<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1997
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)
540 N. Santa Cruz Ave., #277, Los Gatos 95030
(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, 1997 was $20,919,839. This valuation is based
on the fair market value of the Registrant's stock as determined by the
Registrant's Board of Directors at the time of issuance of such stock and may
not reflect current fair market value.
At September 15, 1997 registrant had outstanding 8,523,751 shares of
Common Stock.
<PAGE> 2
PART I
ITEM 1. BUSINESS
The following discussions contain forward-looking statements regarding
future events or the future financial performance of Censtor Corporation, (the
"Company" or "Censtor") that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the documents the Company files from time to time with the Securities
and Exchange Commission.
GENERAL
Censtor was incorporated in 1981, and until early calendar 1996, had
been focused on developing technology for and manufacturing high performance
contact recording heads and media for the computer disk drive industry. The
Company has been unable to raise the capital required to pursue its former
strategy of manufacturing contact recording heads and, accordingly, on July 18,
1996, the Company completed a transaction with Read-Rite Corporation
("Read-Rite") to concentrate its efforts on licensing rather than licensing and
manufacturing. The transaction with Read-Rite (the "Read-Rite Transaction")
involved the purchase by Read-Rite of Censtor's manufacturing and research and
development operations including the tangible assets, contracts and lease
liabilities related thereto together with a grant by Censtor to Read-Rite of a
non-exclusive license to Censtor's patents and other intellectual property
rights related to the Company's technology.
The Company owns or has applied for fundamental patents pertaining to
micro-miniature, low-cost read/write heads and special surface treatments for
disk media that allow continuous head/disk contact during operation ("contact
recording") without excessive wear. Most 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 present business model calls for the Company to license
contact, pseudo-contact and suspension recording technologies to disk drive
manufacturers. Currently, Censtor has sold licenses to nine disk drive and disk
drive component manufacturers (IBM, Fujitsu, Hitachi, Maxtor, NEC, Western
Digital, Denka, Read-Rite and TDK) who bought the licenses based upon their
expectations that the Company's technologies may be used in the future or
because they recognized they were utilizing Censtor's technology.
BUSINESS STRATEGY
Censtor's strategy is to perfect its patent protection and proprietary
rights to the disk drive technology developed by it over the last 16 years, and
to exploit that technology through licensing or other strategic transactions
with disk drive manufacturers and other related companies. The Company has been
unsuccessful in its efforts to sell licenses to the Company's technology to some
prospective licensees who, in management's opinion, are infringing the Company's
patents. Accordingly, management and the Board of Directors have concluded that
the Company would benefit from leadership with extensive experience in patent
enforcement. Management has sought, and found, such capability in, and has
entered into a relationship with, Mr. Gary Summers of Teklicon, Inc.
("Teklicon") and Mr. Charles C. Pierpoint III with I. P. Managers, Inc. ("IPM").
IPM has relationships with intellectual property law firms and has an exclusive
contract with Teklicon, a high technology consulting firm specializing in
consulting and expert witness services to the legal profession. Teklicon will
perform marketing and technology due diligence and IPM will provide the
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legal services. Management believes the Company's arrangement with IPM and
Teklicon will provide the best available leadership while minimizing the short
term cash obligations of the Company while it seeks to complete new license
agreements and collect royalties from existing licensees.
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 20 issued United States patents, 15 pending
United States patent applications, 10 foreign patents and 14 foreign patent
applications.
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 technology can provide, which
could render the Company's technology noncompetitive or obsolete, thereby
adversely affecting the Company's results of operations.
The market for the Company's technology 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 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
will be realized in practice or can be maintained over the improvements to
conventional inductive heads.
LICENSES WITH DISK DRIVE AND COMPONENT MANUFACTURERS
The Company has entered into license agreements with six of the
approximately twenty-five disk drive manufacturers in the world: IBM, Fujitsu,
Hitachi, Maxtor, NEC and Western Digital, and with three component manufacturers
- - Denka, Read-Rite and TDK. The Company has executed license agreements with
initial license fees of $27.0 million and has received $7.5 million of
non-refundable advance royalty payments from these licensees. The Company
entered into the license agreement with TDK on September 25, 1997. Some 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. 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
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expected to become a component supplier.
ENVIRONMENTAL REGULATIONS
Although the Company no longer engages in any manufacturing or research
and development activities, in the past the Company has been 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
component. The Company believes that it has been in compliance in all material
respects and at all material times with such regulations and that it had
obtained all necessary environmental permits to conduct its business. Any
failure in the past 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, 1997, the Company had five full-time employees, all
engaged in general and administrative functions. However, three of these
employees terminated their employment at the end of August 1997 and one
terminated on September 3, 1997. The one remaining employee is responsible for
the finance and administrative duties for the Company while outside sources
will be utilized for the Company's intellectual property management duties.
EXECUTIVE OFFICERS OF THE REGISTRANT
On September 3, 1997, at the Company's Annual Meeting of Shareholders,
three new directors were elected. A Board of Directors Meeting followed,
consisting of these new directors who subsequently elected Sabine Austin to the
positions of President, Chief Executive Officer and Chief Financial Officer.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sabine Austin 38 Chief Executive Officer, President, Chief Financial
Officer, Corporate Secretary and Director
Gary J. Summers 54 Director
Charles C. Pierpoint III 56 Director
</TABLE>
SABINE AUSTIN has been President, Chief Executive Officer, Chief
Financial Officer and Corporate Secretary of Censtor Corp. and a member of the
Board of Directors since September 1997. She joined the Company in March 1987
as a cost accountant and financial analyst and became Manager of Finance and
Administration in August 1989 and Finance Director in January 1996. Ms. Austin
received her BA degree in Math-Econometrics from the University of California at
Santa Barbara in 1981 and an MBA from Santa Clara University in 1986.
GARY J. SUMMERS has been a member of the Company's Board of Directors
since September 1997. He has been President, Chief Executive Officer and
Founder of Teklicon, Inc., a high technology consulting firm and wholly owned
subsidiary of Forensic Technologies International Corporation, that provides
consulting and expert witness services to the legal profession, since 1985. In
this capacity he is providing consulting services to Censtor relative to
prospective future licensees. During the last 10 years, Mr. Summers has focused
on high technology intellectual property Litigation, ADR and Licensing services
in the areas of complex technologies such as semiconductors, computer systems,
software, mechanical and chemical systems and telecommunications. He is a member
of IEEE, ETA Kappa Nu, Tau Beta Pi and the American Board of Certified Forensic
Examiners. He received his BSEE and MSEE degrees from the University of Houston
in 1969 and 1970, respectively.
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CHARLES C. PIERPOINT III has been a member of the Company's Board of
Directors since September 1997. He has been a sole practitioner of law in
California since 1976 and is a principal in IPM. He is also presently an
instructor of Administration of Justice at the College of San Mateo and
previously taught Contract Law at San Mateo Law School. Mr. Pierpoint graduated
from the University of San Diego, School of Law, in 1972 and earned his Bachelor
of Arts in Political Science from Pennsylvania Military College in 1963.
ITEM 2. PROPERTIES
Until August 21, 1997, the Company's corporate offices consisted of
approximately 2,000 square feet of office space located in San Jose, California.
The Company's lease on this facility was to expire on May 2, 1999, however, the
Company has been notified that the landlord wishes to terminate this lease
effective December 11, 1997 since the Company moved to a smaller location in Los
Gatos, California. The Company formerly leased approximately 40,000 square feet
located in San Jose, California. Although this lease was assigned to Read-Rite
in connection with the Read-Rite Transaction, the Company has agreed, at the
request of the landlord, to guarantee Read-Rite's obligations under such lease.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 3, 1997, the Company's annual meeting of shareholders was
held. At this meeting, the shareholders elected Sabine Austin, Gary Summers and
Charles C. Pierpoint III to serve as directors of the Company until the next
Annual Meeting of Shareholders or until a successor has been duly elected and
qualified. Of the directors, Sabine Austin received 15,261,683 votes in favor of
her election with 100,000 votes opposed; Gary Summers received 15,251,683 votes
in favor and 110,000 opposed; and Charles Pierpoint received 15,241,683 votes in
favor and 120,000 votes opposed. At the annual meeting, the shareholders also
ratified the appointment of Ernst & Young LLP as the Company's independent
auditors with 15,991,683 shares voting in favor of such ratification, 80,000
shares opposed and 10,000 shares abstaining.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
As of June 30, 1997, the Company had outstanding 8,545,994 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 and other preferences.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
License revenues $ 2,682,666 $ 7,845,799 $ 3,515,472 $ 3,202,704 $ 4,088,332
Expenses:
Research and development 9,411,161 11,723,752 11,448,501 8,261,638 --
Selling, general & administrative 2,126,641 2,372,255 2,846,235 2,393,233 1,799,046
------------- ------------- ------------- ------------- -------------
Total expenses 11,537,802 14,096,007 14,294,736 10,654,871 1,799,046
------------- ------------- ------------- ------------- -------------
Operating income (loss) (8,855,136) (6,250,208) (10,779,264) (7,452,167) 2,289,286
Gain on transfer of research &
development operations -- -- -- -- 1,596,706
Interest and other expense, net (1,863,683) (1,486,025) (959,146) (1,032,112) (114,359)
Minority interest in loss of
subsidiary -- -- 81,650 194,642 --
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax
expense (10,718,819) (7,736,233) (11,656,760) (8,289,637) 3,771,633
Income tax expense -- -- 290,350 319,450 68,333
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (10,718,819) $ (7,736,233) $ (11,947,110) $ (8,609,087) $ 3,703,300
============= ============= ============= ============= =============
Net income (loss) per share $ (1.17) $ (0.84) $ (1.29) $ (0.93) $ 0.16
============= ============= ============= ============= =============
Weighted average number of shares
used in computing per share amount 9,190,000 9,211,000 9,255,000 9,301,000 23,534,000
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,136,240 $ 8,613,200 $ 1,368,891 $ 199,998 $ 799,928
Working capital (deficiency) (6,298,326) 6,215,308 (2,878,918) (8,406,743) (944,315)
Total assets 6,471,377 12,627,804 4,519,001 1,481,767 854,981
Long term obligations, excluding
current maturities 25,510,479 14,309,130 14,304,589 14,488,311 --
Accumulated deficit (79,614,020) (87,350,253) (99,297,363) (107,906,450) (104,203,150)
Net capital deficiency (29,409,664) (4,365,839) (14,515,928) (22,649,811) (18,946,511)
</TABLE>
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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.
The following discussion and analysis contains forward-looking
statements regarding future events or the future financial performance of
Censtor that involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the documents the
Company files from time to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
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 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. Until this fiscal year, the Company had
not been profitable in any fiscal period since inception and, as of June 30,
1997, had an accumulated deficit of $104.2 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 1998 focus on the perfection of
the Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through sales of additional licenses such as the one
entered into between the Company and TDK Corporation subsequent to year-end.
There can be no assurance that the Company will be able to sustain its
operations beyond 1998 without the sale of such additional licenses.
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 research and development agreements. During the
fiscal year ended June 30, 1995, the Company generated net cash from financing
activities of $832,000, resulting primarily from proceeds of $2.0 million from
the sale of preferred stock of a subsidiary of the Company which was partially
offset by $1.1 million of principal payments on capital leases. In 1996, the
Company generated net cash of $6.6 million resulting primarily from $7.5 million
in notes payable and short term borrowing offset by $1.4 million in capital
lease payments. In 1997, the Company used $5.5 million in financing activities
due primarily to the repayment of notes payable and short term borrowing. During
fiscal 1995 and 1996, the Company used net cash in its operations of $8.3
million and $8.1 million, respectively. In 1997, the Company generated cash from
operations of $4.9 million. In 1995 and 1996, the Company received payments of
license fees and non-refundable prepaid royalties from several licensees, which
caused net cash used in operations to be less than the Company's net loss. In
addition, particularly in 1995 and 1996, the Company delayed payments on
accounts payable to conserve cash prior to completion of then-anticipated new
financing.
The Company generated net cash from investing activities of $205,000 in
1995 consisting of $379,000 used for additions to property and equipment and
$584,000 provided by proceeds from the sale and
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leaseback, and sale of fixed assets. In 1996, the Company generated net cash
from investment activities of $358,000 consisting of $192,000 used for additions
to property and equipment and $550,000 provided by proceeds from the sale and
leaseback, and sale of fixed assets. In 1997, the Company generated $1.1 million
primarily from the sale of certain fixed assets to Read-Rite in the Read-Rite
Transaction.
The Company's ability to fund its cash requirements and assert its
intellectual property rights in the future depends largely upon its success in
seeking new licensees. The Company believes the cash received from the license
agreement with TDK will enable it to fund its planned operations through fiscal
1998. The Company's commitments for cash payments in fiscal year 1998 are
primarily for operating expenses, which, going forward may include significant
litigation expense.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from license
agreements with disk drive manufacturers. License fees are generally recognized
over the estimated period in which the Company expects to provide support in
connection with the license. All deferred revenue pertaining to licenses sold to
disk drive manufacturers have been recognized as revenue in fiscal 1996 since
the Company can no longer provide technical support to its licensees as a result
of the Read-Rite Transaction. The license fee from Read-Rite in connection with
the Read-Rite Transaction will be recognized over a period of six years.
The Company's revenues were $3.5 million, $3.2 million and $4.1 million
in 1995, 1996 and 1997, respectively. Revenues in 1995 consisted primarily of
the amortization of the Hitachi license that was sold in December 1994. Revenues
in fiscal 1996 consisted primarily of the continued and complete amortization of
the Hitachi license fee as well as the NEC license sold in August 1995. Revenues
in 1997 were the result of the amortization of the Read-Rite and Western Digital
license fees. These licenses were entered into at the beginning of the fiscal
year.
Research and Development
Research and development expenses decreased from $11.4 million in 1995
to $8.3 million in 1996 and were eliminated in 1997. This is attributed to
Read-Rite's hiring of most of Censtor's employees on February 5, 1996 and the
subsequent acquisition of the Company's research and development operations. In
the future the Company expects no R&D expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $2.8
million in 1995 to $2.4 million in 1996 to $1.8 million in 1997. The decreases
in 1996 and 1997 were due to a reduction in the use of outside legal counsel for
patent filings because the Company hired an "in-house" patent counsel in April
1995, as well as the reduced headcount and operations.
Interest and Other Expense, Net
Interest and other expense, net, consists primarily of interest on the
Company's outstanding indebtedness and capital leases. Interest and other
expense, net, remained constant in 1995 and 1996 at $1.0 million and decreased
to $100,000 in 1997. The decrease in 1997 was due to the fact that the Company
repaid or had been forgiven almost all of its interest bearing debt at the
beginning of the fiscal year.
Gain on Transfer of Research and Development Operation
The Company recognized a gain of $1.6 million in fiscal 1997 relating
to the Read-Rite Transaction. The gain consists of $899,000 related to the
forgiveness of certain promissory notes and $698,000 related to the gain on sale
of fixed assets and the transfer of the Company's workforce.
Income Taxes
As of June 30, 1997, the Company had federal net operating loss and
credit carryforwards of approximately $90.0 million and $3.4 million,
respectively, expiring in various years beginning in 1998 through
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2011. The Company also has state net operating loss and credit carryforwards of
approximately $34.0 million and $1.4 million respectively. The state operating
loss carryforwards will expire in various years beginning in 1998 through 2002
while the credit carryforwards will expire in various years beginning in 2003
through 2011. 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
substantially all credit carryforwards are subject to an annual limitation. The
annual limitation is approximately $1.2 million per year. The balance of $15.0
million federal net operating loss carryforwards can be used without limitation.
Similar limitations apply to state carryforwards. Income tax expense in 1995 and
1996 represents foreign withholdings in connection with license agreements.
Income tax expense in 1997 represents a provision for alternative minimum taxes.
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-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not Applicable.
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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, 1997 to the Chief
Executive Officer (the "named officer") during that year:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION(#)(1)(2) COMPENSATION(3)
--------------------------- ---- ------ ----- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Russell M. Krapf(4) 1997 207,684 129,225 510,206 2,598
President, Chief Executive 1996 184,381 9,654 75,000 488
Officer 1995 166,730 26,650 100,000 775
</TABLE>
- -------------------
(1) The stock options granted to the named officer 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
$0.046 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 officer for
term life insurance with benefits payable to beneficiaries designated by
the officer.
(4) Mr. Krapf was appointed President and Chief Executive Officer effective
April 22, 1996 and resigned this position effective September 4, 1997. Mr.
Krapf's stock options expire December 3, 1997.
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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 September 15, 1997 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)
------------------------------ -------------------------- --------------------------
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
NAME OF OWNER OWNED OWNED OWNED OWNED OWNED OWNED
------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Brentwood Associates(3) ............... 1,298,244 8.66% 3,438,593 40.34% 4,736,837 20.15%
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Aeneas Venture Corporation(4) ......... 2,938,225 19.60 0 0 2,938,225 12.50
600 Atlantic Avenue,
26th Floor
Boston, MA 02210-2203
Wolfensohn Associates II L.P.(5) ...... 413,172 2.76 1,066,211 12.51 1,479,383 6.29
590 Madison Avenue, 32nd Floor
New York, NY 10022
J.P. Morgan Investment Corporation(6) . 363,796 2.43 1,060,244 12.44 1,424,040 6.06
60 Wall Street, 14th Floor
New York, NY 10260-0060
New Enterprise Associates(7) .......... 1,424,590 9.50 0 0 1,424,590 6.06
1119 St. Paul Street
Baltimore, MD 21202
William R. Timken ..................... 0 0 798,830 9.37 798,830 3.40
Hambrecht & Quist
1 Bush Street
San Francisco, CA 94104
Fujitsu Limited ....................... 0 0 784,682 9.21 784,682 3.34
1015 Kamikodanaka
Nakahara-ku, Kawasaki-shi
Kanagawa-ken 211
Japan
Russell M. Krapf(8) ................... 0 0 319,016 3.71 319,016 1.36
Sabine Austin(9) ...................... 0 0 0 0 0 0
Gary J. Summers ....................... 0 0 0 0 0 0
Charles C. Pierpoint III .............. 0 0 0 0 0 0
All directors and executive officers as 0 0 0 0 0 0
a group (3 persons)
</TABLE>
* 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 September 15,
1997, 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.
-12-
<PAGE> 13
(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;
160,002; 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 former
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 319,016 shares subject to stock options which are exercisable
within 60 days of September 15, 1997.
(9) Ms. Austin's stock options were canceled in lieu of the incentive
compensation agreement she entered into with the Company effective July 29,
1997.
-13-
<PAGE> 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into the following transactions with its
officers and directors since July 1, 1996:
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 was called and the stock was canceled by
action of the Board of Directors on June 25, 1997.
In September 1990, Edwin V.W. Zschau, a former director of the Company,
exercised stock options as to 282,485 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 was due
April 23, 1997 and was not extended. The Board of Directors called the note and
canceled the stock on June 25, 1997.
In September 1990, Russell M. Krapf, former CEO and President of the
Company, exercised stock options as to 188,323 shares of the Company's Common
Stock and, in lieu of payment to the Company for such exercise, Mr. Krapf
delivered to the Company a promissory note in the principal amount of $55,000.
Upon his resignation in February 1992, and pursuant to the terms of the
Restricted Stock Purchase Agreement between Mr. Krapf and the Company, the
Company repurchased 76,585 of these shares. On June 25, 1997, pursuant to its
terms, the promissory note was canceled upon surrender by Mr. Krapf of the
remaining shares.
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.
On July 7, 1997, Russell M. Krapf notified the Company that he
intended to resign his position as President and CEO effective September 4,
1997. On July 29, 1997, the Company entered into a consulting agreement with Mr.
Krapf for a period up to one year. Mr. Krapf will be paid $45,000 for these
consulting services.
On July 29, 1997, the Company created an incentive compensation program
for Ms. Sabine Austin to serve as a director of the Company. This program will
pay Ms. Austin a bonus equal to 1.5% of all net licensing revenue received by
the Company as long as she serves as a director.
On July 31, 1997, the Company entered into an exclusive license with
IPM, whereby IPM will be Censtor's agent to enforce its current licenses and to
negotiate licenses with prospective licensees. IPM also has an exclusive
contract with Teklicon whereby Teklicon will perform marketing and technology
due diligence. Under this agreement, IPM will be paid between 15-45% of the net
proceeds of such activities depending upon the source of revenue. Mr. Charles
Pierpoint is a principal with IPM and Mr. Gary Summers is a principal with
Teklicon.
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
-14-
<PAGE> 15
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.
Additionally, certain shareholders beneficially owning more than 5% of
the Company's capital stock made loans to the Company in the first calendar
quarter of 1996. Fifty percent of the principal balances of these loans plus
accrued interest on that portion were repaid from the proceeds received by the
Company at the closing of the Read-Rite Transaction, while the remainder plus
accrued interest on the remaining portion was repaid on April 18, 1997.
-15-
<PAGE> 16
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-20 of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors .............................. F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 ....................... F-3
Consolidated Statements of Operations for each of the Three Years in the Period F-4
Ended June 30, 1997
Consolidated Statements of Net Capital Deficiency for each of the Three Years in F-5
the Period Ended June 30, 1997
Consolidated Statements of Cash Flows for each of the Three Years in the Period F-6
Ended June 30, 1997
Notes to Consolidated Financial Statements ..................................... F-7
</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>
3.1(5) Restated Articles of Incorporation of
Registrant.
3.2(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.
</TABLE>
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.4(1)(2) License Agreement, dated September 23, 1991,
between the Company and Maxtor Corporation, as
amended.
10.5(1)(2) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited, as
amended.
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.
10.12(6) Agreement for Purchase and Sale of Assets by and
between Read-Rite Corporation and the Company.
10.13(2) License Agreement, dated August 12, 1996, between
Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to Assignment,
dated July 2, 1996, between The Sobrato Group,
Censtor Corp. and Read-Rite Corp.
10.15(7) Fifth Amendment to Manufacturing License
Agreement, dated February 22, 1996, with Denki
Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated February
22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.17(7) License Agreement, dated July 18, 1996, between
Read-Rite Corporation and the Company.
10.18 Agreement between I.P. Managers, Inc. and the
Company dated July 31, 1997.
</TABLE>
-17-
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.19 Incentive Compensation Agreement between the
Company and Sabine Austin, dated July 29, 1997.
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</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) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.
(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.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
CENSTOR CORP.
September 29, 1997 By: /s/ Sabine Austin
-------------------------------------
Sabine Austin
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Sabine Austin as his
attorneys-in-fact, with full power of substitution for him in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ Sabine Austin President, Chief Executive Officer and September 29, 1997
- ------------------------------ Director (Principal Executive Officer,
Sabine Austin Principal Financial and Accounting Officer)
/s/ Gary J. Summers Director September 29, 1997
- ------------------------------
Gary J. Summers
/s/ Charles C. Pierpoint III Director September 29, 1997
- ------------------------------
Charles C. Pierpoint III
</TABLE>
-19-
<PAGE> 20
CENSTOR CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.................F-3
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended June 30, 1997.........................F-4
Consolidated Statements of Net Capital Deficiency for Each of the
Three Years in the Period Ended June 30, 1997.........................F-5
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended June 30, 1997.........................F-6
Notes to Consolidated Financial Statements...............................F-7
</TABLE>
F-1
<PAGE> 21
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Censtor Corp.
We have audited the accompanying consolidated balance sheets of Censtor Corp. as
of June 30, 1996 and 1997, and the related consolidated statements of
operations, net capital deficiency, and cash flows for each of the three years
in the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Censtor Corp. at
June 30, 1996 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
San Jose, California
August 11, 1997, except for Note 8,
as to which the date is
September 26, 1997
F-2
<PAGE> 22
CENSTOR CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 199,998 $ 799,928
Receivables ........................................ 14,336 6,316
Prepaid expenses and other current assets .......... 111,135 38,221
Property and equipment held for sale ............... 911,055 -
---------- ----------
Total current assets .................................. 1,236,524 844,465
Property and equipment, at cost:
Machinery and equipment ............................ 45,703 45,703
---------- ----------
45,703 45,703
Accumulated depreciation ........................... 33,880 39,437
---------- ----------
11,823 6,266
Restricted cash ....................................... 94,450 -
Deposits and other assets ............................. 138,970 4,250
---------- ----------
Total assets .......................................... $1,481,767 $ 854,981
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Short-term borrowings ............................... $ 6,450,000 $ -
Accounts payable .................................... 974,889 66,372
Notes payable to related parties .................... 1,000,000 -
Accrued payroll and related expenses ................ 232,278 48,471
Deferred revenue .................................... - 1,583,333
Other current liabilities ........................... 378,257 90,604
Obligations under capital leases .................... 607,843 -
------------- -------------
Total current liabilities .............................. 9,643,267 1,788,780
Long-term obligations:
Deferred revenue .................................... - 5,333,335
Subordinated debentures ............................. 14,488,311 -
Restructured debt obligation ........................ - 12,679,377
Net capital deficiency:
Convertible preferred stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 14,987,807 in 1996
and 1997 ........................................ 32,509,031 32,509,031
Common stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 9,303,344 in 1996
and 8,545,994 in 1997 ........................... 50,508,593 50,241,660
Warrants to purchase shares of preferred
stock - 1,098,318 in 1996 and 1997 ................ 253,050 253,050
Capital surplus ..................................... 2,263,708 2,263,708
Accumulated deficit ................................. (107,906,450) (104,203,150)
------------- -------------
(22,372,068) (18,935,701)
Notes receivable from shareholders .................. (277,743) (10,810)
------------- -------------
Net capital deficiency ................................. (22,649,811) (18,946,511)
------------- -------------
Total liabilities and net capital deficiency ........... $ 1,481,767 $ 854,981
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 23
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
License revenues ........................ $ 3,515,472 $ 3,202,704 $ 4,088,332
Costs and expenses:
Research and development ............. 11,448,501 8,261,638 -
Selling, general, and administrative.. 2,846,235 2,393,233 1,799,046
------------ ------------ ------------
Total expenses .......................... 14,294,736 10,654,871 1,799,046
------------ ------------ ------------
Operating income (loss).................. (10,779,264) (7,452,167) 2,289,286
Gain on transfer of research and
development operation ................ - - 1,596,706
Interest income ......................... 173,379 5,481 -
Interest expense ........................ (1,106,488) (1,183,680) (275,140)
Other income (expense), net ............. (26,037) 146,087 160,781
Minority interest in loss of subsidiary.. 81,650 194,642 -
------------ ------------ ------------
Income (loss) before income tax
expense............................... (11,656,760) (8,289,637) 3,771,633
Income tax expense ...................... (290,350) (319,450) (68,333)
------------ ------------ ------------
Net income (loss)........................ $(11,947,110) $ (8,609,087) $ 3,703,300
============ ============ ============
Net income (loss) per share ............. $ (1.29) $ (0.93) $ 0.16
============ ============ ============
Weighted average number of shares
used in computing per share amounts
(in thousands)........................ 9,255 9,301 23,534
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 24
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994............................... 14,987,807 $ 32,513,244 9,239,670 $ 50,323,363
Issuance of Series B preferred stock, net of
issuance costs.................................... - (4,213) - -
Issuance of common stock............................ - - 35,055 11,634
Cancelation of note receivable...................... - - (10,334) (103,500)
Net exercise of warrants in connection
with capital leases............................... - - 36,078 276,000
Issuance of warrants in connection with
capital leases, exercisable at $2.50 per share.... - - - -
Capital surplus from investment in
subsidiary........................................ - - - -
Net loss - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1995............................... 14,987,807 32,509,031 9,300,469 50,507,497
Issuance of common stock............................ - - 2,875 1,096
Issuance of warrants in connection with
bank line of credit............................... - - - -
Expiration of warrants in connection with
capital leases.................................... - - - -
Capital surplus from investment in
subsidiary........................................ - - - -
Net loss............................................ - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1996............................... 14,987,807 32,509,031 9,303,344 50,508,593
Cancelation of notes receivable..................... - - (757,350) (266,933)
Net income.......................................... - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1997............................... 14,987,807 $ 32,509,031 8,545,994 $ 50,241,660
========== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
WARRANTS TO PURCHASE WARRANTS TO PURCHASE
PREFERRED STOCK COMMON STOCK
----------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994............................... 988,318 $ 253,050 224,266 $ 276,000
Issuance of Series B preferred stock, net of
issuance costs.................................... - - - -
Issuance of common stock............................ - - - -
Cancelation of note receivable...................... - - - -
Net exercise of warrants in connection
with capital leases............................... - - (199,159) (276,000)
Issuance of warrants in connection with
capital leases, exercisable at $2.50 per share.... - - 80,000 -
Capital surplus from investment in
subsidiary........................................ - - - -
Net loss............................................ - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1995............................... 988,318 253,050 105,107 -
Issuance of common stock............................ - - - -
Issuance of warrants in connection with
bank line of credit............................... 110,000 - - -
Expiration of warrants in connection with
capital leases.................................... - - (25,107) -
Capital surplus from investment in
subsidiary........................................ - - - -
Net loss............................................ - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1996............................... 1,098,318 253,050 80,000 -
Cancelation of notes receivable..................... - - - -
Net income.......................................... - - - -
---------- ------------- ------------- -------------
Balance at June 30, 1997............................... 1,098,318 $ 253,050 80,000 $ -
========== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
CAPITAL ACCUMULATED FROM NET CAPITAL
SURPLUS DEFICIT SHAREHOLDERS DEFICIENCY
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994............................... $ - $ (87,350,253) $ (381,243) $ (4,365,839)
Issuance of Series B preferred stock, net of
issuance costs.................................... - - - (4,213)
Issuance of common stock............................ - - - 11,634
Cancelation of note receivable...................... - - 103,500 -
Net exercise of warrants in connection
with capital leases............................... - - - -
Issuance of warrants in connection with
capital leases, exercisable at $2.50 per share....
- - - -
Capital surplus from investment in
subsidiary........................................ 1,789,600 - - 1,789,600
Net loss - (11,947,110) - (11,947,110)
---------- ------------- ------------- -------------
Balance at June 30, 1995............................... 1,789,600 (99,297,363) (277,743) (14,515,928)
Issuance of common stock............................ - - - 1,096
Issuance of warrants in connection with
bank line of credit............................... - - - -
Expiration of warrants in connection with
capital leases.................................... - - - -
Capital surplus from investment in
subsidiary........................................ 474,108 - - 474,108
Net loss............................................ - (8,609,087) - (8,609,087)
---------- ------------- ------------- -------------
Balance at June 30, 1996............................... 2,263,708 (107,906,450) (277,743) (22,649,811)
Cancelation of notes receivable..................... - - 266,933 -
Net income.......................................... - 3,703,300 - 3,703,300
---------- ------------- ------------- -------------
Balance at June 30, 1997............................... $2,263,708 $(104,203,150) $ (10,810) $ (18,946,511)
========== ============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE> 25
CENSTOR CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $(11,947,110) $ (8,609,087) $ 3,703,300
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,594,956 1,456,658 18,043
Gain on sale of fixed assets............................ (2,156) (145,908) -
Gain on transfer of research
and development operation............................. - - (1,596,706)
Interest on subordinated debentures..................... 774,016 816,856 191,066
Loss applicable to minority interest.................... (81,650) (194,642) -
Changes in assets and liabilities:
Accounts receivables.................................. (3,113) 13,009 8,020
Prepaid expenses and other current assets............. (148,175) 211,051 72,914
Accounts payable...................................... 112,320 271,778 (908,517)
Accrued payroll and related expenses.................. (40,346) (205,173) (183,807)
Deferred revenue...................................... 1,475,840 (2,062,498) 3,916,668
Other current liabilities............................. (15,853) 319,942 (287,652)
------------ ------------ ------------
3,665,839 481,073 1,230,029
------------ ------------ ------------
Net cash provided by (used in) operating activities.......... (8,281,271) (8,128,014) 4,933,329
INVESTING ACTIVITIES
Additions to property and equipment.......................... (378,731) (191,668) -
Deposits and other assets.................................... - - 122,220
Proceeds from sale and leaseback
and sale of fixed assets.................................. 583,751 550,050 1,025,000
------------ ------------ ------------
Net cash provided by investing activities.................... 205,020 358,382 1,147,220
FINANCING ACTIVITIES
Proceeds from issuance of short- and
long-term debt............................................ - - 350,000
Proceeds from short-term borrowings.......................... - 1,000,000 -
Proceeds from notes payable.................................. - 6,450,000 -
Proceeds from sale of preferred stock of subsidiary.......... 2,000,000 540,000 -
Purchase of certificate of deposit
in connection with leases................................. (94,450) - -
Principal payments under capital leases...................... (1,081,029) (1,390,357) (23,825)
Principal payments on short- and long-term debt.............. - - (5,901,244)
Release of certificate of deposit in connection with leases.. - - 94,450
Net proceeds from sale of capital stock...................... 7,421 1,096 -
------------ ------------ ------------
Net cash provided by (used in) financing activities.......... 831,942 6,600,739 (5,480,619)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents......... (7,244,309) (1,168,893) 599,930
Cash and cash equivalents at beginning of year............... 8,613,200 1,368,891 199,998
------------ ------------ ------------
Cash and cash equivalents at end of year..................... $ 1,368,891 $ 199,998 $ 799,928
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 26
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Censtor Corp. (the Company) licenses technology related to recording
heads and storage media utilizing contact magnetic recording technology. The
Company licenses its technology to disk drive and component manufacturers. In
June 1995, the Company formed a new subsidiary, Contact Recording Technology,
Inc. (CRT), to develop and manufacture contact longitudinal data storage heads
for the computer disk drive industry. The Company received an approximate 89.5%
interest in the subsidiary 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 for $2 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%.
Consolidation
The accompanying consolidated financial statements include the accounts
of the Company, CRT, and its wholly owned subsidiary, Censtor Media Corp.
(Media), an inactive research and development company.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company invests
excess cash in money market funds with a local bank. These investments are
generally available upon demand and are collateralized by the assets of the bank
and the financial institution.
F-7
<PAGE> 27
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial Instruments
Carrying amounts and fair values of financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1996 1997
-------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents ... $ 199,998 $ 199,998 $799,928 $799,928
Borrowings:
Short-term borrowings .... $ 1,000,000 $1,000,000 $ - $ -
Promissory note to potential
licensee ................. $ 3,000,000 N/A $ - $ -
Notes payable ............... $ 3,450,000 $3,450,000 $ - $ -
Subordinated debentures ..... $14,488,311 N/A $ - $ -
</TABLE>
The fair values for cash and cash equivalents approximate the amounts reported
at the balance sheet dates. Fair values for the short-term borrowings and notes
payable approximate their carrying amounts. Fair value for the promissory note
to the potential licensee is not provided as it was exchanged for a license on
August 12, 1996 (see Note 3). Fair value for the subordinated debentures is not
provided as approximately $12,488,300 plus accrued interest of $191,000 was
forgiven on September 30, 1996. The remaining $2 million was paid on July 18,
1996 (see Note 3).
Revenue Recognition
License fees are generally recognized over the estimated period in
which the Company expects to provide support in connection with the license.
Royalties from licensees on sales of licensed products will be
recognized when products incorporating the Company's technology are shipped by
the licensees or when nonrefundable payments are received.
F-8
<PAGE> 28
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Income (Loss) Per Share
Net income per share is computed based upon the weighted average number
of outstanding shares of the Company's common stock and convertible preferred
stock on an if-converted basis, and dilutive common stock equivalents from the
exercise of stock options and warrants (using the treasury stock method). Common
stock equivalents from stock options and warrants are excluded from the
computation if their effect is antidilutive. The Company's stock options and
warrants were antidilutive for the year ended June 30, 1997 and, accordingly,
were not included in the weighted average number of shares.
Net loss per share is computed based on the weighted average number of
outstanding 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 each of the two years ended June 30, 1995 and
1996 and, accordingly, were not included in the weighted average number of
shares.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (FAS
128) which the Company will be required to adopt during the quarter ending
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute income per share and to restate all prior
periods. The new requirements will include a calculation of "basic" net income
per share, which will exclude the dilutive effect of convertible preferred
stock. The calculation of basic net income per share for fiscal 1997 results in
net income per share of $0.40. The Company's common stock equivalent shares for
the years ended June 30, 1995 and 1996 were antidilutive, and accordingly, there
will be no impact on net loss per share. Diluted earnings per share are not
materially different from net income (loss) per share amounts reported for the
years ended June 30, 1995, 1996, and 1997.
F-9
<PAGE> 29
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Major Licensees
Significant customers accounted for the following percentages of net
sales in fiscal 1995, 1996, and 1997:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Customer A 10% - -
Customer B 82% 64% -
Customer C - 34% -
Customer D - - 33%
Customer E - - 67%
</TABLE>
2. THE READ-RITE TRANSACTION
On March 29, 1996, the Company entered into an agreement (the
Agreement) with Read-Rite Corporation (Read-Rite), a large manufacturer of
components for disk drives, that provided for the transfer to Read-Rite of the
Company's research and development operations, including the hiring of
eighty-four of its employees and the sale of certain of the Company's physical
assets, rights, and obligations under contracts related thereto (the Read-Rite
Transaction). The Agreement was approved by the Company's shareholders on July
11, 1996, and the Read-Rite Transaction closed on July 18, 1996 (the Closing).
Additionally, on the Closing of the Read-Rite Transaction, the Company
granted a nonexclusive irrevocable worldwide license to Read-Rite covering the
Company's intellectual property, including the Company's rights in patents,
technology, and software.
Gross proceeds to the Company in connection with the Read-Rite
Transaction were approximately $9.0 million, subject to certain adjustments
under the Agreement, of which $6.5 million was received on the Closing, $250,000
was received in November 1996, $250,000 was received in January 1997, $250,000
was received in March 1997, and the balance of $1.8 million was received in
April 1997. The gross proceeds were reduced by approximately $1.9 million,
related to partial repayment of the outstanding balance on certain notes payable
to Read-Rite. The remaining balance on the notes payable of approximately
$900,000 was forgiven (see Note 3).
F-10
<PAGE> 30
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Of the total proceeds, $8.0 million was in consideration for the grant
of the license and $1.0 million for the sale of assets and transfer of the
assembled workforce. The Company recognized a gain of approximately $700,000 in
connection with the sale of assets and the transfer of the assembled workforce.
Of the net proceeds received at the Closing of the Read-Rite
Transaction, the Company used approximately $3.6 million to pay down obligations
that were due as of the Closing, including a $2.0 million payment to partially
repay outstanding accrued interest on certain subordinated debentures (see Note
3), $1.0 million to repay the Company's line of credit, and $598,000, including
accrued interest, to partially repay certain convertible promissory notes (see
Note 3) from investors. The remainder of the proceeds will be used for general
working capital purposes with respect to the Company's ongoing licensing
operations.
The Company has granted to 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 following the effective date of the
Agreement, the Company 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 two succeeding years, and the escrow terminates the following year.
Accordingly, the Company is recognizing $4.0 million of such license fee ratably
over the first three years following the Closing of the Read-Rite Transaction,
which approximates the time period during which the Company expects to be
incurring costs to maintain its patents in support of the Company's license
agreement with Read-Rite. Subsequently, amounts will be recognized as the escrow
fund described above is reduced.
3. DEBT
Obligations Under Capital Leases
On July 18, 1996, in connection with the sale of assets to Read-Rite,
all obligations under capital leases were transferred to Read-Rite.
F-11
<PAGE> 31
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Short-Term Borrowings
In January 1996, several of the existing investors of Censtor loaned
the Company $1.0 million in exchange for promissory notes convertible into
shares of the next security issued by the Company. The Company repaid
approximately $598,000, including accrued interest of $51,000, out of the
proceeds from the Closing of the Read-Rite Transaction, and the due date of the
balance of such notes was extended until nine months after the Closing. The
Company repaid the remaining principal of $453,000 and accrued interest of
$37,000 on April 18, 1997.
Between February and July 1996, the Company obtained bridge loans
totaling $2.8 million from Read-Rite as part of negotiations in connection with
the Read-Rite Transaction. These bridge loans were used to pay the operating
expenses of the Company until the Closing. Accordingly, on the Closing, the
Company received a net amount of $4.6 million from Read-Rite out of the $6.5
million first installment payable by Read-Rite in connection with the Read-Rite
Transaction.
Subordinated Debentures
The Company's subordinated debentures at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
----------- --------------
<S> <C> <C>
Convertible subordinated debentures,
due August 24, 1997, convertible at $26.55 of
principal and accrued interest per share .... $ 5,000,000 $ -
Accrued interest at 6% per year ................ 2,137,846 -
Subordinated debentures, due January 17, 1998 .. 5,000,000 -
Accrued interest at 6% per year ................ 2,350,465 -
----------- --------------
$14,488,311 $ -
=========== ==============
</TABLE>
F-12
<PAGE> 32
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On February 22, 1996, the subordinated debentures issued by the Company
were modified such that the Company was obligated to pay $2,000,000 against the
outstanding accrued interest on such debentures by July 31, 1996. On July 18,
1996, upon closing the Read-Rite Transaction, this amount was paid. Furthermore
the debenture holder agreed if certain financial conditions were not met, the
remaining accrued interest and principal balance on September 30, 1996 will be
forgiven in return for 5% of the royalties the Company receives from its present
and future licenses through the year 2001. The Company did not meet the
financial conditions, and consequently, the outstanding interest and principal
of $12,700,000 was forgiven. The future cash payments related to the royalty
payments now owed to such former debenture holder are currently indeterminate
and may exceed the carrying value of the debentures prior to the debt being
forgiven. Therefore, the Company has deferred recognition of any gain as a
result of the debt being forgiven until such time as the future cash payments
become estimable.
4. COMMITMENTS
In connection with the Agreement, the Company transferred its principal
facility to Read-Rite who assumed the remaining lease payments. At that time,
the Company entered into a lease that expires in April 1999 for a smaller office
facility. A schedule of future minimum lease payments as of June 30, 1997 under
the new lease agreement is as follows:
<TABLE>
<C> <C>
1998 ................................... $53,712
1999 ................................... 44,760
-------
Total minimum lease payments............ $98,472
=======
</TABLE>
Rental expense for 1995, 1996, and 1997 was approximately $709,000,
$468,000, and $53,000, respectively.
F-13
<PAGE> 33
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. COMMON AND CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock
The preferred stock is divided into Series A and B preferred stock as
follows:
<TABLE>
<CAPTION>
SHARES
---------------------------------
ISSUED AND
AUTHORIZED OUTSTANDING TOTAL
--------------- ------------ ------------
<S> <C> <C> <C>
Series A................................. 7,500,000 6,617,299 $14,055,143
Series B................................. 14,000,000 8,370,508 18,453,888
Undesignated............................. 3,500,000 - -
--------------- ----------- ------------
25,000,000 14,987,807 $32,509,031
=============== =========== ============
</TABLE>
The holders of Series A and B preferred stock are entitled to
noncumulative dividends, as declared by the Board of Directors out of legally
available funds, at a rate of $0.2124 and $0.25 per share, per annum,
respectively. After payment of the dividend preferences and payment to the
holders of common stock of noncumulative dividends, as declared by the Board of
Directors out of legally available funds, at a rate of $0.10 per share, per
annum, the preferred stock shall participate, as if converted on a
share-for-share basis with common stock, as to any dividends paid by the
Company. Such dividends are noncumulative.
Series A and B preferred stock are convertible at any time after the
date of issuance into common stock on a one-for-one basis, subject to adjustment
for certain subsequent dilutive stock issuances. In addition, the Series A and B
preferred stock will automatically convert into common stock upon the closing of
an underwritten public offering of the Company's common stock at not less than
$4.00 per share, which results in gross proceeds of not less than $10,000,000,
or in the event of an affirmative vote of the holders of at least 51% of Series
A and B preferred stock.
F-14
<PAGE> 34
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Upon liquidation, the Series B preferred shareholders are entitled to
receive an amount equal to $2.50 per share plus the aggregate amount of any
declared but unpaid dividends, after which the Series A preferred shareholders
are entitled to receive an amount equal to $2.124 per share plus the aggregate
amount of any declared but unpaid dividends. After the distributions above have
been made, remaining amounts shall be distributed among the holders of Series A
and B preferred stock and common stock pro rata, based on the number of shares
of common stock held by each shareholder, assuming conversion of all preferred
stock. Preferred shareholders participate in the voting rights of the Company as
if their shares were converted to common stock.
Warrants to Purchase Preferred Stock
At June 30, 1997, certain of the Company's lessors held warrants to
purchase 301,318 shares of the Company's Series B preferred stock, exercisable
at $2.50 per share, through the later of September 2003 or five years after the
closing of a public offering of the Company's common stock.
At June 30, 1997, the sales agent, in connection with the sale of the
Series B preferred stock, held warrants to purchase 687,000 shares of Series B
preferred stock, exercisable at $2.50 per share and expiring on March 23, 1998.
The warrants are convertible into warrants to purchase shares of common stock.
At June 30, 1997, the Company's primary bank held warrants to purchase
approximately 110,000 shares of the Company's preferred stock at the lower of
$2.50 or the share price of the next security issued by the Company, exercisable
from November 2000 through February 2001.
F-15
<PAGE> 35
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Warrants to Purchase Common Stock
At June 30, 1997, one of the Company's lessors held warrants to
purchase 80,000 shares of the Company's common stock, exercisable at $2.50 per
share through the later of January 2005 or five years after the closing of a
public offering of the Company's common stock.
1990 Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25) and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
because the exercise price of the Company employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Outstanding options are granted at fair market value and generally
expire ten years after the date of grant. The exercise provisions of the option
grants are determined by the Board of Directors and are generally exercisable
over a 48-month period beginning six months after issuance.
On October 3, 1996, the Company exchanged substantially all of its
outstanding options for new options to purchase common stock at $0.046 per
share, the fair market value on such date as determined by the Company's Board
of Directors and an independent consultant.
The effect of applying FAS 123 to the Company's stock option grants
would not result in net loss amounts that are materially different from
historical amounts reported. Therefore, pro forma information is not separately
presented herein. Future pro forma net income results may be materially
different from actual amounts reported.
F-16
<PAGE> 36
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes option activity for the plan:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
-------------------------------------------
AVAILABLE OPTION PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- --------- ---------------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 180,058 1,492,957 $0.2921 - $0.40 $ 566,021
Authorized .......... 1,500,000 - $ - -
Granted ............. (1,475,340) 1,475,340 $0.40 590,136
Exercised ........... - (35,055) $0.2921 - $0.40 (11,634)
Canceled ............ 333,105 (333,105) $0.2921 - $1.062 (123,758)
---------- --------- -----------
Balance at June 30, 1995 537,823 2,600,137 $0.2921 - $0.40 1,020,765
Granted ............. (422,500) 422,500 $0.40 169,000
Exercised ........... - (2,875) $0.2921 - $0.40 (1,096)
Canceled ............ 1,546,354 (1,546,354) $0.2921 - $0.40 (600,952)
---------- --------- -----------
Balance at June 30, 1996 1,661,677 1,473,408 $0.2921 - $0.40 587,717
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
-------------
<S> <C> <C> <C> <C>
Granted ............. (3,102,549) 3,102,549 $0.046 76,437
Canceled ............ 1,639,778 (1,639,778) $0.046 (9,150)
--------- --------- --------
Balance at June 30, 1997 198,906 2,936,179 $0.046 $655,004
========= ========= ========
</TABLE>
There were 920,991, 769,398, and 1,297,367 options exercisable at June
30, 1995, 1996, and 1997, respectively. The average remaining contractual life
of options outstanding is 7.6 years.
Stock Reserved for Future Issuance
Shares of preferred and common stock reserved for future issuance are
1,098,318 shares and 19,301,210 shares, respectively, at June 30, 1997.
F-17
<PAGE> 37
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES
Income tax expense for fiscal 1995 and 1996 consists of foreign
withholding taxes on license revenue and for fiscal 1997 consists of a
provision for alternative minimum taxes.
Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 35,203,000 $ 32,843,000
Tax credit carryforwards ....... 4,221,000 4,425,000
Other .......................... 2,115,000 3,050,000
------------ ------------
Total deferred tax assets ......... 41,539,000 40,318,000
Valuation allowance ............... (41,539,000) (40,318,000)
------------ ------------
Net deferred tax assets ........... $ - $ -
============ ============
</TABLE>
The change in the valuation allowance was a net increase of $1,461,000
for fiscal 1996 and a net decrease of $1,221,000 for fiscal 1997. Income tax
expense reconciles to loss before income tax expense multiplied by the statutory
rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate ... $(3,991,000) $(2,885,000) $ 1,282,355
Unbenefited tax losses .. 3,991,000 2,885,000 (1,282,355)
Foreign withholding taxes
under license agreement 290,350 319,450 68,333
----------- ----------- -----------
Income tax expense ...... $ 290,350 $ 319,450 $ 68,333
=========== =========== ===========
</TABLE>
F-18
<PAGE> 38
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of June 30, 1997, the Company had federal net operating loss and
credit carryforwards of approximately $90 million and $3.4 million,
respectively, expiring in various years beginning in 1998 through 2011. The
Company also has state net operating loss and credit carryforwards of
approximately $34 million and $1.4 million, respectively. The state operating
loss carryforwards will expire in various years beginning in 1998 through 2002,
while the credit carryforwards will expire in various years beginning in 2003
through 2011.
Tax law provides that the use of net operating loss and credit
carryforwards are limited 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 million of federal net operating loss and
substantially all credit carryforwards are subject to an annual limitation. The
annual limitation is approximately $1.2 million per year. The balance of $15
million of federal net operating loss carryforwards can be used without
limitation. Similar limitations apply to state carryforwards.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest costs and significant noncash investing and
financing activities, not disclosed elsewhere, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Interest paid ............................. $ 282,484 $ 67,958 $ 2,088,000
Equipment purchased under capital leases $ 687,588 $ 24,851 $ -
Conversion of note payable to license ..... $ - $ - $ 3,000,000
Assignment of leases in connection with the
Agreement .............................. $ - $ - $ 584,018
Cancelation of note receivable ............ $ 103,500 $ - $ 266,933
</TABLE>
F-19
<PAGE> 39
CENSTOR CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. SUBSEQUENT EVENT
The employment of all but one of the Company's current employees was
terminated effective August 31, 1997. Immediately following the expiration of
all options outstanding pursuant to the 1990 Stock Option Plan, the plan shall
terminate.
On September 25, 1997, the Company entered into a licensing arrangement
with TDK to license its technology. The Company received a nonrefundable payment
of $1.5 million on September 26, 1997. This payment is subject to a 10%
withholding tax by the Japanese authorities.
F-20
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit
Number Description
-------- -----------
<S> <C>
3.1(5) Restated Articles of Incorporation of
Registrant.
3.2(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.
</TABLE>
-16-
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.4(1)(2) License Agreement, dated September 23, 1991,
between the Company and Maxtor Corporation, as
amended.
10.5(1)(2) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited, as
amended.
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.
10.12(6) Agreement for Purchase and Sale of Assets by and
between Read-Rite Corporation and the Company.
10.13(2) License Agreement, dated August 12, 1996, between
Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to Assignment,
dated July 2, 1996, between The Sobrato Group,
Censtor Corp. and Read-Rite Corp.
10.15(7) Fifth Amendment to Manufacturing License
Agreement, dated February 22, 1996, with Denki
Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated February
22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.17(7) License Agreement, dated July 18, 1996, between
Read-Rite Corporation and the Company.
10.18 Agreement between I.P. Managers, Inc. and the
Company dated July 31, 1997.
</TABLE>
-17-
<PAGE> 42
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.19 Incentive Compensation Agreement between the
Company and Sabine Austin, dated July 29, 1997.
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</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) Incorporated by reference to exhibits filed with Registrant's Annual report
on Form 10-K for the year ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with Registrant's Annual report
on Form 10-K for the year ended June 30, 1996.
-18-
<PAGE> 1
EXHIBIT 10.18
CONFIDENTIAL
EXCLUSIVE REPRESENTATION AGREEMENT
This Agreement made this 31st day of July, 1997 (the "Effective Date")
by and between Censtor Corp., a corporation organized and existing under the
laws of the State of California and having a place of business at 2105 Hamilton
Avenue, Suite #270, San Jose, CA 95125 (hereinafter "Censtor"), and I.P.
Managers, Inc. a corporation organized and existing under the laws of the State
of California, having a place of business at 1700 S. El Camino Real, Suite #420,
San Mateo, CA 94402 (hereinafter "IPM").
RECITALS
WHEREAS, Censtor is the owner of certain proprietary rights with
respect to Censtor Technology (as defined below).
WHEREAS, Censtor has granted licenses to several companies ("Existing
Licensees," as defined below) to manufacture and sell certain products covered
by the Censtor Technology.
WHEREAS, Censtor desires to engage IPM as its exclusive representative
with respect to the licensing and sale of, and the enforcement of Censtor's
intellectual property rights in and to, the Censtor Technology, and IPM desires
to accept such engagement.
NOW, THEREFORE, in consideration of the foregoing premises and of the
agreements and conditions hereinafter set forth, the parties hereto agree as
follows:
AGREEMENT
1. DEFINITIONS
1.1 "Action" has the meaning set forth in Section 2.1(b) below.
1.2 "Censtor Technology" shall mean the following items which are
owned by Censtor (or licensed by Censtor from others with the right to grant
sublicenses) during the term of this Agreement:
(a) the patents and patent applications listed in Exhibit A
hereto, and all divisions, continuations, continuations-in-part, and
substitutions thereof ("Censtor Patents"); and
(b) all trade secrets, technology, know-how and manufacturing
processes related thereto ("Censtor Know-How").
1.3 "Confidential Information" has the meaning set forth in
Section 8.1 below.
1.4 "Enforcement Activities" has the meaning set forth in Section
2.1(b) below.
<PAGE> 2
CONFIDENTIAL
1.5 "Enforcement Proceeds" shall mean royalties or other payments
received by or on behalf of Censtor from a Licensee or other third party as a
direct result of IPM's Enforcement Activities hereunder, including amounts
recovered in an Action by way of judgment, settlement agreement, royalty
payments received from Licensees as a result of such Action, or future royalties
received pursuant to License Agreements entered into with any defendant(s) to
such Action subsequent to the final disposition in Censtor's favor of any
dispositive motion.
1.6 "Existing Licensees" shall mean the companies listed in
Exhibit B hereto with whom Censtor has entered into License Agreements prior to
the Effective Date.
1.7 "License Agreement" shall mean a written agreement entered
into between Censtor and a Licensee pursuant to which Censtor grants (or has
granted) licenses for the manufacture and sale of certain products covered by
the Censtor Technology.
1.8 "Licensees" shall mean Existing Licensees and New Licensees
collectively.
1.9 "Licensing Activities" has the meaning set forth in Section
2.1(a) below.
1.10 "Net Payments" shall mean amounts paid by Licensees or other
third parties to either party as a direct result of IPM's Licensing Activities
or as Enforcement Proceeds, less the applicable amount of Reimbursables then due
to either party, if any.
1.11 "New Licensees" shall mean the companies not listed in Exhibit
B with whom Censtor enters into License Agreements during the term of this
Agreement as a direct result of IPM's efforts in its capacity as Censtor's
exclusive licensing representative as authorized hereunder.
1.12 "Prosecution Activities" has the meaning set forth in Section
2.1(c) below.
1.13 "Reimbursables" shall mean each party's respective out-of-
pocket costs and expenses incurred as a direct result of Licensing Activities,
Enforcement Activities, and/or Prosecution Activities, including without
limitation attorneys' fees (whether paid on a contingency basis or otherwise),
consultants' fees, and travel expenses, provided that any and all such costs and
expenses are reasonable. Reimbursables shall not include compensation paid to
principals and employees of either party.
2. AUTHORITY OF IPM
2.1 Exclusive Licensing Representative. Subject to the terms and
conditions set forth herein, Censtor hereby authorizes IPM to act as its
exclusive licensing representative during the term of this Agreement. As
Censtor's exclusive licensing representative, IPM will have the authority to
engage in the following activities on behalf of Censtor but shall not have
authority to bind Censtor.
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<PAGE> 3
CONFIDENTIAL
(a) Licensing Activities. IPM may (i) contact and discuss with
Existing Licensees the status of such Existing Licensees' compliance with the
terms and conditions of such Existing Licensees' respective License Agreements,
and renegotiate such License Agreements, subject to Censtor's written approval,
which approval will not be unreasonably withheld; and (ii) identify potential
New Licensees, and discuss and negotiate with each such New Licensee the terms
and conditions of a License Agreement, subject to Censtor's written approval of
such License Agreement, which approval will not be unreasonably withheld
(collectively, "Licensing Activities").
(b) Enforcement Activities. IPM may coordinate on Censtor's
behalf the initiation and prosecution of any action, suit or proceeding
(including any declaratory judgment action) (collectively, an "Action") with
respect to infringement by any third party of Censtor Technology, subject to
Censtor's written approval, which approval will not be unreasonably withheld,
and Censtor will cooperate fully with IPM in connection with any such Action
(collectively, "Enforcement Activities"). To the extent that Censtor has
sufficient funds available, such Enforcement Activities shall be undertaken at
Censtor's expense. In the event that Censtor does not or ceases to have
sufficient funds available, IPM may, at its discretion, elect to assume
financial responsibility for the costs and expenses associated with the
continuation of such Enforcement Activities (including without limitation all
related legal fees and costs, whether paid on a contingency basis or otherwise),
provided that in consideration thereof, IPM's commission with respect to such
continued Enforcement Activities shall be as set forth in Section 5.1(b).
(c) Patent Prosecution Activities. IPM may coordinate on
Censtor's behalf, at Censtor's expense, the prosecution and maintenance of the
Censtor Patents for their full term, and the preparation, filing, prosecution
and maintenance of any additional patents, including reissues, continuations,
divisions, and continuations in part and any interferences, re-examinations,
extensions of claims and opposition proceedings relating thereto (collectively,
"Prosecution Activities"). IPM shall consult with Censtor regarding the conduct
of all such Prosecution Activities, and shall obtain Censtor's written approval
with respect to expenses related thereto, which approval will not be
unreasonably withheld. In the event that Censtor does not or ceases to have
sufficient funds available, IPM may, at its discretion, elect to assume
financial responsibility for the costs and expenses associated with the
continuation of such Prosecution Activities. IPM shall be entitled to be
reimbursed for Reimbursables incurred by IPM with respect to such continued
Prosecution Activities, provided that such reimbursement shall be deducted from
proceeds received in connection with Licensing Activities as a direct result of
such Prosecution Activities.
2.2 Counsel. In connection with IPM's performance of the foregoing
activities, IPM may engage for Censtor counsel of IPM's choice, subject to
Censtor's written approval, which approval will not be unreasonably withheld.
2.3 IPM Due Diligence. IPM shall use due diligence in exercising its
authority on behalf of Censtor with respect to the foregoing activities.
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CONFIDENTIAL
3. COOPERATION
3.1 Delivery of Patents. Censtor has delivered or will furnish to
IPM copies of the Censtor Patents and their respective file histories and shall
promptly advise IPM as to any changes in the status of the Censtor Patents.
3.2 Delivery of Censtor Know-How. On the Effective Date, Censtor
shall deliver to IPM the Censtor Know-How contained in the Censtor technical
information packet described in Exhibit C attached hereto.
3.3 Inquiries. Censtor shall refer to IPM all inquiries and
solicitations received from third parties with respect to obtaining a license to
Censtor Technology.
3.4 Censtor Technical Documents. Censtor shall, upon request and
without charge to IPM, provide IPM with copies of all manuals, catalogs and
publications in Censtor's possession relating to the use, promotion and sale of
the products covered by the Censtor Technology.
3.5 Licensee Technical Documents. IPM shall furnish to Censtor
copies of the publications and catalogs acquired by IPM from Licensees relating
to the specification and use of the products covered by the Censtor Technology.
4. REPRESENTATIONS
4.1 By Censtor. Censtor represents that as of the Effective Date,
Censtor: (i) owns the Censtor Technology and has the right to enter into new
License Agreements, subject to the License Agreements with Existing Licensees,
current copies of which will be provided to IPM (as well as any amendments
thereto); and (ii) has disclosed or made available to IPM all agreements,
documents, data, files and business information in Censtor's possession
(including without limitation facts, records and correspondence) related to the
Censtor Technology (including without limitation information with respect to
encumbrances, infringement issues, and the validity of the Censtor Patents),
which information IPM has reviewed, and Censtor has not failed to disclose or
make available any material information.
4.2 Disclaimer. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE CENSTOR
TECHNOLOGY IS PROVIDED WITHOUT WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT OR FITNESS
FOR A PARTICULAR PURPOSE.
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<PAGE> 5
CONFIDENTIAL
5. COMPENSATION
5.1 Commission. IPM's sole compensation under the terms of this
Agreement shall be a commission calculated as follows:
(a) Licensing Activities. With respect to any Net Payment paid
by a Licensee to either party as a direct result of IPM's Licensing Activities
hereunder, IPM will receive a commission of fifteen percent (15%) of each such
Net Payment;
(b) Enforcement Activities. With respect to any Net Payment paid
by a Licensee or other third party as Enforcement Proceeds, IPM will receive a
commission of twenty-five percent (25%) of each such Net Payment.
Notwithstanding the foregoing, in the event IPM assumes financial responsibility
for the continuation of Enforcement Activities, as provided for in Section
2.1(b), IPM's commission with respect to any Enforcement Proceeds received as a
direct result of such continued Enforcement Activities will be forty five
percent (45%) of the gross amounts received as such Enforcement Proceeds, less
any Reimbursables, except that IPM shall not be reimbursed for any Reimbursables
incurred by IPM with respect to attorneys' fees and other legal costs and
expenses (whether paid on a contingency basis or otherwise) in connection with
such continued Enforcement Activities.
5.2 TDK Negotiations. IPM acknowledges and agrees that as of the
Effective Date, Censtor is negotiating a License Agreement with TDK with respect
to certain Censtor Technology (the "TDK Agreement"). Notwithstanding the
provisions of Section 5.1, in the event that Censtor and TDK enter into the TDK
Agreement on or before September 30, 1997, Censtor will pay IPM a commission of
ten percent (10%) of the Net Payments Censtor receives under the TDK Agreement.
In the event that Censtor and TDK enter into the TDK Agreement after such date,
IPM will receive a commission commensurate with its activities with respect to
the TDK Agreement in accordance with the provisions of Section 5.1(a) or 5.1(b),
as appropriate.
5.3 Purchase of Assets. If as a direct result of IPM's activities
under this Agreement Censtor and a third party enter into a written agreement
with respect to the disposition of Censtor Technology as part of a purchase of
Censtor's assets or a sale of Censtor's patent portfolio, IPM will receive a
commission commensurate with its activities with respect to such agreement in
accordance with the provisions of Section 5.1(a).
6. PAYMENTS; REPORTS
6.1 Payments.
(a) Within thirty (30) days after the end of each calendar
quarter, each party shall deliver to the other party a statement detailing on a
per transaction basis, (i) all amounts received, if any, by such party from
Licensees and/or other third parties in connection with this Agreement during
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<PAGE> 6
CONFIDENTIAL
such quarter, and (ii) all costs and expenses incurred by such party as
Reimbursables during such quarter; and
(b) Within fifteen (15) days thereafter, (i) Censtor shall remit
to IPM an amount representing IPM's commission with respect to each transaction
during such quarter and the related Reimbursables owed to IPM for each such
transaction, and a statement of accounting with respect to the calculation of
such amount; and (ii) IPM shall remit to Censtor an amount representing the
payments, if any, IPM received during such quarter on Censtor's behalf directly
from a Licensee and/or other third party (i.e., amounts owed to Censtor as
royalties, Enforcement Proceeds, or otherwise), less the applicable commission
due to IPM with respect to such payments and IPM's related Reimbursables, and a
statement of accounting with respect to the calculation of such amount.
6.2 Currency. All payments due hereunder shall be made in United
States dollars. Amounts based in foreign currencies shall be converted to United
States dollars according to the official exchange rate published in the Western
Edition of the Wall Street Journal on the last publication day during the
quarter for which such amounts are being paid.
6.3 Records; Audit Rights. Each party shall keep at its principal
place of business, accurate and complete records of all royalties, Enforcement
Proceeds, and other payments received, and all Reimbursables incurred, in
connection with this Agreement, and of all information related to the Licensing
Activities, Enforcement Activities, and Prosecution Activities associated
therewith. These records shall be retained for a period of three (3) years from
the expiration or termination of this Agreement. Upon thirty (30) days written
notice, each party shall have the right to examine and audit, not more than once
a year, during normal business hours and at its expense, all such records of the
other party. Prompt adjustment shall be made by the audited party to compensate
for any errors and/or omissions disclosed by such examination or audit which
result in an underpayment of amounts due to the other party hereunder. Should
the amount of any such error and/or omission exceed five percent (5%) of the
total amounts due for the period under audit, then upon request by the other
party, the audited party shall pay for the cost of the audit.
6.4 Reports. Within thirty (30) days after the end of each calendar
quarter, IPM shall deliver to Censtor a report detailing any and all potential
New Licensees and/or defendants to an Action IPM has contacted and with whom IPM
has entered into discussions or negotiations. Such report shall include the
names of the contact people, the dates of discussions or negotiations, and the
status of all Licensing Activities, Enforcement Activities, and Prosecution
Activities undertaken by IPM pursuant to this Agreement.
7. TERM AND TERMINATION
7.1 Term. This Agreement shall become effective on the Effective
Date and shall remain in full force and effect until the later of either the
expiration of the period during which a claim could be made under the last to
expire Censtor Patent or the expiration of the last existing License
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<PAGE> 7
CONFIDENTIAL
Agreement negotiated by IPM under this Agreement, unless sooner terminated in
accordance with the provisions of this Section 7.
7.2 Termination for IPM Insolvency. Censtor may terminate this
Agreement, effective immediately upon written notice to IPM, (i) upon the
institution by or against IPM of insolvency, receivership or bankruptcy
proceedings or any other proceedings for the settlement of IPM's debts, (ii)
upon IPM's making an assignment for the benefit of creditors, or (iii) upon
IPM's dissolution or cessation of business.
7.3 Termination for Breach. If either party defaults in the
performance of any provision of this Agreement, then the nondefaulting party may
give written notice to the defaulting party that if the default is not cured
within ninety (90) days the Agreement will be terminated. If the non-defaulting
party gives such notice and the default is not cured during the ninety-day
period, then the Agreement shall automatically terminate at the end of that
period.
7.4 Termination for Convenience by Censtor. At any time after
December 31, 1999, Censtor may terminate this Agreement upon ninety (90) days
written notice to IPM.
7.5 Termination for Convenience by IPM. IPM shall have the right to
terminate this Agreement on ninety (90) days written notice to Censtor.
7.6 Effect of Termination. Termination of this Agreement shall not
affect the continuing validity of, and the continuing interest of IPM in, any
License Agreement entered into, or any Enforcement Proceeds resulting from an
Action concluded, during the term of this Agreement. In addition, if Censtor
terminates this Agreement pursuant to Section 7.4 and within a twelve (12) month
period from the effective date of such termination Censtor enters into a License
Agreement or successfully concludes an Action as a direct result of Licensing
Activities or Enforcement Activities, respectively, that IPM had been actively
engaged in during the preceding six (6) month period, IPM shall be entitled to
receive its commission with respect to such activities, in accordance with the
applicable provisions of this Agreement, provided that IPM had complied with its
reporting obligations under Section 6.4.
7.7 Survival. Sections 4, 7, 8, 9, 10, and any outstanding payment
obligations hereunder shall survive expiration or termination of this Agreement.
8. CONFIDENTIAL INFORMATION
8.1 Definition. As used in this Agreement, the term "Confidential
Information" shall mean any information disclosed by one party to the other
during the term of this Agreement which is in written, graphic, machine readable
or other tangible form and is marked "Confidential", "Proprietary" or in some
other manner to indicate its confidential nature. Confidential Information may
also include oral information disclosed by one party to the other in the course
of the performance of this
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<PAGE> 8
CONFIDENTIAL
Agreement, provided that such information is designated as confidential at the
time of disclosure and reduced to a written summary by the disclosing party,
within thirty (30) days after its oral disclosure, which is marked in a manner
to indicate its confidential nature and delivered to the receiving party. As
used herein, "Confidential Information" may include, without limitation, the
License Agreements, know-how, inventions, prototypes, materials, processes,
process equipment, designs, specifications, and certain technical data, business
and financial data, product information, patent applications, and documents
relating to the development, manufacturing, testing, and marketing of products
disclosed by either party to the other directly in writing or by drawings or
inspection of parts or equipment.
8.2 Nondisclosure. Each party shall treat as strictly confidential
all Confidential Information of the other party, shall not use such Confidential
Information except as expressly set forth herein or otherwise authorized in
writing, shall implement reasonable procedures to prohibit the disclosure,
unauthorized duplication, misuse or removal of the other party's Confidential
Information and shall not disclose such Confidential Information to any third
party except as may be necessary and required in connection with the rights and
obligations of such party under this Agreement, and subject to confidentiality
obligations at least as protective as those set forth herein. Without limiting
the foregoing, each of the parties shall use at least the same procedures and
degree of care which it uses to prevent the disclosure of its own confidential
information of like importance to prevent the disclosure of Confidential
Information disclosed to it by the other party under this Agreement.
8.3 Exceptions. Notwithstanding the above, neither party shall have
liability to the other with regard to any Confidential Information of the other
which:
(a) was generally known and available in the public domain at
the time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiver;
(b) was known to the receiver without restriction at the time of
disclosure as shown by the files of the receiver in existence at the time of
disclosure and was not acquired directly or indirectly from a third party under
obligation of confidentiality to the disclosing party;
(c) is disclosed with the prior written approval of the
discloser;
(d) was independently developed by the receiver without any use
of the Confidential Information, provided that the receiver can demonstrate such
independent development by documented evidence prepared contemporaneously with
such independent development;
(e) becomes known to the receiver without restriction from a
source other than the discloser without breach of this Agreement by the receiver
and otherwise not in violation of the discloser's rights; or
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<PAGE> 9
CONFIDENTIAL
(f) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, that the
receiver shall provide prompt, advance notice thereof to enable the discloser to
seek a protective order or otherwise prevent such disclosure.
8.4 Binding Other Parties. Each party shall obtain the execution of
proprietary nondisclosure agreements with its subsidiaries, employees, agents
and consultants having access to Confidential Information of the other party,
and shall exercise due care in administering such agreements.
8.5 Rights Under Breach. Each party acknowledges that the other
party's Confidential Information is an extremely valuable business asset, the
misuse or improper disclosure of which would cause irreparable harm to the
interest of such party. Accordingly, if either party breaches any of its
obligations under this Section 8, the other party shall be entitled to equitable
relief to protect its interest therein, including but not limited to injunctive
relief, as well as money damages. In addition, the parties agree upon request to
cooperate in efforts seeking to enjoin the subsequent wrongful disclosure of
Confidential Information by third parties to whom such information was disclosed
by a receiving party hereunder.
9. INDEMNIFICATION
IPM shall indemnify, defend and hold harmless Censtor and its directors,
officers, employees and agents from and against any and all liabilities,
damages, losses, costs or expenses (including reasonable attorneys' and
professional fees and other expenses of litigation and/or arbitration) resulting
from any claim, suit or proceeding brought by a third party arising out of or in
connection with any actions of IPM that exceed the scope of the authority
granted to IPM hereunder.
10. GENERAL PROVISIONS
10.1 Minimum Damages. In the event Censtor wrongfully terminates this
Agreement, Censtor acknowledges that IPM's current hourly billing rate is Two
Hundred and Fifty Dollars ($250).
10.2 Limitation of Liability. CENSTOR'S LIABILITY ARISING OUT OF THIS
AGREEMENT SHALL NOT EXCEED THE AMOUNTS RECEIVED BY CENSTOR HEREUNDER. IN NO
EVENT SHALL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT
OR SPECIAL DAMAGES HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY ARISING OUT OF
THIS AGREEMENT. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
10.3 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effective when
mailed by registered or certified mail,
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<PAGE> 10
CONFIDENTIAL
postage prepaid, or otherwise delivered by hand, by messenger or by
telecommunication, addressed to the addresses first set forth above or at such
other address furnished with a notice in the manner set forth herein. Such
notices shall be deemed to have been served when delivered or, if delivery is
not accomplished by reason of some fault of the addressee, when tendered.
10.4 Severability of Provisions. If any Section, provision, or clause
thereof in this Agreement shall be, found or be held to be invalid or
unenforceable in any jurisdiction in which this Agreement is being performed,
the remainder of this Agreement shall be valid and enforceable and the parties
shall negotiate, in good faith, a substitute, valid and enforceable provision
which most nearly effects the parties' intent in entering into this Agreement.
10.5 Disclosure. Neither IPM nor Censtor will voluntarily disclose to
any person, firm or corporation the contents of this Agreement unless under a
protective order, or ordered by a court of law, or as otherwise required by the
SEC, or under a confidential disclosure agreement; provided, however, that IPM
is authorized to issue public statements related to its authority to act as
Censtor's exclusive representative hereunder.
10.6 Settlement of Disputes; Choice of Law. The parties hereto shall
use their best endeavors to settle by mutual agreement any disputes,
controversies or differences which may arise from, under, out of or in
connection with this Agreement. If such disputes, controversies or differences
cannot be settled between the parties, they shall be finally resolved by binding
arbitration in San Jose, California, in accordance with the then-current Rules
of Practice and Procedure of Judicial Arbitration and Mediation Services, Inc.
("JAMS") by an arbitration panel selected in accordance with said rules. The
arbitrators shall apply California law to the merits of any dispute or claim,
without reference to rules of conflicts of law or arbitration. Judgment on the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to
any court of competent jurisdiction for temporary, preliminary, or final
injunctive or other equitable relief without breach of this arbitration
provision.
10.7 Authority. Each party represents that all corporate action
necessary for the authorization, execution and delivery of this Agreement by
such party and the performance of its obligations hereunder has been taken.
10.8 Assignment. IPM may not, directly, indirectly, or by a change in
control, assign or delegate this Agreement or any of its rights or obligations
under this Agreement without the prior written consent of Censtor.
10.9 Counterparts. This Agreement may be executed in two (2) or more
counterparts all of which, taken together, shall be regarded as one and the same
instrument.
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CONFIDENTIAL
10.10 Relationship of Parties. The relationship of Censtor and IPM
established by this Agreement is that of independent contractors. Nothing
contained herein or done in pursuance of this Agreement shall be construed to
give either party the power to direct and control the day-to-day activities of
the other, or constitute either party the agent of the other party for any
purpose or in any sense whatsoever, or constitute the parties as partners or
joint venturers.
10.11 Modification. No alteration, amendment, waiver, cancellation or
any other in any term or condition of this Agreement shall be valid or binding
on either party unless same shall have been mutually assented to in writing by
both parties.
10.12 Waiver. The failure of either party to enforce at any time the
provisions of this Agreement, or the failure to require at any time performance
by the other party of any of the provisions of this Agreement, shall in no way
be constituted to be a present or future waiver of such provisions, nor in any
way affect the validity of either party to enforce each and every provision
thereafter. The express waiver by either party of any provision, condition or
requirement of this Agreement shall not constitute a waiver of any future
obligation to comply with such provision, condition or requirement.
10.13 Entire Agreement. The terms and conditions herein constitute the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof and no agreement or understanding varying or
extending the same shall be binding upon either party hereto unless in a written
document signed by the party to be bound thereby.
10.14 Section Headings and Language. The section headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
made and executed as of the below indicated dates.
CENSTOR CORPORATION
Date: 7/31/97 By: /s/ RUSSELL M. KRAPF
-------------------------------- ----------------------------------
Name: Russell M. Krapf
Title: President & CEO
I.P. MANAGERS, INC.
Date: 7/31/97 By: /s/ CHARLES PIERPOINT, III
-------------------------------- ----------------------------------
Name: Charles Pierpoint, III
Title: Secretary & Counsel
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EXHIBIT A (CENSTOR PATENTS & APPLICATIONS)
<TABLE>
<CAPTION>
PATENT # TITLE
-------- -----
<S> <C>
4,423,450 Magnetic Head and Multitrack Transducer for Perpendicular
(CNR-343) Recording and Method of Fabricating
4,636,894 Recording Head Slider Assembly
(CNR-341)
4,751,598 Thin-Film Cross-Field Closed-Flux Anisotropic Electromagnetic
(CNR-001) Field Device
4,757,402 Slider Assembly for Supporting a Magnetic Head
(CNR-342)
4,860,139 Planarized Read/Write Head and Method
(CNR-304)
5,041,932 Integrated Magnetic Read/Write Head/Flexure/Conductor Structure
(CNR-309)
5,063,712 Micro-Burnishing Flex Head Structure
(CNR-310)
5,073,242 Method of Making Integrated Magnetic Read/Write Head/Flexure/
(CNR-309A) Conductor Structure
5,111,351 Integrated Magnetic Read/Write Head/Flexure/Conductor Structure
(CNR-309B)
5,163,218 Method of Making Integrated Magnetic Read/Write Head/Flexure/
(CNR-309C) Conductor Structure
5,174,012 Method of Making Integrated Magnetic Read/Write Head/Flexure/
(CNR-309D) Conductor Structure
5,396,388 Compact High-Speed Rotary Actuator and Transducer Assembly with
(CNR-324) Reduced Moment of Inertia and Mass-Balanced Structural Overlap
with Drive Motor and Organizing Method for the Same
5,625,515 Compact High-Speed Rotary Actuator and Transducer Assembly with
(CNR-324A) Reduced Moment of Inertia and Mass-Balanced Structural Overlap
With Drive Motor and Organizing Method for the Same
5,453,315 Unitary Micro-Flexure Structure and Method of Making
(CNR-313A)
</TABLE>
<PAGE> 14
EXHIBIT A (CONTINUED)
<TABLE>
<CAPTION>
PATENT # TITLE
-------- -----
<S> <C>
5,476,131 Unitary Micro-Flexure Structure and Method of Making
(CNR-313D)
5,483,025 Unitary Micro-Flexure Structure
(CNR-313CA)
5,490,027 Gimbaled Micro-Head/Flexure/Conductor Assembly and System
(CNR-322)
5,550,691 Size-Independent Rigid-Disk Magnetic Digital-Information Storage
(CNR-321A) System with Localized Read/Write Enhancements
5,557,488 Gimbaled Micro-Head/Flexure/Conductor Assembly and System
(CNR-322A)
</TABLE>
A-2
<PAGE> 15
EXHIBIT A (CONTINUED)
<TABLE>
<CAPTION>
APPLICATION # TITLE
- ------------- -----
<S> <C>
CNR-321B Hard Disk Drive with Lightly Contacting Head
08/702,936 (Divisional of CNR-321A)
CNR-329 Transducer/Flexure/Conductor Structure for Electromagnetic
08/338,394 Read/Write System (CIP of CNR-309 & 321)
CNR-329A Head Structure for Electromagnetic Read/Write System
08/668,977 (Divisional of CNR-329, which is CIP of CNR-309 & 321)
CNR-329B Conductive Articulator Structure for Electromagnetic Read/Write System (Divisional of
08/669,950 CNR-329, which is CIP of CNR-309 & 321)
CNR-335 Contact Interface, System and Medium in Electromagnetic Read/Write
08/408,036 Rigid-Recording-Media Environment (CIP of CNR-311)
CNR-345 Interactive System for Lapping Transducers
08/452,041
CNR-347 Durable, Low-Vibration, Dynamic-Contact Hard Disk Drive System
08/621,521 (CIP of 5,041,932)
CNR-348 Low Friction Sliding Hard Disk Drive System
08/515,140 (Continuation in part of CNR-335)
CNR-349 Contact Planar Ring Head
08/528,890 (Continuation in part of CNR-329)
CNR-350 Hard Disk Drive Having Ring Head Sliding on Perpendicular Media
08/577,493 (Continuation in part of CNR-349)
CNR-351 Contact MagnetoResistive Hard Disk Drive Head
08/725,296
CNR-354 Virtual Contact Hard Disk Drive with Planar Transducer
08/673,281
CNR-355 Stiffened Hinge for Reducing Torsional Vibration of a Suspension
08/705,798
CNR-358 Hard Disk Drive Having Contact Write and Recessed MagnetoResistive Read Head
08/778,566
</TABLE>
A-3
<PAGE> 16
EXHIBIT A (CONTINUED)
<TABLE>
<CAPTION>
APPLICATION # TITLE
- ------------- -----
<S> <C>
CNR-360 Hard Disk Drive with MagnetoResistive Head and Perpendicular Media (Divisional of CNR-350)
08/771,468
</TABLE>
A-4
<PAGE> 17
EXHIBIT B
EXISTING LICENSEES
o International Business Machines Corporation
o Kabool Electronics, Ltd.
o Denki Kagaku Kogyo Kabushiki Kaisha ("Denka")
o NEC Corporation
o Maxtor Corporation
o Read-Rite Corporation
o Western Digital Corporation
o Fujitsu Limited
o Hitachi, Ltd.
o LST
o Ministor
<PAGE> 18
CONFIDENTIAL
EXHIBIT C
CENSTOR TECHNICAL INFORMATION PACKET
o Tooling and Fixture Drawings for wafer process, assembly and test of
Censtor Heads
o Process instructions for wafer process, assembly and test of Censtor
Heads
o Wafer process mask designs
o Electrical Schematics for custom designed test equipment to manufacture
Censtor Heads
o Process Summary for Censtor-designed disk for use with Censtor Contact
Head.
Most of the above information will be provided on magnetic data cartridges.
<PAGE> 1
EXHIBIT 10.19
[CENSTOR LOGO]
COMPENSATION AGREEMENT
This compensation agreement between Censtor Corp. ("Censtor"), employer, and
Sabine Austin, employee, is entered into this 29th day of July, 1997. Under
this agreement, Sabine Austin, who will serve as Corporate Secretary, Finance
Director, and a director of the Company if elected at the September 3, 1997
Annual Shareholders Meeting, will receive, as incentive compensation (if
elected), a bonus of 1.5% of all net licensing revenue received by the Company
as long as she serves in those positions (including any proposed agreements
under negotiations as of the date of this agreement.)
As compensation for fulfilling the requirements of her positions as Finance
Director and Corporate Secretary, Ms. Austin will also receive compensation in
the gross amount of $4,000/month to be paid monthly on the 15th of every month,
commencing on September 1, 1997, as long as she serves in those positions. In
the event that the number of hours worked in a given three (3) month period
exceeds 180, she will be paid at the rate of $75/hour for the excess hours. She
will also be entitled to two (2) months severance pay in the event her
employment is terminated by Censtor without cause or if Censtor becomes
insolvent.
Agreed to by: /s/ Russell M. Krapf
------------------------------
Russell M. Krapf
Agreed to by: /s/ Sabine Austin
------------------------------
Sabine Austin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 799,928
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 844,465
<PP&E> 45,703
<DEPRECIATION> 39,437
<TOTAL-ASSETS> 854,981
<CURRENT-LIABILITIES> 1,788,780
<BONDS> 0
0
32,509,031
<COMMON> 50,241,660
<OTHER-SE> (101,697,202)
<TOTAL-LIABILITY-AND-EQUITY> 854,981
<SALES> 0
<TOTAL-REVENUES> 4,088,332
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,799,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275,140
<INCOME-PRETAX> 3,771,633
<INCOME-TAX> 68,333
<INCOME-CONTINUING> 3,703,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,703,300
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
