<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the fiscal quarter ended: September 30, 1998 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)
<TABLE>
<S> <C>
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
540 N. Santa Cruz Ave., Suite #277
Los Gatos, California 95030
(address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (408) 298-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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<S> <C>
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
Common Stock - no par value 8,523,751
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CENSTOR CORP.
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and September 30, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
three months ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
three months ended September 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 9
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 1998 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $915,690 $714,154
Receivables and prepaid expenses 19,266 19,266
--------------- ---------------
Total current assets 934,956 733,420
Total assets $934,956 $733,420
=============== ===============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $40,553 $52,592
Deferred revenue 1,333,333 1,250,000
Other current liabilities 101,570 64,071
--------------- ---------------
Total current liabilities 1,475,456 1,366,663
Long-term obligations:
Deferred revenue 4,000,000 3,750,000
Restructured debt obligation 12,679,377 12,679,377
Net capital deficiency:
Preferred stock 32,612,081 32,612,081
Common stock 50,230,850 50,230,850
Warrants to purchase shares of preferred stock 150,000 150,000
Capital surplus 2,263,708 2,263,708
Accumulated deficit (102,476,516) (102,319,259)
--------------- ---------------
Net capital deficiency (17,219,877) (17,062,620)
--------------- ---------------
Total liabilities and net capital deficiency $934,956 $733,420
=============== ===============
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See accompanying notes to condensed consolidated financial statements.
3
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Revenues - license fees $2,083,333 $333,333
Costs and expenses:
Selling, general, and administrative 519,791 182,217
--------------- ---------------
Total expenses 519,791 182,217
--------------- ---------------
Operating income 1,563,542 151,116
Interest and other income, net 1,239 6,141
--------------- ---------------
Income before income tax expense 1,564,781 157,257
Income tax expense 150,000 ---
--------------- ---------------
Net income $1,414,781 $157,257
=============== ===============
Basic net income per share $0.17 $0.02
=============== ===============
Diluted net income per share $0.06 $0.01
=============== ===============
Shares used in basic calculation (in thousands): 8,528 8,524
=============== ===============
Shares used in diluted calculation (in thousands): 23,516 23,512
=============== ===============
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See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income $1,414,781 $157,257
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,122 ---
Changes in assets and liabilities:
Receivables and prepaid expenses 6,258 ---
Accounts payable 195,626 12,039
Deferred revenue (583,333) (333,333)
Other current liabilities (82,234) (37,499)
--------------- ---------------
(461,561) (358,793)
--------------- ---------------
Net cash provided by (used in) operating activities 953,220 (201,536)
Net increase (decrease) in cash and cash 953,220 (201,536)
equivalents
Cash and cash equivalents at beginning of period 799,928 915,690
--------------- ---------------
Cash and cash equivalents at end of period $1,753,148 $714,154
=============== ===============
Supplemental disclosure of noncash financing activities:
Cancellation of shareholder notes receivable $10,810 $ ---
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 -- BASIS OF PRESENTATION AND BUSINESS ACTIVITIES:
The accompanying unaudited condensed consolidated financial statements have
been prepared by Censtor Corp. ("Censtor" or the "Company") in accordance with
generally accepted accounting principles for interim financial information, and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the full year
ended June 30, 1999. The financial information presented herein should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended June 30, 1998 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
The Company's cash flow needs in fiscal 1999 are primarily for operating
expenses which may include significant litigation expense. The Company believes
its existing cash resources will enable it to fund its planned operations
through fiscal 1999.
NOTE 2 -- NET INCOME PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
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<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1998
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<S> <C> <C>
Denominator for basic earnings per share -
weighted average shares 8,528 8,524
Effect of dilutive securities:
Convertible preferred stock 14,988 14,988
----------- -------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 23,516 23,512
=========== =============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following contains projections or other forward-looking statements
regarding future events or the future financial performance of Censtor Corp.
("Censtor" or the "Company"), including statements related to Censtor's 1999
operating plans, sale of licenses by the Company and future Censtor operating
expenses and cash flows. Actual events or results may differ materially as a
result of risks and uncertainties, including those set forth in documents the
Company files from time to time with the Securities and Exchange Commission,
including the Company's last filed Form 10-K. In the following discussion and
analysis, forward-looking statements are made in the Overview, Liquidity and
Capital Resources, and Results of Operations sections.
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by 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 the first quarter of fiscal 1997,
the Company had not been profitable in any fiscal period since inception, and,
as of September 30, 1998, had an accumulated deficit of $102.3 million. There
can be no assurance that the Company will be able to sustain its recent
profitability or achieve or sustain significant revenues or profitability in the
future.
Censtor's operating plans for fiscal 1999 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. There can be
no assurance that the Company will be able to sustain its operations beyond 1999
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 quarters ended September 30, 1998 and 1997, the Company did not
engage in any financing or investing activities. The Company used cash in its
operations of $202,000 for the quarter ended September 30, 1998. During the
quarter ended September 30, 1997, the Company generated cash in its operations
of $953,000, primarily from the sale of a license. As of September 30, 1998, the
Company had negative working capital of approximately $633,000.
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 its existing cash reserves will
enable it to fund its planned operations through fiscal 1999. The Company's
commitments for cash payments in fiscal year 1999 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 the sale of license
agreements with disk drive manufacturers. Revenues of $333,000 for the quarter
ended September 30, 1998, related to the recognition of deferred
7
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revenues associated with the license sold to Read-Rite. Revenue for the quarter
ended September 30, 1997 was $2.1 million, relating to the recognition of
deferred revenue associated with certain licenses to Read-Rite and to Western
Digital Corp. ("WD") entered into during the first quarter of fiscal 1997 and
the fees received from the license with TDK entered into in September 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $520,000 for
the quarter ended September 30, 1997 to $182,000 in the quarter ended September
30, 1998. This decrease was largely the result of lower headcount.
Income Taxes
The Company recorded an income tax expense of $150,000 for the quarter
ended September 30, 1997, relating to the 10% Japanese withholding tax on the
sale of a license in September 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1998, the Company's annual meeting of shareholders was held.
At this meeting, the shareholders elected Sabine Austin, Gary J. Summers and
Michael R. Morgan 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 13,738,209 votes in favor of
her election with 40,000 votes opposed; Gary J. Summers received 13,738,209
votes in favor and 40,000 opposed; and Michael R. Morgan received 13,738,209
votes in favor and 40,000 votes opposed. At the annual meeting, the shareholders
also ratified the appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending June 30, 1999 with 13,718,209 shares voting
in favor of such ratification, 10,000 shares opposed and 50,000 shares
abstaining.
8
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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Exhibit
Number Description
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3.1 (4) Restated Articles of Incorporation of Registrant.
3.2 (1) Amended and Restated Bylaws of Registrant.
10.1 (1) Form of Indemnification Agreement entered into between the Company and each of its
directors and officers.
10.2 (1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
10.3 (1) (2) License Agreement, dated February 28, 1991, between the Company and Fujitsu Limited,
as amended.
10.4 (1) (2) Manufacturing License Agreement, dated August 26, 1988, between the Company and Denki
Kagaku Kogyo Kabushiki Kaisha, as amended.
10.5 (1) (2) License Agreement, dated June 1, 1993, between the Company and International Business
Machines Corporation.
10.6 (3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the Company.
10.7 (4) License Agreement, dated June 19, 1995, between Contact Recording Technology, Inc. and the
Company.
10.8 (2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
10.9(5) Agreement for Purchase and Sale of Assets by and between Read-Rite Corporation and the Company.
10.10(2) License Agreement, dated August 12, 1996, between Western Digital and the Company.
10.11(6) Assignment of Lease and Consent to Assignment, dated July 2, 1996, between The Sobrato Group,
Censtor Corp. and Read-Rite Corp.
10.12(6) Fifth Amendment to Manufacturing License Agreement, dated February 22, 1996, with Denki Kagaku
Kogyo Kabushiki Kaisha.
10.13(6) Amendment to Terms of Debentures, dated February 22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.14(6) License Agreement, dated July 18, 1996, between Read-Rite Corporation and the Company.
10.15(7) Agreement between I.P. Managers, Inc. and the Company dated July 31, 1997.
10.16(7) Incentive Compensation Agreement between the Company and Sabine Austin, dated July 29, 1997.
10.17(8) License Agreement, dated September 25, 1997 between TDK Corporation and the Company.
27.1 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) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1995.
(5) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.
(6) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1997.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
9
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(b) Reports on Form 8-K.
None.
10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENSTOR CORP.
Registrant
BY: /s/ Sabine Austin
----------------------------------
Sabine Austin
President and Principal Accounting
Officer
Dated: November 6, 1998
11
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INDEX TO EXHIBITS
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<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
3.1 (4) Restated Articles of Incorporation of Registrant.
3.2 (1) Amended and Restated Bylaws of Registrant.
10.1 (1) Form of Indemnification Agreement entered into between the Company and each of its
directors and officers.
10.2 (1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
10.3 (1) (2) License Agreement, dated February 28, 1991, between the Company and Fujitsu Limited,
as amended.
10.4 (1) (2) Manufacturing License Agreement, dated August 26, 1988, between the Company and Denki
Kagaku Kogyo Kabushiki Kaisha, as amended.
10.5 (1) (2) License Agreement, dated June 1, 1993, between the Company and International Business
Machines Corporation.
10.6 (3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the Company.
10.7 (4) License Agreement, dated June 19, 1995, between Contact Recording Technology, Inc. and the
Company.
10.8 (2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
10.9(5) Agreement for Purchase and Sale of Assets by and between Read-Rite Corporation and the Company.
10.10(2) License Agreement, dated August 12, 1996, between Western Digital and the Company.
10.11(6) Assignment of Lease and Consent to Assignment, dated July 2, 1996, between The Sobrato Group,
Censtor Corp. and Read-Rite Corp.
10.12(6) Fifth Amendment to Manufacturing License Agreement, dated February 22, 1996, with Denki Kagaku
Kogyo Kabushiki Kaisha.
10.13(6) Amendment to Terms of Debentures, dated February 22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.14(6) License Agreement, dated July 18, 1996, between Read-Rite Corporation and the Company.
10.15(7) Agreement between I.P. Managers, Inc. and the Company dated July 31, 1997.
10.16(7) Incentive Compensation Agreement between the Company and Sabine Austin, dated July 29, 1997.
10.17(8) License Agreement, dated September 25, 1997 between TDK Corporation and the Company.
27.1 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) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1995.
(5) Incorporated by reference to exhibit filed with Registrant's Proxy
Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.
(6) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1997.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 714,154
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 733,420
<PP&E> 15,322
<DEPRECIATION> (15,322)
<TOTAL-ASSETS> 733,420
<CURRENT-LIABILITIES> 1,366,663
<BONDS> 0
0
32,612,081
<COMMON> 50,230,850
<OTHER-SE> (99,905,551)
<TOTAL-LIABILITY-AND-EQUITY> 733,420
<SALES> 0
<TOTAL-REVENUES> 333,333
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 182,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 157,257
<INCOME-TAX> 0
<INCOME-CONTINUING> 157,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,257
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.01
</TABLE>
