
--------------- ------------- ----------
Loss before income tax expense (11,656,760) 10,715,081 (941,679)
Income tax expense (290,350) 290,350 A --
--------------- ------------- ----------
Net loss $ (11,947,110) $ 11,005,431 $ (941,679)
--------------- ------------- ----------
Net loss per share $ (1.29) $ (0.10)
--------------- ----------
Weighted average number of shares
used in computing per share amount 9,255,000 9,255,000
</TABLE>
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<PAGE> 31
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1996
--------------------------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
------------ ----------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues - license fees $ 3,202,706 $(2,202,706) A, F $ 1,000,000
Costs and expenses:
Research and development 7,399,095 (7,399,095) A --
Selling, general & administrative 1,754,855 (404,855) A 1,350,000
------------ ----------- -----------
Total expenses 9,153,950 (7,803,950) 1,350,000
------------ ----------- -----------
Operating loss (5,951,244) 5,601,244 (350,000)
Interest and other income -- -- B --
Interest and other expense (693,701) 25,662 C (468,039)
Minority interest in loss of subsidiary 194,642 -- 194,642
------------ ----------- -----------
Loss before income tax expense (6,450,303) 5,826,906 (623,397)
Income tax expense (319,450) 319,450 A --
------------ ----------- -----------
Net loss $ (6,769,753) $ 6,146,356 $ (623,397)
------------ ----------- -----------
Net loss per share $ (0.73) $ (0.07)
------------ -----------
Weighted average number of shares
used in computing per share amount 9,301,000 9,301,000
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS:
Current assets:
Cash and cash equivalents $ 50,703 $ 900,283 E $ 950,986
Receivables 8,846 2,500,000 E 2,508,846
Prepaid expenses & other current assets 121,246 -- 121,246
Property & equipment held for sale 1,260,693 (1,260,693) D --
------------- ----------- -------------
Total current assets 1,441,488 2,139,590 3,581,078
Property & equipment, net 13,311 -- 13,311
Restricted cash 94,450 (94,450) E --
Deposits & other assets 147,221 -- 147,221
------------- ----------- -------------
Total assets $ 1,696,470 $ 2,045,140 $ 3,741,610
============= =========== =============
LIABILITIES & NET CAPITAL DEFICIENCY:
Current liabilities:
Notes payable $ 5,900,000 $(2,900,000) E $ 3,000,000
Accounts payable 1,005,557 (800,000) E 205,557
Deferred Revenue -- 8,000,000 F 8,000,000
Accruals & other liabilities 385,472 (19,167) E 366,305
Obligations under capital leases 806,887 (806,887) D --
------------- ----------- -------------
Total current liabilities 8,097,916 3,473,946 11,571,862
Long-term obligations:
Obligations under capital leases 127,080 (127,080) D --
Subordinated debentures 14,282,547 (2,000,000) E 12,282,547
Net capital deficiency (20,811,073) 698,274 D (20,112,799)
------------- ----------- -------------
Total liabilities and net capital deficiency $ 1,696,470 $ 2,045,140 $ 3,741,610
============= =========== =============
</TABLE>
Notes to Unaudited Pro-Forma Condensed Financial Data
(A) Prior to the consummation of the Agreement, the Company was primarily
engaged in research and development activities and providing
technological assistance and support to its licensees. In conjunction
with the Agreement, substantially all of the Company's employees,
including all of its research and development employees, were
transferred to Read-Rite. Accordingly, research and development
expenses and a significant portion of selling, general and
administrative expenses would not have been incurred. Without a
research and development department to provide ongoing technological
assistance and support to its licensees, the non-refundable license
fees (and any related withholding tax) would have been recognized when
the license fees were received.
(B) No interest income is reflected on the cash transferred to the Company
by Read-Rite.
(C) The Company expects a reduction in interest expense following the
assumption of the capital leases by Read-Rite as part of the Agreement
and due to the use of $2,000,000 of the sale proceeds to repay a
portion of the subordinated debentures.
28
<PAGE> 33
(D) Reflects the transfer of the majority of the Company's tangible fixed
assets to Read-Rite and the assumption by Read-Rite of the associated
capital leases in accordance with the agreement. A gain of $698,274
arises on the sale of the equipment and transfer of the assembled
workforce.
(E) The Company will receive gross consideration of $9,025,000 (subject to
a maximum of $2.4 million in potential downward adjustments in the
Initial Payment at the Closing) in connection with the Agreement. The
gross consideration will be reduced by approximately $2,000,000 of the
$2,450,000 total expected to be outstanding at the Closing with respect
to an existing note payable of $900,000 to Read-Rite and an additional
$1,550,000 bridge loan from Read-Rite received or to be received under
terms of the Agreement. The remaining amounts received under the notes,
(about $450,000), will be used to pay certain expenses incurred up to
the Closing relating to the employees transferred and the physical
assets to be sold to Read-Rite and these amounts will be forgiven. The
Company estimates that it will receive net consideration of $8,125,000
of which $5,625,000 will be received at the Closing. The net
consideration will be used as follows:
<TABLE>
<S> <C>
Payment of certain accounts
payable balances $ 500,000
Repayment of Silicon Valley
Bank note 1,000,000
Repayment of investors notes
(of which $453,000 will be
paid nine months after Closing) 1,000,000
Payment of investors accrued
interest 19,167
Repayment of a portion of the
subordinated debentures 2,000,000
----------
$4,519,167
==========
</TABLE>
29
<PAGE> 34
An additional $2,500,000 will be received by the Company provided that
certain representations and warranties included in the Agreement are not
violated. This amount is receivable in the following installments:
<TABLE>
<S> <C>
November 15, 1996 $ 250,000
December 13, 1996 250,000
Nine months from the closing
date 2,000,000
----------
$2,500,000
==========
</TABLE>
Further, following the assumption by Read-Rite of the capital leases,
the restrictions over $94,450 of the Company's cash will be released.
(F) Deferred revenue relates to the license fee received or due from
Read-Rite. Under the terms of the Agreement, Censtor shall continue to
file patent applications and maintain and defend the patents during the
term of the Agreement.
Censtor has granted Read-Rite a security interest in its intellectual
property to secure certain obligations and warranties with respect to the
intellectual property for a period of six years following the effective
date of the Agreement. After the third year after the effective date of
the Agreement, Censtor may terminate the security interest by depositing
$4.0 million in an escrow account. Such amount is reduced by $1.0 million
in each of the succeeding two years, and the escrow terminates the
following year.
Management believes that all of the license fee may not be realized due
to amounts which will have to be paid out of the escrow fund or amounts
which will have to be paid prior to the establishment of the escrow.
Accordingly, $4.0 million of the license fee will be recognized ratably
over the first three years following the effective date of the agreement,
which approximates the time period during which Censtor expects to be
incurring costs to maintain its patents and which also reflects
management estimate of the reduction in potential exposure from the
effective date of the Agreement until the establishment of the escrow
fund. Subsequent amounts will be recognized as the escrow fund is
reduced. Therefore, the pro forma statement of operations include revenue
recognized on the license of $1,333,333 and $1,000,000 for the year ended
June 30, 1995 and the nine months ended March 31, 1996, respectively.
DISPUTE RESOLUTION
Management of Read-Rite and the Company will initially attempt to
resolve any material disagreements which might arise from implementing the
Proposed Transaction without assistance of an arbitrator or court. If this
proves unsuccessful, the Asset Sale Agreement dictates resolution by several
stages starting with good faith negotiation of the parties to the agreement and
culminating in binding arbitration under the commercial rules of the American
Arbitration Association. Any arbitration must be held in Santa Clara,
California.
SHAREHOLDER APPROVAL
The Asset Sale Agreement requires Shareholder approval as a condition
to the Closing. The affirmative vote of a majority of the shares of the
Company's Common Stock and Preferred Stock outstanding at the Record Date is
therefore being sought to approve the Proposed Transaction.
CERTAIN INFORMATION CONCERNING READ-RITE
Read-Rite, a public company, is one of the world's leading independent
manufacturer of recording heads, head gimbal assemblies (HGAs) and head stack
assemblies (HSAs) for disk drives and magnetoresistive heads for
quarter-
30
<PAGE> 35
inch-cartridge tape drives. With headquarters in Milpitas, California
and operations in Japan, Thailand, Malaysia, the Philippines and Singapore, the
company employs more than 24,000 people. For Fiscal 1995, Read-Rite reported
sales of more than $1.0 billion, during the most recent quarter (ending March
31, 1996), Read-Rite reported sales exceeding $258.0 million and profits of $
1.3 million. Additionally, Read-Rite had $189.0 million in cash, cash
equivalents and short term securities at quarter end. Based on these results,
Company management believes that Read-Rite will be able to pay $9,025,000 of the
aggregate purchase price, to the Company. Read-Rite's Common Stock is traded on
the NASDAQ National Market. Prior to the Proposed Transaction, Read-Rite and the
Company had no affiliation.
OPINION OF FINANCIAL ADVISOR
Von Gehr International (the "Advisor") was retained by the Company on
February 23, 1996 to render to the Company its opinion as to the fairness, from
a financial point of view, to the Company's Board of Directors and Shareholders
of the consideration to be received by the Company, pursuant to the Proposed
Transaction with Read-Rite. (See "Background" above on pages 20-24.) The Advisor
was not contacted by any other party concerning alternative transactions to the
Proposed Transaction. The Advisor has rendered a written opinion dated March 29,
1996 to the Company's Board of Directors to the effect that, as of such date,
the payment in cash by Read-Rite to the Company of the Purchase Price and
License Fee, as set forth in the Asset Sale Agreement and License Agreement,
respectively, are fair, from a financial point of view, to the Shareholders of
the Company. The full text of the written opinion of the Advisor is attached to
this Proxy Statement as Appendix B. Such opinion should be read in its entirety
for a description of the matters considered, assumptions made and limits of
review by the Advisor in arriving at its opinion.
In arriving at its opinion, the Advisor reviewed a copy of the
definitive Asset Sale Agreement (including Exhibits thereto) and reviewed
historical financial information about the Company as well as product and other
information furnished to it by the Company. The Advisor also held discussions
with members of the Company's senior management regarding the historic and
current business operations and future risks and prospects of the Company,
including their expectation for certain strategic benefits of the Proposed
Transaction. (See "Recommendation of the Board of Directors" on page 5.) The
Advisor did not receive any material, including forecast information from
Read-Rite. As part of these discussions, the Advisor reviewed other types of
sale transactions contemplated by the Company over the preceding twenty-four
months and carefully reviewed the circumstances surrounding the contemplated
financing transaction that failed to close in December 1995 and subsequent
attempts to finance or sell the Company. Read-Rite's offer to acquire certain
assets of the Company was in fact the only offer received by the Company.
In deriving its fairness opinion, the Advisor considered the value of
the Company and its assets by comparing the contemplated transactions with
Read-Rite to other technology licensing transactions including the Company's
prior licensing transactions and other financial studies, analyses and
investigations the Advisor deemed appropriate for purposes of its opinion.
Specifically the Advisor compared the benefits to be received by the Company
from Read-Rite as part of the contemplated transactions including cash payments,
assumption of liabilities and the cost avoidance of continuing to develop the
technology, as compared to the expected net present value of executing a
standard license agreement with Read-Rite and determined that the contemplated
transactions provided superior economic benefits. The Advisor compared the
benefits of the contemplated transactions with a variety of other technology
licensing agreements including Ethical's licensing transaction with Elan,
Imatron's licensing transaction with Siemens and Ecogen's licensing transaction
with Monsanto and determined that the considerations provided by Read-Rite to
the Company were favorable to the other transactions reviewed, based on a ratio
of anticipated future profits to front end cash payments. Additionally, the
Advisor compared the ratio of transaction considerations provided and related
transaction expenses with that of 33 technology licensing transactions and
determined that the ratio of the contemplated transactions materially exceeded
the mean of the 33 transactions considered. In considering alternatives to
maximize Shareholder value, the Advisor also analyzed liquidating the Company as
an alternative to sale of certain of its research and development assets to
Read-Rite. The Advisor concluded that the cost of an orderly liquidation of
these assets of the Company would decrease substantially the resulting value to
the Shareholders compared to that realizable for the Proposed Transaction. Based
on all the above and the prospect of continuing operating losses, the Advisor
concluded that consummating the Transaction as quickly as possible would
maximize Shareholder value. In the opinion rendered, the Advisor did not provide
a valuation range for the Proposed Transaction.
The Advisor considered a wide range of alternative methods to validate
the fairness of the transaction through analysis. In researching recent
transactions, no other deals were identified that were directly comparable to
the
31
<PAGE> 36
transaction contemplated and after careful consideration the Advisor
determined that the opinion should be based on four different analyses and
considerations as follows:
1. Comparison of the benefits received by Censtor from Read-Rite
including cash payments, assumption of liabilities, and most importantly, the
cost avoidance of continuing to develop the technology as compared to the future
potential of executing a "standard" licensing agreement between the parties.
Under this approach, market share information was compiled on Read-Rite
and used as a basis for determining the anticipated net present value of the
royalty stream should Censtor have executed a traditional license under which a
front end payment would have been made, plus a royalty paid over time. The
result was compared to the benefit received by Censtor.
Key assumptions were: (i) a license with Read-Rite would have included
a $2.0 million front end payment and a royalty of 1% of sales commencing in
1997; (ii) additional investment of $16.5 million is required to commercialize
the Censtor technology (based on information provided by the Company); (iii) had
the Company suspended operations, it would have incurred personnel termination
liabilities of approximately $500,000; and (iv) the Company did not provide
forecasts beyond the year 2000, royalties beyond that time were extrapolated
based on a standard diffusion curve,
The results of this analysis indicated that the transaction benefit
received by the Company was $26.4 million, comparing favorably to the $10.45
million net present value estimated should the Company have entered into a
standard licensing agreement with Read-Rite. The calculation for the net present
value of the royalty stream included a 15% risk factor and a 12% capital cost.
2. Comparison of the transaction with other publicly disclosed
non-exclusive licensing transactions under which ratios were calculated for the
considerations provided to the licensor as a function of anticipated benefits by
the licensee. Licensing transactions identified in this analysis were as
follows:
Imatron transaction with Siemens
Ethical transaction with Elan
Araid transaction with Hoechst
Ecogen transaction with Monsanto
NPS Pharmaceutical transaction with Amgen
ICN Pharmaceutical transaction with Schering Plough
A ratio was developed for each of the referenced transactions of the
future profit anticipated as a result of the transaction cost. The highest ratio
(the most favorable to the licensee) was the Ethical/Elan transaction with a
ratio of 47.4, with the lowest ratio (most favorable to the licensor) being
Imatron/Siemens transaction at 12.5. The average of the six transactions was
determined to be 28.1. Using the same methodology, the Proposed Transaction was
calculated to be 21.9, well below the average of the licensing transaction
population, and therefore, favorable to the Company, the licensor.
3. Comparison of the transaction, based on a ratio of the consideration
provided as a function of transaction costs, when compared to other licenses
granted by the Company and a mean ratio of 33 contracts for technology
considerations as a function of transfer cost (the "Ratio") as compiled by
Francis Bibault (Professor, Lyon GSB) in a paper titled "Technology Pricing;
Principles to Strategy".
Key assumptions included in this analysis were that the Read-Rite
considerations include (i) initial payments and development cost avoidance of
$25.9 million and (ii) the Company's previous licensing transactions included
royalties for a 17 year period and transaction costs of $16.5 million investment
required to commercialize the technology (see estimate previously referenced).
Using the methodology described in the above cited paper , the Ratio of
the Proposed Transaction was calculated to be 129.5, reflecting $25.9 million
benefit divided by transaction costs estimated to be $200,000. Dr. Bibault's
publication concluded that the mean Ratio for 33 such transactions analyzed was
116.2. Since the Proposed
32
<PAGE> 37
Transaction Ratio exceeds the mean reflected in the analysis, the Advisor
concluded that this approach provided further support to its fairness of the
transaction, from a financial point of view.
The Advisor did not make any independent valuation of the Company's
assets or intellectual property nor did it review any of the Company's corporate
records. In addition, the Advisor assumed, without independent verification, the
accuracy, completeness and fairness of all the financial statements, product
information, marketing strategies and other information regarding the Company
that was provided to the Advisor by the Company and its representatives. The
Company believes the Advisor's lack of independent verification of its
historical financial statements is justified and reasonable under the
circumstances, since the annual financial statements of the Company provided to
the Advisor were audited by Ernst & Young LLP, the Company's independent
auditors. The audited statements covered all but the interim period from July
1995 through March 29, 1996, the date the opinion was issued. Except as
described above, neither the Company nor any affiliate provided instructions to
the Advisor or imposed any limitations on the scope of the Advisor's
investigation.
Neither the Advisor nor any of its principals or affiliates has or,
over the past two years, has had any material relationship with the Company or
Read-Rite, other than the Advisor's engagement by the Company, described above,
to render an opinion regarding the fairness of the contemplated transaction.
(See "Background" on pages 20-24.)
For the Advisor's services related to rendering of its written fairness
opinion referred to above in connection with the Proposed Transaction, the
Company has agreed to pay the Advisor a single fee of $35,000. The Company has
agreed to indemnify and hold the Advisor harmless from certain liabilities,
including liabilities under the federal securities laws, and has agreed to
reimburse the Advisor for its reasonable out-of-pocket expenses incurred in
connection with its services, which are estimated to be less than $100.
The Advisor's opinion was rendered March 29, 1996; the Advisor did
consider potential adjustments to the purchase price through March 29, 1996 but
not after that date. The Company does not intend to request an updated opinion
from the Advisor.
INTEREST OF MANAGEMENT IN THE TRANSACTION
The Company's management is not affected by this transaction except
that Robert Hempstead, Censtor's Chief Technical Officer, has resigned from
Censtor and was subsequently hired, along with 83 other Censtor employees, by
Read-Rite on February 5, 1996. Dr. Hempstead subsequently resigned from
Read-Rite. It is not contemplated that any other of the Company's management
will become employees of Read-Rite as a result of this transaction.
EFFECT ON EMPLOYEES
As of February 5, 1996, 84 of the 89 employees of the Company became
employees of Read-Rite for the purposes of operating the assets and developing
the technology being transferred to Read-Rite pursuant to the terms of the Asset
Sale Agreement. The remaining four employees (Russell Krapf, Sabine Austin, Mark
Lauer, and Elizabeth Harmon) are continuing to be employed by the Company to
continue the Company's licensing operations. (Garry Garrettson, Censtor's
President has resigned effective April 22, 1996; he will continue to serve on
the Board of Directors if he is elected by the Shareholders.)
APPLICATION OF SALE PROCEEDS
Of the net proceeds from the Proposed Transaction, the Company expects
to use approximately $6.5 million to pay down obligations estimated to be due as
of the Closing, including a $2.0 million escrow for the July 31, 1996 Denka
payment and $1,000,000 plus interest, will be used to pay obligations to certain
Shareholders of which $546,675, plus accrued interest will be paid at the
Closing. The following two tables detail the application of anticipated proceeds
related to the Proposed Transaction and the Shareholders whose notes will be
repaid from the proceeds of the sale. The remainder of the proceeds, if any,
will be used for general working capital purposes with respect to its remaining
business operations. The Company has no present intent to pay a dividend to
Shareholders or to otherwise distribute to its Shareholders any proceeds
received from the Proposed Transaction.
33
<PAGE> 38
The use of net proceeds is estimated as follows:
ESTIMATED USE OF PROCEEDS (IN MILLIONS)
<TABLE>
<S> <C>
Denka Obligations $2.0
Investor Loan 1.0
Silicon Valley Bank 1.0
Accounts Payable 0.5
Read-Rite Loan a/ 2.0
---
General Corp. and Other Working Capital Requirements 2.5
---
Total Proceeds (before repayment of Read-Rite loan) $9.0
</TABLE>
a/ Equal to the amount of Seller's Expenses
If the Company incurs the maximum expenses of $2.4 million through the
Closing, the net cash available for "general corporate and other working capital
requirements" may be reduced to $2.1 million. The Company estimates that such
amount is adequate to finance the Company's operations in the near term. Based
on $2.0 million in Seller's Expenses, the purchase price, net of potential
downward adjustments attributable to the repayment of the Read-Rite loan is $7.0
million; at the maximum expense level of $2.4 million, the purchase price, net
of potential downward adjustments attributable to the repayment of the Read-Rite
loan, is $6.6 million.
INVESTOR NOTES TO BE REPAID a/
<TABLE>
<CAPTION>
Shareholder Total Principal Owing Due at Closing Due Nine Months after Closing
----------- --------------------- --------------- -----------------------------
<S> <C> <C> <C>
Wolfensohn Partners $ 186,700 $140,025 $ 46,675
Brentwood Associates 211,000 105,500 105,500
Harvard Management Co. 173,000 86,500 86,500
Nippon Enterprise Dev. 92,000 46,000 46,000
New Enterprise Assoc 169,000 84,500 84,500
Spectra Enterprise Assoc 15,000 7,500 7,500
Morgenthaler Ventures 73,300 36,650 36,500
Advanced Technology Ven 73,000 36,500 36,500
Dr. Richard Cottrell 7,000 3,500 3,500
---------- -------- --------
Totals $1,000,000 $546,675 $453,325
</TABLE>
a/ Excluding interest at 11%
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For tax purposes, the Company will recognize income or gain as a result
of the Proposed Transaction. Notwithstanding, the Company determined that it
will not have to pay any income tax related to the Proposed Transaction because
of any income or gain will be offset by current year net operating loss or prior
year net operating loss carry forwards.
Additionally, the Company determined that the Proposed Transaction will
not have any federal income tax consequences to the Shareholders.
The above tax discussion was developed by the Company after
consultation with its tax and legal advisors.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board retained the Advisor to provide an opinion to the
Board of Directors regarding the fairness, from a financial point of view, of
the Asset Sale Agreement. The Advisor provides financial advisory services
associated with mergers, acquisitions and strategic partnering for emerging
growth companies. Since the Advisor was
34
<PAGE> 39
founded in 1990, it has completed over 50 such assignments. The Advisor is
located in Palo Alto, California. In addition, the Company's Board of Directors
unanimously determined that the terms of the Proposed Transaction are fair and
in the best interest of the Company and its Shareholders and recommends a vote
in favor of the Proposed Transaction. In the course of reaching its decision to
approve the Proposed Transaction, the Board consulted with its legal and
financial advisors as well as the Company's management and considered the
following factors:
(1) The Board's desire to focus the Company's resources on
developing its proprietary technology through patents and
licensing of its proprietary technology where it believes that
the Company has greater asset value, competitive advantage and
probability of success. The Board has determined that the risk
and cost of raising the necessary capital to pursue the
manufacture of magnetic heads using the Company's technology
is prohibitive. The Board has therefore adopted a strategy of
capitalizing on its proprietary technology through further
patent protection of its existing technology and licensing of
that protected technology.
(2) The anticipated positive effects upon the Company's balance
sheet and results of operations from the use of the net
proceeds therefrom to retire indebtedness and expand the
Company's licensing capabilities. Among other factors
considered by the Board of Directors were the positive effects
of using $6.5 million of the anticipated proceeds from the
Proposed Transaction, which based on the agreement entered
into with the debt holder will eliminate substantially all of
the Company's short and long-term debt, currently
approximately $18.0 million, (comprised approximately of Denka
($14.3 million), Silicon Valley Bank ($1.0 million),
Shareholder loan ($1.0 million), equipment leasing contracts
($0.9 million), and trade payables ($0.5 million)), which
would result in annual interest savings of approximately $1.2
million. In addition, the Proposed Transaction would allow the
Company to eliminate a rapidly deteriorating asset and
earnings base, substitute the Company's relatively illiquid
assets for cash, and recraft its infrastructure to create a
more efficient business with lower ongoing costs and at the
same time no loss of jobs. The Board felt that this model
would have a better prospect of increasing Shareholder value
because the Company, with limited resources, would be directly
focused on two objectives: (1) increasing the patent portfolio
of intellectual property, the Company's most valuable asset
and (2) licensing the intellectual property to create a
royalty stream.
(3) The absence of any serious offers from any other third parties
regarding a possible acquisition of the Company's assets or a
possible merger with the Company. The Board had been involved
in ongoing discussions with management regarding the prospects
of raising equity financing, debt financing, merger and
acquisition; additionally, the Board had been in discussions
with potential equity investors such as Allen Patricof, US
Venture Partners, Pacven Walden Management, Integral Capital
Partners, Burr Egan, Deleage, Paine Webber, JAFCO (Japan) and
others. Management and the Board tried unsuccessfully for
seven months to raise additional capital for the Company. The
Board concluded that there were no offers other than Read-Rite
forthcoming.
(4) The opinion of the Advisor, that the purchase price is fair,
from a financial point of view, to the Company and its
Shareholders. The Advisor reviewed its opinion in detail with
the Board of Directors and asked questions with respect to the
various methodologies used, the details of other licensing
agreements used, the background and experience base of the
Advisor as well as other questions regarding the analysis
performed by the Advisor.
(5) The willingness of Read-Rite to continue to employ the
Company's work force. The Board discussed the potential
liability of laying off the employees that were employed by
Read-Rite. The Board felt that the Shareholders were better
served by avoiding the termination expenses involved and
utilizing the funds instead to perfect the intellectual
property and finding additional licensees of the Company's
technology.
Considering all of the above factors, the Board of Directors concluded
that the Company should become tightly focused on licensing its proprietary
technology and that it is likely that in an increasingly competitive environment
the physical assets to be sold and the technology to be licensed would not have
a value higher than that which existed at the time that the Proposed Transaction
was approved by the Company's Board. In addition, management, with its intimate
35
<PAGE> 40
knowledge of the physical assets to be sold and the technology to be licensed
(on a non-exclusive basis) and with the assistance and advice of the Advisor,
had concluded that it was unlikely that any purchaser other than Read-Rite would
be willing to pay a price higher than that to be received in the Proposed
Transaction and communicated this to the Board of Directors. The Board did not
independently establish a value for the Proposed Transaction, but based on all
the above factors determined that the Proposed Transaction was fair and
reasonable to the Company and its Shareholders. The Board did not assign a
weight for the individual factors considered in evaluating the Proposed
Transaction. The Board of Directors did consider potential adjustments to the
purchase price through the Closing and determined that the purchase price net of
potential downward adjustments is fair to the Company's Shareholders. See
"Proposal Three: The Proposed Transaction Background" (pages 20-24), above.
REPRESENTATIONS AND WARRANTIES
The Company has made certain customary representations and warranties
in the Asset Sale Agreement relating to the Company, the authorization, validity
and the enforceability of the Asset Sale Agreement and similar corporate
matters. The Company has also made certain representations and warranties
regarding execution, delivery and performance of the Asset Sale Agreement; title
to the assets being sold; the payment of taxes; pending and threatened claims
and litigation; identity of suppliers; compliance with laws and regulations;
environmental matters; condition of the assets being sold; contracts to be
assumed by Read-Rite; pending or threatened proceedings related to employees;
absence of brokers or finders; this Proxy Statement; and completeness of
representations and warranties. To the extent that any of the representations
and warranties are proven to be inaccurate, the Company has agreed, subject to
certain limitations contained in the Asset Sale Agreement, to permit Read-Rite
to withhold amounts for damages caused by such inaccuracies from the Final
Payment. Read-Rite is not, however, entitled to recover any damages resulting
from the actions of Read-Rite or any employee of Read-Rite to the extent that
any such action results in a breach of the Asset Sale Agreement by the Company.
COVENANTS
The Company has agreed, until the Closing, among other things to
conduct its business in the ordinary course consistent with past practices; to
preserve and maintain the assets being sold to Read-Rite; to perform obligations
required to be performed by the Company under the contracts to be assumed by
Read-Rite; to give prompt notice to Read-Rite of any material adverse change in
the operations being sold to Read-Rite; not to mortgage, pledge or subject to
lien any of the assets being sold to Read-Rite or to transfer any such assets;
to discharge the Company's liabilities when due; to provide Read-Rite with
access to the Company's facilities, properties, and the information; not to
pursue another agreement for the sale of the assets subject to the Asset Sale
Agreement; to prepare this Proxy Statement; to hold a meeting of Shareholders;
to consult with Read-Rite in obtaining any necessary third party consents; and
to obtain the release of certain liens on the assets being sold to Read-Rite.
Additionally, the Company has agreed to pay transfer taxes related to the
proposed transaction, and to allow Read-Rite to hire the Company's employees
related to the Company's research and development operations.
CONDITIONS TO THE PROPOSED TRANSACTION
Consummation of the Proposed Transaction is subject to approval by the
Shareholders and to a number of other conditions, including: (a) all
representations and warranties made by the other party in the Asset Sale
Agreement being true and correct, and all agreements, covenants and conditions
required having been performed under the Asset Sale Agreement, as of the
Closing, (b) each party's receipt at the Closing of certain closing certificates
and legal opinions, and (c) the absence of any pending or threatened legal
action to enjoin the Proposed Transaction.
Read-Rite's obligations under the Asset Sale Agreement are contingent
upon Read-Rite and the Company consummating the License Agreement. Additionally,
the Voting Agreement must be executed by certain Shareholders prior to
consummation of the Asset Sale Agreement.
TERMINATION OF THE PROPOSED TRANSACTION
At any time prior to the Closing, the Asset Sale Agreement may be
terminated under certain circumstances, including the following: (a) if a court
prohibits the Proposed Transaction, (b) by mutual written consent of Read-Rite
36
<PAGE> 41
and the Company, (c) by the Company if there has been a material breach on the
part of Read-Rite in its representations, warranties or covenants, subject to a
right to cure, and (d) by Read-Rite if there has been a material breach on the
part of the Company in its representations, warranties or covenants, subject to
a right to cure. If terminated in accordance with (a) or (b), Read-Rite and the
Company shall enter into a limited license agreement (the "Limited License
Agreement") pursuant to which the Company shall grant a perpetual, non-exclusive
license to Read-Rite covering the Company's rights to certain technology and
software, for a one-time fee of $2.0 million. If terminated in accordance with
(c), Read-Rite will forgive certain obligations of the Company and the Company
and Read-Rite (if elected by Read-Rite) shall enter into the Limited License
Agreement for a one time fee of $2.0 million. If terminated in accordance with
(d), the Company and Read-Rite shall enter into the Limited License Agreement
for no fee and the Company must repay certain obligations to Read-Rite.
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
Under the Asset Sale Agreement, the Company until the Closing, is
obligated (a) to conduct its business only in the ordinary course consistent
with past practices, and use the facilities and assets in the usual, regular and
ordinary course and in substantially the same manner as previously used; (b) to
preserve and maintain its assets; (c) to perform all obligations required to be
performed by the Company under all contracts assumed by Read-Rite; (d) to give
prompt notice to Read-Rite of any material adverse change to the Company's
assets or facilities; (e) not to mortgage, pledge or subject to lien any of the
assets or sell or transfer any of the assets; and (f) to discharge when due all
liabilities, provided that upon the Closing, Read-Rite shall be responsible for
all Assumed Liabilities.
EXPENSES
Total costs to the Company associated with the Proposed Transaction are
estimated at $250,000. Such amount represents primarily legal and advisory fees
and will be paid by the Company. Costs incurred by Read-Rite will be paid by
Read-Rite.
37
<PAGE> 42
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, is required to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Copies of
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
Regional offices of the SEC: Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and Suite 1300, 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates certain documents by reference which
have been previously delivered to Shareholders. These documents are also
available upon request from Sabine Austin, Assistant Secretary, Censtor Corp.,
2105 Hamilton Avenue, Suite 270, San Jose, CA 95125, telephone (408) 298-8400.
The Company hereby undertakes to provide, without charge, to each
person, including any beneficial owner of the Company's Common Stock, to whom a
copy of this Proxy Statement has been delivered, upon written or oral request of
any such person, a copy of any and all of the documents referred to below which
have been or may be incorporated herein by reference. Requests for such
documents should be directed to the person indicated in the immediately
preceding paragraph.
The following documents, which have been filed with the SEC pursuant to
the Exchange Act and which were mailed to Shareholders on or about June 14,
1996, are hereby incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the year ended
June 30, 1995, as amended by the Company's Form 10-K/A
Amendment No. 2, dated December 13, 1995; and
(b) The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996.
By Order of the Board of Directors,
/s/ Sabine Austin
-----------------------------------
Sabine Austin
Assistant Secretary
San Jose, California
June 28, 1996
38
<PAGE> 43
CENSTOR CORP.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 11, 1996
The undersigned hereby appoints _________________ and
___________________, or either of them, each with full power of substitution, as
the proxyholder(s) of the undersigned to represent the undersigned and vote all
shares of the Common Stock of and Preferred Stock of Censtor Corp. (the
"Company") which the undersigned would be entitled to vote if personally present
at the annual meeting of Shareholders of the Company to be held on July 11,
1996, and at any adjournments or postponements of such meeting, as follows:
1. To elect as directors James A. Cole, Garrett A. Garrettson,
B. Kipling Hagopian, Edwin V.W. Zschau, Russell M. Krapf.
[ ] For all nominees listed above (except as indicated
below)
[ ] Withhold authority to vote (as to all nominees)
To withhold authority to vote for any individual
nominee, write that nominee's name on the following
line: _______________________________
2. To ratify appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1996:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the Asset Sale Agreement, providing for the
transfer by the Company to Read-Rite of the Company's research and development
operations, including the hiring of 84 Censtor employees, the sale of certain of
the Company's physical assets and the Company's rights and obligations under
contracts related thereto, and the grant by the Company of a non-exclusive
license to the Company's intellectual property, including the Company's rights
in patents, technology and software, pursuant to the terms and conditions of the
Agreement for Purchase and Sale of Assets, dated as of March 29, 1996, by and
between Read-Rite Corporation and the Company and the transactions contemplated
thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy, when properly executed, will be voted in the
manner directed above. WHEN NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
THE NOMINEES AND THE ABOVE PROPOSALS. This proxy may be revoked by the
undersigned at any time, prior to the time it is voted, by any of the means
described in the accompanying Proxy Statement.
________________________ ________________________ Dated: _____________, 1996
Signature of Shareholder Signature of Shareholder
Typed or Printed Name: Typed or Printed Name:
Please sign EXACTLY as your name appeared on the envelope
transmitting the Notice of Annual Meeting and print your name under your
signature. If signing for estates, trusts, corporations or other entities, title
or capacity should be stated. If shares are held jointly, each holder should
sign.
TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO
FILL IN, DATE AND RETURN PROMPTLY THIS BLUE PROXY FORM IN THE ENCLOSED POSTAGE
PREPAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOUR
PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
39
<PAGE> 44
APPENDIX A
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
BY AND BETWEEN
READ-RITE CORPORATION AND
CENSTOR CORPORATION
This AGREEMENT FOR PURCHASE AND SALE OF ASSETS (the "Agreement") is
made and entered into as of March 29, 1996 by and between Censtor Corporation, a
California corporation (the "Seller"), and Read-Rite Corporation, a Delaware
corporation (the "Buyer").
RECITALS
A. Seller is engaged in the business of designing, manufacturing and
selling magnetic recording heads for use in disk drives.
B. Buyer desires to purchase at the Closing (as hereinafter defined)
certain specified assets of Seller, but to assume only certain specified
liabilities of Seller, all in accordance with the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the representations, warranties and
agreements herein contained, the parties hereto agree as follows:
SECTION 1
1. DEFINITIONS. Capitalized terms in this Agreement shall have the
meanings stated in this Section 1 or defined elsewhere in this Agreement. A
reference to a particular Exhibit is to an Exhibit to this Agreement, each of
which is incorporated into and made a part of this Agreement by that reference.
A reference to a particular Section is to a Section of this Agreement.
"Allocation Schedule" shall have the meaning set forth in Section 3.6.
"Assets" shall have the meaning set forth in Section 2.1.
"Assumed Contracts" shall have the meaning set forth in Section 3.5.
"Assumed Liabilities" shall have the meaning set forth in Section 3.5.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation, and Liability Act.
"Claims" shall mean any and all personal injury, property damage,
nuisance, tort, contract or other claims, actions or demands brought at any
time, any and all demands, actions or claims for investigations, remediation,
removal, closure or other action with respect to Hazardous Substances, and any
and all other suits, demands, actions, fines, penalties, claims, enforcement
actions, Liens, Liabilities, damages, deficiencies, injunctions, attorneys'
fees, experts' fees, costs and expenses
<PAGE> 45
imposed, threatened, paid or incurred at any time, whether foreseeable or
unforeseeable, conditional or unconditional.
"Closing" and "Closing Date" shall have the respective meanings set
forth in Section 4.1.
"Code" shall have the meaning set forth in Section 3.6.
"Compensation" shall mean all base straight time gross earnings,
commissions, overtime, shift premium, incentive compensation, incentive
payments, bonuses, health insurance benefits, payroll taxes and other
withholdings, and other compensation related amounts paid or accrued with
respect to any Employee.
"Disclosure Schedule" shall have the meaning set forth in Section 5.1.
"Employees" shall mean those individuals identified on Exhibit A hereto
who were employees of Seller on February 4, 1996 and who became employees of
Buyer on February 5, 1996.
"Environmental Laws" shall mean the common law and all local, state,
federal, foreign or international laws, statutes, ordinances, rules,
regulations, guidelines, judgments, injunctions, stipulations, decrees, orders,
permits, approvals, treaties, or protocols, and all amendments and modifications
of any of the foregoing, now or hereafter enacted, issued or promulgated by any
Governmental Body which relate to any Hazardous Substance or any Hazardous
Substance Activity.
"Environmental Liability" shall mean all Liabilities arising out of or
in connection with (a) Seller's Hazardous Substance Activities conducted prior
to the Closing Date or (b) the violation of any Environmental Law by the Seller
or the Facility (including without limitation the violation, of any applicable
building codes, regulations, ordinances or other laws in effect on the Closing
Date, resulting from the presence of any Hazardous Substance in construction
materials, structures or improvements of the Facility on or after the Closing
Date).
"Environmental Permit" shall mean any approval, permit, license,
clearance or consent required to be obtained from any private person or any
Governmental Body with respect to a Hazardous Substances Activity which is or
was conducted by the Seller at the Facility.
"Excluded Assets" shall have the meaning set forth in Section 2.2.
"Governmental Body" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"Hazardous Substance" shall mean any material or substance that is now
or hereafter prohibited or regulated by any statute, law, rule, regulation,
ordinance, judgment, stipulation, treaty or protocol or that is now or hereafter
designated by any Governmental Body to be radioactive, toxic, hazardous or
otherwise a danger to human health, reproduction or the environment, including
without limitation, asbestos, asbestos containing materials, petroleum,
including crude oil or any fraction thereof, polychlorinated biphenyls or
electro magnetic fields.
<PAGE> 46
"Hazardous Substance Activity" shall mean the handling, transportation,
transfer, recycling, storage, use, treatment, manufacture, investigation,
removal, remediation, release, emissions, disposal, exposure of any person to,
sale, or distribution of any Hazardous Substance or any product containing a
Hazardous Substance.
"Lease Agreement" shall mean that certain lease agreement dated
November 28, 1983, as amended, between The Sobrato Group, a California limited
partnership, and Seller related to the premises at 530 Race Street, San Jose,
California.
"Liabilities" shall mean any and all liabilities (including strict
liability), claims, judgments, demands, actions, causes of action, damages,
losses, expenses, penalties, fines, obligations, encum brances, liens, costs,
and expenses of investigation or defense of any claim, of whatever kind or
nature, whether absolute, contingent, accrued or otherwise, matured or
unmatured, foreseeable or unforeseeable.
"License Agreement" shall have the meaning set forth in Section 4.2(e).
"Liens" shall mean mortgages, deeds of trust, pledges, taxes, security
interests, liens, leases, licenses, escrow arrangements, liabilities,
encumbrances, costs, charges and claims of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or otherwise (including, without
limitation, any agreement to give any of the foregoing).
"Loan Adjustment Amount" shall have the meaning set forth in Section
3.3.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or governmental body.
"Permitted Liens" shall mean (i) liens for current taxes which are not
yet due and payable, which liens in any event will not exist upon the transfer
of the Assets to Buyer at the Closing, and (ii) purchase-money liens arising out
of the purchase of equipment pursuant to those Equipment Lease Agreements which
are Assumed Contracts.
"Purchase Price" shall have the meaning set forth in Section 3.1.
"Returns" shall have the meaning set forth in Section 5.1(d).
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any
federal, state, local or foreign income, gross receipts, property, sales, use,
license, excise, franchise, employment, payroll, withholding, alternative or
add-on minimum, ad valorem, transfer or excise tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, imposed by any Governmental
Body.
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<PAGE> 47
SECTION 2
2. TRANSFER OF ASSETS.
2.1 Assets to be Purchased at the Closing. Subject to the terms and
conditions of this Agreement, Seller agrees to sell, transfer, convey, assign
and deliver to Buyer on the Closing Date (as defined herein), and Buyer agrees
to buy and acquire, all right, title and interest of Seller in and to the
following assets and properties of Seller as provided herein (collectively, the
"Assets").
(a) All machinery, tooling, computer hardware, software and
other equipment and all furnishings, furniture, office supplies, leasehold
improvements, fixtures and other tangible personal property of Seller (other
than those assets specifically identified in Schedule 2.2(c) hereto), including
but not limited to the assets listed in Schedule 2.1(a) hereto;
(b) Prepaid expenses with respect to rent, services and the like
related to the Assumed Contracts;
(c) Copies, but not the originals, of all books, records,
accounts, correspondence and production records related to the Assets;
(d) Copies of all manufacturing and technical documentation
(including any documentation set forth in magnetic, machine-readable form)
related to the Assets or used by Seller in the conduct of the business related
to the Assets; and
(e) All other assets of Seller which are not Excluded Assets (as
defined herein).
2.2 Excluded Assets. The Assets shall not include any of the
following assets and properties of Seller (collectively, the "Excluded Assets").
(a) Seller's cash or cash equivalents;
(b) All know how, intellectual property, copyrights, trade
secrets, patents and patent applications, that are owned, controlled, acquired
or otherwise licensable by Seller; and
(c) All other assets which are specifically identified on
Schedule 2.2(c) hereto; and
(d) The originals of all items referenced in Section 2.1(c) and
2.1(d) above, and all other books, records, accounts, and correspondence
relating to Seller's business and to Seller.
SECTION 3
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<PAGE> 48
3. CONSIDERATION. In consideration for the transfer of the Assets,
Buyer agrees to make the following payments and assume the following
liabilities:
3.1 Purchase Price. Subject to any claims for Damages under Section
8 hereof, the aggregate purchase price (the "Purchase Price") to be paid by the
Buyer to the Seller hereunder shall be Nine Million Twenty-Five Thousand Dollars
($9,025,000). The Purchase Price shall be payable in installments as follows:
(i) Six Million Five Hundred Twenty-Five Thousand Dollars ($6,525,000) shall be
paid on the Closing Date, (ii) Two Hundred Fifty Thousand Dollars ($250,000)
shall be paid on November 15, 1996, (iii) Two Hundred Fifty Thousand Dollars
($250,000) shall be paid on December 13, 1996, and (iv) Two Million Dollars
($2,000,000) (the "Final Payment") shall be paid on the date which is nine (9)
calendar months from the Closing Date (the "Final Payment Date"). The latter
three (3) payments shall, however, be subject to any claims for Damages under
Section 8 hereof. Notwithstanding the foregoing, Buyer shall be entitled to
credit against the portion of the Purchase Price to be paid to Seller on the
Closing Date any Loan Adjustment Amount (as defined in Section 3.3 hereof) and
all Seller Expenses (as defined in Section 3.4 hereof).
3.2 Payment to Seller on Closing Date. On the Closing Date, Buyer
shall pay Six Million Five Hundred Twenty-Five Thousand Dollars ($6,525,000) of
the Purchase Price to Seller by check or wire transfer to an account designated
by the Seller. Notwithstanding the foregoing, Buyer shall be entitled to credit
against the portion of the Purchase Price to be paid to Seller on the Closing
Date any Loan Adjustment Amount (as defined in Section 3.3 hereof) and all
Seller Expenses (as defined in Section 3.4 hereof).
3.3 Initial Loan to Seller. In connection with that certain Letter
of Intent between Seller and Buyer dated February 2, 1996 (the "Letter
Agreement"), Buyer agreed to loan Seller up to $900,000 pursuant to those
certain Promissory Notes dated February 2, 1996, February 29, 1996 and March 22,
1996 (collectively, the "Promissory Notes"). The amount of principal, interest
and other amounts outstanding from time to time under the Promissory Notes is
hereafter referred to as the "Loan Amount." Seller agrees that all amounts
loaned to it by Buyer pursuant to the Promissory Notes have been used and will
be used by Seller as operating funds in the normal and ordinary course of
business. The "Loan Adjustment Amount" shall equal (i) fifty percent (50%) of
the Loan Amount outstanding on the date hereof plus (ii) fifty percent (50%) of
the Compensation accrued or paid by Buyer with respect to the Employees through
the date hereof (provided that the amount of such Compensation shall not exceed
the rate of Compensation being paid by Seller to such Employees on February 4,
1996) plus (iii) fifty percent (50%) of all accrued but unpaid expenses of
Seller for the period beginning on February 2, 1996 through the date hereof less
(iv) all prepaid expenses of Seller outstanding on the date hereof to the extent
Seller can demonstrate that such expenses were paid from amounts borrowed from
Buyer pursuant to the Promissory Notes. The determination of any accrued amounts
or prepaid expenses shall be made in accordance with generally accepted
accounting principles consistently applied, and shall be subject to the mutual
review and agreement of Seller and Buyer. Buyer hereby agrees with Seller that
any Loan Amount outstanding as of the Closing Date less the Loan Adjustment
Amount shall be forgiven as of the Closing Date and shall constitute additional
consideration paid by Buyer to Seller hereunder. The Loan Adjustment Amount
shall be
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<PAGE> 49
computed by Buyer, and Buyer shall deliver a copy of such computation to Seller
on or prior to the Closing Date.
3.4 Additional Loan to Seller. Upon the execution and delivery of
this Agreement, Buyer shall agree to loan Seller up to an additional $800,000,
such loan to be evidenced by a promissory note in the form attached hereto as
Exhibit B (the "Bridge Note"). Buyer acknowledges that the proceeds of any loans
obtained by Seller from Buyer pursuant to the Bridge Note may be used to fund
ongoing costs incurred by Seller in the usual and ordinary course of its
business, including without limitation Seller's accounting, legal and other
costs related to the transactions contemplated hereby and costs associated with
the Assumed Contracts. For purposes hereof, Seller and Buyer agree that any
expenses of Seller related to the period subsequent to the date hereof which are
paid or accrued but unpaid pursuant to the terms of the Assumed Contracts,
including any lease payments, property taxes, insurance, utilities or
maintenance charges (whether incurred to preserve the Facility of Seller
referenced in the Lease Agreement, any Asset being leased pursuant to those
Equipment Lease Agreements which constitute Assumed Contracts, or any of the
other Assets) are referred to herein as "Nonseller Expenses." All other expenses
of any kind whatsoever paid or accrued by Seller, including without limitation
legal and accounting fees, patent filing and maintenance fees, salaries and
benefits, workers' compensation expenses, any accrued interest under the Bridge
Note and any amounts owed by Seller to Buyer under the Bridge Note which were
not used by Seller to pay Nonseller Expenses are referred to herein as "Seller
Expenses." At the Closing, Buyer shall be entitled to credit against the amount
of the Purchase Price to be paid by Buyer to Seller the full amount of any
Seller Expenses, and any other amount due under the Bridge Note shall be
forgiven by Buyer and shall constitute additional consideration paid by Buyer to
Seller hereunder. The determination of any accrued amounts hereunder shall be
made in accordance with generally accepted accounting principles consistently
applied, and shall be subject to the mutual review and agreement of Seller and
Buyer.
3.5 Assumed Liabilities. On the Closing Date, Buyer shall assume and
agree thereafter to pay, perform and discharge only Seller's obligations under
the Lease Agreement and the Equipment Lease Agreements to which Seller is a
party and which are specifically listed on Schedule 3.5 hereto (collectively,
the "Assumed Contracts") and no others, but only to the extent they remain
unpaid and unperformed on the Closing Date and excluding any such obligations or
liabilities based on any actions by Seller or any failure by Seller to perform
its obligations under the Assumed Contracts prior to the Closing Date (the
"Assumed Liabilities"). Except for the Assumed Liabilities and as contemplated
by Section 8.6 hereof, Buyer shall not assume, directly or indirectly, or have
any responsibility for any Liability of Seller, and Seller shall retain all
Liabilities arising from the operation of the Assets and the related business
prior to the Closing Date, other than the Assumed Liabilities. Without limiting
the foregoing, Buyer shall not directly or indirectly, assume or have any
responsibility for any liability for any Compensation or other Liabilities
related to the employment of the Employees by the Seller prior to February 5,
1996.
3.6 Tax Allocation. The parties agree to allocate the purchase price
for the Assets in accordance with a schedule that Buyer shall prepare and
deliver to Seller at the Closing (the "Allocation Schedule"). The Allocation
Schedule shall be subject to Seller's approval, which shall not
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<PAGE> 50
be withheld unreasonably. Buyer and Seller agree that they will prepare and file
their federal and any state or local income tax returns based on the purchase
price allocation contained in the Allocation Schedule and agree not to take a
reporting position inconsistent therewith. This allocation is intended to comply
with Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"),
and Buyer and Seller hereby agree to prepare and file all notices or other
filings required pursuant to such section and hereby further agree that all such
notices or filings will be based on the allocation contained in the Allocation
Schedule.
SECTION 4
4. CLOSING.
4.1 Closing Date. The closing of the transactions contemplated by
this Agreement (the "Closing") shall occur at the offices of Wilson Sonsini
Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, as soon as
practicable after the satisfaction or waiver of each of the conditions set forth
in this Section 4 or at such other time and place as the parties hereto agree
(the "Closing Date").
4.2 Conditions to Obligation of Buyer. The obligation of Buyer to
close hereunder is subject to the following conditions:
(a) Subject to changes (i) resulting from the actions of Buyer
contemplated by Section 8.6 hereof or (ii) that are not in the aggregate
materially adverse in the reasonable judgment of Buyer, the representations and
warranties made by Seller in this Agreement shall be true and correct on and as
of the Closing Date with the same effect as if made on and as of the Closing
Date, and Seller shall have performed and complied with all agreements,
covenants and conditions on its part required to be performed or complied with
on or prior to the Closing Date.
(b) Buyer shall have received a certificate of the Secretary of
Seller, dated the Closing Date, in form and substance satisfactory to Buyer, as
to (i) the Articles of Incorporation of Seller; (ii) the by-laws of Seller;
(iii) the resolutions of the Board of Directors of Seller authorizing the
execution and performance of this Agreement and the other documents executed in
connection herewith; and (iv) the resolutions of the shareholders of Seller
authorizing the execution and performance of this Agreement.
(c) A duly authorized officer of Seller shall deliver to Buyer,
at the Closing, a certificate certifying as to the matters set forth in Section
4.2(a) hereof and that there has been no adverse change with respect to the
Assets or the Assumed Liabilities since the date hereof, except any such change
resulting from the actions of Buyer contemplated by Section 8.6 hereof.
(d) No legal action or proceeding shall be pending or threatened
(i) by any governmental agency seeking to restrain, prohibit, invalidate or
otherwise affect the consummation of
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<PAGE> 51
the transactions contemplated hereby or (ii) which is reasonably likely to have
a material adverse effect on the Assets or the use of the Assets by the Buyer.
(e) Buyer and Seller shall have entered into a license agreement
related to Seller's intellectual property, such license agreement to be in the
form attached hereto as Exhibit C (the "License Agreement").
(f) Seller shall have delivered to Buyer all bills of sale,
endorsements, assignments and other instruments as Buyer shall reasonably
request or as necessary or appropriate to sell, convey, assign, transfer and
deliver to Buyer good title, free and clear of all Liens (except for Permitted
Liens), to all the Assets.
(g) All necessary third party consents shall have been obtained
for Seller to transfer the Assumed Contracts to Buyer.
(h) Buyer shall have received an opinion of counsel to the
Seller, such opinion to be substantially in the form attached hereto as Exhibit
D, with such changes as may be reasonably acceptable to Buyer. In addition, the
list of "material agreements" to be referenced in such opinion shall be
reasonably acceptable to Buyer and shall include the material contracts and
license agreements of Seller.
(i) The transactions contemplated hereby shall have been
approved by all necessary action of Seller's shareholders.
(j) Seller shall have received (A) the written consent of Maxtor
Corporation ("Maxtor") to the transactions contemplated hereby (including the
License Agreement) as required by that certain License Agreement between the
Seller and Maxtor dated September 23, 1991 (the "Maxtor Agreement"), and (B)
written confirmation from Maxtor that Buyer will not be obligated to extend any
license rights to Maxtor pursuant to Section 4.3 of the Maxtor Agreement or
otherwise, such consent and confirmation to be reasonably acceptable to Buyer.
(k) Seller shall have received the written consent of Denki
Kagaku Kogyo Kabushiki Kaisha ("Denka") to the transactions contemplated hereby
(including the License Agreement) to the extent required by Seller's existing
agreements with Denka, and such consent shall be reasonably acceptable to Buyer.
(l) Seller shall have received the written consent of NEC
Corporation ("NEC") to the transactions contemplated hereby (including the
License Agreement) as required by that certain License Agreement between the
Seller and NEC dated August 7, 1995, and such consent shall be reasonably
acceptable to Buyer.
(m) Seller shall have received written confirmation from Fujitsu
Corporation ("Fujitsu") that Buyer will not be obligated to extend any license
rights to Fujitsu
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<PAGE> 52
pursuant to Section 4.3 of the License Agreement between Seller and Fujitsu
dated February 28, 1991 or otherwise, and such written confirmation shall be
reasonably acceptable to Buyer.
4.3 Conditions of Obligation of Seller. The obligation of Seller to
close hereunder is subject to the following conditions:
(a) Subject to changes that are not in the aggregate materially
adverse in the reasonable judgment of Seller, the representations and warranties
made by Buyer in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as if made on and as of the Closing Date, and
Buyer shall have performed and complied with all agreements, covenants and
conditions on its part required to be performed or complied with on or prior to
the Closing Date.
(b) No legal action or proceeding shall be pending or threatened
by any governmental agency seeking to restrain, prohibit, invalidate or
otherwise affect the consummation of the transactions contemplated hereby.
SECTION 5
5. REPRESENTATIONS AND WARRANTIES.
5.1 Representations and Warranties of Seller. Except as set forth in
the Disclosure Schedule attached hereto as Exhibit E, which schedule shall
specifically reference the Sections of this Agreement to which the disclosure
therein applies, Seller represents and warrants to Buyer as of the date of this
Agreement and as of the Closing Date as follows:
(a) Organization, Standing and Qualification. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of California. Seller has all requisite corporate power and authority and is
entitled to carry on its business as it is now being conducted, and to own,
lease or operate the properties owned, leased and operated by it in the places
where such business is now conducted and where the Assets and its other
properties are now owned, leased or operated. Seller is qualified to do business
as a foreign corporation in all jurisdictions where such qualification is
required for the conduct of its business, except where the failure to be so
qualified would not have a material adverse effect on Seller or the Assets.
(b) Execution, Delivery and Performance. Neither the execution
and delivery nor the performance of this Agreement by Seller will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien, charge or encumbrance pursuant to any provisions of
Seller's Articles of Incorporation or Bylaws, or any franchise, mortgage, deed
of trust, lease, license, agreement (including each of the Assumed Contracts) or
understanding, or conflict with, result in a default, right to accelerate or
loss of rights under, or result in the creation of any lien, charge or
encumbrance pursuant to any law, ordinance, rule or regulation, or any order,
judgment, award or
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decree to which Seller is a party or by which it may be bound or affected.
Seller has full corporate power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and all corporate and other
proceedings required to be taken to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly executed and
delivered by and constitutes the valid and binding obligation of Seller and is
enforceable in accordance with its terms.
(c) Good Title to Assets. Seller has good and marketable title
to all the Assets, and none of the Assets is subject to any Lien (other than
Permitted Liens).
(d) Taxes.
(i) To the extent a failure to do so could adversely impact
Buyer, the Assets or Buyer's use of the Assets, (a) Seller has timely filed
within the time period for filing or any extension granted with respect thereto,
all federal, state, local and foreign Tax returns, reports and estimates
("Returns") which it is required to file relating or pertaining to any and all
Taxes attributable to or levied upon the Assets and (b) paid any and all Taxes
it is required to pay in connec tion with the taxable periods to which such
Returns relate. There are (and immediately following the Closing Date there will
be) no Liens on the Assets relating or pertaining to Taxes. To the best know
ledge of Seller, there is no basis for the assertion of any claims which, if
adversely determined, would result in a Lien on the Assets or otherwise
adversely effect Buyer or the Assets.
(ii) To the extent relevant to the Assets, Seller shall (a)
provide Buyer with such assistance as may be required in connection with the
preparation of any Return and the conduct of any audit or other examination by
any taxing authority or in connection with judicial or administrative
proceedings relating to any liability for Taxes, provided that Buyer shall
reimburse Seller for any third party expenses reasonably incurred by Seller in
providing such assistance and (b) retain and provide Buyer with all records or
other information that may be relevant to the preparation of any Returns, or the
conduct of any audit or examination, or other Tax proceeding by a Governmental
Body or otherwise. Seller shall retain all relevant documents, including prior
year's Returns, supporting work schedules and other records or information that
may be relevant to such returns and shall not destroy or otherwise dispose of
any such records without the prior written consent of Buyer.
(e) Claims and Litigation. No Claim (including warranty claims),
legal action, suit, arbitration, governmental investigation or other legal,
regulatory or administrative proceeding is pending against Seller related to the
Assets, nor to the best of Seller's knowledge is there any threat thereof
against or relating to the Assets or the transactions contemplated by this
Agreement, and to the best of Seller's knowledge there is no basis for any such
Claim, suit or other proceeding.
(f) Suppliers. The Disclosure Schedule contains a correct list
of all of the current suppliers of supplies, equipment, spare parts or similar
goods for the use or operation of the
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Assets. To the best of Seller's knowledge, such suppliers provide all of the
supplies, equipment, spare parts or similar goods necessary to use or operate
the Assets.
(g) Compliance with Laws and Regulations; Permits. Seller is in
compliance with all statutes, laws, rules and regulations with respect to or
affecting the ownership or operation of the Assets. Seller is not presently
subject to any judgment, order, injunction or decree issued by any Governmental
Body or court relating to the Assets. Seller holds and has at all times held all
licenses, permits and authorizations necessary for the lawful conduct in all
respects of its business wherever conducted pursuant to all laws and regulations
of any Governmental Body. Seller does not know of any material violation of any
of the foregoing licenses, permits and authorizations and Seller has not
received notice from any Governmental Body of any such violation or the
intention of such Governmental Body to investigate the existence of any such
violation.
(h) Real Property; Environmental Matters.
(i) As of the Closing Date, to the best knowledge of
Seller,no Hazardous Substance is present on the property subject to the Lease
Agreement (the "Facility") and, to the best knowledge of Seller, no reasonable
likelihood exists that any Hazardous Substance present on other property will
come to be present on the Facility and there are no underground storage tanks,
aboveground storage tanks, asbestos or PCBs present on the Facility.
(ii) Seller has conducted all Hazardous Substance
Activities in compliance with all applicable Environmental Laws. The Hazardous
Substance Activities of Seller prior to the Closing Date have not resulted in:
(a) the exposure of any Employee to a Hazardous Substance in a manner which has
or will cause an adverse health effect to said person; or (b) the presence of
any Hazardous Substance at the Facility, or the air, soil, groundwater or
surface water thereof, in violation of Environmental Law.
(iii) The Disclosure Schedule accurately describes all of
the Environmental Permits currently held by the Seller and such Environmental
Permits are all of the Environmental Permits necessary for the continued conduct
of any Hazardous Substance Activity of the Seller as such activities are
currently being conducted. Except as set forth in the Disclosure Schedule, all
such Environmental Permits are valid, in full force and effect, and will survive
the Closing without modification. Seller has complied with all covenants and
conditions of any Environmental Permit which is or has been in force with
respect to its Hazardous Substances Activities. No circumstances exist which
could cause any Environmental Permit to be revoked, modified, or rendered
non-renewable upon payment of the permit fee or which could impose upon Seller
the obligation to obtain any additional Environmental Permit. All Environmental
Permits and all other consents and clearances required by any Environmental Law
or any agreement to which Seller is bound as a condition to the performance and
enforcement of this Agreement, including without limitation, all environmental
clearances or "closure" obligations required by any Governmental Body have been
obtained or will be obtained prior to the Closing at no cost to Buyer.
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(iv) In the best of Seller's knowledge, there is no fact or
circumstance which presently or with the passing of time could involve the
Facility in any proceeding concerning an Environmental Liability or impose upon
the Facility or Buyer any Environmental Liability.
(v) Seller has delivered to Buyer all records concerning
its Hazardous Substance Activities and all environmental audits and
environmental assessments of the Facility conducted at the request of, or
otherwise available to Seller. Seller has complied with all environmental
disclosure obligations imposed upon Seller with respect to this transaction by
applicable law.
(i) Property, Plant and Equipment. From the date hereof until
the Closing Date, none of the Assets shall be disposed of. All tangible personal
property, including machinery, equipment and fixtures, included in the Assets
is, and at the Closing Date will be, in good operating condition and repair,
ordinary wear and tear and routine maintenance excepted. The present use of
Seller's leased premises conforms, and at the Closing Date will conform
(assuming Buyer's use is consistent with Seller's use prior to February 5,
1996), to the requirements of the Lease Agreement. The Lease Agreement is valid
and enforceable and not in default. Seller is a legal and equitable owner and
holder of the leasehold interest in the Lease Agreement and Seller has not
assigned, transferred or encumbered its interest under the Lease Agreement nor
has Seller sublet all or any portion of the lease premises. The improvements on
the real property subject to the Lease Agreement are permitted structures under
applicable zoning and building laws and ordinances and the present or
contemplated uses of the improvements are permitted uses under applicable zoning
and building laws and ordin ances. The Facility is in good repair and to the
best of Seller's knowledge, there are no conditions existing on or relating to
the Facility which might result in any impairment of the use of the Facility by
Seller or Buyer.
(j) Assumed Contracts. Seller has provided to Buyer copies of
each of the Assumed Contracts, and has performed all obligations required to be
performed by it to date under all of the Assumed Contracts. Except as otherwise
indicated in the Disclosure Schedule, (a) to Seller's best knowledge each of the
other parties to the Assumed Contracts or bound thereby has performed all the
obligations required to be performed by it to date thereunder, (b) Seller does
not know of the intention of any party to terminate any such Assumed Contract,
and (c) each Assumed Contract is valid, binding and enforceable in accordance
with its terms and is in full force and effect with no default or dispute or
basis therefor existing with respect thereto.
(k) Employees. There are no suits, actions or administrative,
arbitration or other proceedings pending or threatened against Seller or
affecting Seller or its business concerning any Employee. Seller has no
Liabilities to any Employee or beneficiary of an Employee.
(l) Brokers or Finders. Seller is not obligated, directly or
indirectly, to any person for brokerage or finders' fees, agents' commissions or
any similar charges in connection with this Agreement or the transactions
contemplated hereby.
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(m) Proxy Statement. The information statement or proxy
statement prepared by Seller in connection with the meeting of Seller's
shareholders to consider the transactions contemplated hereby (the "Shareholders
Meeting") (such information statement or proxy statement as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to Seller's shareholders, at the time
of the Shareholders Meeting and at the Closing Date, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made therein not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Shareholders Meeting which has become false or misleading. If at
any time prior to the Closing Date any event or information should be discovered
by Seller which should be set forth in a supplement to the Proxy Statement,
Seller shall promptly inform Buyer and take all action necessary to so
supplement the Proxy Statement.
(n) Vote Required. The affirmative votes of the holders of a
majority of the shares of Seller's Common Stock and Preferred Stock outstanding
on the record date set for the Shareholders Meeting is the only vote of the
holders of any of Seller's capital stock necessary to approve this Agreement and
the transactions contemplated hereby.
(o) Board Approval. The Board of Directors of Seller has
unanimously (i) approved this Agreement and the transactions contemplated
hereby, and (ii) recommended that its shareholders approve this Agreement and
the transactions contemplated hereby.
(p) License Agreement. The representations and warranties made
by Seller in Section 3 of the License Agreement are hereby incorporated by
reference in their entirety.
(q) Representations Complete. None of the representations or
warranties made by Seller herein, nor any statement made in any schedule or
certificate furnished pursuant to this Agreement, contains or will contain any
untrue statement of a material fact at the Closing Date, or omits or will omit
to state any material fact necessary in order to make the statements contained
herein or therein not misleading. There is no fact known to Seller or any of its
management which adversely affects, or could reasonably be expected to adversely
affect, the Assets, Buyer's use of the Assets or the ability of Seller to carry
out the transactions contemplated by this Agreement.
5.2 Representations and Warranties of Buyer. Buyer represents and
warrants to Seller as of the date of this Agreement and as of the Closing Date
as follows:
(a) Organization, Standing and Qualification. Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Buyer has all requisite corporate power and authority
and is entitled to carry on its business as now conducted, and to own, lease or
operate its properties in the places where its business is now conducted and
such properties are now owned, leased or operated. Buyer is qualified to do
business in all foreign jurisdictions in which it is required to be so
qualified, except where the failure to be so qualified would not have a material
adverse effect on the business or assets of Buyer.
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(b) Execution, Delivery and Performance. Neither the execution
and delivery nor the performance of this Agreement by Buyer will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien or charge or encumbrance pursuant to any provision of
Buyer's Certificate of Incorporation or Bylaws, or any franchise, mortgage, deed
of trust, lease, license, agreement or understanding, or conflict with, result
in a default, right to accelerate or loss of rights under, or result in the
creation of any lien, charge or encumbrance pursuant to any law, ordinance,
rule or regulation, or any order, judgment, award or decree to which Buyer is a
party or by which it may be bound or affected. Buyer has full corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby, and all corporate and other proceedings required to be
taken to authorize the execution, delivery and performance of this Agreement
have been taken. This Agreement has been duly executed and delivered by and
constitutes the valid and binding obligation of Buyer and is enforceable in
accordance with its terms.
SECTION 6
6. ADDITIONAL AGREEMENTS.
6.1 Transfer Taxes. In connection with the transactions contemplated
hereunder, Seller shall pay all sales, use, transfer and other similar taxes, if
any, which may be or become due and payable as a result hereof.
6.2 Operation of Business Prior to Closing Date. During the period
from the date of this Agreement up to the Closing Date, Seller shall:
(a) conduct its business in the ordinary course consistent with
past practices, and use the Facility and the Assets in the usual, regular and
ordinary course and in substantially the same manner as heretofore used, except
for any actions of Buyer contemplated by Section 8.6 hereof;
(b) preserve and maintain the Assets in their condition as of
the date hereof (subject to use in the ordinary course of business), except for
any actions of Buyer contemplated by Section 8.6 hereof;
(c) perform all obligations required to be performed by it under
all of the Assumed Contracts, including the making of all payments under the
Assumed Contracts;
(d) give prompt notice to Buyer of any material adverse change
to the Assets or the Facility; and
(e) not mortgage, pledge or subject to Lien any of the Assets or
sell or transfer any of the Assets.
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6.3 Discharge of Liabilities. From and after the date hereof, Seller
shall discharge when due all Liabilities of Seller, provided that upon the
Closing, Buyer shall be responsible for all Assumed Liabilities.
6.4 Access to Information. Between the date of this Agreement and
the Closing Date, Seller shall give Buyer and its authorized representatives
reasonable access during normal working hours to Seller's facilities and
properties, and its books and records, shall permit Buyer to make inspections
thereof, and shall furnish Buyer with such financial and operating information
as Buyer may from time to time reasonably request.
6.5 Hiring of Employees. Seller acknowledges and agrees that with
Seller's consent, each of the Employees became employed by Buyer on February 5,
1996. Seller further acknowledges and agrees that the Employees were hired by
Buyer at Seller's request. In Seller, on behalf of itself, its shareholders,
officers and directors and anyone claiming by or through Seller, hereby releases
and forever discharges Seller and all of its subsidiaries, officers, directors,
employees, agents and anyone acting by or through Buyer from any and all Claims,
demands, torts, causes or action or claims for relief of whatever kind or
nature, whether known or unknown, which Seller may have or which may hereafter
be asserted or accrue against the Release Parties, or any of them, resulting
from or in any way relating to Buyer's hiring of the Employees.
6.6 No Other Negotiations. From and after the date of this Agreement
until the earlier of the Closing Date or the termination of this Agreement in
accordance with its terms, Seller shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by Seller or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than Buyer,
relating to the possible acquisition of Seller or any of its subsidiaries
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any of its or their capital stock or any material portion of its
or their assets (with any such efforts by any such person, including a firm
proposal to make such an acquisition, to be referred to as an "Acquisition
Proposal"), (ii) provide non-public information with respect to Seller or any of
its subsidiaries to any person, other than Buyer, relating to a possible
Acquisition Proposal by any person, other than Buyer, (iii) enter into an
agreement with any person, other than Buyer, providing for a possible
Acquisition Proposal, or (iv) make or authorize any statement, recommen dation
or solicitation in support of any possible Acquisition Proposal by any person
other than Buyer. If Seller or any of its subsidiaries receives any unsolicited
offer or proposal to enter negotiations relating to an Acquisition Proposal,
Seller shall immediately notify Buyer thereof, including infor mation as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. Seller recognizes and
acknowledges that a breach of this Section 6.6 may cause irreparable and
material loss and damage to Buyer as to which Buyer may not have an adequate
remedy at law or in damages and that, accordingly, Seller agrees that the
issuance of an injunction or other equitable remedy is the appropriate remedy
for any such breach. Notwith standing the foregoing, in the event that Seller
receives a bona fide, unsolicited proposal relating to an Acquisition Proposal
by any person other than Buyer, which proposal, in the reasonable good faith
judgment of Seller's Board of Directors, is financially more favorable to the
shareholders of Seller than the terms of this Agreement (a "Superior Proposal"),
Seller's Board of Directors may engage in
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discussions or negotiations with (but not soliciting or initiating such
discussions or negotiations or encouraging inquiries or the making of an
Acquisition Proposal by any third party other than the party making the Superior
Proposal) the party making the Superior Proposal if Seller's Board of Directors
determines in good faith, based on the written advice of outside legal counsel,
that such action is required by reason of the fiduciary duties of the members of
Seller's Board of Directors to Seller's shareholders under applicable law;
provided that in such event Seller notifies Buyer of such determination by the
Seller's Board of Directors and provides Buyer with a true and complete copy of
the Superior Proposal received from such third party, if the Superior Proposal
is in writing, or a complete written summary thereof, if it is not in writing,
and provides Buyer with all documents containing or referring to non-public
information of Seller that are supplied to such third party.
6.7 Proxy Statement. As promptly as practicable after the execution
of this Agreement, Seller shall prepare, and file with the Securities and
Exchange Commission, preliminary proxy materials relating to the approval of the
transactions contemplated hereby by the shareholders of Seller. The Proxy
Statement shall include the recommendation of the Board of Directors of Seller
in favor of the transactions contemplated hereby.
6.8 Meetings of Shareholders. Seller shall promptly after the date
hereof take all action necessary in accordance with law and its Articles of
Incorporation and Bylaws to convene the Shareholders Meeting on or prior to
April 5, 1996 or as soon thereafter as is practicable. Seller shall use its best
efforts to solicit from its shareholders proxies in favor of the transactions
contemplated thereby and shall take all other action necessary or advisable to
secure the vote or consent of shareholders required to effect the transactions
contemplated thereby.
6.9 Public Disclosure. Seller and Buyer shall consult with each
other before issuing any press release or otherwise making any public statement
or making any other public (or non-confidential) disclosure regarding the terms
of this Agreement and the transactions contemplated hereby, and neither shall
issue any such press release or make any such statement or disclosure without
the prior approval of the other (which approval shall not be unreasonably
withheld), except as may be required by law.
6.10 Consents. Promptly after the date hereof, Seller and Buyer
shall consult with each other regarding the actions which are required to be
taken to cause the Assumed Contracts to be transferred to Buyer on the Closing
Date. Subject to such consultations, Seller shall promptly apply for or
otherwise seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the transactions
contemplated hereby and shall use its best efforts to obtain all necessary
consents, waivers and approvals under any of the Assumed Contracts in connection
with the transaction for the assignment thereof or otherwise.
6.11 Voting Agreements. Prior to or concurrently with the execution
of this Agreement, each of Seller's shareholders named in Schedule 6.11 hereto
shall have executed and delivered to Buyer a Voting Agreement substantially in
the form of Exhibit F attached hereto.
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6.12 Buyer Subsidiary as Party. Seller acknowledges that Buyer may
create or use a subsidiary corporation that is wholly-owned directly or
indirectly by Buyer (a "Buyer Subsidiary") to own and operate the Assets after
the Closing Date. To the extent Buyer determines to create the Buyer Subsidiary
prior to the Closing Date, Seller agrees that the Buyer Subsidiary shall be
substi tuted for Buyer for the purpose of exercising those rights and performing
those obligations of Buyer as Buyer shall designate. Following the Closing Date
and the transfer of the Assets to the Buyer Subsidiary, the Buyer Subsidiary
shall be substituted for Buyer for the purpose of such sections. The creation or
use by Buyer of the Buyer Subsidiary pursuant to this Section 6.12, shall not
serve to (i) excuse Buyer as a primary obligor with respect to any obligation
delegated to the Buyer Subsidiary; or (ii) limit in any manner the right of
Buyer to directly enforce any rights hereunder that Buyer may have delegated to
the Buyer Subsidiary.
6.13 Release of Liens. On or prior to the Closing Date, all Liens on
the Assets and Seller's intellectual property, including but not limited to, (i)
those in favor of Silicon Valley Bank, (ii) those in favor of the investors
listed or described on the Disclosure Schedule and (iii) those otherwise listed
or referred to in the Disclosure Schedule; shall have been released or all such
actions as may be required in the sole judgment of Buyer to cause the release of
such Liens shall have been taken.
6.14 Release of Denka Liens. On or prior to the Closing Date, Seller
shall have deposited in escrow with its legal counsel, all amounts as are
required to satisfy any obligations of Seller to Denka necessary to obtain a
release of all Liens on the Assets and Seller's intellectual property in favor
of Denka, all as further detailed in Section 2.3.3 of the License Agreement.
Seller further covenants and agrees with Buyer that Seller will take all such
further actions as may be required in the sole judgment of Buyer to cause all
Liens in favor of Denka to be released on or prior to July 31, 1996.
SECTION 7
7. TERMINATION. This Agreement may be terminated at any time on or
prior to the Closing Date:
7.1 Injunction. By Buyer or Seller if any court of competent
jurisdiction in the United States shall have issued an order (other than a
temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such order, decree, ruling or other action shall have become final
and non-appealable.
7.2 Mutual Agreement. By mutual written agreement of Seller and
Buyer.
7.3 Seller Material Breach. By Buyer if there has been a material
breach on the part of Seller in its representations, warranties or covenants set
forth herein; provided, however, that if any such breach is susceptible to cure
Seller shall have ten (10) business days after receipt of written notice from
Buyer of its intention to terminate this Agreement pursuant to this Section 7.3
in which to cure such breach.
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7.4 Buyer Material Breach. By Seller if there has been a material
breach on the part of Buyer in its representations, warranties or covenants set
forth herein; provided, however, that if any such breach is susceptible to cure
Buyer shall have ten (10) business days after receipt of written notice from
Seller of its intention to terminate this Agreement pursuant to this Section 7.4
in which to cure such breach.
7.5 Effects of Termination.
(a) If this Agreement is terminated pursuant to Section 7.1 or
Section 7.2 hereof, at Buyer's election, Buyer and Seller shall enter into a
Limited License Agreement in substantially the form attached hereto as Exhibit
G (the "Limited License Agreement") and Buyer shall have the right to continue
to employ all of the Employees. In connection with the payment to be made by
Buyer to Seller pursuant to the Limited License Agreement, the amount of such
payment shall be reduced by the full amount of the Loan Adjustment Amount (as
defined in Section 3.3 hereof).
(b) If this Agreement is terminated pursuant to Section 7.3
hereof or in connection with a Superior Proposal (as defined in Section 6.6
hereof), at Buyer's election, Buyer shall have the right to continue to employee
all of the Employees and Buyer and Seller shall enter into the Limited License
Agreement. In such event, Buyer shall not be obligated to make any payment to
Seller under the Limited License Agreement. In addition, Seller shall be
obligated to repay all amounts which Seller has borrowed from Buyer pursuant to
the Promissory Notes, the Bridge Note or otherwise.
(c) If this Agreement is terminated pursuant to Section 7.4
hereof, Buyer agrees that any and all amounts due and payable by Seller to Buyer
pursuant to the Promissory Notes, the Bridge Note or otherwise shall be
discharged and canceled. In such event, Buyer shall have the right to continue
to employ all of the Employees and, at Buyer's election, Buyer and Seller shall
enter into the Limited License Agreement.
SECTION 8
8. HOLDBACK OF FINAL PAYMENT; INDEMNIFICATION
8.1 Holdback of Final Payment. The payments referenced in Section
3.1(ii) and (iii) above (the "Interim Payments") and the Final Payment shall be
retained by Buyer as security to compensate Buyer for any loss, expense,
liability or other damage, including attorneys' fees, to the extent of the
amount of such loss, expense, liability or other damage (collectively "Damages")
that Buyer has incurred or reasonably anticipates incurring by reason of the
breach by Seller of any representation, warranty, covenant or agreement of, or
misrepresentation by, Seller contained in this Agreement or in the License
Agreement. In the case of a third party claim, any indemnification for Damages
hereunder shall be offset or reduced by any amount actually recovered by Buyer
pursuant to counterclaims made by it directly relating to the facts giving rise
to such third party claims. Nothing in this Agreement shall limit the liability
(i) of Seller for any breach of any representation, warranty or
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covenant if the Closing does not occur, or (ii) of any shareholder of Seller in
connection with any breach by such shareholder of the Voting Agreement signed by
such shareholder in connection with this Agreement.
8.2 Claims upon Final Payment.
(a) Subject to the other provisions of this Section 8, the
Interim Payments and the Final Payment shall be paid by Buyer to Seller on the
respective payment dates set forth in Section 3.1; provided, however, that Buyer
shall have no obligation to pay to Seller such portion of such payments which,
in the reasonable judgment of Buyer, subject to the objection of the Seller and
the subsequent arbitration of the matter in the manner provided below, is
necessary to satisfy any unsatisfied claims specified in any Officer's
Certificate theretofore delivered to the Seller on or prior to the relevant
payment date until such claims have been resolved. As soon as all such claims
have been resolved, the Buyer shall deliver to Seller the remaining portion of
the applicable payment not required to satisfy such claims.
(b) Upon receipt by the Seller on or before the applicable
payment date of a certificate signed by any officer of Buyer (an "Officer's
Certificate"):
(i) stating that Damages exist or are reasonably
anticipated to exist and specifying in reasonable detail the individual items as
to which Damages relate, the date each such item was paid, or properly accrued
or arose, and the nature of the misrepresentation, breach of warranty or claim
to which such item is related, then
(ii) the applicable payment shall be reduced dollar for
dollar in an amount equal to such Damages.
(c) The Officer's Certificate shall be delivered within a
reasonable time after Buyer concludes that it has a claim for Damages for which
it will seek recovery and concerning which it has the information required to be
stated in the Officer's Certificate.
8.3 Objections to Claims. Upon the expiration of a thirty (30) day
period following delivery of the Officer's Certificate by Buyer to Seller, the
amount of the applicable payment shall be deemed to be reduced by the amount of
the Damages unless Seller shall object in a written statement delivered to the
Buyer prior to the expiration of such thirty (30) day period. Notwithstanding
anything herein to the contrary, Seller shall not be liable for any claims for
Damages unless the aggregate amount of such Damages exceeds $50,000.00 or unless
the amount of any individual claim for Damages exceeds $25,000.00, provided that
in either such case Buyer shall be entitled to recover for its entire claim once
either such threshold is met. Except as set forth in Section 4.2 of this
Agreement, the holdback provisions contained in this Section 8 shall be deemed
to be the exclusive remedy of Buyer in the event of any breach by Seller of any
representation or warranty contained herein (or in any certificates or documents
delivered pursuant hereto), except for (i) claims relating to fraud or willful
concealment or willful misrepresentation by Seller, (ii) any claim
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or action by Buyer under the License Agreement and (iii) any claim or action by
Buyer related to Seller's obligations under Section 6.16 hereof.
8.4 Resolution of Conflicts, Arbitration.
(i) In case the Seller shall so object in writing to any claim
or claims by Buyer made in any Officer's Certificate, Buyer shall have thirty
(30) days to respond in a written statement to the objection of the Seller. If
after such thirty (30) day period there remains a dispute as to any claims, the
Seller and Buyer shall attempt in good faith for thirty (30) days to agree upon
the rights of the respective parties with respect to each of such claims. If the
Seller and Buyer should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties.
(ii) If no such agreement can be reached after good faith
negotiation, either Buyer or the Seller may, by written notice to the other,
demand arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event arbitration shall
not be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by arbitration
conducted by three (3) arbitrators. Within fifteen (15) days after such written
notice is sent, Buyer and the Seller shall each select one (1) arbitrator, and
the two (2) arbitrators so selected shall select a third arbitrator. The
decision of the arbitrators as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to this
Agreement.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara, California under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section 8.4, in any
arbitration hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, Buyer shall be deemed to be the
Non-Prevailing Party unless the arbitrators award Buyer more than one-half (1/2)
of the amount in dispute, plus any amounts not in dispute; in that event, Seller
shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
8.5 Third-Party Claims. In the event Buyer becomes aware of a
third-party claim which Buyer believes may result in a claim against the Final
Payment, Buyer shall notify the Seller of such claim, and the Seller shall be
entitled, its expense, to participate in any defense of such claim. Buyer may
not effect the settlement of any such claim without the consent of the Seller,
which consent shall not be unreasonably withheld. In the event that the Seller
has consented to any such settlement, the Seller shall have no power or
authority to object under any provision of this Section 8 to the amount of any
claim by Buyer against the Interim Payments or the Final Payment for indemnity
with respect to such settlement.
8.6 Conduct of the Business of the Assets. Seller acknowledges and
agrees that at Seller's request and with Seller's informed consent, Buyer has
agreed to operate the Assets in place at
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the Facility from February 5, 1996 until the Closing Date. Accordingly, Seller
and Buyer hereby agree that Buyer shall not be entitled to recover for any
Damages resulting from the actions of Buyer or any employee of Buyer to the
extent that any such action results in the breach by Seller of any
representation, warranty, covenant or agreement of Seller contained in this
Agreement nor shall such actions by Buyer constitute a breach by Seller of any
covenant or agreement hereunder or of any representation or warranty of Seller
hereunder.
SECTION 9
9. MISCELLANEOUS.
9.1 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
9.2 Further Assurances. Each party agrees to cooperate fully with
the other party and to execute such further instruments, documents and
agreements and to give such further written assurances and to make physical
delivery of any Assets not already delivered or made reasonably available to
Buyer from and after the date hereof as may be reasonably requested to evidence
and reflect the transaction described herein.
9.3 Changes, Waivers, Etc. Neither this Agreement nor any provision
hereof may be amended, changed, waived, discharged or terminated orally, except
by a statement in writing which references this Agreement and is signed by the
party against whom enforcement of the amendment, change, waiver, discharge or
termination is sought.
9.4 Payment of Fees and Expenses. Each of the parties hereto shall
pay its own respective fees and expenses incurred in connection herewith.
9.5 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, sent by telecopy, or mailed first-class postage prepaid, registered
or certified mail,
If to Buyer: Read-Rite Corporation
345 Los Coches Street
Milpitas, CA 95035
Attention: Rex S. Jackson, Esq.
Telephone: (408) 262-6700
Telecopy: (408) 956-3203
with a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
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<PAGE> 65
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Frances S. Currie, Esq.
Telephone: (415) 493-9300
Telecopy: (415) 493-6811
If to Seller: Censtor Corporation
530 Race Street
San Jose, CA 95126
Attention: Garry A. Garrettson
Telephone: (408) 298-8400
Telecopy: (408) 288-9910
with a copy to: Heller, Ehrman, White & McAuliffe
525 University Avenue
Suite 1100
Palo Alto, CA 94301
Attention: Matthew Quilter
Telephone: (415) 324-7000
Telecopy: (415) 324-0638
Such notices and other communications shall for all purposes of this Agreement
be treated as being effective or having been given if delivered personally or by
telecopy on the date of delivery, or, if sent by mail, five (5) days thereafter.
9.6 Entire Agreement. This Agreement, including the schedules and
exhibits which are incorporated into and made an integral part of this Agreement
by reference, sets forth the entire understanding of the parties and supersedes
all prior agreements of the parties (including the Letter Agreement) with
respect to the subject matter hereof.
9.7 Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not.
9.8 Best Efforts. Each party will use its best efforts to cause all
conditions to its obligations hereunder to be timely satisfied and to perform
and fulfill all obligations on its part to be performed and fulfilled under this
Agreement to the end that the transactions contemplated hereby shall be effected
substantially in accordance with the terms of this Agreement as soon as
practicable.
9.9 Bulk Transfer Laws. Subject to Section 8, the parties hereby
waive compliance with any applicable bulk transfer laws, including, but not
limited to, the bulk transfer provisions of the Uniform Commercial Code of any
state, or any similar statute, with respect to the transactions contemplated
hereby.
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9.10 Attorneys' Fees. If any litigation or arbitration is commenced
between the parties hereto or their representatives concerning any provision of
this Agreement or the rights and duties of any person or entity hereunder,
solely as between the parties hereto or their successors, the party or parties
prevailing in such proceeding (including any arbitration) will be entitled to
the reasonable attorneys' fees and expenses of counsel and court costs and other
out-of-pocket expenses incurred by reason of such litigation or arbitration.
9.11 Equitable Remedies. The parties acknowledge that the remedy at
law for any breach, or threatened breach, of their respective covenants to
consummate the transactions contemplated hereby will be inadequate and,
accordingly, each covenants and agrees that, with respect to any such breach or
threatened breach, the other will, in addition to any other rights or remedies
that it may have and regardless of whether such other rights or remedies have
been previously exercised, be entitled to such equitable and injunctive relief
as may be available from any appropriate court.
9.12 Headings; References to Agreement. The headings of the sections
of this Agreement have been inserted for convenience of reference only and do
not constitute a part of this Agreement. References herein to "this Agreement"
shall include all schedules and exhibits hereto.
9.13 Choice of Law; Interpretation. It is the intention of the
parties that the laws of the State of California shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties. Each party acknowledges and agrees that it has
had the opportunity to seek advice from legal counsel regarding the terms and
provisions of this Agreement and that, in any event, this Agreement shall not be
construed against any party by reason of its preparation or word processing.
9.14 Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted from this
Agreement and the remaining provisions of this Agreement shall be unaffected and
shall continue in full force and effect.
9.15 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
9.16 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.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed and delivered as of date and year first above written.
READ-RITE CORPORATION CENSTOR CORPORATION
By: /s/ REX S. JACKSON By: /s/ GARRETT A. GARRETTSON
-------------------------------- ---------------------------------
Title: VICE PRESIDENT AND Title: PRESIDENT AND CEO
GENERAL COUNSEL --------------------------------
-----------------------------
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<PAGE> 68
APPENDIX B
March 29, 1996
Board of Directors
Censtor Corporation
530 Race Street
San Jose, CA 95126
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Censtor Corporation ("Censtor") of the
consideration to be paid by Read-Rite Corporation ("RRC") in the transactions
between Censtor and RRC as set forth in the Agreement for Purchase and Sale of
Assets dated March 29, 1996 and License Agreements attached as exhibits thereto
(the "Agreements").
Von Gehr International, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions and corporate partnering transactions.
In arriving at our opinion, we have reviewed the Agreements and also have
reviewed financial, product and other information that was furnished to us by
Censtor. We also have held discussions with members of the senior managements of
Censtor and RRC regarding the historic and current business operations and
future risks and prospects of their respective companies including their
expectations for certain strategic benefits of the transaction. We reviewed the
basic structure of the technology licenses previously granted by Censtor, and in
addition, have analyzed consideration provided in certain other similar
licensing transactions, and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
We have assumed, without independent verification, the accuracy, completeness
and fairness of all of the financial statements, product information, marketing
strategies and other information regarding Censtor which have been provided to
us by the Company and its representatives. We did not make any independent
evaluation of Censtor's assets or technologies, nor did we independently review
any of their corporate records.
<PAGE> 69
Censtor Corporation Page 2
Board of Directors March 29, 1996
Based on the foregoing and such other factors as we deem relevant, we are of the
opinion as of the date hereof, that the payment of $9,025,000 plus additional
considerations including forgiveness of approximately 50% of the $800,000 loan
provided by RRC to Censtor and assumption of the outstanding lease obligations
of approximately $1,300,000 in exchange for all of the "hard" assets (machinery,
equipment, etc.) of the Company (subject to non material defined exclusions) and
a fully paid up non exclusive license to Censtor's intellectual property, as set
forth in the Agreements, is fair, from a financial point of view, to Censtor
shareholders.
Sincerely Yours,
/s/ VON GEHR INTERNATIONAL
- -------------------------------
Von Gehr International
<PAGE> 70
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the fiscal year ended:
June 30, 1995
OR
Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the transition period from ______ to
______.
Commission File Number 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
530 Race Street, San Jose, CA 95126
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 298-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Series B Convertible Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in 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]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of September 15, 1995 was $25,149,648. As there is no trading
market for the registrant's stock, this valuation is based on the Fair Market
Value of the registrant's stock as determined by the registrant's Board of
Directors. For purposes of this disclosure, shares of common stock (assuming
conversion of all outstanding shares of preferred stock) held by (i) persons who
hold greater than five percent of the outstanding shares of common stock and
(ii) Officers and Directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At September 15, 1995 registrant had outstanding 9,300,469 shares of
Common Stock.
<PAGE> 71
PART I
ITEM 1. BUSINESS
GENERAL
Censtor Corp. ("Censtor" or "the Company"), incorporated in 1981, is
focused on developing technology for and manufacturing high performance contact
recording heads and media for the computer disk drive industry. The Company's
technology is embodied in micro-miniature, low-mass, low-cost read/write heads
and special surface treatments for disk media that allow continuous head/disk
contact during operation without excessive wear. Manufacturing will be performed
by Censtor's newly-formed majority owned subsidiary, Contact Recording
Technology, Inc. ("CRT") initially through subcontracting relationships with
Daido Steel Co. ("Daido"), which will fabricate wafers of transducers for heads
using Censtor's technology, and Kabil Electronics ("Kabil") which will assemble
and test completed heads.
Censtor's technology is embodied in heads that are smaller, lighter and
less costly to manufacture than competing products and in special surface
treatments for disk media that allow continuous head/disk contact during
operation without excessive wear. Current heads available commercially are
designed to operate at a microscopic distance or "fly" above the surface of the
disk on a cushion of air and come into true contact with the disk only when the
drive is turned off or "powered down." Historically, increases in areal density
(the number of bits of data stored in a unit of area, usually quoted in square
inches, on the surface of the recording disk) have come primarily from
reductions in flying height. Contact recording has not been possible because of
the excessive wear and crash problems inherent in operating conventional head
designs in continuous contact with the disk media. The Company believes that
Censtor technology solves these problems.
The Company's business model has been to license contact recording
technology to disk drive manufacturers and then to transfer the technology to
them and their designated head and disk suppliers for production of heads, media
and disk drives. Currently, Censtor has sold licenses to six disk drive
companies (IBM, Fujitsu, Hitachi, Maxtor, NEC and MiniStor) who bought the
licenses based upon their expectations that the Company's technologies will be
the mainstream technologies of the future. The formation of CRT reflects a
tactical shift in Censtor's operations to include the manufacturing and sale of
heads incorporating the Company's contact longitudinal recording technology, in
addition to continuing to license the technology for fees and royalties. CRT is
being formed to accelerate the rate at which products using Censtor's technology
are put into volume manufacturing.
In 1989, the Company began exploring contact recording using
perpendicular recording techniques. Perpendicular technology enabled the
transducer to use a relatively long vertical magnetic pole which could tolerate
significant wear before becoming inoperative. During the past two years, the
Company has developed key technology breakthroughs that allow it to fabricate
longitudinal transducers and to operate them in continuous contact with the disk
without performance degradation due to pole wear at the head/disk interface.
These technology breakthroughs include an ultra-low-wear head/disk interface and
a simple, low cost suspension which integrates mechanical and electrical
functions in one structure while requiring a very low positioning force or "head
load" to hold the Censtor transducer in continuous contact with the disk
surface. The transducer is fabricated entirely in a wafer level process, which
eliminates the costly machining operations inherent in conventional flying head
technology. These breakthroughs result in a manufacturing cost which is
significantly less than the cost of conventional flying heads capable of
comparable areal storage densities. The Company's contact longitudinal head can
be used with longitudinal disks from a number of current volume media
manufacturers who can readily adopt the Company's contact technology. This
reduces substantially the risks in commercializing the technology.
BUSINESS STRATEGY
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Censtor's strategy is to develop critical enabling technologies for the
disk drive industry, protect those technologies with a portfolio of patents as
well as carefully protecting its proprietary know-how, to license its technology
to disk drive manufacturers and to provide, via CRT, an assured, low cost source
of heads to those licensees. The Company's goal is to establish its technology
as a main stream choice for high capacity disk drives in general and small form
factor disk drives in particular. To ensure an adequate supply of
production-quality heads are available to support the launch of its licensees'
drive product programs, the Company intends to upgrade its fabrication capacity
to enable it to manufacture up to one thousand tested heads per month by
December 1995 and nine thousand per month by August 1996. In 1996, it plans to
increase the quantity of heads available for it to sell to licensees by
utilizing CRT to arrange subcontract wafer fabrication and head assembly
relationships capable of supporting output of up to 1.2 million heads per month
by December 1996 with expansion beyond that in 1997 through 1999. The Company
believes that this strategy will enable it to access a broader base of potential
customers and to bring disk drives using its components to market in a shorter
time frame than if it were required to independently develop the head and media
technology plus put in place all of the manufacturing capacity required to
supply licensees using Censtor's technology in their disk drives.
RESEARCH AND DEVELOPMENT
The Company has been spending between $9.0 million and $12.0 million
annually over the last three years on its ongoing research and development
activities. Going forward, the majority of the head development expense will be
supported by CRT. In order to provide advanced solutions for a wide variety of
customers and applications, CRT and Censtor will continue to concentrate their
research and development efforts on improving the performance and cost
effectiveness of their technology. The Company will seek to complement its
internal research and development capability through collaborative efforts with
customers, component manufacturers and universities. At the same time, the
direct access, through CRT, to an actual manufacturing wafer fab and head
assembly operation will facilitate the transition of technology enhancements
from the laboratory to manufacturing. While Censtor currently owns improvements
to its technology developed by CRT, it is anticipated in the future that both
CRT and Censtor will each own their intellectual property, with a
cross-licensing agreement.
SALES, MARKETING AND DISTRIBUTION
By creating license relationships with disk drive manufacturers, the
Company is building a base of captive customers for components using its
technology. The Company has initially targeted disk drive companies focused on
the personal computer and small form factor market segments where the Company
believes the advantages of its technology should be most compelling. Integrated
computer and disk drive manufacturing companies, particularly located outside
the U. S., have recognized that low mass contact recording will ultimately be
required to achieve the increases in areal storage densities necessary to
sustain future drive product generations. These companies have shown a clear
willingness to invest today in order to acquire access to and to start learning
to use what they perceive will be the mainstream recording technology within
just a few years. Therefore, the Company has already sold licenses to several
such companies, including IBM, Fujitsu and Hitachi, as well as OEM disk drive
manufacturers Maxtor and MiniStor, and is in discussions with several others.
Censtor completed the sale of a license to Nippon Electric Company ("NEC") in
August 1995. Because of the relationships established via the licensor/licensee
link, the requirement for CRT to have a traditional geographically oriented OEM
sales force, supported by an extensive marketing activity, is significantly
reduced. However, a strong technical support organization is required to support
the licensees as they integrate Censtor's technology into their drive products.
MiniStor is currently operating under protection of Chapter 11 of the
United States Bankruptcy Code. However, the Company is not dependent upon, nor
did it plan to derive a significant portion of its revenues from, sales to
MiniStor.
MANUFACTURING ACTIVITIES
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The Company's strategy is to use CRT to generate the ability to deliver
up to 1.2 million heads per month by December 1996 to provide a credible,
high-volume, low-cost source of heads for its licensees. It plans to accomplish
this by enhancing its present fabrication capacity to be able to produce one
thousand tested heads per month by December 1995 and nine thousand per month by
August 1996 while establishing wafer fabrication and subcontract head assembly
relationships that will increase its delivery capacity to 1.2 million tested
good heads per month by December 1996. This should provide an initial source of
head supply adequate to support the product launch requirements of Censtor's
licensees while providing a path to the role of a high-volume, low-cost supplier
capable of supporting multiple licensees' product programs. Despite the
Company's strategy, the Company's full license agreements, currently owned only
by Fujitsu and Maxtor, require that the Company transfer the rights to use, and
knowledge of how to manufacture components using, the technology to its
licensees or component manufacturers of the licensees' choice. There can be no
assurance that CRT will be chosen as the component manufacturer by Fujitsu or
Maxtor or by any future licensee similar to that of Maxtor or Fujitsu. Any such
failure on the part of Maxtor, Fujitsu or any future licensee could have a
material impact on the Company's business, financial conditions and results of
operations.
CRT's Internal Manufacturing
The Company believes that its initial planned manufacturing
capacity provided by CRT will be adequate to support licensees' initial product
introductions and ongoing development of Censtor's technology but will not
achieve the volumes necessary to take full advantage of the economies of scale
and cost reductions available.
Leveraging Component Manufacturers' Investments
The Company believes that a critical element in its success
will be to develop and leverage its relationships with component suppliers. To
facilitate acceptance of its technology, Censtor is working with Kabil
Electronics, Daido, Hutchinson Technology, NHK and StorMedia to establish
manufacturing capacity for beams, heads and disks incorporating the Company's
technology. Discussions are also underway with Fuji Denka Kagaku ("FDK"), a head
manufacturing subsidiary of Fujitsu with both flying inductive and flying MR
technology, regarding FDK becoming an additional source of both wafers and
completed Head Gimbal Assemblies for CRT. The Company believes that these
suppliers in aggregate have invested approximately $35 million in their internal
development activities and manufacturing processes and capacities to supply disk
drive components to Censtor's licensees. The Company also believes that Daido
will become the initial subcontract wafer fabricator to support Censtor's
manufacturing strategy. Daido has been working directly with the Company for
three years and is expected to have installed six-inch wafer fab capacity
capable of output of up to two million untested heads per month by December
1996.
COMPETITION AND TECHNOLOGICAL CHANGE
The disk drive component industry is intensely competitive.
Participants in the industry include both independent component suppliers as
well as large disk drive and computer manufacturers that supply their internal
component requirements. These companies have greater financial, marketing and
technological resources than the Company. The Company also competes with
companies offering products based on alternative data storage and retrieval
technologies. Technological advances in magnetic, optical, semiconductor or
other technologies, or the development of new technologies, could result in the
introduction of competitive products with superior performance to and
substantially lower prices than the Company's products, which could render the
Company's products noncompetitive or obsolete, thereby adversely affecting the
Company's results of operations.
The market for the Company's products is intensely competitive
and characterized by rapidly changing advances in head and media technologies.
These advances result in frequent product introductions, short product life
cycles and increased product capabilities that may result in significant
performance improvements and price reductions. Specifically, the Company is
subject to competition from
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<PAGE> 74
manufacturers of thin film inductive and MR heads, as well as
thin film media based on use of conventional flying head and longitudinal
recording technologies. Head and media product performance has been improving
steadily due to a combination of increased transducer efficiency, improved media
performance, smaller slider size, lower flying heights, and pseudo-contact heads
and it is expected to continue to improve. In addition to enabling lower flying
heights, the cost of advanced inductive flying heads is being decreased by the
reduction in the size of the slider, which permits fabrication of more sliders
per wafer. There can be no assurance that the Company's potential performance
and manufacturing cost advantages will be realized in practice or can be
maintained over the improvements to conventional inductive heads.
MAINTENANCE AND ENHANCEMENT OF PATENT PORTFOLIO
To protect and enhance its large investment in head and media
development, the Company maintains an aggressive patent prosecution strategy and
has obtained several patents covering low mass recording heads. The Company's
patent portfolio currently includes thirteen issued United States patents,
twelve pending United States patent applications, and seven foreign patents and
a number of foreign patent applications. With respect to the micro Flexhead(R)
components in particular, the Company has three issued United States patents
covering the structure, manufacturing process for and application of low-mass
contact recording devices and two additional United States patents covering
improvements and advances relating to those patents. The Company believes its
patents may create substantial barriers to entry for competing technologies
which incorporate heads with very low effective mass for either contact or
flying head recording. Currently Censtor owns improvements to its technology
developed by CRT. It is anticipated that in the future both Censtor and CRT will
each own their intellectual property, with a cross-licensing arrangement.
LICENSES WITH DISK DRIVE MANUFACTURERS
As of September 15, 1995, the Company has entered into license
agreements with six of the roughly twenty-five disk drive manufacturers in the
world: IBM, Fujitsu, Hitachi, Maxtor, MiniStor and NEC. The Company has executed
license agreements with initial license fees of $19.7 million from these
licensees, of which the Company has received $14.5 million. The receipt of the
remaining $5.2 million is dependent upon the occurrence of certain triggering
events expected to occur in 1996. In addition, the Company has received $7.5
million of non-refundable advance royalty payments. Two of these agreements
provide that no future licenses granted by the Company will be more favorable
than the existing licenses and that the licensee may grant restricted sub
licenses to component suppliers. Two others permit the licensees to acquire the
right to appoint subcontractors in exchange for the payment of additional
license fees and royalties. The specific terms of the license agreements vary
depending on when the licenses were entered into, whether or not the Company has
rights to future royalty payments from the licensee, whether the license extends
to not only the Company's patents but also its trade secret information, and
whether the licensee is expected to become a component supplier.
HITACHI
In December 1994, Hitachi purchased a paid-up license to the Company's
patents issued and applied for as of December 31, 1994 as well as the Company's
initial patent, when and if applied for and issued, covering Censtor's contact
longitudinal head design. The amount paid included an initial license fee and
prepaid royalties. Hitachi also received options for three years to acquire
licenses under the Company's other future patents and to use Censtor's know-how
in exchange for the payment of certain additional sums plus royalties at
specified rates which may be discounted and prepaid if the option is exercised
by Hitachi before a certain date. While Censtor believes that Hitachi's original
intent in purchasing the license was to enable it to manufacture contact
perpendicular heads of its own design, Hitachi has signed a letter of intent
stating that it could become a customer for the Company's contact longitudinal
heads if they are made available at competitive prices and in the quantities
reflected by the schedule in CRT's business plan for 1995 and 1996. Until it
exercises its options, Hitachi will not have the right to require Censtor to
transfer its know-how, either to Hitachi or to other head suppliers, for use in
building heads using Censtor's designs for Hitachi and other Censtor licensees.
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<PAGE> 75
MAXTOR
The Company entered into a royalty-bearing license agreement with
Maxtor, a leading manufacturer and supplier of advanced high capacity disk
drives, in October 1991. Maxtor is currently developing small form factor disk
drives and Censtor is building prototype disk drives based upon a modified
Maxtor design and incorporating micro Flexhead(R) components to permit Maxtor to
evaluate the use of Censtor's technology in these disk drives. Like Hitachi,
Maxtor has signed a letter of intent stating that it could become a customer for
the Company's heads if they are made available at competitive prices and in the
quantities reflected by the schedule in CRT's business plan for 1995 and 1996.
Under its license, Maxtor has the rights to require Censtor to transfer its
know-how to one other head supplier.
FUJITSU
In February 1991, the Company entered into a license agreement with
Fujitsu, one of Japan's largest computer and disk drive manufacturers. Fujitsu's
license is fully paid and royalty free; however, it does not allow for the
incorporation of certain advanced technologies in combination with the Company's
micro Flexhead(R) components without the payment of additional royalties.
Fujitsu plans to continue to consider the Company's technology for use in future
disk drives. Fujitsu has the right under its license to require Censtor to
transfer its know-how to subcontract head and media suppliers.
IBM
IBM purchased a royalty-bearing license from the Company in June 1993.
The license with IBM provides that after IBM has paid the Company a specified
amount in royalties, IBM will have no further obligation to make additional
royalty payments. However, IBM's license does not grant to IBM access to certain
of the Company's trade secrets. IBM has agreed to license to the Company and its
licensees the rights to any patents that IBM receives on improvements to the
Company's technology made by IBM. If any such IBM improvements are incorporated
in disk drives sold by Censtor licensees, Censtor must share with IBM a
percentage of royalty revenue arising from sales of such drives.
MINISTOR
MiniStor demonstrated a disk drive prototype built in conjunction with
Censtor in its private technology suite at COMDEX '94 in November. In December
1994, MiniStor purchased a license to acquire components incorporating Censtor's
technology from qualified suppliers and to use those components in building and
selling disk drives in exchange for the payment of an up-front fee in cash plus
a promissory note as well as royalties due upon the sale of disk drives
utilizing such components. MiniStor also received an option to acquire the right
to receive Censtor's know-how in exchange for the payment of a specified
additional sum. MiniStor is currently operating under protection of Chapter 11
of the United States Bankruptcy Code. However, the Company is not dependent
upon, nor does it plan to derive a significant portion of its revenues from,
sales to MiniStor.
NEC
In August 1995, Censtor entered into a royalty-bearing license
agreement with NEC to license its patents relating to data storage devices and
processes for manufacturing such devices. This license provided the Company with
an up-front payment, with the remaining amount payable on the earlier of 24
months from the August 7, 1995 effective date or the date on which NEC first
ships a Licensed Data Storage Device to a customer. NEC also has an option to
acquire certain of the Company's trade secret information, in return for
additional license fees and royalties.
POTENTIAL ADDITIONAL LICENSEES
The Company continues to seek other new licensees for its technology
and currently has discussions underway with several other disk drive companies
including Conner Peripherals, Samsung, SyQuest and
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<PAGE> 76
Western Digital, some of whom have already received sample components. In
addition, Western Digital has signed a letter of intent stating that it plans to
evaluate Censtor-design heads for use in its disk drive products. In September
1995, Western Digital entered into a Convertible Promissory Note with CRT. This
note is convertible into Series C Preferred Stock in CRT, or can be exchanged
with the Company for a non-transferable license upon terms to be negotiated.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations
relating to the use, storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture and test the Company's micro Flexhead(R) component. The Company
believes that it is currently in compliance in all material respects with such
regulations and that it has obtained all necessary environmental permits to
conduct its business. Nevertheless, the failure to comply with current or future
regulations could result in substantial fines being imposed on the Company,
suspension of production, alteration of the manufacturing process or cessation
of operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
HUMAN RESOURCES
As of June 30, 1995, the Company had 95 full-time employees, two
part-time employees and nine contract employees. Of the total, 95 employees were
engaged in product and manufacturing process research and development and 11 in
selling, general and administrative functions. The Company's success will depend
in large part on its ability to attract and retain skilled and experienced
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
The Company is highly dependent upon certain members of its management
and engineering staff, the loss of service of one or more of whom could
adversely affect the Company. The Company has only limited management,
operational and financial resources to accommodate growth. The Company has no
employment contracts with its key personnel. The Company's ability to continue
research and development as well as develop its micro Flexhead(R) component
manufacturing process will require the Company to continue to implement and
improve its operational and financial systems and to hire and train new
employees. These demands are expected to require the addition of new management
and the development of additional expertise by existing management. There can be
no assurance that the Company will be able to attract and retain skilled and
experienced personnel or properly manage future growth and failure to do so
could have a material adverse effect on the Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of June 30,
1995, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Garrett A. Garrettson 52 Chief Executive Officer, President and Director
Russell M. Krapf 48 Senior Vice President, Component Supply
David M. Kowalski* 51 Chief Financial Officer, Vice President, Administration and
Secretary
Robert D. Hempstead 52 Vice President of Head Development
James A. Cole 52 Director
B. Kipling Hagopian 53 Chairman of the Board
Harold J. Hamilton 71 Director
</TABLE>
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<PAGE> 77
<TABLE>
<S> <C> <C>
Paul R. Low 62 Director
Richard C. E. Morgan 51 Director
</TABLE>
GARRETT A. GARRETTSON joined Censtor in February 1993 as Chief
Technical Officer, and became President and Chief Executive Officer in April
1993. He was appointed a founding director, President and Chief Executive
Officer of CRT upon its founding. Before joining the Company, Dr. Garrettson
served as Vice President of Product Strategy and Engineering of Seagate
Technology, Inc. beginning in August 1990, and served as Vice President of
Engineering and Product Line Management (responsible for Minneapolis Disk Drive
Operations) at Imprimis Technology (Control Data Corp.) for four years beginning
in October 1986. Dr. Garrettson attended Stanford University where he earned
B.S. and M.S. degrees in Engineering Physics, and a Ph.D. in Mechanical
Engineering (Nuclear). Because Dr. Garrettson serves as President and CEO of
both Censtor and CRT, the two companies will share the costs of his employment
based upon the relative employee populations.
RUSSELL M. KRAPF rejoined Censtor as Senior Vice President, Corporate
Development and Component Supply in August 1993. He was appointed to the same
position within CRT upon its founding. Mr. Krapf has been associated with
Censtor since February 1988, at which time he was appointed Vice President,
Operations and from February 1990 to February 1992 served as President and Chief
Operating Officer of the Company. From November 1992 to July 1993, Mr. Krapf
served as President of California Micro Devices Corporation after which time he
returned to the Company as a consultant and currently has responsibility for
developing and maintaining relationships with the Company's component
manufacturers and existing and prospective licensees. Mr. Krapf received a B.S.
in Engineering Science from Florida State and an M.B.A. from Boston University.
Mr. Krapf has also served for four years as President and a Director of IDEMA (a
trade association for the disk drive industry). Because Mr. Krapf serves as a
Senior Vice President of both Censtor and CRT, the two companies will share the
costs of his employment based upon the relative employee populations.
*DAVID M. KOWALSKI had joined Censtor in August 1993 as Chief Financial
Officer and Vice President, Administration and was subsequently elected
Secretary of the Company. He was appointed to the same positions within CRT upon
its founding. He spent the prior fourteen months at Western Digital as Chief
Accounting Officer starting in June 1992. He spent nine years at Maxtor
beginning in October 1983, where he served as Controller and then as Vice
President of Finance, Corporate Secretary and Treasurer. In his last year at
Maxtor, Mr. Kowalski acted as Vice President of Finance and Chief Financial
Officer of Maxoptix, Maxtor's joint venture with Kubota. He received his B.A. in
Mechanical Engineering from Harvard and his M.B.A. from Stanford. Mr. Kowalski
resigned from the Company effective August 11, 1995. Since that date, the
Company has retained the consulting services of Wilson O. Cochran as acting
Chief Financial Officer and Vice President, Administration. Prior to joining the
Company, Mr. Cochran was the Vice President, Sales and Marketing, of
StereoGraphics Corp. Prior to that he held various executive positions such as
Chief Financial Officer, President, Vice President and Controller at companies
such as Lapine Technology, Falco Data Products, Comport Corporation and Domain
Technology of which he was also a founder. Mr. Cochran earned his M.B.A. from
George Washington University. Because Mr. Cochran provides consulting services
as Vice President, CFO and Secretary of both Censtor and CRT, the two companies
will share the cost of his engagement based upon the relative employee
populations.
ROBERT D. HEMPSTEAD joined the Company in November 1993 as Director,
Head Development and was appointed Vice President of Head Development in April
1995. He was appointed a founding director and Vice President of CRT upon its
founding. From 1989 to 1993, Dr. Hempstead worked as a technical consultant in
the areas of thin film heads and thin film disks for magnetic recording. Dr.
Hempstead received his bachelor and masters degrees in Electrical Engineering
from M.I.T. in 1965 and Ph.D. in Physics from the University of Illinois in
1970. Dr. Hempstead will become an employee of CRT and his employment by Censtor
will end upon the transfer of Censtor's head development staff to CRT.
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<PAGE> 78
JAMES A. COLE joined the Company's Board of Directors in October 1992.
Since 1986, Mr. Cole has been the Managing General Partner of Spectra Enterprise
Associates, and a Partner of New Enterprise Associates, both private venture
capital partnerships. Mr. Cole is also a director of Gigatronics, Inc.,
Spectrian Corp. and Vitesse Semiconductor Corp., all public companies. Mr. Cole
is a graduate of the University of California Graduate School of Management at
Los Angeles.
B. KIPLING HAGOPIAN joined the Company's Board of Directors in November
1981 and became Chairman in 1993. In 1972, Mr. Hagopian founded Brentwood
Associates, one of the largest high technology venture capital investment
companies in the United States, and has been a General Partner since that time.
Mr. Hagopian is also a member of the Board of Directors of Natural Language,
Inc. and Performance Semiconductor Corporation. Mr. Hagopian received his B.A.
and M.B.A. from the University of California at Los Angeles.
HAROLD J. HAMILTON recently retired from his position as the Company's
Senior Vice President, Research and Advanced Technology, a position he held from
January 1987 to July 1994, and presently serves as a director and a consultant
to the Company. Dr. Hamilton is a founder of Censtor and has been the Company's
key technical contributor. He is the inventor of the Company's micro Flexhead
technology and is responsible for many of the innovations that contributed to
contact and perpendicular recording technology for hard disk drive applications.
Dr. Hamilton has an interdisciplinary Ph.D. in techno-economic forecasting and
socio-economic planning from the University of Southern California. Dr. Hamilton
has a B.S. degree in Physics from Stanford University.
PAUL R. LOW joined the Company's Board of Directors in March 1993. In
July 1992, Mr. Low formed PRL Associates, a technology consulting firm and
became an advisory partner of Weiss, Peck & Greer, a venture capital firm. From
1957 to July 1992, Mr. Low served in various positions at IBM where he was
promoted to General Manager of Technology Products, appointed to the Corporate
Management Board and became President of the General Products Division. Mr. Low
is also a member of the Board of Directors of Applied Materials, Inc., NexGen
Microsystems and Solectron Corporation, all publicly traded companies, as well
as the following private companies: CMX Corporation, IPAC, and Dynalogic. Mr.
Low received his B.S. and M.S. from the University of Vermont and earned his
Ph.D. in Electrical Engineering from Stanford University.
RICHARD C.E. MORGAN joined the Company's Board of Directors in June
1990. He has served as a General Partner of Wolfensohn Partners L.P. since June
1986. Mr. Morgan is also a director of Quidel, Inc., Celgene Corporation,
Lasertechnics, Inc., MediSense, Inc. and Liposome Technology, Inc. Mr. Morgan
received his B.S. in Engineering from the University of Auckland and his M.B.A.
from Harvard Business School.
ITEM 2. PROPERTIES
The Company's corporate offices, principal laboratories and
manufacturing operations are in a facility of approximately 40,000 square feet
shared with CRT located in San Jose, California. The Company's lease on this
facility expires on July 15, 1998, but the Company has the option to renew the
lease for an additional three years. The Company's Flexhead(R) component
prototype production is conducted by CRT in this facility. The Company believes
that its existing facility will be adequate to meet the Company's needs
throughout 1996 including the expansion of its wafer fab capacity to support an
output of nine thousand good heads per month by August 1996 as well as the
activities necessary to support the subcontracting of the wafer fabrication and
head assembly plus the distribution and sale of up to 2.3 million heads per
month by the middle of 1997. Should the Company need additional space,
management believes that the Company will be able to secure additional space at
reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
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<PAGE> 79
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 80
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
As of June 30, 1995, the Company had outstanding 9,300,469 shares of
common stock held by 145 shareholders, 6,617,299 shares of Series A Preferred
Stock held by 15 shareholders and 8,370,508 shares of Series B Convertible
Preferred Stock held by 557 shareholders. There is no established public trading
market for any class of the Company's equity securities.
The Company has not paid any dividends on any of its capital stock and
does not anticipate that any cash dividends will be declared in the foreseeable
future. The holders of Preferred Stock are entitled to certain preferences with
respect to dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
1991 1992 1993 1994 1995
------------- ------------ ------------- ------------ ---------------
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
License fees $ 328,000 $ 6,007,634 $ 2,682,666 $ 7,845,799 $ 3,515,472
Research and development fees 4,294,000 -- -- -- --
------------- ------------ ------------- ------------ ---------------
Total revenues 4,622,000 6,007,634 2,682,666 7,845,799 3,515,472
Expenses:
Research and development 8,882,978 9,633,250 9,411,161 11,723,752 11,448,501
Selling, general & administrative 1,308,760 1,502,372 2,126,641 2,372,255 2,846,235
------------- ------------ ------------- ------------ ---------------
Total expenses 10,191,738 11,135,622 11,537,802 14,096,007 14,294,736
------------- ------------ ------------- ------------ ---------------
Operating loss (5,569,738) (5,127,988) (8,855,136) (6,250,208) (10,779,264)
Interest and other income (expense) (1,200,690) (1,017,988) (1,863,683) (1,486,025) (959,146)
Minority interest in loss of subsidiary -- -- -- -- 81,650
------------- ------------ ------------- ------------ ---------------
Loss before income tax expense (6,770,428) (6,145,976) (10,718,819) (7,736,233) (11,656,760)
Income tax expense 390,000 530,000 -- -- 290,350
------------- ------------ ------------- ------------ ---------------
Net loss $ (7,160,428) $(6,675,976) $(10,718,819) $(7,736,233) $ (11,947,110)
============ =========== ============ =========== =============
Net loss per share $ (1.67) $ (0.72) $ (1.17) $ (0.84) $ (1.29)
============ =========== ============ =========== =============
Weighted average number of shares 4,296,000 9,248,000 9,190,000 9,211,000 9,255,000
used in computing per share amount
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,371,780 $ 331,202 $ 3,136,240 $ 8,613,200 $ 1,368,891
Working capital (deficiency) 649,190 (6,392,269) (6,298,326) 6,215,308 (2,878,918)
</TABLE>
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<PAGE> 81
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets 6,035,223 2,098,955 6,471,377 12,627,804 4,519,001
Long term obligations, excluding 12,774,094 12,295,167 25,510,479 14,309,130 14,304,589
current maturities
Accumulated deficit (62,219,225) (68,895,201) (79,614,020) (87,350,253) (99,297,363)
Net capital deficiency (12,018,937) (18,694,313) (29,409,664) (4,365,839) (14,515,928)
</TABLE>
The Company has not paid any dividends on any of its capital stock and
does not anticipate that any cash dividends will be declared in the foreseeable
future. The holders of Preferred Stock are entitled to certain preferences with
respect to dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless otherwise indicated, references to years in this section
refer to fiscal years ending June 30.
RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology for disk drives. The Company has recently shifted the focus of its
development efforts from perpendicular to longitudinal contact recording
technology. To date, the Company's principal source of revenue has been license
fees from disk drive manufacturers. While the Company's license agreements
typically provide for on-going royalty payments by the licensees based upon
sales of products incorporating the Company's technology, to date none of the
Company's licensees has commercialized products using the Company's technology
and the Company has received no recurring royalty revenue. The Company has not
been profitable in any fiscal period since inception and, as of June 30, 1995,
had an accumulated deficit of $99.3 million. There can be no assurance that the
Company will achieve or sustain significant revenues or profitability in the
future.
Censtor's operating plans for fiscal 1996 include continued development
of contact recording technology and improvements to the head/disk interface to
reduce wear and improve storage performance as well as continued building of
prototype disk drives and delivering of sample components to existing and
prospective licensees. The Company expects to finance these operations through
sales of additional licenses and by seeking additional equity financing. There
can be no assurance that the Company will be able to sustain its operations
without the sale of such additional licenses or without obtaining additional
equity financing.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and contract research and development agreements.
During the fiscal years ended June 30, 1993 and 1994, the Company generated net
cash from financing activities of $9.1 million and $17.7 million respectively,
reflecting sales of the 12% Secured Convertible Debentures in 1993 and the
Series B Convertible Preferred Stock in 1994. In 1995, net cash provided by
financing activities was $832,000, resulting primarily from proceeds of $2
million from the sale of preferred stock of CRT which was partially offset by
$1.1 million of principal payments on capital leases. During the same periods,
the Company used cash in its operations of $3.8 million, $13.2 million and $8.3
million respectively. In 1993 and 1995, the Company received payments of license
fees and non-refundable prepaid royalties from several licensees, which caused
cash used in operations to be less than the Company's net loss. In addition,
particularly in 1993 and 1995, the Company delayed payments on accounts payable
to conserve cash prior to completion of anticipated new financing. The Company
used
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<PAGE> 82
cash in investing activities of $2.5 million in 1993, primarily for the
acquisition of capital equipment and generated net cash from investing
activities of $1.0 million in 1994 consisting of $1.7 million used for additions
to property and equipment and $2.8 million provided by proceeds from the sale
and leaseback, and sale of fixed assets. In 1995, with a similar transaction,
the Company generated net cash from investing activities of $205,000 consisting
of $379,000 used for additions to property and equipment and $584,000 provided
by proceeds from the sale and leaseback, and sale of fixed assets.
As of June 30, 1995, the Company had a working capital deficiency of
approximately $2.9 million, monthly cash usage in excess of $1.0 million and no
available credit facilities or assured sources of financing to meet its
operating needs. Given the recurring operating losses in carrying out the
development and deployment of its technologies and the requirement to continue
payments on its equipment leases, the Company does not currently have sufficient
liquidity to sustain its operations for the next twelve months. Furthermore,
given this inadequate liquidity, coupled with the lack of immediately available
sources of financing, the Company requires future sources of financing to be
able to continue executing its strategic plans. Accordingly, the independent
auditors report on the June 30, 1995 consolidated financial statements of the
Company contains an uncertainty paragraph with respect to the Company's ability
to continue as a going concern. See Note 1 of "Notes to Consolidated Financial
Statements".
The Company expects to incur substantial additional costs related to
its continuing research and development efforts and operating activities,
including the establishment of prototype production capability in CRT. The
amount and timing of anticipated expenditures will depend upon numerous factors
both within and outside the Company's control. The Company is currently pursuing
financing alternatives including sales of new licenses and new equity financing.
The Company's ability to fund its cash requirements through fiscal 1996
continues to depend upon its success in selling additional licenses and/or
equity and other sources of financing. Management expects to enter into
additional license agreements that provide for the payment of license fees and,
potentially, prepaid royalties during fiscal 1996. It also expects to obtain
additional equity financing for CRT and to a lesser extent for Censtor. There
can be no assurance that the Company will be able to sell such additional
licenses and/or obtain such equity investments. Any such failure would have a
material adverse impact on the Company's financial condition and results of
operations. The Company's commitments for cash payments in fiscal year 1996 are
primarily for operating expenses, which are currently expected to increase, in
total, over operating expenses incurred during fiscal 1995 given the
manufacturing start-up. See "Note 3 of Notes to Consolidated Financial
Statements."
If the Company is successful in selling these additional licenses
and/or raising such other sources of financing, it believes that it will be able
to finance its operations and lease obligations during fiscal 1996. There can be
no assurance, however, that the Company will be successful in these endeavors
nor that the aggregate of the funds received from these sources will be adequate
to fund its operations or that any other financing, if obtained, would be
adequate to support the Company's operations or on terms favorable to the
Company. See "Note 9 of Notes to Consolidated Financial Statements."
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from license
agreements with disk drive manufacturers. These license agreements have
generally included an initial fee, which is paid either at the inception of the
license or on an installment basis and, for two of its current licenses,
royalties on the future sale of products incorporating the Company's technology.
Non refundable fees received, or contractually obligated to be paid, are
recognized as revenue on a straight line basis over the estimated period during
which the Company is required to satisfy significant obligations under the
license agreements.
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<PAGE> 83
The Company's revenues were $2.7 million, $7.8 million and $3.5 million
in 1993, 1994 and 1995 respectively. Of these revenues, approximately $1.4
million and $1.8 million in 1993 and 1994, respectively were represented by
revenues from related parties. (See "Note 2 to Notes to Consolidated Financial
Statements.") Revenues in 1993 include the continued amortization of license
fees associated with the Fujitsu license and additional license revenue
associated with a license granted to Maxtor in September 1991. In June 1993, the
Company entered into a license agreement with IBM, which contributed $4.1
million to the Company's revenues in 1994. In addition, in October 1993, the
Company entered into a technical assistance agreement, whereby the Company
granted the right to priority access by Daido to training and technical
assistance by the Company in developing manufacturing capabilities for certain
components. The Company received approximately $1.7 million from Daido in fiscal
year 1994 under this agreement. The Daido agreement expired in October 1994.
Revenues in 1995 consisted primarily of the amortization of the Hitachi license
that was entered into in December 1994. See "Note 6 of Notes to Consolidated
Financial Statements."
Research and Development
The Company intends to continue to invest in research and development
in order to complete the development and improve the performance and cost
effectiveness of products incorporating its technology. Research and development
expenses increased from $9.4 million in 1993 to $11.7 million in 1994, and
decreased slightly to $11.4 million in 1995. The increase in the rate of
research and development expenses in 1994 and 1993 as compared to prior years
was due to non recurring engineering charges for development and functional
verification of manufacturing and test equipment required to establish pilot
production capacity as well as to the cost of building prototype disk drives for
a prospective licensee. Research and development expenses are expected to
continue to increase at a modest rate in future years to support additional
licensees and sustain the Company's competitive position. The Company expects
its licensees and sub licensed component manufacturers to conduct significant
development work at their own expense with respect to incorporating the
Company's technology in disk drive products. Consequently, the Company expects
to conduct less research and development than would otherwise be the case. The
benefits of experience in teaching successive licensees to use Censtor's
technology are also expected to minimize the need for large annual increases in
research and development expenses as additional licensees develop products
incorporating the Company's technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $2.1
million in 1993 to $2.4 million in 1994 and to $2.8 million in 1995. These
increases resulted primarily from an increase in legal fees for patent filings,
the fee for recruiting the Chief Technical Officer in 1994, attorney and
accountant fees due to the Company's requirements for disclosure as a public
reporting entity, and legal fees associated with establishing CRT in 1995.
Interest and Other Income (Expense)
Interest expense consists primarily of interest on the Company's
outstanding indebtedness and capital leases. Interest expense decreased from
$2.0 million in 1993 to $1.7 million in 1994 and further decreased to $1.1
million in 1995. The decrease in 1994 is primarily attributable to the
conversion of 12% Secured Convertible Debentures that were issued in October and
November 1992 and subsequently converted into Series A Preferred Stock in
November 1993. The further decrease in 1995 is attributable to the pay down of
existing leases. Interest payments on the Company's outstanding 6% subordinated
debentures payable to Denka have been deferred until the earlier of maturity of
the obligations in 1997 and 1998 or until the Company has generated pre-tax
income in three consecutive quarters. Interest will compound on the deferred
interest at the base rate of the 6%.
Interest income is the result of interest earned on the temporary
investment of the Company's cash pending its use in operations. Interest income
increased from $83,000 in 1993 to $200,000 in 1994 and
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<PAGE> 84
decreased to $173,000 in 1995. The large increase in interest income in 1994 was
attributable to the temporary investment of the cash proceeds from the sale of
the Company's Series B Convertible Preferred Stock. The subsequent decrease was
due to lower cash balances earning interest over the course of the year.
Income Taxes
As of June 30, 1995, the Company had federal net operating loss and
credit carryforwards of approximately $94.0 million and $2.5 million,
respectively, expiring in various years beginning in 1997 through 2010. The
Company also has state net operating loss and credit carryforwards of
approximately $28.8 million and $900,000 respectively. The state operating loss
carryforwards will expire in various years beginning in 1996 through 2000 while
the credit carryforwards will expire in various years beginning in 2003 through
2010. Tax law provides that the use of net operating loss and credit
carryforwards are restricted if there is a substantial change in the ownership
of the Company. Due to prior years' equity transactions, such a change has
occurred. Approximately $75.0 million of federal net operating loss and all
credit carryforwards are subject to an annual limitation. The annual limitation
should range between $500,000 and $2.0 million depending upon a final
determination of the value of the Company on the date the substantial change in
ownership occurred. The balance of $19.0 million federal net operating loss
carryforwards can be used without limitation. Similar limitations apply to state
carryforwards.
Effect of Inflation
The Company believes that inflation has not had a material impact on
its operating or financial ratios during the year ended June 30, 1995 as
compared to the years ended June 30, 1994 and 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the Consolidated Financial Statements set forth on pages F-1 through F-19.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE> 85
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers is included in
Part I hereof under the caption "Executive Officers of the Registrant" and is
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
compensation paid by the Company for the year ended June 30, 1995 to the Chief
Executive Officer and each of the other most highly compensated executive
officers of the Company whose total compensation exceeded $100,000:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION
------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SECURITIES UNDERLYING ALL OTHER
- --------------------------- ---- ------ ----- OPTION(#)(1)(2) COMPENSATION(3)
--------------- ---------------
<S> <C> <C> <C> <C> <C>
Garrett A. Garrettson, 1995 $ 250,480 $ 775 300,000 $ 912
Chief Executive Officer 1994 250,000 -- 480,224 1,056
Robert D. Hempstead 1995 161,290 40,000 200,000 746
Vice President, Head Research 1994 110,381 25,000 75,330 427
and Development
Russell M. Krapf 1995 166,730 26,650 100,000 775
Senior Vice President, 1994 174,952 14,425 94,161 707
Component Supply
David M. Kowalski(4) 1995 153,847 28,000 100,000 730
Chief Financial Officer, 1994 163,788 26,250 160,075 667
Vice President, Administration,
Secretary
</TABLE>
- -------------------
(1) The stock options granted to the named officers vest as to 1/48 of the
shares per month at the end each month after the date of grant;
provided, however, that in certain cases options are not first
exercisable until six months after the date of grant. The options are
exercisable at a price of $0.40 per share and expire ten years from the
date of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
(3) Reflects premiums paid by the Company on behalf of the named officers
for term life insurance with benefits payable to beneficiaries
designated by the officers.
(4) Mr. Kowalski resigned his position with the Company effective August
11, 1995.
-16-
<PAGE> 86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding shares of Common Stock and
Preferred Stock (on an as converted basis) as of October 20, 1995 by (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
PREFERRED STOCK (1) COMMON STOCK TOTALS (2)
NAME OF OWNER NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT
SHARES OF CLASS SHARES OF CLASS COMMON OF COMMON
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY EQUIVALENTS EQUIVALENTS
OWNED OWNED OWNED OWNED BENEFICIALLY BENEFICIALLY
OWNED OWNED
<S> <C> <C> <C> <C> <C> <C>
Brentwood Associates(3)................ 1,298,244 8.66% 3,452,023 29.65% 4,750,267 17.83%
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Aeneas Venture Corporation(4).......... 2,938,225 19.60 0 0 2,938,225 11.20
600 Atlantic Avenue,
26th Floor
Boston, MA 02210-2203
Wolfensohn Partners L.P.(5)............ 413,172 2.76 1,070,467 9.19 1,483,639 5.57
599 Lexington Avenue
New York, NY 10022
J.P. Morgan Investment Corporation(6).. 363,796 2.43 1,064,477 9.14 1,428,273 5.36
60 Wall Street
New York, NY 10260-0060
New Enterprise Associates(7)........... 1,424,590 9.50 0 0 1,424,590 5.35
1119 St. Paul Street
Baltimore, MD 21202
Morgenthaler Venture Partners(8)....... 314,669 2.10 802,018 6.89 1,116,687 4.19
700 National City Bank Building
Cleveland, OH 44114
Fujitsu Limited........................ 0 0 784,682 784,682
1015 Kamikodanaka 6.74% 2.95%
Nakahara-ku, Kawasaki-shi
Kanagawa-ken 211
Japan
Garrett A. Garrettson(9)............... 0 0 415,944 3.57 415,944 1.56
B. Kipling Hagopian(10)................ 1,298,244 8.66 3,452,023 29.65 4,750,267 17.83
Harold J. Hamilton(11)................. 0 0 302,375 2.60 302,375 1.14
Russell M. Krapf(12)................... 0 0 198,157 1.70 198,157 *
Paul R. Low(13)........................ 0 0 15,692 * 15,692 *
Richard C.E. Morgan(14)................ 413,172 2.76 1,079,883 9.27 1,493,055 5.60
James A. Cole(15)...................... 1,424,590 9.50 0 0 1,424,590 5.35
David M. Kowalski(16).................. 0 0 98,918 * 98,918 *
Robert D. Hempstead (17)............... 0 0 92,859 * 92,859 *
All directors and executive officers as 3,136,006 20.92 5,655,851 48.59 8,791,857 33.02
a group (9 persons)(18)................
</TABLE>
-17-
<PAGE> 87
- --------------------
* Less than one percent
(1) Includes Series A Preferred and Series B Preferred. Preferred Stock is
reflected on an as-converted to Common Stock basis. As of October 20,
1995, each share of Series A and Series B Preferred converts into one
share of Common Stock.
(2) Reflects Preferred Stock (on an as-converted to Common Stock basis) and
Common Stock combined.
(3) Includes: 1,260,769; 2,373,667; 878,257; and 237,574 shares held
respectively by Bren twood Associates II, Brentwood Associates III,
Brentwood Associates IV and Evergreen II, L.P., of which 3,573; 6,689;
2,493; and 675 shares, respectively, are issuable upon exercise of
warrants to purchase Common Stock, 229,289; 429,253; 60,002; and 43,343
shares, respectively, are shares of the Company's Series A Preferred, and
108,494; 222,972; 82,519; and 22,372 shares, respectively, are shares of
the Company's Series B Preferred. Mr. Hagopian, the Chairman and a
Director of the Company is a General Partner of Brentwood Associates. Mr.
Hagopian disclaims beneficial ownership of the shares owned by Brentwood
Associates.
(4) Includes 2,678,141 shares of the Company's Series A Preferred and 260,084
shares of the Company's Series B Preferred.
(5) Includes 4,256 shares issuable upon exercise of warrants to purchase
Common Stock, 273,116 shares of the Company's Series A Preferred and
140,056 shares of the Company's Series B Preferred. Richard C.E. Morgan, a
Director of the Company, is a General Partner of Wolfensohn Partners L.P.
Mr. Morgan disclaims beneficial ownership of the shares held by Wolfensoh
n Partners L.P.
(6) Includes 4,233 shares issuable upon exercise of warrants to purchase
Common Stock, 223,796 shares of the Company's Series A Preferred and
140,000 shares of the Company's Series B Preferred.
(7) Includes 1,274,853 and 149,737 shares held respectively by New Enterprise
Associates V ("NEA") and Spectra Enterprise Associates ("Spectra"), of
which 1,071,256 and 131,788 shares, respectively, are shares of the
Company's Series A Preferred and 203,597 and 17,949 shares, respectively,
are shares of the Company's Series B Preferred. NEA and Spectra are
independent partnerships; however, the General Partners of Spectra are
also General Partners of NEA. James A. Cole, a Director of the Company, is
a Partner of NEA and the Managing General Partner of Spectra. Mr. Cole
disclaims beneficial ownership of the shares owned by NEA and Spectra.
(8) Includes 332,352 and 784,335 shares held respectively by Morgenthaler
Venture Partners and Morgenthaler Venture Partners II, of which 949 and
2,239 shares, respectively, are issuable upon exercise of warrants to
purchase Common Stock.
(9) Includes 415,944 shares subject to stock options which are exercisable
within 60 days of October 20, 1995.
(10) Includes shares beneficially owned or held of record by entities
associated with Brentwood Associates, as described in footnote 3 above.
Mr. Hagopian is a General Partner of Brentwood Associates. Mr. Hagopian
disclaims beneficial ownership of such shares.
(11) Includes (i) 282,144 shares held in trust for the benefit of Mr. Hamilton,
(ii) 5,648 shares held by Mr. Hamilton's two children, as to which shares
he disclaims beneficial ownership, and (iii) 14,583 shares subject to
stock options which are exercisable within 60 days of October 20, 1995.
(12) Includes 86,419 shares subject to stock options which are exercisable
within 60 days of October 20, 1995.
(13) Includes 15,692 shares subject to stock options which are exercisable
within 60 days of October 20, 1995.
(14) Includes shares beneficially owned or held of record by Wolfensohn
Partners L.P., as described in footnote 5 above. Mr. Morgan is a General
Partner of Wolfensohn Partners L.P. Mr. Morgan disclaims beneficial
ownership of such shares.
(15) Includes shares beneficially owned or held of record by NEA and Spectra as
described in footnote 7 above. Mr. Cole is a Partner of NEA and the
Managing General Partner of Spectra. Mr. Cole disclaims beneficial
ownership of these shares.
(16) Includes 98,918 shares subject to stock options which are exercisable
within 60 days at October 20, 1995.
(17) Includes 92,859 shares subject to stock options which are exercisable
within 60 days of October 20, 1995.
(18) Includes 724,415 shares subject to stock options exercisable within 60
days of October 20, 1995. See Notes 9, 11, 12, 13, 16 and 17. Also
includes 7,667,912 shares which may be deemed to be beneficially owned by
certain directors and officers. See Notes 10, 14 and 15.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1990, Harold J. Hamilton, a retired executive officer and
a current director of the Company, exercised stock options as to 244,821 shares
of the Company's Common Stock and, in lieu of payment to the Company for such
exercise, Mr. Hamilton delivered to the Company a promissory note in the
principal amount of $71,500. The note, the total principal amount of which is
still outstanding, was subsequently amended to change the interest rate,
currently bears interest at the rate of 5.38% per annum and is due September 21,
2000.
The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by California law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
-18-
<PAGE> 88
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal shareholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
-19-
<PAGE> 89
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1) Financial Statements.
The following Consolidated Financial Statements of Censtor
Corp. and subsidiaries, and the Report of Independent Auditors
are included at pages F-1 through F-19 of this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
--------------------------------------------------------------------------------- --------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................ F-1
Consolidated Balance Sheets as of June 30, 1995 and 1994......................... F-2
Consolidated Statements of Operations for each of the Three Years in the Period F-3
Ended June 30, 1995..............................................................
Consolidated Statements of Net Capital Deficiency for each of the Three Years in F-4
the Period Ended June 30, 1995...................................................
Consolidated Statements of Cash Flows for each of the Three Years in the Period F-5
Ended June 30, 1995..............................................................
Notes to Consolidated Financial Statements....................................... F-6
</TABLE>
2) Financial Statement Schedules.
No schedules have been filed as part of this report because
they are not applicable or are not required or the information
required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.i (5) Restated Articles of Incorporation of Registrant.
3.ii (1) Amended and Restated Bylaws of Registrant.
10.1 (1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2 (1) Form of Indemnification Agreement entered into between the Company and each of its
directors and officers.
10.3 (1) Lease Agreement, dated November 28, 1983, between the Company and The Sobrato
Group, together with amendments thereto.
10.4 (1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
</TABLE>
-20-
<PAGE> 90
<TABLE>
<S> <C>
10.5 (1)(2) License Agreement, dated February 28, 1991, between the Company and Fujitsu
Limited, as amended.
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.6 (1)(2) Manufacturing License Agreement, dated August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as amended.
10.7 (1)(2) License Agreement, dated June 1, 1993, between the Company and International
Business Machines Corporation.
10.8 (1) Denka Promissory Note.
10.9 (3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the Company.
10.10 (5) License Agreement, dated June 19, 1995, between Contact Recording Technology, Inc.
and the Company.
10.11 (2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
24 (5) Power of Attorney (see page 20)
</TABLE>
-------------------------
(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10 which
became effective December 25, 1994.
(2) Confidential Treatment requested for portions of
Exhibit.
(3) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Previously filed.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
See response to Item 14(a)(3) above.
(d) Financial Statement Schedules
See response to Item 14(a)(2) above.
-21-
<PAGE> 91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
CENSTOR CORP.
December 13, 1995 By:
/s/ Garrett A. Garrettson
_____________________________________
Garrett A. Garrettson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- ----------------------------- ------------------------------------------- -----------------
<S> <C> <C>
President,Chief Executive Officer and December 13, 1995
- -----------------------------
Garrett A. Garrettson Director (Principal Executive Officer,
Principal Financial and Accounting Officer)
* Chairman of the Board December 13, 1995
- -----------------------------
B. Kipling Hagopian
* Director December 13, 1995
- -----------------------------
Harold J. Hamilton
Director December 13, 1995
- -----------------------------
James A. Cole
Director December 13, 1995
- -----------------------------
Paul R. Low
* Director December 13, 1995
- -----------------------------
Richard C. E. Morgan
</TABLE>
*By: /s/ Russell M. Krapf
-------------------------------------
Russell M. Krapf, Attorney-In-Fact
-22-
<PAGE> 92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
CENSTOR CORP.
December 13, 1995 By:
_____________________________________
Garrett A. Garrettson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- ----------------------------- ------------------------------------------- -----------------
<S> <C> <C>
President,Chief Executive Officer and December 13, 1995
- -----------------------------
Garrett A. Garrettson Director (Principal Executive Officer,
Principal Financial and Accounting Officer)
* Chairman of the Board December 13, 1995
- -----------------------------
B. Kipling Hagopian
* Director December 13, 1995
- -----------------------------
Harold J. Hamilton
- ----------------------------- Director December 13, 1995
James A. Cole
- ----------------------------- Director December 13, 1995
Paul R. Low
* Director December 13, 1995
- -----------------------------
Richard C. E. Morgan
</TABLE>
*By:
-------------------------------------
Russell M. Krapf, Attorney-In-Fact
-23-
<PAGE> 93
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the fiscal quarter ended: March 31, 1996 or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
530 Race Street
San Jose, California 95126
- ---------------------------------------- ------------------------------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 298-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 31, 1996
<S> <C>
Common Stock - no par value 9,301,719
</TABLE>
================================================================================
<PAGE> 94
CENSTOR CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1995 and March 31, 1996 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
three and nine months ended March 31, 1995 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited)
nine months ended March 31, 1995 and 1996 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
</TABLE>
-2-
<PAGE> 95
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1995 MARCH 31, 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,368,891 $ 50,703
Receivables 27,345 8,846
Prepaid expenses and other current assets 326,436 121,246
Property and equipment held for sale -- 1,260,693
------------- -------------
Total current assets 1,722,672 1,441,488
Property and equipment, net 2,517,155 13,311
Restricted cash 94,450 94,450
Deposits and other assets 184,724 147,221
------------- -------------
Total assets 4,519,001 1,696,470
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Notes payable $ -- $ 5,900,000
Accounts payable 703,111 1,005,557
Accrued payroll and related expenses 437,451 94,450
Deferred revenue 2,062,498 --
Other current liabilities 58,315 291,022
Obligations under capital leases 1,340,215 806,887
------------- -------------
Total current liabilities 4,601,590 8,097,916
Long-term obligations:
Obligations under capital leases 633,134 127,080
Subordinated debentures 13,671,455 14,282,547
Minority interest of subsidiary 128,750 --
Net capital deficiency:
Preferred stock 32,509,031 32,509,031
Common stock 50,507,497 50,507,997
Warrants to purchase shares of preferred stock 253,050 253,050
Capital surplus 1,789,600 2,263,708
Accumulated deficit (99,297,363) (106,067,116)
------------- -------------
(14,238,185) (20,533,330)
Notes receivable from shareholders (277,743) (277,743)
------------- -------------
Net capital deficiency (14,515,928) (20,811,073)
------------- -------------
Total liabilities and net capital deficiency $ 4,519,001 $ 1,696,470
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
-3-
<PAGE> 96
CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues - license fees $ 1,237,650 $ 735,934 $ 2,276,923 $ 3,202,706
Costs and expenses:
Research and development 2,674,745 1,538,233 8,811,579 7,399,095
Selling, general, and administrative 803,657 657,746 2,204,568 1,754,855
------------ ------------ ------------ ------------
Total expenses 3,478,402 2,195,979 11,016,147 9,153,950
------------ ------------ ------------ ------------
Operating loss (2,240,752) (1,460,045) (8,739,225) (5,951,244)
Interest and other expenses, net 257,296 327,966 640,209 693,701
Minority interest in loss of subsidiary -- -- -- (194,642)
------------ ------------ ------------ ------------
Loss before income tax expense (2,498,048) (1,788,011) (9,379,434) (6,450,303)
Income tax expense 123,750 73,333 166,600 319,450
------------ ------------ ------------ ------------
Net loss ($ 2,621,798) ($ 1,861,344) ($ 9,546,034) ($ 6,769,753)
============ ============ ============ ============
Net loss per share ($ 0.28) ($ 0.20) ($ 1.03) ($ 0.73)
============ ============ ============ ============
Weighted average number of shares used in
computing per share amounts (in thousands) 9,255 9,302 9,245 9,301
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 97
CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------------------
Operating activities: 1995 1996
----------- -----------
<S> <C> <C>
Net loss ($9,546,033) ($6,769,753)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,194,026 1,093,030
Gain on sale of fixed assets (43,092) (145,908)
Interest on subordinated debentures 570,645 611,092
Loss applicable to minority interest -- (194,642)
Changes in assets and liabilities:
Receivables (38,902) 18,499
Prepaid expenses and other current assets (368,251) 205,190
Accounts payable (202,289) 302,446
Accrued payroll and related expenses 143,689 (343,001)
Deferred revenue 2,713,338 (2,062,498)
Other current liabilities (7,373) 232,707
----------- -----------
3,961,791 (283,086)
----------- -----------
Net cash used in operating activities (5,584,241) (7,052,838)
Investing activities:
Additions to property and equipment (294,751) (191,668)
Proceeds from sale and leaseback, and sale of fixed assets 583,751 550,050
----------- -----------
Net cash provided by investing activities 289,000 358,382
Financing activities:
Proceeds from issuance of short-term debt -- 5,900,000
Principal payments under capital leases (769,058) (1,064,232)
Purchase of certificate of deposit in connection with leases (94,450) --
Sale of preferred stock of subsidiary -- 540,000
Sale of common stock 4,649 500
----------- -----------
Net cash provided by (used in) financing activities (858,859) 5,376,268
----------- -----------
Net decrease in cash and cash equivalents (6,154,101) (1,318,188)
Cash and cash equivalents at beginning of period 8,613,200 1,368,891
Cash and cash equivalents at end of period $ 2,459,099 $ 50,703
=========== ===========
Supplemental disclosure of noncash financing activities:
Equipment purchased under capital leases $ 842,340 $ 24,851
</TABLE>
-5-
<PAGE> 98
CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information, and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for annual consolidated financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ended June 30,
1996. The financial information presented herein should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
for the year ended June 30, 1995 included in the Company's Annual Report on
Form10-K/A filed with the Securities and Exchange Commission.
NOTE 2 -- NET LOSS PER SHARE:
Net loss per share is computed based upon the weighted average number
of shares of the Company's common stock. The Company's common stock equivalent
shares from convertible preferred stock and from stock options and warrants were
antidilutive for the three and nine month periods ended March 31, 1995 and 1996
and, accordingly, were not included in the weighted average number of shares.
NOTE 3 -- FISCAL 1996 FINANCING:
As of March 31, 1996, the Company had negative working capital due
primarily to a history of monthly cash usage in excess of $1.0 million. In
addition, the Company has limited available credit facilities and no assured
sources of financing to meet its operating needs. Given the recurring operating
losses in carrying out the development and deployment of its technologies and
the requirement to continue payments on its equipment leases, the Company does
not currently have sufficient liquidity to sustain its operations for the next
twelve months. Furthermore, given this inadequate liquidity, coupled with the
lack of immediately available sources of financing, the Company requires future
sources of financing to be able to continue operations. Because these conditions
also existed at June 30, 1995, the independent auditor's report on the June 30,
1995 financial statements of the Company contains an uncertainty paragraph with
respect to the Company's ability to continue as a going concern.
The Company's ability to fund its recurring losses from operations
depends upon its success in selling licenses, and/or raising other sources of
financing. The Company is actively pursuing sources of financing. In addition,
the Company has entered into an agreement (the "Agreement") with an established
component manufacturer in the disk drive industry, for such manufacturer to
acquire the majority of the Company's tangible assets and related lease
liabilities, and to purchase a non-exclusive patent and know-how license to use
the Company's technology (the "Proposed Transaction"). The Agreement was entered
into on March 29, 1996 with the "Closing" expected to occur in early- to
mid-June, upon obtaining approval from the Company's shareholders. Under the
terms of the Agreement, the Company will retain those physical assets, primarily
office equipment and computers, necessary to protect its patent portfolio and
intellectual property and to continue operations as a technology licensing
company.
-6-
<PAGE> 99
If the Company is successful in selling new licenses, consummating the
Agreement, and/or raising other sources of financing, it believes that it will
be able to finance its operations through the next twelve months. There can be
no guarantee that the Company will be able to raise additional financing.
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The financial statements included herein do not include any adjustments that
might result should the Company not be able to finance its expected level of
future expenditures.
NOTE 4 -- EQUITY FINANCING:
In June 1995, the Company formed a subsidiary, Contact Recording
Technology, Inc. ("CRT") to develop and manufacture contact longitudinal data
storage heads for the computer disk drive industry. The Company received
approximately an 89.5% interest in exchange for agreements to license certain
technology and to provide certain services to the subsidiary. The remaining
10.5% interest was sold to two outside investors/joint venture partners for $2.0
million.
In September 1995, a potential third outside investor/joint venture
partner was issued a warrant to purchase 250,000 shares of preferred stock of
CRT at an exercise price of $4.00 per share, exercisable through December 31,
1995. The investor exercised the warrant to purchase a total of 135,000 shares
for a total of $540,000 for an approximate equity interest of 2.7%. The investor
was also issued a warrant to purchase 720,000 shares of the preferred stock of
CRT, exercisable through June 30, 1996, in exchange for certain equipment which
it presently owns for use in the assembly and test of contact recording heads
for computer disk drives.
In the first half of fiscal 1996, CRT received $3.0 million under a
promissory note issued to a potential licensee. Repayment of the principal,
initially by October 26, 1995, by automatic conversion into preferred stock of
CRT or in exchange for a license with the Company for the use of certain of the
Company's patents, has been extended to May 17, 1996. If the note is converted
to stock, the holder of the note has the option to exchange the shares for a
license or to retain the shares and acquire a license for $3.0 million at any
time prior to February 23, 1997.
The Company was unable to secure any additional equity financing in the
current quarter, but has entered into the Agreement. This transaction will
affect the Company's equity only to the extent of any gain on the assets sold,
and it will provide cash necessary for the ongoing operations of Censtor.
NOTE 5 -- LINE OF CREDIT:
In October 1995, the Company arranged a line of credit with its primary
bank to provide short term working capital of up to $750,000, repayable in
November 1995. This line was increased in November 1995 to $1.0 million and
extended through December 1995. Subsequent to the quarter end, the line was
further extended through May 31, 1996. The line bears a variable interest rate
of prime plus 2.5% and is collateralized by the assets of the Company. In
connection with the line of credit the bank was granted warrants to purchase
approximately 70,000 and 40,000 shares of preferred stock in Censtor at the
lower of $2.50 or the share price of the next security issued by the Company,
exercisable through November 2000 and February 2001, respectively. The line is
expected to be repaid out of the proceeds from the transaction contemplated in
the Agreement.
NOTE 6 -- BRIDGE LOANS:
In January 1996, several of the existing investors of Censtor loaned
the Company $1.0 million in the form of convertible promissory notes. The notes
bear interest at prime plus 2.5% and were initially due February 23, 1996. These
notes have been extended until nine months after the Closing, however, and
approximately 50% of the principal plus accrued interest will be repaid out of
the Closing proceeds. The notes are collateralized by the assets of the Company
and are subordinated to the Company's line of credit with its primary bank. At
the option of the investors, the notes can be automatically converted into
shares of the next equity security issued by Censtor.
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In February 1996, the Company obtained a bridge loan of $900,000 from a
component manufacturer in the disk drive industry as part of negotiations in
connection with the Proposed Transaction. On the signing of the Agreement, the
Company entered into an additional promissory note for up to $800,000 of which
the Company had received $500,000 by April 30, 1996. These notes bear interest
at 10% per annum. On the Closing, the outstanding balance on the $800,000 note
and approximately half of the $900,000 note, subject to certain adjustments,
will be forgiven, with the balance being offset against the proceeds from the
Proposed Transaction.
NOTE 7 -- THE PROPOSED TRANSACTION:
On March 29, 1996, the Company entered into the Agreement, which
provides for the transfer, on the Closing date, of the Company's research and
development operations, including the hiring of 84 of its employees, and the
sale of certain of the Company's physical assets and rights and obligations
under contracts related thereto to an established manufacturer in the disk drive
industry. Additionally, on the Closing, pursuant to the Agreement, the Company
will grant a non-exclusive irrevocable world-wide license covering the Company's
intellectual property to such manufacturer. The Proposed Transaction is subject
to shareholder approval.
The Company will receive approximately $9.0 million, subject to certain
adjustments, in connection with the Proposed Transaction, $6.5 million of which
will be received on the Closing and up to $2.5 million of which will be received
between November 15, 1996 and nine months after the Closing.
Of the net proceeds from the Proposed Transaction, the Company expects
to use approximately $5.8 million to pay down obligations estimated to be due as
of the Closing, including a $2.0 million payment of outstanding accrued interest
on the subordinated debentures (see Note 8), $588,000 to partially repay the
convertible promissory notes (see Note 6) and $1,000,000 to repay the Company's
line of credit (see Note 5). The remainder of the proceeds, if any, will be used
for general working capital purposes with respect to the Company's ongoing
licensing operations.
NOTE 8 -- CONVERTIBLE DEBT:
On February 22, 1996, certain subordinated debentures of the Company's
were modified such that the Company is obligated to pay $2.0 million against the
outstanding accrued interest on such debentures by July 31, 1996. This amount
will be put into escrow upon the Closing. The Company has agreed to use its best
efforts consistent with good business practices, subject to certain conditions,
to pay the remaining outstanding principal and accrued interest of the
debentures on September 30, 1996. Notwithstanding the amount paid, any remaining
interest will be forgiven on September 30, 1996. In addition, the debenture
holder has agreed to forgive the remaining principal balance of the debentures
(due September 1997 and January 1998) in return for 5% of the royalties Censtor
may receive from its present and future licenses through the year 2001, and
subject to the repayments above.
NOTE 9 -- COMMITMENTS:
As of March 31, 1996, the Company had outstanding non-cancellable
purchase orders of approximately $1.8 million, primarily relating to
acquisitions of capital equipment. Of the orders, $1.5 million are related to
equipment that was expected to be resold to a joint venture partner for use in
manufacture of Censtor's contact recording heads. Due to the Company's return to
a licensing strategy, Censtor is negotiating to cancel most of these open
orders.
NOTE 10 -- SUBSEQUENT EVENT:
In connection with the Proposed Transaction, the Company has amended
an agreement with a licensee to allow for the licensing of the Company's
technology to the disk drive component manufacturer of
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the Proposed Transaction as well as to eliminate the licensee's obligations (i)
to pay royalties on the licensed technology and (ii) to pay the Company $3.0
million if the licensee uses the licensed technology commercially.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions and analysis contain forward-looking
statements regarding future events or the future funancial performance of
Censtor Corp. and its subsidiary, CRT, (collectively, the "Company" or
"Censtor"). There are a number of important factors that could cause the actual
results of the Company to differ materially. Such factors are set forth in the
documents the Company files from time to time with the Securities and Exchange
Commission, specifically the Company=s last filed Form 10-K/A and Form 10-Q.
In the following discussion and analysis, forward-looking statements
are made in the Overview, Liquidity and Capital Resources, and Results of
Operations sections.
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by the licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. The Company has not been profitable in
any fiscal period since inception and as of March 31, 1996 had an accumulated
deficit of $106.1million. There can be no assurance that the Company will
achieve or sustain significant revenues or profitability in the future.
Censtor's strategy is to develop critical enabling technologies for the
disk drive industry, protect those technologies with a portfolio of patents as
well as carefully protecting its proprietary know-how, and to license its
technology to disk drive manufacturers. In June 1995, the Company intended to
provide, via its subsidiary, Contact Recording Technology, Inc. ("CRT"), an
assured low cost source of heads to those licensees. The Company has been unable
to raise capital in the magnitude needed to bring this plan to fruition and has,
accordingly, entered into an agreement (the "Agreement") with Read-Rite
Corporation ("Read-Rite"), an established component manufacturer in the disk
drive industry, for Read-Rite to acquire the majority of Censtor's tangible
assets and related lease liabilities, and to purchase a non-exclusive patent and
know-how license to use Censtor's technology (the "Proposed Transaction"). The
Proposed Transaction is expected to close (the "Closing") shortly following
approval by the shareholders of the Company if such approval is received.
Certain shareholders of the Company holding a majority of the voting equity
securities of the Company have granted Read-Rite an irrevocable proxy to vote
their shares in favor of the Proposed Transaction, and, accordingly, the Company
believes that the Proposed Transaction will be approved by the Company's
shareholders in early- to mid-June. At the Closing, Read-Rite will pay up to
$6,525,000 to the Company, subject to certain adjustments. In addition, if the
Proposed Transaction is consummated, Read-Rite will pay the Company up to an
additional $2,500,000, also subject to certain adjustments, to be made in three
payments, $250,000 on November 15, 1996, $250,000 on December 13, 1995 and $2.0
million nine months after the Closing. In February 1996, the Company obtained a
bridge loan of $900,000 from Read-Rite as part of negotiations in connection
with the Proposed Transaction. On the signing of the Agreement, the Company
entered into an additional promissory note for up to $800,000 of which the
Company had received $500,000 by April 30, 1996. These notes bear interest at
10% per annum. On the Closing, the outstanding balance on the $800,000 note and
approximately half of the $900,000 note, subject to certain adjustments, will be
forgiven, with the balance being offset against the proceeds from the Proposed
Transaction. In addition, in connection with the Proposed Transaction, the
Company has amended an agreement with a licensee to allow for the licensing of
the Company's technology to Read-Rite as well as to eliminate the licensee's
obligations (i) to pay royalties on the licensed technology and (ii) to pay the
Company $3.0 million if the licensee uses the licensed technology commercially.
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As a result of the Agreement, Censtor's strategic focus for the next
twelve months has shifted to reducing its overhead, and returning to its
original strategy of perfecting its existing patents, selling additional
licenses, and collecting royalties due under the licenses. If the Company's
patented technology becomes a main stream choice for high capacity disk drives,
Censtor could ultimately collect royalties from some past and future licensees.
There can be no assurance, however, that the Company will be successful in this
strategy.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and contract research and development agreements.
During the nine months ended March 31, 1996, the Company generated net
cash from financing activities of $5.4 million, primarily from the receipt of
$5.9 million on various notes payable and the sale of stock in CRT for $540,000,
offset by payments of $1.1 million on capital leases. In comparison, Censtor
consumed $769,000 in cash for payments on capital leases during the nine months
ended March 31, 1995. During the same periods, the Company used cash in its
operations of $7.1 million and $5.6 million, respectively. The lower cash usage
during the period in fiscal 1995 is primarily due to receipt of license fees in
the amount of $4.5 million, a significant portion of which was recorded as
deferred revenue. The Company generated cash from investing activities of
$358,000 for the nine months ended March 31, 1996, primarily from the sale of
fixed assets, partially offset by the purchase of fixed assets, and generated
$289,000 for the nine months ended March 31, 1995, also from the sale of fixed
assets, partially offset by the purchase of fixed assets.
As of March 31, 1996, the Company had negative working capital of
approximately $7.9 million, due to a history of monthly cash usage in excess of
$1.0 million. In addition, the Company has limited available credit facilities
with no assured sources of financing to meet its operating needs. Given the
recurring operating losses in carrying out the development and deployment of its
technologies and the requirement to continue payments on its equipment leases,
the Company does not currently have sufficient liquidity to sustain its
operations for the next twelve months. The Company requires future sources of
financing to be able to continue operations. Because these conditions also
existed at June 30, 1995, the independent auditor's report on the June 30, 1995
financial statements of the Company contains an uncertainty paragraph with
respect to the Company's ability to continue as a going concern.
The Company expects to decrease its future operating expenses
significantly if the Proposed Transaction is consummated as, pursuant to the
Agreement, Read-Rite will acquire the majority of Censtor's tangible assets and
related lease liabilities, as well as a non-exclusive license for Censtor's
technology, and Read-Rite has hired all of CRT's employees and all but five of
Censtor's employees effective February 5, 1996, substantially reducing Censtor's
likely future monthly spending.
In addition to the above funds, the Company secured several sources of
working capital during and prior to the quarter ended March 31, 1996, including
the following:
1. The Company has negotiated a $1.0 million line of credit with its
primary bank, currently repayable on May 31, 1996. The Company plans to
repay the line out of the proceeds from the Proposed Transaction. The
line bears a variable interest rate of prime plus 2.5% and is
collateralized by the assets of the Company. In connection with the
line of credit the bank was granted warrants to purchase approximately
70,000 and 40,000 shares of preferred stock in Censtor at the lower of
$2.50 or the share price of the next security issued by the Company,
exercisable through November 2000 and February 2001, respectively.
2. In September and October 1995, CRT received a total of $3.0 million
under a promissory note issued to a potential licensee. Repayment of
the principal, initially by October 26, 1995, by
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automatic conversion into preferred stock of CRT or in exchange for a
license with the Company for use of certain of the Company's patents,
has been extended to May 17, 1996. If the note is converted to stock,
the holder of the note has the option of exchanging the shares for a
license or retaining the shares and acquiring a license for $3.0
million at any time prior to February 23, 1997.
3. In January 1996, the existing investors of Censtor loaned the Company
$1.0 million in the form of convertible promissory notes. The notes
bear interest at prime plus 2.5%. The Company plans to pay
approximately 50% of the outstanding notes, plus accrued interest, at
the Closing, and pay the remainder nine months after the Closing. The
notes are collateralized by the assets of the Company and are
subordinated to the Company's line of credit with its primary bank. At
the option of the investors, the notes can be automatically converted
into shares of the next equity security issued by Censtor.
In addition, on February 8, 1996, the Company met with a major
noteholder to propose a restructuring of certain of Censtor's debt obligations.
An agreement was reached on February 22, 1996 . Under this new agreement the
Company is obligated to pay $2.0 million against the outstanding accrued
interest (which totaled $4.3 million as of March 31, 1996) by July 31, 1996 and
use its best efforts consistent with good business practices, subject to certain
conditions, to pay the remaining outstanding principal and accrued interest on
September 30, 1996. Not withstanding the amount paid, any remaining interest
shall be forgiven on September 30, 1996. In addition, the noteholder has agreed
to forgive the remaining principal balance (due in September 1997 and January
1998) in return for 5% of the royalties Censtor may receive from its present and
future licenses through the year 2001, and subject to the repayments above.
The Company's commitments for cash payments during the next twelve
months are primarily for operating expenses. The Company had outstanding
non-cancellable purchase orders totalling approximately $1.8 million, primarily
relating to acquisitions of capital equipment. Of the orders, $1.5 million are
related to equipment that was expected to be resold to a joint venture partner
for use in the manufacture of Censtor's contact recording heads. Due to the the
Company's return to a licensing strategy, Censtor is negotiating to cancel most
of these open orders. The Company is currently unable to estimate the impact on
operations of any cancellation fees. Due to the limited cash available to the
Company over the last four to six months, the Company's accounts payable have
increased to over $1.0 million as of March 31, 1996. Of this amount,
approximately 25% represented invoices older than 90 days. Upon the Closing, the
Company intends to pay down these overdue amounts.
The Company's ability to fund its cash requirements through the next
twelve months continues to depend upon its success in selling additional
licenses and completing the Proposed Transaction or raising other sources of
financing. Management expects to enter into additional license agreements that
provide for the payment of license fees and, potentially, royalties during the
next twelve months.
If the Company is successful in selling additional licenses and
completing the Proposed Transaction or raising such other sources of financing,
it believes that it will be able to finance its operations during the next
twelve months. There can be no assurance, however, that the Company will be
successful in these endeavors or that the aggregate of the funds received from
these sources will be adequate to fund its operations or that any other
financing, if obtained, would be adequate to support the Company's operations or
on terms favorable to the Company. Any such failure would have a material
adverse impact on the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from the sale of
license agreements with disk drive manufacturers. These license agreements have
generally included an initial fee, which is paid either at the inception of the
license or on an installment basis and, for two of its current licenses, prepaid
royalties on
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the future sale of products incorporating the Company's technology.
Nonrefundable fees received, or contractually obligated to be paid, are
recognized as revenue on a straight line basis over the estimated period during
which the Company is required to satisfy significant obligations under the
license agreements. As a result of Read-Rite's hiring of all of CRT's employees
and all but five of Censtor's employees, the remainder of the Company's deferred
revenue in connection with its licenses was recognized as revenue in the quarter
ended March 31, 1996, because with its present employees, Censtor is no longer
able to provide technical support to its licensees.
Accordingly, revenues for both the quarter and the nine months ended
March 31, 1996, $736,000 and $3.2 million respectively, relate primarily to the
recognition of deferred revenues associated with a license to Hitachi, Ltd.,
which were fully recognized by December 1995, and the recognition of the balance
of deferred revenue from a license to NEC Corporation, entered into August 1995.
The $1.2 million in recognized revenue for the quarter ended March 31, 1995 was
derived primarily from the license agreement with Hitachi, Ltd. which was
entered into in December 1994. The $2.3 million in recognized revenue for the
nine months ended March 31, 1995 related to a technical assistance agreement
with Daido which expired in October 1994, and license agreements with Maxtor,
Ministor and Hitachi, Ltd.
Research and Development
Research and development expenditures for the quarter ended March 31,
1996 were $1.5 million, significantly lower than the $2.7 million in
expenditures in the same quarter of the prior year. Expenses for the nine month
period ending March 31, 1996 were also lower at $7.4 million as compared to $8.8
million in the nine months ended March 31, 1995. This decrease in research and
development expenses is expected to continue in the future as all of the
Company's engineering personnel have been hired by Read-Rite effective February
5, 1996. The majority of the Company's tangible assets and their related
depreciation expense and lease liabilities will be assigned upon the Closing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $804,000
for the quarter ended March 31, 1995 to $658,000 in the quarter ended March 31,
1996. This decrease was largely the result of decreased utilization of outside
patent counsel due to the hiring of in-house patent counsel. Expenses decreased
from $2.2 million for the nine months ended March 31, 1995 to $1.8 million in
the same period of the current year primarily for the same reason.
Interest and Other Expenses, Net
Interest and other expenses, net, increased from $257,000 for the
quarter ended March 31, 1995 to $328,000 for the quarter ended March 31, 1996.
Although interest expense alone remained fairly even, other expenses included a
loss on the disposal of equipment of $23,000 in 1996. Interest and other
expenses, net, were fairly even at $694,000 in the nine months ended March 31,
1996, compared to approximately $640,000 in the prior period. Again, interest
expense was fairly even. The period in 1995 included an offset of a $43,000 gain
on equipment sales and $105,000 of interest income. The current year amount
includes a gain on the sale of equipment of $146,000.
Income Taxes
In the quarter and the nine months ended March 31, 1995, the Company
recognized tax expense of $124,000 and $167,000 respectively, relating to the
10% Japanese withholding tax on fees from the sale of the Hitachi license in
December 1994 which were recognized as revenue during the period. Income taxes
of $73,000 and $319,000 for the quarter and nine months ended March 31, 1996,
respectively, relate to 10% Japanese withholding tax on both the Hitachi license
and the license with NEC Corporation. Prepaid taxes are being amortized into
expense over the same twelve-month period that gross proceeds for the licenses
are being
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amortized into revenue. Since the remaining deferred revenue was recognized as
revenue this quarter, the remaining portion of the prepaid Japanese withholding
tax on the NEC license was recognized as tax expense this quarter as well.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
2.1(1) Agreement for Purchase and Sale of Assets by
and between Read-Rite Corporation and Censtor
Corporation dated March 29, 1996.
3.1(6) Restated Articles of Incorporation of
Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
10.1(2)(5) 1990 Stock Plan and Form of Option Agreement.
10.2(2) Form of Indemnification Agreement entered
into between the Company and each of its
directors and officers.
10.3(2) Lease Agreement, dated November 28, 1983,
between the Company and The Sobrato Group,
together with amendments thereto.
10.4(2)(3) License Agreement, dated September 23,
1991, between the Company and Maxtor
Corporation, as amended.
10.5(2)(3) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited,
as amended.
10.6(2)(3) Manufacturing License Agreement, dated
August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as
amended.
10.7(2)(3) License Agreement, dated June 1, 1993,
between the Company and International
Business Machines Corporation.
10.8(2) Denka Promissory Note.
10.9(4) License Agreement, dated December 19, 1994,
between Hitachi, Ltd. and the Company.
10.10(6) License Agreement, dated June 19, 1995,
between Contact Recording Technology, Inc.
and the Company.
10.11(6)(3) License Agreement, dated August 7, 1995,
between NEC Corporation and the Company.
-------------------------
(1) Incorporated by reference to exhibits filed with
Registrant's Proxy Statement on April 24, 1996.
(2) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10 which
became effective December 25, 1994.
(3) Confidential Treatment requested for portions of
Exhibit.
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(4) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994.
(5) Document indicated is a compensatory plan.
(6) Incorporated by reference to exhibits filed with
Registrant's 10-K for the year ended June 30, 1995
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1996.
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SIGNATURE
Pursuant to the requirements 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.
CENSTOR CORP.
Registrant
BY: /s/ Russell M. Krapf
----------------------------------
Russell M. Krapf
President
Chief Executive Officer
and acting Chief Financial Officer
Dated: May 2, 1996
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