<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: December 31, 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)
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<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 DECEMBER 31, 1998
Common Stock -- no par value 8,523,751
</TABLE>
<PAGE> 2
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 at
June 30, 1998 and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended December 31, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended December 31, 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
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 9
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
JUNE 30, DECEMBER 31,
1998 1998
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 915,690 $ 451,880
Receivables and prepaid expenses 19,266 --
------------- -------------
Total current assets 934,956 451,880
Total assets $ 934,956 $ 451,880
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 40,553 $ 57,381
Deferred revenue 1,333,333 1,166,667
Other current liabilities 101,570 76,770
------------- -------------
Total current liabilities 1,475,456 1,300,818
Long-term obligations:
Deferred revenue 4,000,000 3,500,000
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) (102,284,954
------------- -------------
Net capital deficiency (17,219,877) (17,028,315)
------------- -------------
Total liabilities and net capital
deficiency $ 934,956 $ 451,880
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues -- license fees $ 333,333 $ 333,333 $2,416,666 $ 666,666
Costs and expenses:
Selling, general, and administrative 245,283 303,076 765,074 485,293
---------- ---------- ---------- ----------
Total expenses 245,283 303,076 765,074 485,293
---------- ---------- ---------- ----------
Operating income 88,050 30,257 1,651,592 181,373
Interest and other income, net 11,045 4,048 12,284 10,189
---------- ---------- ---------- ----------
Income before income tax expense 99,095 34,305 1,663,876 191,562
Income tax expense -- -- 150,000 --
---------- ---------- ---------- ----------
Net income $ 99,095 $ 34,305 $1,513,876 $ 191,562
========== ========== ========== ==========
Basic net income per share $ 0.01 $ 0.00 $ 0.18 $ 0.02
========== ========== ========== ==========
Diluted net income per share $ 0.00 $ 0.00 $ 0.06 $ 0.01
========== ========== ========== ==========
Shares used in basic calculation (in
thousands): 8,524 8,524 8,526 8,524
========== ========== ========== ==========
Shares used in diluted calculation (in
thousands): 23,512 23,512 23,514 23,512
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------------
Operating activities: 1997 1998
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<S> <C> <C>
Net income $1,513,876 $ 191,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,698 --
Changes in assets and liabilities:
Receivables and prepaid expenses (9,700) 19,266
Accounts payable (8,938) 16,828
Deferred revenue (916,666) (666,666)
Other current liabilities (60,529) (24,800)
---------- ----------
(993,135) (655,372)
---------- ----------
Net cash provided by (used in) operating activities 520,741 (463,810)
Net increase (decrease) in cash and cash equivalents 520,741 (463,810)
Cash and cash equivalents at beginning of period 799,928 915,690
---------- ----------
Cash and cash equivalents at end of period $1,320,669 $ 451,880
========== ==========
Supplemental disclosure of noncash financing activities:
Cancellation of shareholder notes receivable $ 10,810 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 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 six months ended December 31, 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 calendar 1999 are primarily for operating
expenses which may include significant litigation expense. The Company's
existing cash resources will not be sufficient to fund its planned operations
through calendar 1999 without the sale of additional licenses or a reduction in
operating expenses.
NOTE 2 -- NET INCOME PER SHARE:
The following table sets forth the computation of the denominator for the
basic and diluted earnings per share calculations (in thousands):
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share
-- weighted average shares 8,524 8,524 8,526 8,524
Effect of dilutive securities:
Convertible preferred stock 14,988 14,988 14,988 14,988
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 23,512 23,512 23,514 23,512
====== ====== ====== ======
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<PAGE> 7
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 hard disk drive recording
technology and to manufacture head and disk components for disk drives. 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 December 31, 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. The Company
will not be able to sustain its operations beyond fiscal 1999 without the sale
of such additional licenses or a reduction in operating expenses.
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 six month periods ended December 31, 1998 and 1997, the Company
did not engage in any financing or investing activities. The Company used cash
in its operations of $464,000 for the six months ended December 31, 1998. During
the six months ended December 31, 1997, the Company generated cash in its
operations of $521,000, primarily from the sale of a license. As of December 31,
1998, the Company had a working capital deficit of approximately $849,000.
The Company's commitments for cash payments in calendar year 1999 are
primarily for operating expenses, which, going forward, may include significant
litigation expense. 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, there can be no assurance that the Company can
enter into a new license agreement in fiscal 1999 or at any subsequent time. Any
such failure to enter into licenses or reduce operating expenses would have
material adverse affects on the Company's business and would result in the
Company's cash reserves being inadequate to fund the Company's operations.
<PAGE> 8
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 and $667,000 for
the quarter and six months ended December 31, 1998, related to the recognition
of deferred revenues associated with the license sold to Read-Rite. Revenues for
the quarter and six months ended December 31, 1997 were $333,000 and $2.4
million, respectively, 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 increased from $245,000 for
the quarter ended December 31, 1997 to $303,000 in the quarter ended December
31, 1998. This increase was largely the result of increases in litigation
expenses related to enforcement of the Company's intellectual property rights
during the quarter. For the six month periods ending December 31, 1997 and 1998,
selling, general and administrative expenses were $765,000 and $485,000
respectively. This decrease was due to lower headcount and lower overhead
expense as the Company reduced its scope of operations.
Income Taxes
The Company recorded an income tax expense of $150,000 for the six months
ended December 31, 1997, relating to the 10% Japanese withholding tax on the
sale of a license in September 1997.
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
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
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- ----------
(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 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.
<PAGE> 10
(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.
(b) Reports on Form 8-K.
None.
<PAGE> 11
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: February 8, 1999
<PAGE> 12
EXHIBIT INDEX
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<CAPTION>
Exhibit
Number Description
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<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 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.
<PAGE> 13
(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.
(b) Reports on Form 8-K.
None.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 451,880
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 451,880
<PP&E> 15,322
<DEPRECIATION> (15,322)
<TOTAL-ASSETS> 451,880
<CURRENT-LIABILITIES> 1,300,818
<BONDS> 0
0
32,612,081
<COMMON> 50,230,850
<OTHER-SE> (99,871,246)
<TOTAL-LIABILITY-AND-EQUITY> 451,880
<SALES> 0
<TOTAL-REVENUES> 666,666
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 485,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 191,562
<INCOME-TAX> 0
<INCOME-CONTINUING> 191,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,562
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.01
</TABLE>
