CENSTOR CORP /CA/, 10-K/A, 1996-06-11

CENSTOR CORP /CA/
10-K/A, 1996-06-11
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1
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

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> 2

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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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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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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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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<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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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

-9-
<PAGE> 10

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

-10-

<PAGE> 11

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>

-11-
<PAGE> 12

<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>

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

-12-
<PAGE> 13

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.

-13-
<PAGE> 14

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

-14-
<PAGE> 15

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.

-15-
<PAGE> 16

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> 17

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> 18

- --------------------
* 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> 19

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> 20

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> 21

<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.

(d) Financial Statement Schedules
See response to Item 14(a)(2) above.

-21-

<PAGE> 22

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> 23

SIGNATURES

Registrant

CENSTOR CORP.

December 13, 1995 By:
_____________________________________
Garrett A. Garrettson
President and Chief Executive Officer

<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- ----------------------------- ------------------------------------------- -----------------

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-