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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
CENSTOR CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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TABLE OF CONTENTS
PAGE
SUMMARY OF PROXY STATEMENT....................................................................................... 4
PROPOSAL 1: ELECTION OF DIRECTORS............................................................................... 9
Board Meetings and Committees........................................................................... 10
Director Compensation.................................................................................. 10
Summary Compensation Table.............................................................................. 11
Option Grants in Last Fiscal Year...................................................................... 12
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values...................... 13
Certain Relationships and Related Transactions......................................................... 13
Security Ownership of Directors, Executive Officers and Certain Shareholders........................... 14
Compliance with Section 16(a) of the Exchange Act....................................................... 17
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................................................ 17
PROPOSAL 3: THE PROPOSED TRANSACTION........................................................................... 18
General ............................................................................................... 18
Background............................................................................................. 18
Purchase Price......................................................................................... 22
Assets to be Sold and Retained by the Company.......................................................... 22
Intellectual Property to be Retained for Licensing by the Company...................................... 23
Dispute Resolution...................................................................................... 23
Shareholder Approval................................................................................... 23
Certain Information Concerning Read-Rite............................................................... 23
Opinion of Financial Advisor........................................................................... 23
Interest of Management in the Transaction............................................................... 26
Effect on Employees..................................................................................... 26
Application of Sale Proceeds............................................................................ 26
Certain Federal Income Tax Consequences................................................................. 27
Recommendation of the Board of Directors................................................................ 27
Representations and Warranties.......................................................................... 28
Covenants............................................................................................... 29
Conditions to the Proposed Transaction.................................................................. 30
Termination of the Proposed Transaction................................................................. 30
Conduct of Business Prior to the Closing................................................................ 30
Expenses ............................................................................................... 30
AVAILABLE INFORMATION............................................................................................ 31
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS..................................................................... 32
APPENDIX
APPENDIX A - ASSET SALE AGREEMENT
APPENDIX B - OPINION OF VON GEHR INTERNATIONAL
APPENDIX C - UNAUDITED PRO-FORMA FINANCIAL STATEMENTS
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( Date )
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Censtor Corp. (the "Company") to be held on ( Date ), at the principal
offices of the Company, Suite 270, 2105 Hamilton Avenue, San Jose, California
95125, at 11 a.m., local time. In addition to electing directors and ratifying
the appointment of independent auditors, the Shareholders will be considering
and acting upon a proposal to approve the sale of the Company's research and
development operations, including the assets and contracts related thereto, and
the grant of a non-exclusive license to the Company's intellectual property,
including the Company's rights in patents, technology and software, pursuant to
the terms and conditions of the Agreement for Purchase and Sale of Assets, dated
as of March 29, 1996, by and between Read-Rite Corporation ("Read-Rite") and the
Company (the "Proposed Transaction").
Details of the Proposed Transaction and the other proposals and other
important information concerning the Company appear in the accompanying Proxy
Statement. Please give this material your careful attention.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED TRANSACTION IS IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE
FOR THE PROPOSAL TO APPROVE THE PROPOSED TRANSACTION. CERTAIN SHAREHOLDERS OF
THE COMPANY HOLDING A MAJORITY OF THE VOTING SHARES OF CAPITAL STOCK OF THE
COMPANY HAVE GRANTED READ-RITE AN IRREVOCABLE PROXY TO VOTE THEIR SHARES IN
FAVOR OF APPROVING THE PROPOSED TRANSACTION.
YOUR VOTE IS VERY IMPORTANT TO THE COMPANY.
As a condition to consummating the Proposed Transaction, the Proposed
Transaction must be approved by the affirmative vote of holders of at least a
majority of the outstanding shares of the Company's Common Stock and Preferred
Stock voting together as a single class. Therefore, it is important that your
shares be represented at the Annual Meeting, whether or not you are able to
attend. Accordingly, please complete, sign and date the accompanying blue form
of PROXY and return it in the enclosed prepaid envelope as soon as possible. If
you attend the Annual Meeting, you may vote in person if you wish, even if you
previously returned your proxy. Your prompt cooperation will be greatly
appreciated.
Sincerely,
/s/ RUSSELL M. KRAPF
--------------------------------
Russell M. Krapf
President & CEO
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CENSTOR CORP.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON (DATE)
TO THE SHAREHOLDERS OF CENSTOR CORP.
Notice is hereby given that the Annual Meeting of Shareholders (the
"Annual Meeting") of Censtor Corp. (the "Company") will be held at the principal
offices of the Company, Suite 270, 2105 Hamilton Avenue, San Jose, California
95125, on ( Date ), 1996 at 11 a.m., local time, to consider and vote upon the
following proposals:
1. To elect five (5) directors to serve for the ensuing year and until
their successors are elected;
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1996;
3. To approve the sale of the Company's research and development
operations, including the assets and contracts related thereto, and the
grant of a non-exclusive license to the Company's intellectual
property, including the Company's rights in patents, technology and
software, pursuant to the terms and conditions of the Agreement for
Purchase and Sale of Assets, dated as of March 29, 1996, by and between
Read-Rite Corporation ("Read-Rite") and the Company and the
transactions contemplated thereby (collectively, the "Proposed
Transaction"); and
4. To transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
The close of business on May 31, 1996 has been fixed as the record date
for the determination of Shareholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment or postponement thereof. Shareholders are not
entitled to dissenters' rights under California General Corporation Law in
connection with the Proposed Transaction. A complete list of Shareholders
entitled to vote at the Annual Meeting will be available for inspection by
Shareholders at the offices of the Company during the Company's ordinary
business hours beginning ten days prior to the Annual Meeting for any purpose
germane to the Annual Meeting.
Accompanying this Notice of Annual Meeting and Proxy Statement are: (i)
the Company's 1995 Annual Report, which consists of the Company's Form 10-K for
the year ended June 30, 1995, as amended by the Company's Form 10-K/A Amendment
No. 2 dated December 13, 1995, (ii) a letter to the Shareholders from the
President, (iii) the Company's Form 10-Q for the quarter ended March 31, 1996,
(iv) pro-forma financial statements (included in Appendix C to the Proxy
Statement) and (v) the form of proxy card to be returned in the enclosed
envelope.
By Order of the Board of Directors
/s/ SABINE AUSTIN
--------------------------------------
Sabine Austin
Assistant Secretary
San Jose, California
( Date ), 1996
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY MAIL THE ENCLOSED BLUE FORM OF PROXY IN THE RETURN ENVELOPE PROVIDED.
ANY PERSON GIVING A PROXY MAY REVOKE IT AT ANY TIME, AND SHAREHOLDERS WHO ARE
PRESENT AT THE MEETING MAY WITHDRAW THEIR PROXIES AND VOTE IN PERSON.
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CENSTOR CORP.
SUITE 270, 2105 HAMILTON AVENUE
SAN JOSE, CALIFORNIA 95125
(408) 298-8400
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
( DATE )
THIS PROXY STATEMENT IS FURNISHED TO THE HOLDERS OF COMMON STOCK AND
PREFERRED STOCK OF CENSTOR CORP. (THE "COMPANY" OR "CENSTOR") IN CONNECTION WITH
THE SOLICITATION BY THE BOARD OF DIRECTORS OF THE COMPANY OF PROXIES IN THE FORM
ENCLOSED TO BE VOTED AT AN ANNUAL MEETING OF SHAREHOLDERS OF THE COMPANY TO BE
HELD AT THE COMPANY'S OFFICES, SUITE 270, 2105 HAMILTON AVENUE, AT 11 A.M. ON
(DATE), 1996 (THE "ANNUAL MEETING"). THIS PROXY STATEMENT AND THE ACCOMPANYING
FORM OF PROXY ARE BEING MAILED TO THE SHAREHOLDERS ON OR ABOUT ( DATE ), 1996
AND THE COMPANY IS BEARING THE COST OF THIS SOLICITATION.
PURPOSE OF THE MEETING
At the Annual Meeting, the Shareholders of the Company (the
"Shareholders") will be asked to consider and act upon the following proposals:
1. To elect five (5) directors to serve for the ensuing year and until
their successors are elected;
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1996;
3. To approve the sale of the Company's research and development
operations, including the assets and contracts related thereto, and the
grant of a non-exclusive license to the Company's intellectual
property, including the Company's rights in patents, technology and
software, pursuant to the terms and conditions of the Agreement for
Purchase and Sale of Assets, dated as of March 29, 1996 (the "Asset
Sale Agreement"), by and between Read-Rite Corporation ("Read-Rite")
and the Company and the transactions contemplated thereby
(collectively, the "Proposed Transaction"); and
4. To transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
VOTING RIGHTS
Shareholders of record of the Company as of the close of business on
May 31, 1996 have the right to receive notice of and to vote at the Annual
Meeting. On May 31, 1996, the Company had issued and outstanding 24,291,151
shares of capital stock entitled to vote, consisting of 9,303,344 shares of
Common Stock, 6,617,299 shares of Series A Preferred Stock and 8,370,508 shares
of Series B Preferred Stock. Each share of Common Stock, Series A Preferred
Stock and Series B Preferred Stock is entitled to one vote. For action to be
taken at the Annual Meeting, the majority of the shares entitled to vote must be
represented at the meeting in person or by proxy.
While the Company's Restated Articles of Incorporation authorize the
holders of the Company's Series B Preferred stock voting as a separate class to
elect one member of the Company's Board of Directors, to date, the holders of
the Series B Preferred Stock have not chosen to do so. Therefore, the holders of
Preferred Stock and Common Stock, voting together as a single class, will elect
all the members of the Board of Directors.
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Every Shareholder voting for the election of directors may cumulate
such Shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
Shareholder's shares are entitled, or distribute the Shareholder's votes on the
same principle among as many candidates as the Shareholder thinks fit, provided
that votes cannot be cast for more than the number of directors to be elected.
However, no Shareholder shall be entitled to cumulate votes unless such
candidate's name has been placed in nomination prior to the voting and the
Shareholder, or any other Shareholder, has given notice at the meeting prior to
the voting of his or her intention to cumulate his or her votes.
Consummation of the Proposed Transaction requires the affirmative vote
of a majority of the shares of Common Stock and Preferred Stock voting together
as a single class. Certain Shareholders of the Company have granted Read-Rite an
irrevocable proxy to vote their shares in favor of approving the Proposed
Transaction. The Shareholders that granted such proxies currently hold a
majority of the outstanding shares of capital stock with voting rights and, if
such shares are voted in accordance with the proxy, the proposal to approve the
Proposed Transaction will be adopted by the Shareholders of the Company.
PROXIES
Proxies for use at the Annual Meeting are being solicited by the Board
of Directors of the Company from its Shareholders.
Shares represented by properly executed proxies received by the Company
will be voted at the Annual Meeting in accordance with the instructions thereon.
Shares represented by executed proxies received by the Company with no
instructions will be voted in favor of all proposals set forth in the Notice of
Meeting. The Company intends to include abstentions as present or represented
for purposes of establishing a quorum for the transaction of business.
Abstentions are counted as votes against a proposal for purpose of determining
whether or not a proposal has been approved.
Any person giving a proxy in the form accompanying this Proxy Statement
has the power to revoke it at any time before its exercise by (i) filing with
the Assistant Secretary of the Company a signed written statement revoking his
or her proxy or (ii) submitting an executed proxy bearing a date later than that
of the proxy being revoked. A proxy may also be revoked by attending the Annual
Meeting and voting in person. Attendance at the Annual Meeting will not by
itself constitute the revocation of a proxy.
No persons have been authorized to give any information or to make any
representations other than those contained in this Proxy Statement in connection
with the solicitation of proxies and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any other person. This Proxy Statement does not constitute the solicitation
of a proxy in any jurisdiction to any person to whom it is not lawful to make
any such solicitation in such jurisdiction. The delivery of this Proxy Statement
does not, under any circumstances, create an implication that there has been no
change in the affairs of the Company since the date hereof or that the
information herein is correct as of any time subsequent to its date.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO READ-RITE
HAS BEEN PROVIDED BY READ-RITE AND THE COMPANY DOES NOT WARRANT THE ACCURACY OR
COMPLETENESS OF INFORMATION RELATING TO READ-RITE.
The approximate date on which this Proxy Statement is being mailed to
the Company's Shareholders is (Date), 1996. This Proxy Statement is accompanied
by (a) the form of proxy card to be signed and returned in the enclosed
envelope, (b) the 1995 Annual Report of the Company, which consists of the
Company's Form 10-K for the year ended June 30, 1995, as amended by the Form
10-K/A Amendment No. 2 dated December 13, 1995, (c) a letter to the Shareholders
from the President, (d) the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1996, (e) pro-forma financial statements (included in
Appendix C to the Proxy Statement) and (f) Notice of Annual Meeting.
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FORWARD LOOKING STATEMENTS
The statements in this Proxy Statement that relate to future plans,
events or performance are forward-looking statements. Actual results could
differ materially due to a variety of important factors, including for example,
Read-Rite's ability to perform under the terms of the Proposed Transaction, the
Company's ability to develop its portfolio of licenses, failure of the Company's
licensees to perform under existing or future licenses, the development of
competing technology and the risks associated with protecting the Company's
intellectual property rights from adverse claims. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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SUMMARY OF PROXY STATEMENT
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in, and attached as
exhibits to, this Proxy Statement.
DATE, TIME AND PLACE OF An Annual Meeting of Shareholders of
ANNUAL MEETING OF Censtor Corp., a California corporation
SHAREHOLDERS (the "Company"), will be held on (Date),
1996 at 11 a.m., local time, at the
Company's principal executive offices,
Suite 270, 2105 Hamilton Avenue, San
Jose, California 95125.
PURPOSE At the Annual Meeting, the Shareholders
OF THE MEETING of the Company will be asked to (i)
elect directors, (ii) ratify and
appoint Ernst & Young LLP as
independent auditors, and (iii) approve
the Proposed Transaction.
PROPOSAL 1:
ELECTION OF DIRECTORS
CURRENT BOARD The board currently consists of the
following seven (7) members, (four of
whom have been nominated for
reelection): James A. Cole, Garrett A.
Garrettson, B. Kipling Hagopian, Edwin
V.W. Zschau, Paul R. Low, Richard C.E.
Morgan and Russell M. Krapf.
NOMINEES Pursuant to a Board resolution, the
number of Directors shall be reduced to
five (5) as of the date of the Annual
Meeting. The five (5) nominees are James
A. Cole, Garrett A. Garrettson, B.
Kipling Hagopian, Edwin V.W. Zschau
and Russell M. Krapf.
PROPOSAL 2:
APPOINTMENT OF INDEPENDENT AUDITORS
CURRENT Ernst & Young LLP were appointed as the
AUDITORS Company's independent auditors for its
fiscal year ending June 30, 1995, and
the Board of Directors has appointed
Ernst & Young LLP as the Company's
independent auditors for its fiscal
year ending June 30, 1996, pending
Shareholder ratification.
PROPOSED The Shareholders are asked to ratify
AUDITORS appointment of Ernst & Young LLP as the
independent auditors for fiscal year
ending June 30, 1996.
PROPOSAL 3:
THE PROPOSED TRANSACTION
IN GENERAL The Asset Sale Agreement (included in
Appendix A to the Proxy Statement), if
approved by the Shareholders, provides
for the transfer by the Company to
Read-Rite of the Company's research and
development operations, including the
hiring of 84 Censtor employees, the sale
of certain of the Company's physical
assets and the Company's rights and
obligations under contracts related
thereto, on the closing date described
in the Asset Sale Agreement (the
"Closing").
Additionally, as a condition to
consummation of the Asset Sale
Agreement, the Company and Read-Rite
will enter into a license agreement (the
"License Agreement"), pursuant to which
the Company will grant a non-exclusive
irrevocable world-wide license to
Read-Rite covering the Company's
intellectual
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property, including the Company's rights
in patents, technology and software.
The Company is not selling any of its
assets relating to the technology,
patents, know-how or any of its
proprietary information. The Company
will retain ownership of the technology
and related patents developed during the
past fourteen (14) years through the
investment of $97.3 million in equity
and debt financing through March 31,
1996. After the consummation of the
Proposed Transaction, the Company will
no longer have technology development
operations or the obligation to fund
such operations. Such funding has
recently required the Company to expend
approximately $1.0 million per month;
this represents two-thirds of the
Company's total cash requirements. The
Company currently owns 16 domestic
patents, 10 foreign patents, has applied
for an additional 10 patents and
intends, through its own in-house patent
attorney, to convert the remainder of
its intellectual property into
licensable patents and to develop
royalty income from its licensees during
the next several years. The Company is
not selling any assets necessary to
continue such licensing operations.
Historically all of the Company's
revenues have been derived from the
grant of licenses. See "Proposal 3: The
Proposed Transaction - Background"
(pages 18-22).
REQUIRED VOTE The Asset Sale Agreement requires that
the Proposed Transaction be approved by
the affirmative vote of at least the
majority of the outstanding shares of
the Company's Common Stock and Preferred
Stock voting together as a class.
Certain Shareholders of the Company have
granted Read-Rite an irrevocable proxy
to vote their shares in favor of
approving the Proposed Transaction;
these Shareholders are: Brentwood
Associates, Aeneas Venture Corporation,
Wolfensohn Partners, J.P. Morgan,
Morgenthaler Ventures, New Enterprise
Associates, Advanced Technology
Associates, Nippon Enterprise
Development Corporation, Spectra
Enterprise Associates and Richard E.
Cottrell. In aggregate, such
Shareholders' common equivalent voting
shares exceed 14 million and represent
approximately 58% of the total
outstanding common equivalent voting
shares of the Company. If Read-Rite
votes in accordance with these proxies,
approval of the Proposed Transaction is
virtually guaranteed.
RECOMMENDATION OF THE The Board of Directors of the Company
BOARD OF DIRECTORS has approved the Proposed Transaction
because it believes it to be fair and in
the best interests of the Company and
Shareholders. The Board of Directors
unanimously recommends that Shareholders
vote "FOR" approval of the Proposed
Transaction. In recommending that
Shareholders approve the Proposed
Transaction, the Board of Directors has
considered various factors including the
cash and non-cash consideration offered
by Read-Rite, the historical and current
financial condition and results of
operations of the Company, the future
prospects of the Company's business and
technology, the opinion of the Company's
financial advisors, the likelihood of
consummating the Proposed Transaction,
the compatibility of the physical assets
being transferred and the non-exclusive
license with the operations of
Read-Rite, and the effect of the
Proposed Transaction on the Company's
employees and customers. See "Proposal
3: The Proposed Transaction --
Recommendation of the Board of
Directors" (pages 27-28) and "Proposal
3: The Proposed Transaction
--Background" (pages 18-23).
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TERMS OF THE PROPOSED Pursuant to the Asset Sale Agreement,
TRANSACTION Read-Rite will purchase most tangible
physical assets of the Company related
to the Company's research and
development operations, and Read-Rite
will assume certain of the Company's
existing contracts and the Company's
liabilities thereunder, including the
Company's lease obligation related to
its facilities at 530 Race Street, San
Jose, California and all the Company's
equipment lease obligations totaling
$934,000 (as of March 31, 1996).
Tangible physical assets being sold
(including leased equipment) have a net
book value of $1.3 million or 99% of
total physical assets (excluding
intangible assets, such as proprietary
technology, which comprise the majority
of the total assets) of the Company as
of March 31, 1996. See Appendix C -
Pro-forma Financial Statements. As of
February 5, 1996, 84 of the 89 employees
of the Company became employees of
Read-Rite for the purposes of operating
the physical assets to be sold to
Read-Rite and developing the technology
to be licensed to Read-Rite (the
"Transferred Employees").
The terms of the Proposed Transaction
require Read-Rite to pay an aggregate
purchase price of $9,025,000, up to
$6,525,000 of which will be paid to the
Company on the Closing, subject to
certain adjustments (the "Initial
Payment"), and up to $2,500,000 of which
will be paid to the Company between
November 15, 1996 and nine months after
the Close ($250,000 on November 15,
1996, $250,000 on December 13, 1996, the
remaining $2.0 million nine months after
the Close) (the "Final Payment") (such
amounts include payment for granting of
the license pursuant to the License
Agreement). The Initial Payment is
subject to reduction in an amount equal
to (a) 50% of the amount outstanding
March 29, 1996 under a promissory note
in the principal amount of $900,000 in
favor of Read-Rite, plus (b) 50% of
certain employee compensation expenses
accrued or paid by Read-Rite through
March 29, 1996, plus (c) 50% of accrued
but unpaid expenses of the Company from
February 2, 1996 through March 29, 1996,
less (d) certain prepaid expenses of the
Company outstanding on March 29, 1996,
less (e) certain expenses of the Company
incurred through the Closing, including
accounting, legal and other expenses
related to the Proposed Transaction
("Seller Expenses"). Seller Expenses are
defined and discussed in greater detail
in the section entitled " Proposal 3:
The Proposed Transaction - Purchase
Price" (page 22). The downward
adjustments to the purchase price
through March 29, 1996 are estimated to
be $857,000.
The Final Payment is subject to
reduction for any claims by Read-Rite
for damages in the event the Company
breaches the Asset Sale Agreement or
License Agreement.
In addition, Read-Rite will lend to the
Company up to $1,550,000 to finance the
Company's operations and certain ongoing
business expenses through the Closing
("Bridge Notes"). Amounts borrowed from
Read-Rite under the Bridge Notes that
are used to pay, or are accrued for,
expenses after March 29, 1996 and before
the Closing related to the assets and
contracts transferred to Read-Rite
(including for example, equipment lease
payments, building rent, utilities and
other related expenses) will be forgiven
as of the Closing. As of May 31, 1996
the balance owing on the Bridge Notes is
$ 1,300,000, excluding interest. It is
anticipated that the Company will
require the entire $1,550,000 of the
Bridge Notes to be drawn down by the
Close.
Of the net proceeds from the Proposed
Transaction, the Company expects to use
approximately $ 6.4 million to pay down
obligations estimated to be due as of
the
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Closing including $2.0 million in escrow
for payment to Denki Kagaku Kogyo Co.,
Ltd. ("Denka") by July 31, 1996, and
$1.0 million plus accrued interest, at
11%, for payment of obligations to
certain Shareholders who have loaned the
Company operating funds, of which
$546,675, plus accrued interest, is due
at the Closing and the remainder due
nine months after the Closing. The
remainder of the proceeds, if any, will
be used for general working capital
purposes with respect to the Company's
remaining business operations. The
Company has no present intention to pay
any dividend to Shareholders or to
otherwise distribute to its Shareholders
any proceeds received from the Proposed
Transaction.
OPINION OF FINANCIAL The Company's financial advisor, Von
ADVISER Gehr International, has rendered a
written opinion that the consideration
to be received by the Company in the
Proposed Transaction is fair from a
financial standpoint. A copy of the
opinion appears as Appendix B and should
be read in its entirety. See "Proposal
3: The Proposed Transaction - Opinion of
Financial Advisor" (pages 23-26).
CONDITIONS OF THE PROPOSED Consummation of the Proposed Transaction
TRANSACTION is subject to approval by the
Shareholders and to a number of other
conditions, including: (a) all
representations and warranties made by
each party in the Asset Sale Agreement
being true and correct, and all
agreements, covenants and conditions
required to be performed under the Asset
Sale Agreement having been performed, as
of the Closing, (b) each party's receipt
at the Closing of certain closing
certificates and legal opinions, (c) the
absence of any pending or threatened
legal action to enjoin the Proposed
Transaction, and (d) consent from
certain existing licensees of the
Company to the essential terms of the
License Agreement. All necessary
consents from licensees have been
received by the Company.
Read-Rite's obligations under the Asset
Sale Agreement are contingent upon
Read-Rite and the Company consummating
the License Agreement.
EFFECTIVE TIME OF THE The Proposed Transaction is anticipated
TRANSACTION to be consummated within ten business
days following Shareholder approval and
satisfaction or waiver of each condition
precedent described in the Asset Sale
Agreement.
TERMINATION OF THE ASSET At any time prior to the Closing, the
SALE AGREEMENT Asset Sale Agreement may be terminated
under certain circumstances, including
the following: (a) if a court prohibits
the Proposed Transaction, (b) by mutual
written consent of Read-Rite and the
Company, (c) by the Company if there has
been a material breach on the part of
Read-Rite in its representations,
warranties or covenants, subject to a
right to cure, and (d) by Read-Rite if
there has been a material breach on the
part of the Company in its
representations, warranties or
covenants, subject to a right to cure.
If terminated in accordance with (a) or
(b), Read-Rite and the Company shall
enter into a limited license agreement
(the "Limited License Agreement")
pursuant to which the Company shall
grant a perpetual, non-exclusive license
to Read-Rite covering the Company's
rights to certain technology and
software, for a one-time fee of $2.0
million. If terminated in accordance
with (c), Read-Rite will forgive certain
obligations of the Company and the
Company and Read-Rite (if elected by
Read-Rite) shall enter into the Limited
License Agreement for a one time fee of
$2.0 million. If terminated in
accordance with (d), the Company and
Read-Rite shall enter into the Limited
License Agreement for no fee and the
Company must repay certain obligations
to Read-Rite.
CERTAIN FEDERAL INCOME TAX For tax purposes, the Company will
CONSEQUENCES recognize income or gain as a result of
the Proposed Transaction.
Notwithstanding, the Company has
determined that it will
7
12
not have to pay any income tax related
to the Proposed Transaction because any
income or gain will be offset by current
year tax net operating loss or prior
year net operating loss carry forwards.
The Proposed Transaction will not have
any federal income tax consequences to
the Shareholders.
PLANS FOR BUSINESS ACTIVITY After shareholder approval, the Company
intends to perfect the remainder of its
proprietary technology through patent
protection and the Company intends to
execute new royalty bearing licenses.
The Company plans to monitor its current
and future licensees and collect
royalties when due. See "Proposal 3: The
Proposed Transaction - Background"
(pages 18-23).
NO DISSENTERS' RIGHTS Under California General Corporation
Law, the holders of Common Stock and
Preferred Stock are not entitled to
dissenters' rights in connection with
the Proposed Transaction. Although
dissenters' rights are not available,
the Company's officers and directors are
bound by their fiduciary obligations to
the Company and its Shareholders and are
subject to legal action for any breach
of such obligations.
SELECTED FINANCIAL Certain audited and unaudited
DATA consolidated financial information
regarding the Company is contained in
the Company's 1995 Annual Report (which
consists of the Annual Report on Form
10-K for the year ended June 30, 1995,
as amended, by the Form 10K/A Amendment
No. 2 dated December 13, 1995, and the
Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1996 and
pro-forma financial statements, all of
which accompany or are included in this
Proxy Statement.
8
13
PROPOSAL 1:
ELECTION OF DIRECTORS
A board of five (5) directors is to be elected at the Annual Meeting.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them to elect as many of the nominees named below as can be elected by votes
represented by such proxies. Five (5) of such nominees (Messrs. Cole,
Garrettson, Hagopian, Zschau and Krapf), are presently directors of the Company.
In the event that any of the nominees shall become unavailable the proxy holders
will vote in their discretion for a substitute nominee. It is not expected that
any nominee will be unavailable. The term of office of each person elected as a
director will continue until the next Annual Meeting of Shareholders or until
his successor has been duly elected and qualified.
The names of the nominees, and certain information about them, are set
forth below:
Name Age Position with Censtor Director Since
- ------------------------- ------ ---------------------------------------- ------------------
James A. Cole (1) 53 Director October 1992
Garrett A. Garrettson (1) 52 Director February 1993
B. Kipling Hagopian 54 Director November 1981
Edwin V.W. Zschau (1) 56 Director December 1995
Russell M. Krapf 48 Director, President and Chief Executive April 1996
Officer of the Company
(1) Member of the Compensation Committee.
JAMES A. COLE joined the Company's Board of Directors in October 1992
and was appointed a member of the Compensation Committee on April 2, 1996. Since
1986, Mr. Cole has been the Managing General Partner of Spectra Enterprise
Associates, and a Partner of New Enterprise Associates, both private venture
capital partnerships. Mr. Cole is also a director of Gigatronics, Inc.,
Spectrian Corp. and Vitesse Semiconductor Corp., all public companies. From 1972
to 1984, he served as co-founder, Executive Vice-President and Director of
Amplica, Inc., a leading supplier of microwave integrated circuit components and
subsystems for the defense and commercial communications industries. Mr. Cole
served in marketing and sales management positions for several companies. Mr.
Cole is a graduate of the University of California Graduate School of Management
at Los Angeles.
GARRETT A. GARRETTSON is President and CEO of Spectrian Corporation.
Dr. Garrettson is the past President and CEO of Censtor Corp.; he resigned from
Censtor in April 1996. He joined the Company in February 1993 as a member of the
Board of Directors, President and Chief Operating Officer, and became Chief
Executive Officer in April 1993. He was also appointed a member of the
Compensation Committee on April 2, 1996. Dr. Garrettson served as Vice President
of Product Strategy and Engineering at Seagate Technology, Inc. beginning in
August 1990, and served as Vice President of Engineering and Product Line
Management at Imprimis Technology for four years beginning in 1986. Prior to
that, Dr. Garrettson worked at Hewlett-Packard Laboratories for thirteen years
where he was Laboratory Director. Dr. Garrettson attended Stanford University
where he earned B.S. and M.S. degrees in Engineering Physics, and a Ph.D. in
Mechanical Engineering (Nuclear), after which he served four years in the U.S.
Navy as Professor of Physics in the Naval Post Graduate School.
B. KIPLING HAGOPIAN joined the Company's Board of Directors in November
1981 and became Chairman in 1993. Mr. Hagopian is also a member of the Board of
Directors of Performance Semiconductor Corporation. In 1972, Mr. Hagopian
founded Brentwood Associates, one of the largest high technology venture capital
investment companies in
9
14
the United States, and has been a General Partner since that time. Mr. Hagopian
received his B.A. and M.B.A. from the University of California at Los Angeles.
EDWIN V.W. ZSCHAU is a Senior Lecturer of Business Administration at
Harvard University. Dr. Zschau was appointed to the Company's Board of Directors
in December 1995; he was subsequently appointed to the Company's Compensation
Committee in April 1996. Prior to Harvard University, he was General Manager of
the IBM Storage Systems Division from April 1993 until July 1995. Prior to that,
he served as Chairman and CEO of Censtor Corporation from July 1988 to April
1993. Before joining Censtor, Dr. Zschau was a General Partner of Brentwood
Associates, a venture capital firm, and prior to that he served two terms in the
U.S. House of Representatives from January 1983 until January 1987. Dr. Zschau
has an A.B. degree from Princeton University and M.B.A., M.S. and Ph.D. degrees
from Stanford University. He serves as a Director of GenRad, Inc. and Identix
Incorporated.
RUSSELL M. KRAPF is President and Chief Executive Officer of the
Company and was appointed to the Board of Directors on April 19, 1996 to replace
Dr. Hamilton who resigned effective April 1, 1996. Mr. Krapf joined Censtor in
February 1988 as Executive Vice President and became President in March 1991. He
subsequently left the Company February 1992 to become the President of one of
the Company's component partners and rejoined the Company in August 1993 as
Senior Vice President. Prior to joining Censtor, Mr. Krapf was Chairman,
President and Chief Executive Officer of Lapine Technology, (which developed and
marketed 3.5 inch hard disk drives). During 1984 - 1985, Mr. Krapf was President
and Chairman of Grenex, Inc. a manufacturer of thin film media which was
acquired by Seagate. In 1983, Mr. Krapf was President of Kearney Magnetics, a
manufacturer of 5.25 inch disk media. Between 1974 and 1983, he held management
positions in the rigid disk business of Memorex and Nashua Corporation. For the
past five years, Mr. Krapf has been a director (also serving three years as
President) of IDEMA, a disk drive trade association. Mr. Krapf has a B.S. in
Engineering Science from Florida State University and an M.B.A. from Boston
University.
BOARD MEETINGS AND COMMITTEES
During the period July 1, 1994 through June 30, 1995, the Company held
twelve (12) Board of Directors meetings, including five (5) telephonic Board of
Directors Meetings. During the period July 1, 1995 through December 31, 1995,
the Company held twenty-two (22) Board of Directors meetings, including twenty
(20) telephonic Board of Directors meetings. No incumbent director participated
in fewer than 75% of the total number of meetings of the Board and all
committees of the Board on which he served that were held during the period he
served on the Board or such committees.
The Compensation Committee did not meet in fiscal year 1995. The
function of the Compensation Committee is to review, and to recommend to the
Board, management compensation and to administer the Company's stock option
plans. During fiscal year 1995, the Board as a whole reviewed and approved
management compensation issues and administered the Company's stock option
plans.
The Board does not have a nominating or audit committee.
DIRECTOR COMPENSATION
Employee directors receive no additional compensation for service on
the Board of Directors. Dr. Zschau, a non-employee director, who has been a
consultant to the Company and who will receive a total of $75,000 of
compensation for work performed between December 1, 1995 and March 31, 1996,
will receive cash compensation for attending meetings (commencing in April 1996)
of the Board of Directors, consisting of $1,000 for each meeting of the Board
which he attends in person and $500 for each telephonic board meeting in which
he participates. Messrs. Cole and Hagopian are reimbursed for reasonable
out-of-pocket expenses incurred in connection with the attendance at Board
meetings. Non-employee directors are entitled to participate in the Company's
1990 Stock Plan. During the fiscal year ended June 30, 1995, 50,000 options were
granted to non-employee directors.
10
15
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company for
the year ended June 30, 1995 to the Chief Executive Officer and each of the
other most highly compensated executive officers of the Company whose total
compensation exceeded $100,000:
Name and Principal Year Annual Compensation Long-Term All Other
---- ------ ------------ Compensation Compensation(3)
Position Salary Bonus ------------ ---------------
- -------- ------ ----- Securities Underlying
Option(#)(1)(2)
---------------
Garrett A. Garrettson 1995 $250,480 $ 775 300,000 $ 912
Chief Executive Officer 1994 250,000 --- --- 1,056
1993 83,654 --- 480,224 352
Robert D. Hempstead 1995 161,290 40,000 200,000 746
Vice President, Head 1994 110,381 25,000 75,330 427
Research and 1993 --- --- --- ---
Development
Russell M. Krapf 1995 166,730 26,650 100,000 775
Sr. Vice President 1994 174,952 14,425 94,161 707
1993 --- --- --- ---
David M. Kowalski(4) 1995 153,847 28,000 100,000 730
Chief Financial 1994 163,788 26,250 160,075 667
Officer, 1993 --- --- --- ---
Vice President,
Administration,
Secretary
- -----------------------------
(1) The stock options granted to the named officers vest as to 1/48 of the
shares per month at the end of each month after the date of grant;
provided, however, that in certain cases options are not first exercisable
until six months after the date of grant. The options are exercisable at a
price of $0.40 per share and expire ten years from the date of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
(3) Reflects premiums paid by the Company on behalf of the named officers for
term life insurance with benefits payable to beneficiaries designated by
the officers.
(4) Mr. Kowalski resigned his position with the Company effective August 11,
1995.
11
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options to each of the Company's executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 1995. Shown are the
hypothetical gains or "option spreads" that would exist for the respective
options. These gains are based on the assumed rates of annual compound stock
price appreciation of 5% and 10% from the date the option was granted over the
full option term.
===================================================================================================================
Individual Grants Potential Realizable Value
----------------------------------------------- at Assumed Annual Rates
of Stock Price
Appreciation for
Option Term
------------------------
- -------------------------------------------------------------------------------------------------------------------
Name Number of % of Total Exercise or Expiration 5%($) 10%($)
- -------------- Securities Options Base Price Date -------- --------
Underlying Granted to $/Share ----------
Options Employees in -----------
Granted (#) Fiscal Year
----------- ------------
Garrett A. 300,000 20.33% $0.40 10/05/04 $75,467 $191,249
Garrettson
- -------------------------------------------------------------------------------------------------------------------
David M. Kowalski 100,000 6.78% $0.40 10/05/04 $25,156 $63,750
- -------------------------------------------------------------------------------------------------------------------
Russell M. Krapf 100,000 6.78% $0.40 10/05/04 $25,156 $63,750
- -------------------------------------------------------------------------------------------------------------------
Robert D. 200,000 13.56% $0.40 10/05/04 $50,312 $127,499
Hempstead
===================================================================================================================
12
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth for each executive officer named in the
Summary Compensation Table above information regarding the fiscal year-end value
of unexercised options for each such person. No named executive officer
exercised options in the last fiscal year.
================================================================================
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 1995 Year-End at 1995 Year-End(1)
------------------------ -------------------
- --------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
- --------------------------------------------------------------------------------
Garrett A. 329,355 450,869 0 0
Garrettson
- --------------------------------------------------------------------------------
David M. Kowalski 91,335 168,740 0 0
- --------------------------------------------------------------------------------
Russell M. Krapf 57,861 136,300 0 0
- --------------------------------------------------------------------------------
Robert D. Hempstead 58,443 216,887 0 0
- --------------------------------------------------------------------------------
- -----------------------------
(1) The option exercise price of $0.40 per share was equal to the fair market
value of the underlying Common Stock as of June 30, 1995.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into the following transactions with its
officers and directors since July 1, 1994:
In September 1990, Harold J. Hamilton, a retired executive officer and
a past director of the Company, exercised stock options as to 244,821 shares of
the Company's Common Stock and, in lieu of payment to the Company for such
exercise, Mr. Hamilton delivered to the Company a promissory note in the
principal amount of $71,500. The note, the total principal amount of which is
still outstanding, was subsequently amended to change the interest rate,
currently bears interest at the rate of 5.38% per annum and is due September 21,
2000.
In September 1990, Edwin V.W. Zschau, a current director of the
Company, exercised stock options as to 283,092 shares of the Company's Common
Stock and in lieu of payment to the Company for such exercise, Dr. Zschau
delivered to the Company a promissory note in the principal amount of $82,500.
The note, the total principal amount of which is still outstanding, was
subsequently amended to change the interest rate, currently bears interest at
the rate of 5.38% per annum and is due April 23, 1997.
The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by California law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal Shareholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
13
18
In December 1995, Edwin V.W. Zschau, a current director of the Company,
entered into a one year consulting agreement with the Company, whereby the
Company would pay Dr. Zschau $7,500 per month for up to three days service per
month to help develop and implement the Company's financing strategy as well as
for participation as a member of the Company's Board of Directors. Dr. Zschau
subsequently worked 30 days on behalf of the Company during the period December
1995 through March 1996, culminating with the Company entering into a Letter of
Intent with Read-Rite. The Company's Board agreed to modify this agreement to
pay Dr. Zschau $75,000 for the 30 days of work through March 31, 1996, and to
terminate any future payments for consulting on financial strategy issues. Dr.
Zschau will be paid for attendance at Board of Director's meetings (See
"Director Compensation".)
On January 31, 1996 and subsequently amended on April 2, 1996, the
Company's Board of Directors approved a six month performance bonus
(approximately $137,500) to be paid semi-monthly commencing April 23, 1996, for
Garrett A. Garrettson. Dr. Garrettson has resigned as President and Chief
Executive Officer effective April 22, 1996. See "Proposal 1: Election of
Directors" (pages 9-10).
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding shares of Common Stock and
Preferred Stock (on an as if converted basis) as of March 31, 1996 by (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers, and (iv) all
directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
14
19
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
------------- ----- ----- ----- ----- ----- -----
Brentwood Associates(3)........... 1,298,244 8.66% 3,438,593 34.19% 4,736,837 18.91%
11150 Santa Monica Boulevard
Suite 1200
Los Angeles, CA 90025
Aeneas Venture Corporation(4)..... 2,938,225 19.60% 0 0 2,938,225 11.73%
600 Atlantic Avenue
26th Floor
Boston, MA 02210-2203
Wolfensohn Partners L.P.(5)....... 413,172 2.76% 1,066,211 10.60% 1,479,383 5.91%
599 Lexington Avenue
New York, NY 10022
J.P. Morgan Investment (6)........ 363,796 2.43% 1,060,244 10.54% 1,424,040 5.69%
60 Wall Street
New York, NY 10260-0060
New Enterprise Associates(7)...... 1,424,590 9.50% 0 0 1,424,590 5.69%
1119 St. Paul Street
Baltimore, MD 21202
Morgenthaler Venture Partners(8).. 314,669 2.10% 798,830 7.94% 1,113,499 4.45%
700 National City Bank Building
Cleveland, OH 44114
Fujitsu Limited................... 0 0 784,682 7.80% 784,682 3.13%
1015 Kamikodanaka
Nakahara-ku, Kawasaki-shi
Kanagawa-ken 211
Japan
Garrett A. Garrettson(9).......... 0 0 503,943 5.01% 503,943 2.01%
B. Kipling Hagopian(10)........... 1,298,244 8.66% 3,438,593 34.19% 4,736,837 18.91%
Harold J. Hamilton(11)............ 0 0 307,583 3.06% 307,583 1.23%
Russell M. Krapf(12).............. 0 0 226,195 2.25% 226,195 *
Paul R. Low(13)................... 0 0 18,144 * 18,144 *
Richard C.E. Morgan(14)........... 413,172 2.76% 1,075,627 10.70% 1,488,799 5.94%
James A. Cole(15)................. 1,424,590 9.50% 0 0 1,424,590 5.69%
David M. Kowalski(16)............. 0 0 0 0 0 0
Robert D. Hempstead(17)........... 0 0 98,596 * 98,596 *
Edwin V.W. Zschau(18)............. 0 0 283,092 2.81% 283,092 1.13%
All directors and executive 3,136,006 20.92% 5,951,773 59.18% 9,087,779 36.29%
officers as a group(10
persons)(19)......................
15
20
- -------------------------------
* Less than one percent.
(1) Includes Series A Preferred and Series B Preferred. Preferred Stock is
reflected on an as-converted to Common Stock basis. As of March 31, 1996,
each share of Series A and Series B Preferred converts into one share of
Common Stock.
(2) Reflects Preferred Stock (on an as-converted to Common Stock basis) and
Common Stock combined.
(3) Includes: 1,257,196; 2,366,978; 875,764; and 236,899 shares held
respectively by Brentwood Associates II, Brentwood Associates III,
Brentwood Associates IV and Evergreen II, L.P., of which 229,289; 429,253;
60,002, and 43,343 shares, respectively, are shares of the Company's
Series A Preferred, and 108,494; 222,972; 82,519; and 22,372 shares,
respectively, are shares of the Company's Series B Preferred. Mr.
Hagopian, the Chairman and a Director of the Company is a General Partner
of Brentwood Associates. Mr. Hagopian disclaims beneficial ownership of
the shares owned by Brentwood Associates.
(4) Includes 2,678,141 shares of the Company's Series A Preferred and 260,084
shares of the Company's Series B Preferred.
(5) Includes 273,116 shares of the Company's Series A Preferred and 140,056
shares of the Company's Series B Preferred. Richard C.E. Morgan, a
Director of the Company, is a General Partner of Wolfensohn Partners L.P.
Mr. Morgan disclaims beneficial ownership of the shares held by Wolfensohn
Partners L.P.
(6) Includes 223,796 shares of the Company's Series A Preferred and 140,000
shares of the Company's Series B Preferred.
(7) Includes 1,274,853 and 149,737 shares held respectively by New Enterprise
Associates V ("NEA") and Spectra Enterprise Associates ("Spectra"), of
which 1,071,256 and 131,788 shares, respectively, are shares of the
Company's Series A Preferred and 203,597 and 17,949 shares, respectively,
are shares of the Company's Series B Preferred. NEA and Spectra are
independent partnerships; however, the General Partners of Spectra are
also General Partners of NEA. James A. Cole, a Director of the Company, is
a Partner of NEA and the Managing General Partner of Spectra. Mr. Cole
disclaims beneficial ownership of the shares owned by NEA and Spectra.
(8) Includes 332,352 and 784,335 shares held respectively by Morgenthaler
Venture Partners and Morgenthaler Venture Partners II.
(9) Includes 503,943 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(10) Includes shares beneficially owned or held of record by entities
associated with Brentwood Associates, as described in footnote 3 above.
Mr. Hagopian is a General Partner of Brentwood Associates. Mr. Hagopian
disclaims beneficial ownership of such shares.
(11) Includes (i) 282,144 shares held in trust for the benefit of Dr. Hamilton,
which were purchased with a Promissory note to the Company in the amount
of $71,500 secured by the shares, (ii) 5,648 shares held by Dr. Hamilton's
two children, as to which shares he disclaims beneficial ownership, and
(iii) 19,791 shares subject to stock options which are exercisable within
60 days of March 31, 1996.
(12) Includes 114,457 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(13) Includes 18,144 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
16
21
(14) Includes shares beneficially owned or held of record by Wolfensohn
Partners L.P., as described in footnote 5 above. Mr. Morgan is a General
Partner of Wolfensohn Partners L.P. Mr. Morgan disclaims beneficial
ownership of such shares.
(15) Includes shares beneficially owned or held of record by NEA and Spectra as
described in footnote 7 above. Mr. Cole is a Partner of NEA and the
Managing General Partner of Spectra. Mr. Cole disclaims beneficial
ownership of these shares.
(16) Mr. Kowalski's vesting expired in August 1995 and his exercise period
expired in February 1996.
(17) Includes 98,596 shares subject to stock options which are exercisable
within 60 days of March 31, 1996.
(18) Includes 283,092 shares held in the name of Zschau Family Charitable
Trust. These shares were purchased with a promissory note to the Company
in the amount of $82,500 secured by the shares.
(19) Includes 754,931 shares subject to stock options exercisable within 60
days of March 31, 1996. See Notes 9, 11, 12, 13, 16 and 17. Also includes
7,650,226 shares which may be deemed to be beneficially owned by certain
directors and officers. See Notes 10, 14, 15 and 18.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a class of a registered class of the
Company's equity securities, to file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission and the
National Association of Securities Dealers. Such officers, directors and ten
percent Shareholders are also required by Securities and Exchange Commission
rules to furnish the Company with copies of all Section 16(a) forms that they
file.
Based solely on its review of copies of such reports received or
written representations from certain reporting persons, the Company believes
that, during the fiscal year ended June 30, 1995, there has been no failure by
any of its officers, directors or ten percent Shareholders to file on a timely
basis any reports required by Section 16(a).
PROPOSAL 2:
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP, the Company's
independent auditors, to audit the Company's consolidated financial statements
for its fiscal year ending June 30, 1996, and further recommends that
Shareholders vote for ratification of such appointment. In the event of a
negative vote on such ratification, the Board of Directors will reconsider its
selection. The Board of Directors recommends that Shareholders vote "FOR"
approval and ratification of such selection.
A representative of Ernst & Young LLP is expected to be available at
the Annual Meeting to make a statement if such representative desires to do so
and to respond to appropriate questions.
17
22
PROPOSAL 3:
THE PROPOSED TRANSACTION
GENERAL
Pursuant to the terms of the Asset Sale Agreement, the Company will
sell to Read-Rite most of its physical assets and assign its rights and
obligations to Read-Rite under its existing contracts related to its research
and development operations, including its lease agreement for its facilities at
530 Race Street, San Jose, California and its other lease agreements.
The Company is not selling any of its assets relating to the
technology, patents, know-how or any of its proprietary information.
Consummation of the Asset Sale Agreement is conditioned upon the Company and
Read-Rite executing the License Agreement, which provides that the Company will
grant to Read-Rite a non-exclusive license covering the Company's intellectual
property, including the Company's rights in patents, technology and software.
The Company will retain ownership of the technology and related patents
developed during the past fourteen (14) years at a cost of $97.3 million in
equity and debt financing through March 31, 1996. The Company currently owns 16
domestic patents, 10 foreign patents, has an additional 10 U.S. patent
applications pending and intends, through its in-house patent attorney, to
convert the remainder of its intellectual property into licensable patents and
to develop royalty income from its licensees during the next several years.
The Company is not selling any assets necessary to continue such
licensing operations. The detailed terms of, and conditions to, the Proposed
Transaction are contained in the Asset Sale Agreement. The statements made in
this Proxy Statement with respect to the terms of the Proposed Transaction and
related transactions are qualified in their entirety by reference to the more
complete information set forth in the Asset Sale Agreement, a copy of which is
attached to this Proxy Statement as Appendix A and which is incorporated herein
by reference.
BACKGROUND
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from flying
perpendicular to contact perpendicular and most recently to longitudinal contact
recording technology. To date, the Company's principal source of revenue has
been license fees from disk drive manufacturers. While the Company's license
agreements typically provide for on-going royalty payments by the licensees
based upon sales of products incorporating the Company's technology, to date
none of the Company's licensees has commercialized products using the Company's
technology and the Company has received no recurring royalty revenue. The
Company has not been profitable in any fiscal period since inception and as of
March 31, 1996 had an accumulated deficit of $106.1 million. There can be no
assurance that the Company will achieve or sustain significant revenues or
profitability in the future.
Since 1989, Censtor's primary strategy has been to develop critical
enabling technologies for the disk drive industry, protect those technologies
with a portfolio of patents as well as carefully protecting its proprietary
know-how, and to license its technology to disk drive manufacturers. Last year
Censtor attempted to provide, via its subsidiary, Contact Recording Technology,
Inc., ("CRT") an assured low cost source of heads to those licensees so that
products embodying the technology could be shipped in volume. The Company's goal
was to establish its technology as a main stream choice for high capacity disk
drives in general and small form factor disk drives in particular. As recently
as December 1995, Censtor's operating plans for 1996 calendar year called for
continued development of contact longitudinal recording technology and
improvements to the head/disk interface to reduce wear and improve storage
performance as well as delivering sample components in evaluation quantities to
existing and prospective licensees.
During 1994 and 1995, Censtor developed a contact longitudinal head and
head-disk interface technology that enabled the Company to sell three additional
licenses to hard disk drive manufacturers, which generated interest among
several licensees in using the technology. Censtor worked diligently during 1995
to obtain financing from venture capital investors to secure the funds necessary
to complete the product engineering of Censtor's contact recording heads and to
put those components into volume production through CRT. The Company projected
1996 cash requirements totaling $35 -
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40 million to complete the development and to implement initial manufacturing
operations. This amount consisted of $10 - 15 million in new equity and $25
million in new equipment lease (debt) financing. The Company attempted
throughout calendar year 1995 to secure financing for such new manufacturing
operations. In so doing, Company's management and Board of Directors expended a
substantial amount of time and effort attempting to secure this financing.
During this time, Silicon Valley Bank loaned the Company $1.0 million based on
the expression of confidence by existing investors that they would invest $1.0
million. The Company was not successful in its efforts to raise the necessary
equity financing from existing investors. Most existing venture capital
investors could not invest new funds since these older partnerships had no
remaining uninvested funds.
The Company received a non-binding offer for a portion of the necessary
equity financing in December 1995 from a venture capital firm that had not
previously invested in the Company. The firm subsequently elected not to make
the investment. The main reasons cited by this and other potential new investors
were their assessment of high financial risk, high future requirements for
additional equity financing and the possibility that the Company would not be
able to implement volume manufacturing quickly enough to satisfy potential
customer requirements. The Company was therefore unable to attract enough
venture capital to develop manufacturing operations.
On January 2, 1996 existing investors loaned the Company $1.0 million
(referenced in the footnotes to the Financial Statements contained in the
Company's 10K/A Amendment No. 2), that they had previously committed. This
enabled the Company to continue operations until an alternative could be
obtained. The Company subsequently drew down on a weekly basis the entire $1.0
million.
The Board of Directors held weekly telephonic Board of Directors
Meetings (starting in the third calendar quarter of 1995) which included
interested large Shareholders or their advisors, in which various financing
alternatives were discussed. Large investors (other than members of the Board of
Directors) who attended many of these meetings included Gary Morgenthaler
(Morgenthaler Partners) Jos Henkens (Advanced Technology Ventures), Renee Baker
(Nippon Enterprise Development Corporation), Richard Kramlich (New Enterprise
Associates), Bob Pavey (Morgenthaler Ventures), Bill Lamkin (Paine Webber, Inc.)
and David Dicioccio, Managing Director (Paine Webber, Inc.). Alternatives
including investment from U.S. venture capital companies, the sale of new
licenses, seeking investment from U.S. investment firms as well as in Japan,
Singapore and Taiwan and offering the sale of equity in the Company or its
manufacturing subsidiary to several magnetic head component manufacturing and
disk drive manufacturing companies. The Company's management team, as well as
the Board of Directors and large investors, pursued these alternatives through
telephone calls and domestic and international meetings over a period of seven
months. The Company approached its existing manufacturing partners, Daido Steel,
Marubeni, and Kabool to request them to increase their financial support through
additional investment. After several direct meetings with executives from these
three partners by mid January 1996 these partners declined to provide additional
direct investment to Censtor or its subsidiary (CRT). The Company was not able
to secure a firm commitment from any of these alternatives.
In addition to the magnetic head and disk drive manufacturing companies
mentioned elsewhere, the Company held initial discussions with Pacven Walden
Management Co.; Allen Patricof & Co.; Helix Investments; U.S. Venture Partners;
Mohr Davidow Ventures; Integral Capital Partners; Burr, Egan, Deleage & Co.;
Singapore Technologies; Vertex Management (Singapore); Seagate; Silmag (France);
Economic Development Board of Singapore; Paine Webber; JAFCO (Japan); Arthur
Rock and Co.; G.E. Capital and others. Ultimately, these firms were not
interested in making an investment in the Company or its manufacturing
subsidiary.
The delay and ultimate inability to attract sufficient equity from new
sources caused the Company to delay making the investments needed for both pilot
production and volume production of Censtor heads. At the same time, prospective
customers had shifted their implementation plans for Censtor's components from
niche market products to mainstream products, leading them to focus on
established high volume head manufacturers for their component supply rather
than the Company.
In order to put Censtor's technology into high volume manufacturing in
1996, the Company also investigated modifying its planar head transducer design
and fabrication processes to produce a high density head using a pseudo-contact
slider (a flying head having a tail containing the recording element which drags
or intermittently contacts the media). Because of the Company's inability to
obtain the necessary financing to support this modification, the Company
abandoned this modification effort, (since the necessary equipment and technical
employees had been transferred to Read-
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Rite as part of the Proposed Transaction, the Company does not currently plan to
develop manufacturing or production operations).
These and other considerations led the Censtor Board of Directors in
early January 1996 to approve a major change in Censtor's business strategy and
to restructure its operations consistent with that new strategy. The Company
began in early January to concentrate its efforts to seek investment from its
licensees and potential customers. After meetings with top management at Maxtor
and Western Digital, Company management decided it should seek a business
relationship with established magnetic recording head suppliers. Western Digital
suggested to Read-Rite, a large independent manufacturer of magnetic recording
heads, that it should negotiate a business relationship with Censtor. The
Company's management and Board of Directors also contacted Silmag, AMC and FDK
(Japan) as alternative partners to Read-Rite. Solomon Brothers investment
bankers assisted in a business proposal to AMC whereby AMC would invest in or
buy Censtor or its manufacturing subsidiary. By the end of January 1996, no
positive interest was indicated by magnetic head manufacturing companies other
than Read-Rite and the Company began negotiations with Read-Rite in January
1996.
The meetings between Read-Rite and Censtor commenced on Monday, January
8, 1996 during which Dr. Garrettson, then President & CEO of the Company and
Cyril Yansouni, Chairman & Chief Executive Officer of Read-Rite met to discuss a
proposal that Dr. Garrettson had presented by telephone several days earlier.
After this meeting, Mr. Yansouni considered whether Read-Rite would be
interested in pursuing a business relationship with the Company. The Company and
Read-Rite held a subsequent meeting by telephone on Friday, January 12, 1996
attended by Dr. Garrettson, Russell Krapf (then Senior V.P. of the Company), Ed
Zschau, a member of the Company's Board of Directors along with Cyril Yansouni
and Rex Jackson, V.P. & General Counsel, both from Read-Rite. During this
telephonic meeting, Read-Rite expressed interest in negotiating a business
relationship whereby Read-Rite, although not willing to make a direct investment
in Censtor or its manufacturing subsidiary, was interested in acquiring most of
the physical assets and key employees of the Company. After further discussion
regarding Censtor's obligations and Read-Rite's valuation of the Company's
intellectual property, Read-Rite expressed an interest in licensing the
Company's technology, hiring the Company's Research and Development employees
and purchasing the specific equipment necessary to develop and manufacture
samples of magnetic heads incorporating the Company's technology. From January
15-28, 1996, Read-Rite and the Company held almost daily meetings, and the
Company was in daily contact with members of the Company's Board of Directors to
further evaluate a potential transaction and to negotiate terms of a proposed
transaction.
On January 26, 1996, the Company held a telephonic Board of Directors
Meeting; the entire Board of Directors was present as well as representatives
from large investors including Paine Webber, New Enterprise Associates and
Nippon Enterprise Development, and in addition the Company's senior management,
Russell Krapf and Wil Cochran, consultant. The Company's outside counsel,
Michael G. Taylor of Wilson Sonsini Goodrich & Rosati also attended the meeting
by telephone. First the Board was notified by Dr. Garrettson that Read-Rite had
decided to proceed with negotiations with the Company. The board reviewed the
status of the Read-Rite negotiations as well as discussed the lack of any other
offers from any source and the Company's immediate need for a cash infusion to
sustain operations. The Board of Directors discussed that they had authorized by
resolution at the January 19, 1996 Board of Directors meeting, duly voted and
approved, for the Company's management and Ed Zschau, member of the Board, to
negotiate the Proposed Transaction. Dr. Garrettson gave further details of the
Company's position including that the Company was insisting that Read-Rite
assume all debt obligations on all physical assets of the company, thereby
significantly reducing the Company's cash requirements going forward.
The negotiations between the Company and Read-Rite led to a Letter of
Intent being signed on February 2, 1996. After further negotiations regarding
representations and warranties, assumption of the Company's leaselines by
Read-Rite, Read-Rite loans to the Company to fund its operations until the
Close, personnel matters relating to the transferred employees to Read-Rite,
negotiations regarding the non-exclusive license for use of the Company's
intellectual property and other matters, the Company entered into the Asset Sale
Agreement on March 29, 1996 with Read-Rite.
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The Proposed Transaction was reviewed by the Advisor (an independent
investment banking firm) to confirm its fairness to the Company and its
Shareholders.
Certain key elements of the proposed transaction are as follows:
o Read-Rite hired Censtor's product development team as of
February 5, 1996.
o Read-Rite will assume, as of the Closing, Censtor's lease
obligations for the building and equipment (approximately
$934,000 as of March 31, 1996) and will purchase the
used equipment (with a net book value of approximately
$125,601 as of March 31, 1996) that Censtor owns.
o Censtor will continue to pay the expenses in support of patent
prosecution and licensing activities.
o Read-Rite will have a non-exclusive paid-up license to
Censtor's technology invented prior to the date of the Closing
(know-how and patents, including patents from applications
that are pending or that may be filed in the future) to
manufacture or sell products to any customers world-wide.
o Censtor will retain ownership of all of its patents and
know-how existing as of the Closing and will continue to be
able to sell non-exclusive licenses to this intellectual
property to any company world-wide. Censtor will not have a
license to improvements to the technology that Read-Rite
invents.
o Censtor will continue to have reasonable access to former
Censtor employees for the purpose of prosecuting patents on
Censtor's inventions.
o For the intellectual property license and the used equipment,
Read-Rite will pay Censtor a total of approximately $9.0
million in four installments (see "Purchase Price below").
Denka holds approximately $14.3 million of the Company's preferred and
convertible debt including accrued interest of $4.3 million as of March 31,
1996. In an unrelated transaction dated February 22, 1996, Denka and the Company
have entered into two agreements entitled "Amendment to Terms of Debentures" and
"Fifth Amendment to Manufacturing License Agreement" (collectively, the
"Amendments"). In the Amendment to Terms of Debentures, the Company is obligated
to pay $2.0 million against the outstanding accrued interest by July 31, 1996
and use its best efforts consistent with good business practices, subject to
certain conditions, to pay the remaining outstanding principal and accrued
interest on September 30, 1996. Notwithstanding the amounts paid, any
remaining interest shall be forgiven, on September 30, 1996. Additionally, in
consideration of executing and delivering the Fifth Amendment to Manufacturing
License Agreement, Denka has agreed to forgive the remaining principal balance
(due in September 1997 and January 1998) in return for increasing from 1% to 5%
Denka's portion of the royalties Censtor may receive from its present and
future licenses through the year 2001, and subject to the repayments above. An
analysis was performed by the Company that compared the amount of debt to be
forgiven by Denka with the amount of the increased royalty sharing that would be
paid by the Company to Denka. Based on the results of the analysis, the
Amendments were deemed to be in the interest of the Company by the Board of
Directors.
As a result of the negotiations with Read-Rite and Denka, Censtor has
the opportunity to eliminate approximately $18.0 million in short and long term
obligations by using $6.4 million of the anticipated proceeds from the Proposed
Transaction to modify and partially satisfy obligations to Denka and to continue
operating as a licensing company with a patent portfolio that the Company
intends to grow in size, relevance and value. Removal of the obligations to
Denka, which are senior to the preferred stock, has been an essential part of
management's strategy to maximize Shareholder return from future licensing
revenues, since the interest being accrued on such obligations would be a
significant drain on future earnings.
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Prior to the Proposed Transaction, the Company has licensed its
technology on a non-exclusive basis to six companies for use in disk drives and
has signed a letter of intent with an additional licensee. These licenses have
so far returned the Company approximately $22.0 million in license fees and
non-refundable advance payments. The Company intends to focus its future
business after consummation of the Proposed Transaction on creating royalties
from these existing licenses and to negotiate new licenses with the remaining
companies in the disk drive industry based on the technology that the Company
has previously developed.
Although the Read-Rite license diminishes the scope of Censtor's
licensing opportunity, it may increase royalties from the Company's licensing
program because the license to Read-Rite may makes it possible for Read-Rite
to bring products, based on Censtor technology, to market in high volume
without Censtor having to make the investment to do so. By doing this, the
Company's technology has a higher probability of being available in larger
volume products in the market place. Other magnetic head manufacturers may
want to license the Company's technology as a competitive response to Read-Rite.
PURCHASE PRICE
The terms of the Proposed Transaction require Read-Rite to pay an
aggregate purchase price of $9,025,000, up to $6,525,000 of which will be paid
to the Company on the Closing, subject to certain adjustments (the "Initial
Payment"), and up to $2,500,000 (to be made in three payments, $250,000 on
November 15, 1996, $250,000 on December 13, 1996 and $2.0 million nine months
after Closing) (the "Final Payment") (such amounts include payment for granting
of the license pursuant to the License Agreement). The Initial Payment is
subject to reduction in an amount equal to (a) 50% of the amount outstanding as
of March 29, 1996 under a promissory note in the principal amount of $900,000 in
favor of Read-Rite, plus (b) 50% of certain employee compensation expenses
accrued or paid by Read-Rite through March 29, 1996, plus (c) 50% of accrued but
unpaid expenses of the Company from February 2, 1996 through March 29, 1996,
less (d) certain prepaid expenses of the Company outstanding on March 29, 1996,
less (e) certain expenses of the Company incurred through the Closing, including
accounting, legal and other expenses related to the Proposed Transaction
("Seller Expenses"). The adjustment to the Initial Payment is estimated to be
$857,000. Seller Expenses are limited in that they include legal and accounting
fees, patent filing and maintenance fees, salaries and benefits, workers'
compensation expenses, certain accrued interest and amounts owed to Read-Rite
and they must adhere to generally accepted accounting principles consistently
applied and be subject to the mutual review and agreement of Read-Rite and the
Company.
The Final Payment is subject to reduction for amounts held back by
Read-Rite for damages in the event the Company breaches the Asset Sale Agreement
or License Agreement.
In addition, Read-Rite will loan to the Company up to $1,550,000 to
finance the Company's operations and certain ongoing business expenses through
the Closing (the "Bridge Notes"). Amounts borrowed from Read-Rite under the
Bridge Notes that are used to pay, or are accrued for, expenses after March 29,
1996 and before the Closing, related to the Assets and contracts being
transferred to Read-Rite (including for example, equipment lease payments,
building rent, utilities and other related expenses) will be forgiven as of the
Closing.
ASSETS TO BE SOLD AND RETAINED BY THE COMPANY
The assets of the Company to be sold to Read-Rite are non-income
producing and consist of all machinery, tooling, computer hardware, software and
other equipment and all furnishings, furniture, office supplies, leasehold
improvements, fixtures and other tangible property of the Company related to the
Company's research and development operations; prepaid expenses related to the
contracts to be assumed by Read-Rite; copies of all books, records, accounts,
correspondence and production records related to the assets to be sold and the
business related to the assets to be sold to Read-Rite; copies of all
manufacturing and technical documentation related to the assets to be sold to
Read-Rite or used by the Company in the conduct of the business related to the
assets to be sold to Read-Rite; and all other assets of the Company which are
not expressly retained by the Company. Assets retained by the Company include
the Company's cash
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or cash equivalents; all know-how, intellectual property,
copyrights, trade secrets, patents and patent applications, that are owned,
controlled, acquired or otherwise licensable by the Company.
INTELLECTUAL PROPERTY TO BE RETAINED FOR LICENSING BY THE COMPANY
Censtor will retain ownership of the intellectual property it has
developed over the years, including issued and pending patents, trade secrets,
software, know-how and trademarks. The Company currently owns approximately 16
United States patents and 10 foreign patents relating to the magnetic data
storage industry, with 10 domestic and numerous foreign patent applications
forthwith. Due in part to the Company's pioneering work in technologies such as
contact recording, it is believed that certain patents and/or patent
applications in the patent portfolio may have significance for the hard disk
drive industry.
Read-Rite will be granted, as a part of the Proposed Transaction, a
non-exclusive license to the intellectual property as detailed in this document.
If Read-Rite is successful in volume production and sales of products
incorporating the Company's technology, the licensing value of the Company's
Intellectual Property may increase, as other entities may emulate Read-Rite and
move into technological areas covered by the Company's patents. The Company
hopes that may promote royalty payments by the Company's existing licensees as
well as encouraging the sale of new licenses. Moreover, divestiture of
manufacturing and sales operations by the Company may possibly strengthen the
Company's licensing position by reducing the need for cross-licensing and
decreasing the threat of an infringement countersuit upon enforcement of the
Company's patents.
DISPUTE RESOLUTION
Management of Read-Rite and the Company will initially attempt to
resolve any material disagreements which might arise from implementing the
Proposed Transaction without assistance of an arbitrator or court. If this
proves unsuccessful, the Asset Sale Agreement dictates resolution by several
stages starting with good faith negotiation of the parties to the agreement and
culminating in binding arbitration under the commercial rules of the American
Arbitration Association. Any arbitration must be held in Santa Clara,
California.
SHAREHOLDER APPROVAL
The Asset Sale Agreement requires Shareholder approval as a condition
to the Closing. The affirmative vote of a majority of the shares of the
Company's Common Stock and Preferred Stock outstanding at the Record Date is
therefore being sought to approve the Proposed Transaction.
CERTAIN INFORMATION CONCERNING READ-RITE
Read-Rite, a public company, is one of the world's leading independent
manufacturer of recording heads, head gimbal assemblies (HGAs) and head stack
assemblies (HSAs) for disk drives and magnetoresistive heads for
quarter-inch-cartridge tape drives. With headquarters in Milpitas, California
and operations in Japan, Thailand, Malaysia, the Philippines and Singapore, the
company employs more than 24,000 people. For Fiscal 1995, Read-Rite reported
sales of more than $1.0 billion, during the most recent quarter (ending March
31, 1996), Read-Rite reported sales exceeding $258.0 million and profits of
$1.3 million. Additionally, Read-Rite had $189.0 million in cash, cash
equivalents and short term securities at quarter end. Based on these results,
Company management believes that Read-Rite will be able to pay $9,025,000 of the
aggregate purchase price, to the Company. Read-Rite's Common Stock is traded on
the NASDAQ National Market. Prior to the Proposed Transaction, Read-Rite and the
Company had no affiliation.
OPINION OF FINANCIAL ADVISOR
Von Gehr International (the "Advisor") was retained by the Company on
February 23, 1996 to render to the Company its opinion as to the fairness, from
a financial point of view, to the Company's Board of Directors and Shareholders
of the consideration to be received by the Company, pursuant to the Proposed
Transaction with Read-Rite. (See "Background" above on pages 18-23.) The Advisor
was not contacted by any other party concerning alternative transactions to the
Proposed Transaction. The Advisor has rendered a written opinion dated March 29,
1996 to the Company's Board of Directors to the effect that, as of such date,
the payment in cash by Read-Rite to the Company of the
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Purchase Price and License Fee, as set forth in the Asset Sale Agreement and
License Agreement, respectively, are fair, from a financial point of view, to
the Shareholders of the Company. The full text of the written opinion of the
Advisor is attached to this Proxy Statement as Appendix B. Such opinion should
be read in its entirety for a description of the matters considered, assumptions
made and limits of review by the Advisor in arriving at its opinion.
In arriving at its opinion, the Advisor reviewed a copy of the
definitive Asset Sale Agreement (including Exhibits thereto) and reviewed
historical financial information about the Company as well as product and other
information furnished to it by the Company. The Advisor also held discussions
with members of the Company's senior management regarding the historic and
current business operations and future risks and prospects of the Company,
including their expectation for certain strategic benefits of the Proposed
Transaction. (See "Recommendation of the Board of Directors" on page 5.) The
Advisor did not receive any material, including forecast information from
Read-Rite. As part of these discussions, the Advisor reviewed other types of
sale transactions contemplated by the Company over the preceding twenty-four
months and carefully reviewed the circumstances surrounding the contemplated
financing transaction that failed to close in December 1995 and subsequent
attempts to finance or sell the Company. Read-Rite's offer to acquire certain
assets of the Company was in fact the only offer received by the Company.
In deriving its fairness opinion, the Advisor considered the value of
the Company and its assets by comparing the contemplated transactions with
Read-Rite to other technology licensing transactions including the Company's
prior licensing transactions and other financial studies, analyses and
investigations the Advisor deemed appropriate for purposes of its opinion.
Specifically the Advisor compared the benefits to be received by the Company
from Read-Rite as part of the contemplated transactions including cash payments,
assumption of liabilities and the cost avoidance of continuing to develop the
technology, as compared to the expected net present value of executing a
standard license agreement with Read-Rite and determined that the contemplated
transactions provided superior economic benefits. The Advisor compared the
benefits of the contemplated transactions with a variety of other technology
licensing agreements including Ethical's licensing transaction with Elan,
Imatron's licensing transaction with Siemens and Ecogen's licensing transaction
with Monsanto and determined that the considerations provided by Read-Rite to
the Company were favorable to the other transactions reviewed, based on a ratio
of anticipated future profits to front end cash payments. Additionally, the
Advisor compared the ratio of transaction considerations provided and related
transaction expenses with that of 33 technology licensing transactions and
determined that the ratio of the contemplated transactions materially exceeded
the mean of the 33 transactions considered. In considering alternatives to
maximize Shareholder value, the Advisor also analyzed liquidating the Company as
an alternative to sale of certain of its research and development assets to
Read-Rite. The Advisor concluded that the cost of an orderly liquidation of
these assets of the Company would decrease substantially the resulting value to
the Shareholders compared to that realizable for the Proposed Transaction. Based
on all the above and the prospect of continuing operating losses, the Advisor
concluded that consummating the Transaction as quickly as possible would
maximize Shareholder value. In the opinion rendered, the Advisor did not provide
a valuation range for the Proposed Transaction.
The Advisor considered a wide range of alternative methods to validate
the fairness of the transaction through analysis. In researching recent
transactions, no other deals were identified that were directly comparable to
the transaction contemplated and after careful consideration the Advisor
determined that the opinion should be based on four different analyses and
considerations as follows:
1. Comparison of the benefits received by Censtor from Read-Rite
including cash payments, assumption of liabilities, and most importantly, the
cost avoidance of continuing to develop the technology as compared to the future
potential of executing a "standard" licensing agreement between the parties.
Under this approach, market share information was compiled on Read-Rite
and used as a basis for determining the anticipated net present value of the
royalty stream should Censtor have executed a traditional license under which a
front end payment would have been made, plus a royalty paid over time. The
result was compared to the benefit received by Censtor.
Key assumptions were: (i) a license with Read-Rite would have included
a $2.0 million front end payment and a royalty of 1% of sales commencing in
1997; (ii) additional investment of $16.5 million is required to commercialize
the Censtor technology (based on information provided by the Company); (iii) had
the Company suspended operations, it
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would have incurred personnel termination liabilities of approximately $500,000;
and (iv) the Company did not provide forecasts beyond the year 2000, royalties
beyond that time were extrapolated based on a standard diffusion curve,
The results of this analysis indicated that the transaction benefit
received by the Company was $26.4 million, comparing favorably to the $10.45
million net present value estimated should the Company have entered into a
standard licensing agreement with Read-Rite. The calculation for the net present
value of the royalty stream included a 15% risk factor and a 12% capital cost.
2. Comparison of the transaction with other publicly disclosed
non-exclusive licensing transactions under which ratios were calculated for the
considerations provided to the licensor as a function of anticipated benefits by
the licensee. Licensing transactions identified in this analysis were as
follows:
Imatron transaction with Siemens
Ethical transaction with Elan
Araid transaction with Hoechst
Ecogen transaction with Monsanto
NPS Pharmaceutical transaction with Amgen
ICN Pharmaceutical transaction with Schering Plough
A ratio was developed for each of the referenced transactions of the
future profit anticipated as a result of the transaction cost. The highest ratio
(the most favorable to the licensee) was the Ethical/Elan transaction with a
ratio of 47.4, with the lowest ratio (most favorable to the licensor) being
Imatron/Siemens transaction at 12.5. The average of the six transactions was
determined to be 28.1. Using the same methodology, the Proposed Transaction was
calculated to be 21.9, well below the average of the licensing transaction
population, and therefore, favorable to the Company, the licensor.
3. Comparison of the transaction, based on a ratio of the consideration
provided as a function of transaction costs, when compared to other licenses
granted by the Company and a mean ratio of 33 contracts for technology
considerations as a function of transfer cost (the "Ratio") as compiled by
Francis Bibault (Professor , Lyon GSB) in a paper titled "Technology Pricing;
Principles to Strategy".
Key assumptions included in this analysis were that the Read-Rite
considerations include (i) initial payments and development cost avoidance of
$25.9 million and (ii) the Company's previous licensing transactions included
royalties for a 17 year period and transaction costs of $16.5 million investment
required to commercialize the technology (see estimate previously referenced).
Using the methodology described in the above cited paper , the Ratio of
the Proposed Transaction was calculated to be 129.5, reflecting $25.9 million
benefit divided by transaction costs estimated to be $200,000. Dr. Bibault's
publication concluded that the mean Ratio for 33 such transactions analyzed was
116.2. Since the Proposed Transaction Ratio exceeds the mean reflected in the
analysis, the Advisor concluded that this approach provided further support to
its fairness of the transaction, from a financial point of view.
The Advisor did not make any independent valuation of the Company's
assets or intellectual property nor did it review any of the Company's corporate
records. In addition, the Advisor assumed, without independent verification, the
accuracy, completeness and fairness of all the financial statements, product
information, marketing strategies and other information regarding the Company
that was provided to the Advisor by the Company and its representatives. The
Company believes the Advisor's lack of independent verification of its
historical financial statements is justified and reasonable under the
circumstances, since the annual financial statements of the Company provided to
the Advisor were audited by Ernst & Young LLP, the Company's independent
auditors. The audited statements covered all but the interim period from July
1995 through March 29, 1996, the date the opinion was issued. Except as
described above, neither the Company nor any affiliate provided instructions to
the Advisor or imposed any limitations on the scope of the Advisor's
investigation.
Neither the Advisor nor any of its principals or affiliates has or,
over the past two years, has had any material relationship with the Company or
Read-Rite, other than the Advisor's engagement by the Company, described above,
to render an opinion regarding the fairness of the contemplated transaction.
(See "Background" on pages 16-18.)
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For the Advisor's services related to rendering of its written fairness
opinion referred to above in connection with the Proposed Transaction, the
Company has agreed to pay the Advisor a single fee of $35,000. The Company has
agreed to indemnify and hold the Advisor harmless from certain liabilities,
including liabilities under the federal securities laws, and has agreed to
reimburse the Advisor for its reasonable out-of-pocket expenses incurred in
connection with its services, which are estimated to be less than $100.
INTEREST OF MANAGEMENT IN THE TRANSACTION
The Company's management is not affected by this transaction except
that Robert Hempstead, Censtor's Chief Technical Officer, has resigned from
Censtor and was subsequently hired, along with 83 other Censtor employees, by
Read-Rite on February 5, 1996. Dr. Hempstead subsequently resigned from
Read-Rite. It is not contemplated that any other of the Company's management
will become employees of Read-Rite as a result of this transaction.
EFFECT ON EMPLOYEES
As of February 5, 1996, 84 of the 89 employees of the Company became
employees of Read-Rite for the purposes of operating the assets and developing
the technology being transferred to Read-Rite pursuant to the terms of the Asset
Sale Agreement. The remaining four employees (Russell Krapf, Sabine Austin, Mark
Lauer, and Elizabeth Harmon) are continuing to be employed by the Company to
continue the Company's licensing operations. (Garry Garrettson, Censtor's
President has resigned effective April 22, 1996; he will continue to serve on
the Board of Directors if he is elected by the Shareholders.)
APPLICATION OF SALE PROCEEDS
Of the net proceeds from the Proposed Transaction, the Company expects
to use approximately $6.4 million to pay down obligations estimated to be due as
of the Closing, including a $2.0 million escrow for the July 31, 1996 Denka
payment and $1,000,000 plus interest, will be used to pay obligations to certain
Shareholders of which $546,675, plus accrued interest is due at the Closing.
The following two tables detail the application of anticipated proceeds
related to the Proposed Transaction and the Shareholders whose notes will be
repaid from the proceeds of the sale. The remainder of the proceeds, if
any, will be used for general working capital purposes with respect to its
remaining business operations. The Company has no present intent to pay a
dividend to Shareholders or to otherwise distribute to its Shareholders any
proceeds received from the Proposed Transaction.
The use of net proceeds is estimated as follows:
ESTIMATED USE OF PROCEEDS (IN MILLIONS)
Denka Obligations $2.0
Investor Loan 1.0
Silicon Valley Bank 1.0
Accounts Payable 0.8
Read-Rite Loan 1.6
General Corp. and Other Working Capital Requirements 2.6
----
Total $9.0
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INVESTOR NOTES TO BE REPAID a/
Shareholder Total Principal Owing Due at Closing Due Nine Months after Closing
----------- --------------------- --------------- -----------------------------
Wolfensohn Partners $ 186,700 $140,025 $ 46,675
Brentwood Associates 211,000 105,500 105,500
Harvard Management Co. 173,000 86,500 86,500
Nippon Enterprise Dev. 92,000 46,000 46,000
New Enterprise Assoc. 169,000 84,500 84,500
Spectra Enterprise Assoc. 15,000 7,500 7,500
Morgenthaler Ventures 73,300 36,650 36,500
Advanced Technology Ventures 73,000 36,500 36,500
Dr. Richard Cottrel 7,000 3,500 3,500
Totals $1,000,000 $546,675 $453,325
a/ Excluding interest at 11%
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For tax purposes, the Company will recognize income or gain as a result
of the Proposed Transaction. Notwithstanding, the Company determined that it
will not have to pay any income tax related to the Proposed Transaction because
of any income or gain will be offset by current year net operating loss or prior
year net operating loss carry forwards.
Additionally, the Company determined that the Proposed Transaction will
not have any federal income tax consequences to the Shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board retained the Advisor to provide an opinion to the
Board of Directors regarding the fairness, from a financial point of view, of
the Asset Sale Agreement. The Advisor provides financial advisory services
associated with mergers, acquisitions and strategic partnering for emerging
growth companies. Since the Advisor was founded in 1990, it has completed over
50 such assignments. The Advisor is located in Palo Alto, California. In
addition, the Company's Board of Directors unanimously determined that the terms
of the Proposed Transaction are fair and in the best interest of the Company and
its Shareholders and recommends a vote in favor of the Proposed Transaction. In
the course of reaching its decision to approve the Proposed Transaction, the
Board consulted with its legal and financial advisors as well as the Company's
management and considered the following factors:
(1) The Board's desire to focus the Company's resources on developing
its proprietary technology through patents and licensing of its
proprietary technology where it believes that the Company has
greater asset value, competitive advantage and probability of
success. The Board has determined that the risk and cost of raising
the necessary capital to pursue the manufacture of magnetic heads
using the Company's technology is prohibitive. The Board has
therefore adopted a strategy of capitalizing on its proprietary
technology through further patent protection of its existing
technology and licensing of that protected technology.
(2) The anticipated positive effects upon the Company's balance sheet
and results of operations from the use of the net proceeds
therefrom to retire indebtedness and expand the Company's licensing
capabilities. Among other factors considered by the Board of
Directors were the positive effects of using $6.4 million of the
anticipated proceeds from the Proposed Transaction, which based on
the agreement entered into with the debt holder will eliminate
substantially all of the Company's short and long-term debt,
currently approximately $18.0 million, (comprised approximately of
Denka ($14.3 million), Silicon Valley Bank ($1.0 million),
Shareholder loan ($1.0 million), equipment leasing contracts
($0.9 million), and trade payables ($0.8 million)), which would
result in annual interest savings of
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approximately $1.2 million. In addition, the Proposed Transaction
would allow the Company to eliminate a rapidly deteriorating asset
and earnings base, substitute the Company's relatively illiquid
assets for cash, and recraft its infrastructure to create a more
efficient business with lower ongoing costs and at the same time no
loss of jobs. The Board felt that this model would have a better
prospect of increasing Shareholder value because the Company, with
limited resources, would be directly focused on two objectives: (1)
increasing the patent portfolio of intellectual property, the
Company's most valuable asset and (2) licensing the intellectual
property to create a royalty stream.
(3) The absence of any serious offers from any other third parties
regarding a possible acquisition of the Company's assets or a
possible merger with the Company. The Board had been involved in
ongoing discussions with management regarding the prospects of
raising equity financing, debt financing, merger and acquisition;
additionally, the Board had been in discussions with potential
equity investors such as Allen Patricof, US Venture Partners,
Pacven Walden Management, Integral Capital Partners, Burr Egan,
Deleage, Paine Webber, JAFCO (Japan) and others. Management and the
Board tried unsuccessfully for seven months to raise additional
capital for the Company. The Board concluded that there were no
offers other than Read-Rite forthcoming.
(4) The opinion of the Advisor, that the purchase price is fair, from a
financial point of view, to the Company and its Shareholders. The
Advisor reviewed its opinion in detail with the Board of Directors
and asked questions with respect to the various methodologies used,
the details of other licensing agreements used, the background and
experience base of the Advisor as well as other questions regarding
the analysis performed by the Advisor.
(5) The willingness of Read-Rite to continue to employ the Company's
work force. The Board discussed the potential liability of laying
off the employees that were employed by Read-Rite. The Board felt
that the Shareholders were better served by avoiding the
termination expenses involved and utilizing the funds instead to
perfect the intellectual property and finding additional licensees
of the Company's technology.
Considering all of the above factors, the Board of Directors concluded
that the Company should become tightly focused on licensing its proprietary
technology and that it is likely that in an increasingly competitive environment
the physical assets to be sold and the technology to be licensed would not have
a value higher than that which existed at the time that the Proposed Transaction
was approved by the Company's Board. In addition, management, with its intimate
knowledge of the physical assets to be sold and the technology to be licensed
(on a non-exclusive basis) and with the assistance and advice of the Advisor,
had concluded that it was unlikely that any purchaser other than Read-Rite would
be willing to pay a price higher than that to be received in the Proposed
Transaction and communicated this to the Board of Directors. The Board did not
independently establish a value for the Proposed Transaction, but based on all
the above factors determined that the Proposed Transaction was fair and
reasonable to the Company and its Shareholders. The Board did not assign a
weight for the individual factors considered in evaluating the Proposed
Transaction. See "Proposal Three: The Proposed Transaction - Background" (pages
18-23), above.
REPRESENTATIONS AND WARRANTIES
The Company has made certain customary representations and warranties
in the Asset Sale Agreement relating to the Company, the authorization, validity
and the enforceability of the Asset Sale Agreement and similar corporate
matters. The Company has also made certain representations and warranties
regarding execution, delivery and performance of the Asset Sale Agreement; title
to the assets being sold; the payment of taxes; pending and threatened claims
and litigation; identity of suppliers; compliance with laws and regulations;
environmental matters; condition of the assets being sold; contracts to be
assumed by Read-Rite; pending or threatened proceedings related to employees;
absence of brokers or finders; this Proxy Statement; and completeness of
representations and warranties. To the extent that any of the representations
and warranties are proven to be inaccurate, the Company has agreed, subject to
certain limitations contained in the Asset Sale Agreement, to permit Read-Rite
to withhold amounts for damages caused by such inaccuracies from the Final
Payment. Read-Rite is not, however, entitled to recover any damages resulting
from the actions of Read-Rite or any employee of Read-Rite to the extent that
any such action results in a breach of the Asset Sale Agreement by the Company.
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COVENANTS
The Company has agreed, until the Closing, among other things to
conduct its business in the ordinary course consistent with past practices; to
preserve and maintain the assets being sold to Read-Rite; to perform obligations
required to be performed by the Company under the contracts to be assumed by
Read-Rite; to give prompt notice to Read-Rite of any material adverse change in
the operations being sold to Read-Rite; not to mortgage, pledge or subject to
lien any of the assets being sold to Read-Rite or to transfer any such assets;
to discharge the Company's liabilities when due; to provide Read-Rite with
access to the Company's facilities, properties, and the information; not to
pursue another agreement for the sale of the assets subject to the Asset Sale
Agreement; to prepare this Proxy Statement; to hold a meeting of Shareholders;
to consult with Read-Rite in obtaining any necessary third party consents; and
to obtain the release of certain liens on the assets being sold to Read-Rite.
Additionally, the Company has agreed to pay transfer taxes related to the
proposed transaction, and to allow Read-Rite to hire the Company's employees
related to the Company's research and development operations.
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34
CONDITIONS TO THE PROPOSED TRANSACTION
Consummation of the Proposed Transaction is subject to approval by the
Shareholders and to a number of other conditions, including: (a) all
representations and warranties made by the other party in the Asset Sale
Agreement being true and correct, and all agreements, covenants and conditions
required having been performed under the Asset Sale Agreement, as of the
Closing, (b) each party's receipt at the Closing of certain closing certificates
and legal opinions, and (c) the absence of any pending or threatened legal
action to enjoin the Proposed Transaction.
Read-Rite's obligations under the Asset Sale Agreement are contingent
upon Read-Rite and the Company consummating the License Agreement. Additionally,
the Voting Agreement must be executed by certain Shareholders prior to
consummation of the Asset Sale Agreement.
TERMINATION OF THE PROPOSED TRANSACTION
At any time prior to the Closing, the Asset Sale Agreement may be
terminated under certain circumstances, including the following: (a) if a court
prohibits the Proposed Transaction, (b) by mutual written consent of Read-Rite
and the Company, (c) by the Company if there has been a material breach on the
part of Read-Rite in its representations, warranties or covenants, subject to a
right to cure, and (d) by Read-Rite if there has been a material breach on the
part of the Company in its representations, warranties or covenants, subject to
a right to cure. If terminated in accordance with (a) or (b), Read-Rite and the
Company shall enter into a limited license agreement (the "Limited License
Agreement") pursuant to which the Company shall grant a perpetual, non-exclusive
license to Read-Rite covering the Company's rights to certain technology and
software, for a one-time fee of $2.0 million. If terminated in accordance with
(c), Read-Rite will forgive certain obligations of the Company and the Company
and Read-Rite (if elected by Read-Rite) shall enter into the Limited License
Agreement for a one time fee of $2.0 million. If terminated in accordance with
(d), the Company and Read-Rite shall enter into the Limited License Agreement
for no fee and the Company must repay certain obligations to Read-Rite.
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
Under the Asset Sale Agreement, the Company until the Closing, is
obligated (a) to conduct its business only in the ordinary course consistent
with past practices, and use the facilities and assets in the usual, regular and
ordinary course and in substantially the same manner as previously used; (b) to
preserve and maintain its assets; (c) to perform all obligations required to be
performed by the Company under all contracts assumed by Read-Rite; (d) to give
prompt notice to Read-Rite of any material adverse change to the Company's
assets or facilities; (e) not to mortgage, pledge or subject to lien any of the
assets or sell or transfer any of the assets; and (f) to discharge when due all
liabilities, provided that upon the Closing, Read-Rite shall be responsible for
all Assumed Liabilities.
EXPENSES
Total costs to the Company associated with the Proposed Transaction are
estimated at $200,000. Such amount represents primarily legal and advisory fees
and will be paid by the Company. Costs incurred by Read-Rite will be paid by
Read-Rite.
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35
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, is required to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Copies of
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
Regional offices of the SEC: Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and Suite 1300, 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549.
By Order of the Board of Directors,
/s/ SABINE AUSTIN
------------------------------------
Sabine Austin
Assistant Secretary
San Jose, California
(Date), 1996
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36
CENSTOR CORP.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD (DATE), 1996
The undersigned hereby appoints _________________ and
___________________, or either of them, each with full power of substitution, as
the proxyholder(s) of the undersigned to represent the undersigned and vote all
shares of the Common Stock of and Preferred Stock of Censtor Corp. (the
"Company") which the undersigned would be entitled to vote if personally present
at the annual meeting of Shareholders of the Company to be held on (Date), 1996,
and at any adjournments or postponements of such meeting, as follows:
1. To elect as directors James A. Cole, Garrett A. Garrettson, B.
Kipling Hagopian, Edwin V.W. Zschau, Russell M. Krapf.
/ / For all nominees listed above (except as indicated below)
/ / Withhold authority to vote (as to all nominees)
To withhold authority to vote for any individual nominee, write
that nominee's name on the following line:
--------------------------------------------------------------
2. To ratify appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1996:
/ / FOR / / AGAINST / / ABSTAIN
3. To approve the Asset Sale Agreement, providing for the transfer by
the Company to Read-Rite of the Company's research and development operations,
including the hiring of 84 Censtor employees, the sale of certain of the
Company's physical assets and the Company's rights and obligations under
contracts related thereto, and the grant by the Company of a non-exclusive
license to the Company's intellectual property, including the Company's rights
in patents, technology and software, pursuant to the terms and conditions of the
Agreement for Purchase and Sale of Assets, dated as of March 29, 1996, by and
between Read-Rite Corporation and the Company and the transactions contemplated
thereby.
/ / FOR / / AGAINST / / ABSTAIN
This proxy, when properly executed, will be voted in the manner
directed above. WHEN NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR THE
NOMINEES AND THE ABOVE PROPOSALS. This proxy may be revoked by the undersigned
at any time, prior to the time it is voted, by any of the means described in the
accompanying Proxy Statement.
Dated: , 1996
- ------------------------ ------------------------ ----------
Signature of Shareholder Signature of Shareholder
Typed or Printed Name: Typed or Printed Name:
Please sign EXACTLY as your name appeared on the envelope transmitting
the Notice of Annual Meeting and print your name under your signature. If
signing for estates, trusts, corporations or other entities, title or capacity
should be stated. If shares are held jointly, each holder should sign.
TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO FILL IN,
DATE AND RETURN PROMPTLY THIS BLUE PROXY FORM IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOUR PROXY
CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
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APPENDIX A
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
BY AND BETWEEN
READ-RITE CORPORATION AND
CENSTOR CORPORATION
This AGREEMENT FOR PURCHASE AND SALE OF ASSETS (the "Agreement") is
made and entered into as of March 29, 1996 by and between Censtor Corporation, a
California corporation (the "Seller"), and Read-Rite Corporation, a Delaware
corporation (the "Buyer").
RECITALS
A. Seller is engaged in the business of designing, manufacturing and
selling magnetic recording heads for use in disk drives.
B. Buyer desires to purchase at the Closing (as hereinafter defined)
certain specified assets of Seller, but to assume only certain specified
liabilities of Seller, all in accordance with the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the representations, warranties and
agreements herein contained, the parties hereto agree as follows:
SECTION 1
1. DEFINITIONS. Capitalized terms in this Agreement shall have the
meanings stated in this Section 1 or defined elsewhere in this Agreement. A
reference to a particular Exhibit is to an Exhibit to this Agreement, each of
which is incorporated into and made a part of this Agreement by that reference.
A reference to a particular Section is to a Section of this Agreement.
"Allocation Schedule" shall have the meaning set forth in Section 3.6.
"Assets" shall have the meaning set forth in Section 2.1.
"Assumed Contracts" shall have the meaning set forth in Section 3.5.
"Assumed Liabilities" shall have the meaning set forth in Section 3.5.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation, and Liability Act.
"Claims" shall mean any and all personal injury, property damage,
nuisance, tort, contract or other claims, actions or demands brought at any
time, any and all demands, actions or claims for investigations, remediation,
removal, closure or other action with respect to Hazardous Substances, and any
and all other suits, demands, actions, fines, penalties, claims, enforcement
actions, Liens, Liabilities, damages, deficiencies, injunctions, attorneys'
fees, experts' fees, costs and expenses
38
imposed, threatened, paid or incurred at any time, whether foreseeable or
unforeseeable, conditional or unconditional.
"Closing" and "Closing Date" shall have the respective meanings set
forth in Section 4.1.
"Code" shall have the meaning set forth in Section 3.6.
"Compensation" shall mean all base straight time gross earnings,
commissions, overtime, shift premium, incentive compensation, incentive
payments, bonuses, health insurance benefits, payroll taxes and other
withholdings, and other compensation related amounts paid or accrued with
respect to any Employee.
"Disclosure Schedule" shall have the meaning set forth in Section 5.1.
"Employees" shall mean those individuals identified on Exhibit A hereto
who were employees of Seller on February 4, 1996 and who became employees of
Buyer on February 5, 1996.
"Environmental Laws" shall mean the common law and all local, state,
federal, foreign or international laws, statutes, ordinances, rules,
regulations, guidelines, judgments, injunctions, stipulations, decrees, orders,
permits, approvals, treaties, or protocols, and all amendments and modifications
of any of the foregoing, now or hereafter enacted, issued or promulgated by any
Governmental Body which relate to any Hazardous Substance or any Hazardous
Substance Activity.
"Environmental Liability" shall mean all Liabilities arising out of or
in connection with (a) Seller's Hazardous Substance Activities conducted prior
to the Closing Date or (b) the violation of any Environmental Law by the Seller
or the Facility (including without limitation the violation, of any applicable
building codes, regulations, ordinances or other laws in effect on the Closing
Date, resulting from the presence of any Hazardous Substance in construction
materials, structures or improvements of the Facility on or after the Closing
Date).
"Environmental Permit" shall mean any approval, permit, license,
clearance or consent required to be obtained from any private person or any
Governmental Body with respect to a Hazardous Substances Activity which is or
was conducted by the Seller at the Facility.
"Excluded Assets" shall have the meaning set forth in Section 2.2.
"Governmental Body" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"Hazardous Substance" shall mean any material or substance that is now
or hereafter prohibited or regulated by any statute, law, rule, regulation,
ordinance, judgment, stipulation, treaty or protocol or that is now or hereafter
designated by any Governmental Body to be radioactive, toxic, hazardous or
otherwise a danger to human health, reproduction or the environment, including
without limitation, asbestos, asbestos containing materials, petroleum,
including crude oil or any fraction thereof, polychlorinated biphenyls or
electro magnetic fields.
39
"Hazardous Substance Activity" shall mean the handling, transportation,
transfer, recycling, storage, use, treatment, manufacture, investigation,
removal, remediation, release, emissions, disposal, exposure of any person to,
sale, or distribution of any Hazardous Substance or any product containing a
Hazardous Substance.
"Lease Agreement" shall mean that certain lease agreement dated
November 28, 1983, as amended, between The Sobrato Group, a California limited
partnership, and Seller related to the premises at 530 Race Street, San Jose,
California.
"Liabilities" shall mean any and all liabilities (including strict
liability), claims, judgments, demands, actions, causes of action, damages,
losses, expenses, penalties, fines, obligations, encum brances, liens, costs,
and expenses of investigation or defense of any claim, of whatever kind or
nature, whether absolute, contingent, accrued or otherwise, matured or
unmatured, foreseeable or unforeseeable.
"License Agreement" shall have the meaning set forth in Section 4.2(e).
"Liens" shall mean mortgages, deeds of trust, pledges, taxes, security
interests, liens, leases, licenses, escrow arrangements, liabilities,
encumbrances, costs, charges and claims of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or otherwise (including, without
limitation, any agreement to give any of the foregoing).
"Loan Adjustment Amount" shall have the meaning set forth in Section
3.3.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or governmental body.
"Permitted Liens" shall mean (i) liens for current taxes which are not
yet due and payable, which liens in any event will not exist upon the transfer
of the Assets to Buyer at the Closing, and (ii) purchase-money liens arising out
of the purchase of equipment pursuant to those Equipment Lease Agreements which
are Assumed Contracts.
"Purchase Price" shall have the meaning set forth in Section 3.1.
"Returns" shall have the meaning set forth in Section 5.1(d).
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any
federal, state, local or foreign income, gross receipts, property, sales, use,
license, excise, franchise, employment, payroll, withholding, alternative or
add-on minimum, ad valorem, transfer or excise tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, imposed by any Governmental
Body.
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SECTION 2
2. TRANSFER OF ASSETS.
2.1 Assets to be Purchased at the Closing. Subject to the terms and
conditions of this Agreement, Seller agrees to sell, transfer, convey, assign
and deliver to Buyer on the Closing Date (as defined herein), and Buyer agrees
to buy and acquire, all right, title and interest of Seller in and to the
following assets and properties of Seller as provided herein (collectively, the
"Assets").
(a) All machinery, tooling, computer hardware, software and
other equipment and all furnishings, furniture, office supplies, leasehold
improvements, fixtures and other tangible personal property of Seller (other
than those assets specifically identified in Schedule 2.2(c) hereto), including
but not limited to the assets listed in Schedule 2.1(a) hereto;
(b) Prepaid expenses with respect to rent, services and the like
related to the Assumed Contracts;
(c) Copies, but not the originals, of all books, records,
accounts, correspondence and production records related to the Assets;
(d) Copies of all manufacturing and technical documentation
(including any documentation set forth in magnetic, machine-readable form)
related to the Assets or used by Seller in the conduct of the business related
to the Assets; and
(e) All other assets of Seller which are not Excluded Assets (as
defined herein).
2.2 Excluded Assets. The Assets shall not include any of the
following assets and properties of Seller (collectively, the "Excluded Assets").
(a) Seller's cash or cash equivalents;
(b) All know how, intellectual property, copyrights, trade
secrets, patents and patent applications, that are owned, controlled, acquired
or otherwise licensable by Seller; and
(c) All other assets which are specifically identified on
Schedule 2.2(c) hereto; and
(d) The originals of all items referenced in Section 2.1(c) and
2.1(d) above, and all other books, records, accounts, and correspondence
relating to Seller's business and to Seller.
SECTION 3
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41
3. CONSIDERATION. In consideration for the transfer of the Assets,
Buyer agrees to make the following payments and assume the following
liabilities:
3.1 Purchase Price. Subject to any claims for Damages under Section
8 hereof, the aggregate purchase price (the "Purchase Price") to be paid by the
Buyer to the Seller hereunder shall be Nine Million Twenty-Five Thousand Dollars
($9,025,000). The Purchase Price shall be payable in installments as follows:
(i) Six Million Five Hundred Twenty-Five Thousand Dollars ($6,525,000) shall be
paid on the Closing Date, (ii) Two Hundred Fifty Thousand Dollars ($250,000)
shall be paid on November 15, 1996, (iii) Two Hundred Fifty Thousand Dollars
($250,000) shall be paid on December 13, 1996, and (iv) Two Million Dollars
($2,000,000) (the "Final Payment") shall be paid on the date which is nine (9)
calendar months from the Closing Date (the "Final Payment Date"). The latter
three (3) payments shall, however, be subject to any claims for Damages under
Section 8 hereof. Notwithstanding the foregoing, Buyer shall be entitled to
credit against the portion of the Purchase Price to be paid to Seller on the
Closing Date any Loan Adjustment Amount (as defined in Section 3.3 hereof) and
all Seller Expenses (as defined in Section 3.4 hereof).
3.2 Payment to Seller on Closing Date. On the Closing Date, Buyer
shall pay Six Million Five Hundred Twenty-Five Thousand Dollars ($6,525,000) of
the Purchase Price to Seller by check or wire transfer to an account designated
by the Seller. Notwithstanding the foregoing, Buyer shall be entitled to credit
against the portion of the Purchase Price to be paid to Seller on the Closing
Date any Loan Adjustment Amount (as defined in Section 3.3 hereof) and all
Seller Expenses (as defined in Section 3.4 hereof).
3.3 Initial Loan to Seller. In connection with that certain Letter
of Intent between Seller and Buyer dated February 2, 1996 (the "Letter
Agreement"), Buyer agreed to loan Seller up to $900,000 pursuant to those
certain Promissory Notes dated February 2, 1996, February 29, 1996 and March 22,
1996 (collectively, the "Promissory Notes"). The amount of principal, interest
and other amounts outstanding from time to time under the Promissory Notes is
hereafter referred to as the "Loan Amount." Seller agrees that all amounts
loaned to it by Buyer pursuant to the Promissory Notes have been used and will
be used by Seller as operating funds in the normal and ordinary course of
business. The "Loan Adjustment Amount" shall equal (i) fifty percent (50%) of
the Loan Amount outstanding on the date hereof plus (ii) fifty percent (50%) of
the Compensation accrued or paid by Buyer with respect to the Employees through
the date hereof (provided that the amount of such Compensation shall not exceed
the rate of Compensation being paid by Seller to such Employees on February 4,
1996) plus (iii) fifty percent (50%) of all accrued but unpaid expenses of
Seller for the period beginning on February 2, 1996 through the date hereof less
(iv) all prepaid expenses of Seller outstanding on the date hereof to the extent
Seller can demonstrate that such expenses were paid from amounts borrowed from
Buyer pursuant to the Promissory Notes. The determination of any accrued amounts
or prepaid expenses shall be made in accordance with generally accepted
accounting principles consistently applied, and shall be subject to the mutual
review and agreement of Seller and Buyer. Buyer hereby agrees with Seller that
any Loan Amount outstanding as of the Closing Date less the Loan Adjustment
Amount shall be forgiven as of the Closing Date and shall constitute additional
consideration paid by Buyer to Seller hereunder. The Loan Adjustment Amount
shall be
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computed by Buyer, and Buyer shall deliver a copy of such computation to Seller
on or prior to the Closing Date.
3.4 Additional Loan to Seller. Upon the execution and delivery of
this Agreement, Buyer shall agree to loan Seller up to an additional $800,000,
such loan to be evidenced by a promissory note in the form attached hereto as
Exhibit B (the "Bridge Note"). Buyer acknowledges that the proceeds of any loans
obtained by Seller from Buyer pursuant to the Bridge Note may be used to fund
ongoing costs incurred by Seller in the usual and ordinary course of its
business, including without limitation Seller's accounting, legal and other
costs related to the transactions contemplated hereby and costs associated with
the Assumed Contracts. For purposes hereof, Seller and Buyer agree that any
expenses of Seller related to the period subsequent to the date hereof which are
paid or accrued but unpaid pursuant to the terms of the Assumed Contracts,
including any lease payments, property taxes, insurance, utilities or
maintenance charges (whether incurred to preserve the Facility of Seller
referenced in the Lease Agreement, any Asset being leased pursuant to those
Equipment Lease Agreements which constitute Assumed Contracts, or any of the
other Assets) are referred to herein as "Nonseller Expenses." All other expenses
of any kind whatsoever paid or accrued by Seller, including without limitation
legal and accounting fees, patent filing and maintenance fees, salaries and
benefits, workers' compensation expenses, any accrued interest under the Bridge
Note and any amounts owed by Seller to Buyer under the Bridge Note which were
not used by Seller to pay Nonseller Expenses are referred to herein as "Seller
Expenses." At the Closing, Buyer shall be entitled to credit against the amount
of the Purchase Price to be paid by Buyer to Seller the full amount of any
Seller Expenses, and any other amount due under the Bridge Note shall be
forgiven by Buyer and shall constitute additional consideration paid by Buyer to
Seller hereunder. The determination of any accrued amounts hereunder shall be
made in accordance with generally accepted accounting principles consistently
applied, and shall be subject to the mutual review and agreement of Seller and
Buyer.
3.5 Assumed Liabilities. On the Closing Date, Buyer shall assume and
agree thereafter to pay, perform and discharge only Seller's obligations under
the Lease Agreement and the Equipment Lease Agreements to which Seller is a
party and which are specifically listed on Schedule 3.5 hereto (collectively,
the "Assumed Contracts") and no others, but only to the extent they remain
unpaid and unperformed on the Closing Date and excluding any such obligations or
liabilities based on any actions by Seller or any failure by Seller to perform
its obligations under the Assumed Contracts prior to the Closing Date (the
"Assumed Liabilities"). Except for the Assumed Liabilities and as contemplated
by Section 8.6 hereof, Buyer shall not assume, directly or indirectly, or have
any responsibility for any Liability of Seller, and Seller shall retain all
Liabilities arising from the operation of the Assets and the related business
prior to the Closing Date, other than the Assumed Liabilities. Without limiting
the foregoing, Buyer shall not directly or indirectly, assume or have any
responsibility for any liability for any Compensation or other Liabilities
related to the employment of the Employees by the Seller prior to February 5,
1996.
3.6 Tax Allocation. The parties agree to allocate the purchase price
for the Assets in accordance with a schedule that Buyer shall prepare and
deliver to Seller at the Closing (the "Allocation Schedule"). The Allocation
Schedule shall be subject to Seller's approval, which shall not
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be withheld unreasonably. Buyer and Seller agree that they will prepare and file
their federal and any state or local income tax returns based on the purchase
price allocation contained in the Allocation Schedule and agree not to take a
reporting position inconsistent therewith. This allocation is intended to comply
with Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"),
and Buyer and Seller hereby agree to prepare and file all notices or other
filings required pursuant to such section and hereby further agree that all such
notices or filings will be based on the allocation contained in the Allocation
Schedule.
SECTION 4
4. CLOSING.
4.1 Closing Date. The closing of the transactions contemplated by
this Agreement (the "Closing") shall occur at the offices of Wilson Sonsini
Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, as soon as
practicable after the satisfaction or waiver of each of the conditions set forth
in this Section 4 or at such other time and place as the parties hereto agree
(the "Closing Date").
4.2 Conditions to Obligation of Buyer. The obligation of Buyer to
close hereunder is subject to the following conditions:
(a) Subject to changes (i) resulting from the actions of Buyer
contemplated by Section 8.6 hereof or (ii) that are not in the aggregate
materially adverse in the reasonable judgment of Buyer, the representations and
warranties made by Seller in this Agreement shall be true and correct on and as
of the Closing Date with the same effect as if made on and as of the Closing
Date, and Seller shall have performed and complied with all agreements,
covenants and conditions on its part required to be performed or complied with
on or prior to the Closing Date.
(b) Buyer shall have received a certificate of the Secretary of
Seller, dated the Closing Date, in form and substance satisfactory to Buyer, as
to (i) the Articles of Incorporation of Seller; (ii) the by-laws of Seller;
(iii) the resolutions of the Board of Directors of Seller authorizing the
execution and performance of this Agreement and the other documents executed in
connection herewith; and (iv) the resolutions of the shareholders of Seller
authorizing the execution and performance of this Agreement.
(c) A duly authorized officer of Seller shall deliver to Buyer,
at the Closing, a certificate certifying as to the matters set forth in Section
4.2(a) hereof and that there has been no adverse change with respect to the
Assets or the Assumed Liabilities since the date hereof, except any such change
resulting from the actions of Buyer contemplated by Section 8.6 hereof.
(d) No legal action or proceeding shall be pending or threatened
(i) by any governmental agency seeking to restrain, prohibit, invalidate or
otherwise affect the consummation of
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the transactions contemplated hereby or (ii) which is reasonably likely to have
a material adverse effect on the Assets or the use of the Assets by the Buyer.
(e) Buyer and Seller shall have entered into a license agreement
related to Seller's intellectual property, such license agreement to be in the
form attached hereto as Exhibit C (the "License Agreement").
(f) Seller shall have delivered to Buyer all bills of sale,
endorsements, assignments and other instruments as Buyer shall reasonably
request or as necessary or appropriate to sell, convey, assign, transfer and
deliver to Buyer good title, free and clear of all Liens (except for Permitted
Liens), to all the Assets.
(g) All necessary third party consents shall have been obtained
for Seller to transfer the Assumed Contracts to Buyer.
(h) Buyer shall have received an opinion of counsel to the
Seller, such opinion to be substantially in the form attached hereto as Exhibit
D, with such changes as may be reasonably acceptable to Buyer. In addition, the
list of "material agreements" to be referenced in such opinion shall be
reasonably acceptable to Buyer and shall include the material contracts and
license agreements of Seller.
(i) The transactions contemplated hereby shall have been
approved by all necessary action of Seller's shareholders.
(j) Seller shall have received (A) the written consent of Maxtor
Corporation ("Maxtor") to the transactions contemplated hereby (including the
License Agreement) as required by that certain License Agreement between the
Seller and Maxtor dated September 23, 1991 (the "Maxtor Agreement"), and (B)
written confirmation from Maxtor that Buyer will not be obligated to extend any
license rights to Maxtor pursuant to Section 4.3 of the Maxtor Agreement or
otherwise, such consent and confirmation to be reasonably acceptable to Buyer.
(k) Seller shall have received the written consent of Denki
Kagaku Kogyo Kabushiki Kaisha ("Denka") to the transactions contemplated hereby
(including the License Agreement) to the extent required by Seller's existing
agreements with Denka, and such consent shall be reasonably acceptable to Buyer.
(l) Seller shall have received the written consent of NEC
Corporation ("NEC") to the transactions contemplated hereby (including the
License Agreement) as required by that certain License Agreement between the
Seller and NEC dated August 7, 1995, and such consent shall be reasonably
acceptable to Buyer.
(m) Seller shall have received written confirmation from Fujitsu
Corporation ("Fujitsu") that Buyer will not be obligated to extend any license
rights to Fujitsu
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pursuant to Section 4.3 of the License Agreement between Seller and Fujitsu
dated February 28, 1991 or otherwise, and such written confirmation shall be
reasonably acceptable to Buyer.
4.3 Conditions of Obligation of Seller. The obligation of Seller to
close hereunder is subject to the following conditions:
(a) Subject to changes that are not in the aggregate materially
adverse in the reasonable judgment of Seller, the representations and warranties
made by Buyer in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as if made on and as of the Closing Date, and
Buyer shall have performed and complied with all agreements, covenants and
conditions on its part required to be performed or complied with on or prior to
the Closing Date.
(b) No legal action or proceeding shall be pending or threatened
by any governmental agency seeking to restrain, prohibit, invalidate or
otherwise affect the consummation of the transactions contemplated hereby.
SECTION 5
5. REPRESENTATIONS AND WARRANTIES.
5.1 Representations and Warranties of Seller. Except as set forth in
the Disclosure Schedule attached hereto as Exhibit E, which schedule shall
specifically reference the Sections of this Agreement to which the disclosure
therein applies, Seller represents and warrants to Buyer as of the date of this
Agreement and as of the Closing Date as follows:
(a) Organization, Standing and Qualification. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of California. Seller has all requisite corporate power and authority and is
entitled to carry on its business as it is now being conducted, and to own,
lease or operate the properties owned, leased and operated by it in the places
where such business is now conducted and where the Assets and its other
properties are now owned, leased or operated. Seller is qualified to do business
as a foreign corporation in all jurisdictions where such qualification is
required for the conduct of its business, except where the failure to be so
qualified would not have a material adverse effect on Seller or the Assets.
(b) Execution, Delivery and Performance. Neither the execution
and delivery nor the performance of this Agreement by Seller will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien, charge or encumbrance pursuant to any provisions of
Seller's Articles of Incorporation or Bylaws, or any franchise, mortgage, deed
of trust, lease, license, agreement (including each of the Assumed Contracts) or
understanding, or conflict with, result in a default, right to accelerate or
loss of rights under, or result in the creation of any lien, charge or
encumbrance pursuant to any law, ordinance, rule or regulation, or any order,
judgment, award or
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decree to which Seller is a party or by which it may be bound or affected.
Seller has full corporate power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and all corporate and other
proceedings required to be taken to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly executed and
delivered by and constitutes the valid and binding obligation of Seller and is
enforceable in accordance with its terms.
(c) Good Title to Assets. Seller has good and marketable title
to all the Assets, and none of the Assets is subject to any Lien (other than
Permitted Liens).
(d) Taxes.
(i) To the extent a failure to do so could adversely impact
Buyer, the Assets or Buyer's use of the Assets, (a) Seller has timely filed
within the time period for filing or any extension granted with respect thereto,
all federal, state, local and foreign Tax returns, reports and estimates
("Returns") which it is required to file relating or pertaining to any and all
Taxes attributable to or levied upon the Assets and (b) paid any and all Taxes
it is required to pay in connec tion with the taxable periods to which such
Returns relate. There are (and immediately following the Closing Date there will
be) no Liens on the Assets relating or pertaining to Taxes. To the best know
ledge of Seller, there is no basis for the assertion of any claims which, if
adversely determined, would result in a Lien on the Assets or otherwise
adversely effect Buyer or the Assets.
(ii) To the extent relevant to the Assets, Seller shall (a)
provide Buyer with such assistance as may be required in connection with the
preparation of any Return and the conduct of any audit or other examination by
any taxing authority or in connection with judicial or administrative
proceedings relating to any liability for Taxes, provided that Buyer shall
reimburse Seller for any third party expenses reasonably incurred by Seller in
providing such assistance and (b) retain and provide Buyer with all records or
other information that may be relevant to the preparation of any Returns, or the
conduct of any audit or examination, or other Tax proceeding by a Governmental
Body or otherwise. Seller shall retain all relevant documents, including prior
year's Returns, supporting work schedules and other records or information that
may be relevant to such returns and shall not destroy or otherwise dispose of
any such records without the prior written consent of Buyer.
(e) Claims and Litigation. No Claim (including warranty claims),
legal action, suit, arbitration, governmental investigation or other legal,
regulatory or administrative proceeding is pending against Seller related to the
Assets, nor to the best of Seller's knowledge is there any threat thereof
against or relating to the Assets or the transactions contemplated by this
Agreement, and to the best of Seller's knowledge there is no basis for any such
Claim, suit or other proceeding.
(f) Suppliers. The Disclosure Schedule contains a correct list
of all of the current suppliers of supplies, equipment, spare parts or similar
goods for the use or operation of the
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Assets. To the best of Seller's knowledge, such suppliers provide all of the
supplies, equipment, spare parts or similar goods necessary to use or operate
the Assets.
(g) Compliance with Laws and Regulations; Permits. Seller is in
compliance with all statutes, laws, rules and regulations with respect to or
affecting the ownership or operation of the Assets. Seller is not presently
subject to any judgment, order, injunction or decree issued by any Governmental
Body or court relating to the Assets. Seller holds and has at all times held all
licenses, permits and authorizations necessary for the lawful conduct in all
respects of its business wherever conducted pursuant to all laws and regulations
of any Governmental Body. Seller does not know of any material violation of any
of the foregoing licenses, permits and authorizations and Seller has not
received notice from any Governmental Body of any such violation or the
intention of such Governmental Body to investigate the existence of any such
violation.
(h) Real Property; Environmental Matters.
(i) As of the Closing Date, to the best knowledge of
Seller,no Hazardous Substance is present on the property subject to the Lease
Agreement (the "Facility") and, to the best knowledge of Seller, no reasonable
likelihood exists that any Hazardous Substance present on other property will
come to be present on the Facility and there are no underground storage tanks,
aboveground storage tanks, asbestos or PCBs present on the Facility.
(ii) Seller has conducted all Hazardous Substance
Activities in compliance with all applicable Environmental Laws. The Hazardous
Substance Activities of Seller prior to the Closing Date have not resulted in:
(a) the exposure of any Employee to a Hazardous Substance in a manner which has
or will cause an adverse health effect to said person; or (b) the presence of
any Hazardous Substance at the Facility, or the air, soil, groundwater or
surface water thereof, in violation of Environmental Law.
(iii) The Disclosure Schedule accurately describes all of
the Environmental Permits currently held by the Seller and such Environmental
Permits are all of the Environmental Permits necessary for the continued conduct
of any Hazardous Substance Activity of the Seller as such activities are
currently being conducted. Except as set forth in the Disclosure Schedule, all
such Environmental Permits are valid, in full force and effect, and will survive
the Closing without modification. Seller has complied with all covenants and
conditions of any Environmental Permit which is or has been in force with
respect to its Hazardous Substances Activities. No circumstances exist which
could cause any Environmental Permit to be revoked, modified, or rendered
non-renewable upon payment of the permit fee or which could impose upon Seller
the obligation to obtain any additional Environmental Permit. All Environmental
Permits and all other consents and clearances required by any Environmental Law
or any agreement to which Seller is bound as a condition to the performance and
enforcement of this Agreement, including without limitation, all environmental
clearances or "closure" obligations required by any Governmental Body have been
obtained or will be obtained prior to the Closing at no cost to Buyer.
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(iv) In the best of Seller's knowledge, there is no fact or
circumstance which presently or with the passing of time could involve the
Facility in any proceeding concerning an Environmental Liability or impose upon
the Facility or Buyer any Environmental Liability.
(v) Seller has delivered to Buyer all records concerning
its Hazardous Substance Activities and all environmental audits and
environmental assessments of the Facility conducted at the request of, or
otherwise available to Seller. Seller has complied with all environmental
disclosure obligations imposed upon Seller with respect to this transaction by
applicable law.
(i) Property, Plant and Equipment. From the date hereof until
the Closing Date, none of the Assets shall be disposed of. All tangible personal
property, including machinery, equipment and fixtures, included in the Assets
is, and at the Closing Date will be, in good operating condition and repair,
ordinary wear and tear and routine maintenance excepted. The present use of
Seller's leased premises conforms, and at the Closing Date will conform
(assuming Buyer's use is consistent with Seller's use prior to February 5,
1996), to the requirements of the Lease Agreement. The Lease Agreement is valid
and enforceable and not in default. Seller is a legal and equitable owner and
holder of the leasehold interest in the Lease Agreement and Seller has not
assigned, transferred or encumbered its interest under the Lease Agreement nor
has Seller sublet all or any portion of the lease premises. The improvements on
the real property subject to the Lease Agreement are permitted structures under
applicable zoning and building laws and ordinances and the present or
contemplated uses of the improvements are permitted uses under applicable zoning
and building laws and ordin ances. The Facility is in good repair and to the
best of Seller's knowledge, there are no conditions existing on or relating to
the Facility which might result in any impairment of the use of the Facility by
Seller or Buyer.
(j) Assumed Contracts. Seller has provided to Buyer copies of
each of the Assumed Contracts, and has performed all obligations required to be
performed by it to date under all of the Assumed Contracts. Except as otherwise
indicated in the Disclosure Schedule, (a) to Seller's best knowledge each of the
other parties to the Assumed Contracts or bound thereby has performed all the
obligations required to be performed by it to date thereunder, (b) Seller does
not know of the intention of any party to terminate any such Assumed Contract,
and (c) each Assumed Contract is valid, binding and enforceable in accordance
with its terms and is in full force and effect with no default or dispute or
basis therefor existing with respect thereto.
(k) Employees. There are no suits, actions or administrative,
arbitration or other proceedings pending or threatened against Seller or
affecting Seller or its business concerning any Employee. Seller has no
Liabilities to any Employee or beneficiary of an Employee.
(l) Brokers or Finders. Seller is not obligated, directly or
indirectly, to any person for brokerage or finders' fees, agents' commissions or
any similar charges in connection with this Agreement or the transactions
contemplated hereby.
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(m) Proxy Statement. The information statement or proxy
statement prepared by Seller in connection with the meeting of Seller's
shareholders to consider the transactions contemplated hereby (the "Shareholders
Meeting") (such information statement or proxy statement as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to Seller's shareholders, at the time
of the Shareholders Meeting and at the Closing Date, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made therein not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Shareholders Meeting which has become false or misleading. If at
any time prior to the Closing Date any event or information should be discovered
by Seller which should be set forth in a supplement to the Proxy Statement,
Seller shall promptly inform Buyer and take all action necessary to so
supplement the Proxy Statement.
(n) Vote Required. The affirmative votes of the holders of a
majority of the shares of Seller's Common Stock and Preferred Stock outstanding
on the record date set for the Shareholders Meeting is the only vote of the
holders of any of Seller's capital stock necessary to approve this Agreement and
the transactions contemplated hereby.
(o) Board Approval. The Board of Directors of Seller has
unanimously (i) approved this Agreement and the transactions contemplated
hereby, and (ii) recommended that its shareholders approve this Agreement and
the transactions contemplated hereby.
(p) License Agreement. The representations and warranties made
by Seller in Section 3 of the License Agreement are hereby incorporated by
reference in their entirety.
(q) Representations Complete. None of the representations or
warranties made by Seller herein, nor any statement made in any schedule or
certificate furnished pursuant to this Agreement, contains or will contain any
untrue statement of a material fact at the Closing Date, or omits or will omit
to state any material fact necessary in order to make the statements contained
herein or therein not misleading. There is no fact known to Seller or any of its
management which adversely affects, or could reasonably be expected to adversely
affect, the Assets, Buyer's use of the Assets or the ability of Seller to carry
out the transactions contemplated by this Agreement.
5.2 Representations and Warranties of Buyer. Buyer represents and
warrants to Seller as of the date of this Agreement and as of the Closing Date
as follows:
(a) Organization, Standing and Qualification. Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Buyer has all requisite corporate power and authority
and is entitled to carry on its business as now conducted, and to own, lease or
operate its properties in the places where its business is now conducted and
such properties are now owned, leased or operated. Buyer is qualified to do
business in all foreign jurisdictions in which it is required to be so
qualified, except where the failure to be so qualified would not have a material
adverse effect on the business or assets of Buyer.
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(b) Execution, Delivery and Performance. Neither the execution
and delivery nor the performance of this Agreement by Buyer will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien or charge or encumbrance pursuant to any provision of
Buyer's Certificate of Incorporation or Bylaws, or any franchise, mortgage, deed
of trust, lease, license, agreement or understanding, or conflict with, result
in a default, right to accelerate or loss of rights under, or result in the
creation of any lien, charge or encumbrance pursuant to any law, ordinance,
rule or regulation, or any order, judgment, award or decree to which Buyer is a
party or by which it may be bound or affected. Buyer has full corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby, and all corporate and other proceedings required to be
taken to authorize the execution, delivery and performance of this Agreement
have been taken. This Agreement has been duly executed and delivered by and
constitutes the valid and binding obligation of Buyer and is enforceable in
accordance with its terms.
SECTION 6
6. ADDITIONAL AGREEMENTS.
6.1 Transfer Taxes. In connection with the transactions contemplated
hereunder, Seller shall pay all sales, use, transfer and other similar taxes, if
any, which may be or become due and payable as a result hereof.
6.2 Operation of Business Prior to Closing Date. During the period
from the date of this Agreement up to the Closing Date, Seller shall:
(a) conduct its business in the ordinary course consistent with
past practices, and use the Facility and the Assets in the usual, regular and
ordinary course and in substantially the same manner as heretofore used, except
for any actions of Buyer contemplated by Section 8.6 hereof;
(b) preserve and maintain the Assets in their condition as of
the date hereof (subject to use in the ordinary course of business), except for
any actions of Buyer contemplated by Section 8.6 hereof;
(c) perform all obligations required to be performed by it under
all of the Assumed Contracts, including the making of all payments under the
Assumed Contracts;
(d) give prompt notice to Buyer of any material adverse change
to the Assets or the Facility; and
(e) not mortgage, pledge or subject to Lien any of the Assets or
sell or transfer any of the Assets.
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6.3 Discharge of Liabilities. From and after the date hereof, Seller
shall discharge when due all Liabilities of Seller, provided that upon the
Closing, Buyer shall be responsible for all Assumed Liabilities.
6.4 Access to Information. Between the date of this Agreement and
the Closing Date, Seller shall give Buyer and its authorized representatives
reasonable access during normal working hours to Seller's facilities and
properties, and its books and records, shall permit Buyer to make inspections
thereof, and shall furnish Buyer with such financial and operating information
as Buyer may from time to time reasonably request.
6.5 Hiring of Employees. Seller acknowledges and agrees that with
Seller's consent, each of the Employees became employed by Buyer on February 5,
1996. Seller further acknowledges and agrees that the Employees were hired by
Buyer at Seller's request. In Seller, on behalf of itself, its shareholders,
officers and directors and anyone claiming by or through Seller, hereby releases
and forever discharges Seller and all of its subsidiaries, officers, directors,
employees, agents and anyone acting by or through Buyer from any and all Claims,
demands, torts, causes or action or claims for relief of whatever kind or
nature, whether known or unknown, which Seller may have or which may hereafter
be asserted or accrue against the Release Parties, or any of them, resulting
from or in any way relating to Buyer's hiring of the Employees.
6.6 No Other Negotiations. From and after the date of this Agreement
until the earlier of the Closing Date or the termination of this Agreement in
accordance with its terms, Seller shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by Seller or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than Buyer,
relating to the possible acquisition of Seller or any of its subsidiaries
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any of its or their capital stock or any material portion of its
or their assets (with any such efforts by any such person, including a firm
proposal to make such an acquisition, to be referred to as an "Acquisition
Proposal"), (ii) provide non-public information with respect to Seller or any of
its subsidiaries to any person, other than Buyer, relating to a possible
Acquisition Proposal by any person, other than Buyer, (iii) enter into an
agreement with any person, other than Buyer, providing for a possible
Acquisition Proposal, or (iv) make or authorize any statement, recommen dation
or solicitation in support of any possible Acquisition Proposal by any person
other than Buyer. If Seller or any of its subsidiaries receives any unsolicited
offer or proposal to enter negotiations relating to an Acquisition Proposal,
Seller shall immediately notify Buyer thereof, including infor mation as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. Seller recognizes and
acknowledges that a breach of this Section 6.6 may cause irreparable and
material loss and damage to Buyer as to which Buyer may not have an adequate
remedy at law or in damages and that, accordingly, Seller agrees that the
issuance of an injunction or other equitable remedy is the appropriate remedy
for any such breach. Notwith standing the foregoing, in the event that Seller
receives a bona fide, unsolicited proposal relating to an Acquisition Proposal
by any person other than Buyer, which proposal, in the reasonable good faith
judgment of Seller's Board of Directors, is financially more favorable to the
shareholders of Seller than the terms of this Agreement (a "Superior Proposal"),
Seller's Board of Directors may engage in
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discussions or negotiations with (but not soliciting or initiating such
discussions or negotiations or encouraging inquiries or the making of an
Acquisition Proposal by any third party other than the party making the Superior
Proposal) the party making the Superior Proposal if Seller's Board of Directors
determines in good faith, based on the written advice of outside legal counsel,
that such action is required by reason of the fiduciary duties of the members of
Seller's Board of Directors to Seller's shareholders under applicable law;
provided that in such event Seller notifies Buyer of such determination by the
Seller's Board of Directors and provides Buyer with a true and complete copy of
the Superior Proposal received from such third party, if the Superior Proposal
is in writing, or a complete written summary thereof, if it is not in writing,
and provides Buyer with all documents containing or referring to non-public
information of Seller that are supplied to such third party.
6.7 Proxy Statement. As promptly as practicable after the execution
of this Agreement, Seller shall prepare, and file with the Securities and
Exchange Commission, preliminary proxy materials relating to the approval of the
transactions contemplated hereby by the shareholders of Seller. The Proxy
Statement shall include the recommendation of the Board of Directors of Seller
in favor of the transactions contemplated hereby.
6.8 Meetings of Shareholders. Seller shall promptly after the date
hereof take all action necessary in accordance with law and its Articles of
Incorporation and Bylaws to convene the Shareholders Meeting on or prior to
April 5, 1996 or as soon thereafter as is practicable. Seller shall use its best
efforts to solicit from its shareholders proxies in favor of the transactions
contemplated thereby and shall take all other action necessary or advisable to
secure the vote or consent of shareholders required to effect the transactions
contemplated thereby.
6.9 Public Disclosure. Seller and Buyer shall consult with each
other before issuing any press release or otherwise making any public statement
or making any other public (or non-confidential) disclosure regarding the terms
of this Agreement and the transactions contemplated hereby, and neither shall
issue any such press release or make any such statement or disclosure without
the prior approval of the other (which approval shall not be unreasonably
withheld), except as may be required by law.
6.10 Consents. Promptly after the date hereof, Seller and Buyer
shall consult with each other regarding the actions which are required to be
taken to cause the Assumed Contracts to be transferred to Buyer on the Closing
Date. Subject to such consultations, Seller shall promptly apply for or
otherwise seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the transactions
contemplated hereby and shall use its best efforts to obtain all necessary
consents, waivers and approvals under any of the Assumed Contracts in connection
with the transaction for the assignment thereof or otherwise.
6.11 Voting Agreements. Prior to or concurrently with the execution
of this Agreement, each of Seller's shareholders named in Schedule 6.11 hereto
shall have executed and delivered to Buyer a Voting Agreement substantially in
the form of Exhibit F attached hereto.
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6.12 Buyer Subsidiary as Party. Seller acknowledges that Buyer may
create or use a subsidiary corporation that is wholly-owned directly or
indirectly by Buyer (a "Buyer Subsidiary") to own and operate the Assets after
the Closing Date. To the extent Buyer determines to create the Buyer Subsidiary
prior to the Closing Date, Seller agrees that the Buyer Subsidiary shall be
substi tuted for Buyer for the purpose of exercising those rights and performing
those obligations of Buyer as Buyer shall designate. Following the Closing Date
and the transfer of the Assets to the Buyer Subsidiary, the Buyer Subsidiary
shall be substituted for Buyer for the purpose of such sections. The creation or
use by Buyer of the Buyer Subsidiary pursuant to this Section 6.12, shall not
serve to (i) excuse Buyer as a primary obligor with respect to any obligation
delegated to the Buyer Subsidiary; or (ii) limit in any manner the right of
Buyer to directly enforce any rights hereunder that Buyer may have delegated to
the Buyer Subsidiary.
6.13 Release of Liens. On or prior to the Closing Date, all Liens on
the Assets and Seller's intellectual property, including but not limited to, (i)
those in favor of Silicon Valley Bank, (ii) those in favor of the investors
listed or described on the Disclosure Schedule and (iii) those otherwise listed
or referred to in the Disclosure Schedule; shall have been released or all such
actions as may be required in the sole judgment of Buyer to cause the release of
such Liens shall have been taken.
6.14 Release of Denka Liens. On or prior to the Closing Date, Seller
shall have deposited in escrow with its legal counsel, all amounts as are
required to satisfy any obligations of Seller to Denka necessary to obtain a
release of all Liens on the Assets and Seller's intellectual property in favor
of Denka, all as further detailed in Section 2.3.3 of the License Agreement.
Seller further covenants and agrees with Buyer that Seller will take all such
further actions as may be required in the sole judgment of Buyer to cause all
Liens in favor of Denka to be released on or prior to July 31, 1996.
SECTION 7
7. TERMINATION. This Agreement may be terminated at any time on or
prior to the Closing Date:
7.1 Injunction. By Buyer or Seller if any court of competent
jurisdiction in the United States shall have issued an order (other than a
temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such order, decree, ruling or other action shall have become final
and non-appealable.
7.2 Mutual Agreement. By mutual written agreement of Seller and
Buyer.
7.3 Seller Material Breach. By Buyer if there has been a material
breach on the part of Seller in its representations, warranties or covenants set
forth herein; provided, however, that if any such breach is susceptible to cure
Seller shall have ten (10) business days after receipt of written notice from
Buyer of its intention to terminate this Agreement pursuant to this Section 7.3
in which to cure such breach.
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7.4 Buyer Material Breach. By Seller if there has been a material
breach on the part of Buyer in its representations, warranties or covenants set
forth herein; provided, however, that if any such breach is susceptible to cure
Buyer shall have ten (10) business days after receipt of written notice from
Seller of its intention to terminate this Agreement pursuant to this Section 7.4
in which to cure such breach.
7.5 Effects of Termination.
(a) If this Agreement is terminated pursuant to Section 7.1 or
Section 7.2 hereof, at Buyer's election, Buyer and Seller shall enter into a
Limited License Agreement in substantially the form attached hereto as Exhibit
G (the "Limited License Agreement") and Buyer shall have the right to continue
to employ all of the Employees. In connection with the payment to be made by
Buyer to Seller pursuant to the Limited License Agreement, the amount of such
payment shall be reduced by the full amount of the Loan Adjustment Amount (as
defined in Section 3.3 hereof).
(b) If this Agreement is terminated pursuant to Section 7.3
hereof or in connection with a Superior Proposal (as defined in Section 6.6
hereof), at Buyer's election, Buyer shall have the right to continue to employee
all of the Employees and Buyer and Seller shall enter into the Limited License
Agreement. In such event, Buyer shall not be obligated to make any payment to
Seller under the Limited License Agreement. In addition, Seller shall be
obligated to repay all amounts which Seller has borrowed from Buyer pursuant to
the Promissory Notes, the Bridge Note or otherwise.
(c) If this Agreement is terminated pursuant to Section 7.4
hereof, Buyer agrees that any and all amounts due and payable by Seller to Buyer
pursuant to the Promissory Notes, the Bridge Note or otherwise shall be
discharged and canceled. In such event, Buyer shall have the right to continue
to employ all of the Employees and, at Buyer's election, Buyer and Seller shall
enter into the Limited License Agreement.
SECTION 8
8. HOLDBACK OF FINAL PAYMENT; INDEMNIFICATION
8.1 Holdback of Final Payment. The payments referenced in Section
3.1(ii) and (iii) above (the "Interim Payments") and the Final Payment shall be
retained by Buyer as security to compensate Buyer for any loss, expense,
liability or other damage, including attorneys' fees, to the extent of the
amount of such loss, expense, liability or other damage (collectively "Damages")
that Buyer has incurred or reasonably anticipates incurring by reason of the
breach by Seller of any representation, warranty, covenant or agreement of, or
misrepresentation by, Seller contained in this Agreement or in the License
Agreement. In the case of a third party claim, any indemnification for Damages
hereunder shall be offset or reduced by any amount actually recovered by Buyer
pursuant to counterclaims made by it directly relating to the facts giving rise
to such third party claims. Nothing in this Agreement shall limit the liability
(i) of Seller for any breach of any representation, warranty or
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covenant if the Closing does not occur, or (ii) of any shareholder of Seller in
connection with any breach by such shareholder of the Voting Agreement signed by
such shareholder in connection with this Agreement.
8.2 Claims upon Final Payment.
(a) Subject to the other provisions of this Section 8, the
Interim Payments and the Final Payment shall be paid by Buyer to Seller on the
respective payment dates set forth in Section 3.1; provided, however, that Buyer
shall have no obligation to pay to Seller such portion of such payments which,
in the reasonable judgment of Buyer, subject to the objection of the Seller and
the subsequent arbitration of the matter in the manner provided below, is
necessary to satisfy any unsatisfied claims specified in any Officer's
Certificate theretofore delivered to the Seller on or prior to the relevant
payment date until such claims have been resolved. As soon as all such claims
have been resolved, the Buyer shall deliver to Seller the remaining portion of
the applicable payment not required to satisfy such claims.
(b) Upon receipt by the Seller on or before the applicable
payment date of a certificate signed by any officer of Buyer (an "Officer's
Certificate"):
(i) stating that Damages exist or are reasonably
anticipated to exist and specifying in reasonable detail the individual items as
to which Damages relate, the date each such item was paid, or properly accrued
or arose, and the nature of the misrepresentation, breach of warranty or claim
to which such item is related, then
(ii) the applicable payment shall be reduced dollar for
dollar in an amount equal to such Damages.
(c) The Officer's Certificate shall be delivered within a
reasonable time after Buyer concludes that it has a claim for Damages for which
it will seek recovery and concerning which it has the information required to be
stated in the Officer's Certificate.
8.3 Objections to Claims. Upon the expiration of a thirty (30) day
period following delivery of the Officer's Certificate by Buyer to Seller, the
amount of the applicable payment shall be deemed to be reduced by the amount of
the Damages unless Seller shall object in a written statement delivered to the
Buyer prior to the expiration of such thirty (30) day period. Notwithstanding
anything herein to the contrary, Seller shall not be liable for any claims for
Damages unless the aggregate amount of such Damages exceeds $50,000.00 or unless
the amount of any individual claim for Damages exceeds $25,000.00, provided that
in either such case Buyer shall be entitled to recover for its entire claim once
either such threshold is met. Except as set forth in Section 4.2 of this
Agreement, the holdback provisions contained in this Section 8 shall be deemed
to be the exclusive remedy of Buyer in the event of any breach by Seller of any
representation or warranty contained herein (or in any certificates or documents
delivered pursuant hereto), except for (i) claims relating to fraud or willful
concealment or willful misrepresentation by Seller, (ii) any claim
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56
or action by Buyer under the License Agreement and (iii) any claim or action by
Buyer related to Seller's obligations under Section 6.16 hereof.
8.4 Resolution of Conflicts, Arbitration.
(i) In case the Seller shall so object in writing to any claim
or claims by Buyer made in any Officer's Certificate, Buyer shall have thirty
(30) days to respond in a written statement to the objection of the Seller. If
after such thirty (30) day period there remains a dispute as to any claims, the
Seller and Buyer shall attempt in good faith for thirty (30) days to agree upon
the rights of the respective parties with respect to each of such claims. If the
Seller and Buyer should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties.
(ii) If no such agreement can be reached after good faith
negotiation, either Buyer or the Seller may, by written notice to the other,
demand arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event arbitration shall
not be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by arbitration
conducted by three (3) arbitrators. Within fifteen (15) days after such written
notice is sent, Buyer and the Seller shall each select one (1) arbitrator, and
the two (2) arbitrators so selected shall select a third arbitrator. The
decision of the arbitrators as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to this
Agreement.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara, California under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section 8.4, in any
arbitration hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, Buyer shall be deemed to be the
Non-Prevailing Party unless the arbitrators award Buyer more than one-half (1/2)
of the amount in dispute, plus any amounts not in dispute; in that event, Seller
shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
8.5 Third-Party Claims. In the event Buyer becomes aware of a
third-party claim which Buyer believes may result in a claim against the Final
Payment, Buyer shall notify the Seller of such claim, and the Seller shall be
entitled, its expense, to participate in any defense of such claim. Buyer may
not effect the settlement of any such claim without the consent of the Seller,
which consent shall not be unreasonably withheld. In the event that the Seller
has consented to any such settlement, the Seller shall have no power or
authority to object under any provision of this Section 8 to the amount of any
claim by Buyer against the Interim Payments or the Final Payment for indemnity
with respect to such settlement.
8.6 Conduct of the Business of the Assets. Seller acknowledges and
agrees that at Seller's request and with Seller's informed consent, Buyer has
agreed to operate the Assets in place at
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57
the Facility from February 5, 1996 until the Closing Date. Accordingly, Seller
and Buyer hereby agree that Buyer shall not be entitled to recover for any
Damages resulting from the actions of Buyer or any employee of Buyer to the
extent that any such action results in the breach by Seller of any
representation, warranty, covenant or agreement of Seller contained in this
Agreement nor shall such actions by Buyer constitute a breach by Seller of any
covenant or agreement hereunder or of any representation or warranty of Seller
hereunder.
SECTION 9
9. MISCELLANEOUS.
9.1 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
9.2 Further Assurances. Each party agrees to cooperate fully with
the other party and to execute such further instruments, documents and
agreements and to give such further written assurances and to make physical
delivery of any Assets not already delivered or made reasonably available to
Buyer from and after the date hereof as may be reasonably requested to evidence
and reflect the transaction described herein.
9.3 Changes, Waivers, Etc. Neither this Agreement nor any provision
hereof may be amended, changed, waived, discharged or terminated orally, except
by a statement in writing which references this Agreement and is signed by the
party against whom enforcement of the amendment, change, waiver, discharge or
termination is sought.
9.4 Payment of Fees and Expenses. Each of the parties hereto shall
pay its own respective fees and expenses incurred in connection herewith.
9.5 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, sent by telecopy, or mailed first-class postage prepaid, registered
or certified mail,
If to Buyer: Read-Rite Corporation
345 Los Coches Street
Milpitas, CA 95035
Attention: Rex S. Jackson, Esq.
Telephone: (408) 262-6700
Telecopy: (408) 956-3203
with a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
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58
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Frances S. Currie, Esq.
Telephone: (415) 493-9300
Telecopy: (415) 493-6811
If to Seller: Censtor Corporation
530 Race Street
San Jose, CA 95126
Attention: Garry A. Garrettson
Telephone: (408) 298-8400
Telecopy: (408) 288-9910
with a copy to: Heller, Ehrman, White & McAuliffe
525 University Avenue
Suite 1100
Palo Alto, CA 94301
Attention: Matthew Quilter
Telephone: (415) 324-7000
Telecopy: (415) 324-0638
Such notices and other communications shall for all purposes of this Agreement
be treated as being effective or having been given if delivered personally or by
telecopy on the date of delivery, or, if sent by mail, five (5) days thereafter.
9.6 Entire Agreement. This Agreement, including the schedules and
exhibits which are incorporated into and made an integral part of this Agreement
by reference, sets forth the entire understanding of the parties and supersedes
all prior agreements of the parties (including the Letter Agreement) with
respect to the subject matter hereof.
9.7 Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not.
9.8 Best Efforts. Each party will use its best efforts to cause all
conditions to its obligations hereunder to be timely satisfied and to perform
and fulfill all obligations on its part to be performed and fulfilled under this
Agreement to the end that the transactions contemplated hereby shall be effected
substantially in accordance with the terms of this Agreement as soon as
practicable.
9.9 Bulk Transfer Laws. Subject to Section 8, the parties hereby
waive compliance with any applicable bulk transfer laws, including, but not
limited to, the bulk transfer provisions of the Uniform Commercial Code of any
state, or any similar statute, with respect to the transactions contemplated
hereby.
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59
9.10 Attorneys' Fees. If any litigation or arbitration is commenced
between the parties hereto or their representatives concerning any provision of
this Agreement or the rights and duties of any person or entity hereunder,
solely as between the parties hereto or their successors, the party or parties
prevailing in such proceeding (including any arbitration) will be entitled to
the reasonable attorneys' fees and expenses of counsel and court costs and other
out-of-pocket expenses incurred by reason of such litigation or arbitration.
9.11 Equitable Remedies. The parties acknowledge that the remedy at
law for any breach, or threatened breach, of their respective covenants to
consummate the transactions contemplated hereby will be inadequate and,
accordingly, each covenants and agrees that, with respect to any such breach or
threatened breach, the other will, in addition to any other rights or remedies
that it may have and regardless of whether such other rights or remedies have
been previously exercised, be entitled to such equitable and injunctive relief
as may be available from any appropriate court.
9.12 Headings; References to Agreement. The headings of the sections
of this Agreement have been inserted for convenience of reference only and do
not constitute a part of this Agreement. References herein to "this Agreement"
shall include all schedules and exhibits hereto.
9.13 Choice of Law; Interpretation. It is the intention of the
parties that the laws of the State of California shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties. Each party acknowledges and agrees that it has
had the opportunity to seek advice from legal counsel regarding the terms and
provisions of this Agreement and that, in any event, this Agreement shall not be
construed against any party by reason of its preparation or word processing.
9.14 Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted from this
Agreement and the remaining provisions of this Agreement shall be unaffected and
shall continue in full force and effect.
9.15 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
9.16 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed and delivered as of date and year first above written.
READ-RITE CORPORATION CENSTOR CORPORATION
By: /s/ REX S. JACKSON By: /s/ GARRETT A. GARRETTSON
-------------------------------- ---------------------------------
Title: VICE PRESIDENT AND Title: PRESIDENT AND CEO
GENERAL COUNSEL --------------------------------
-----------------------------
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APPENDIX B
March 29, 1996
Board of Directors
Censtor Corporation
530 Race Street
San Jose, CA 95126
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Censtor Corporation ("Censtor") of the
consideration to be paid by Read-Rite Corporation ("RRC") in the transactions
between Censtor and RRC as set forth in the Agreement for Purchase and Sale of
Assets dated March 29, 1996 and License Agreements attached as exhibits thereto
(the "Agreements").
Von Gehr International, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions and corporate partnering transactions.
In arriving at our opinion, we have reviewed the Agreements and also have
reviewed financial, product and other information that was furnished to us by
Censtor. We also have held discussions with members of the senior managements of
Censtor and RRC regarding the historic and current business operations and
future risks and prospects of their respective companies including their
expectations for certain strategic benefits of the transaction. We reviewed the
basic structure of the technology licenses previously granted by Censtor, and in
addition, have analyzed consideration provided in certain other similar
licensing transactions, and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
We have assumed, without independent verification, the accuracy, completeness
and fairness of all of the financial statements, product information, marketing
strategies and other information regarding Censtor which have been provided to
us by the Company and its representatives. We did not make any independent
evaluation of Censtor's assets or technologies, nor did we independently review
any of their corporate records.
62
Censtor Corporation Page 2
Board of Directors March 29, 1996
Based on the foregoing and such other factors as we deem relevant, we are of the
opinion as of the date hereof, that the payment of $9,025,000 plus additional
considerations including forgiveness of approximately 50% of the $800,000 loan
provided by RRC to Censtor and assumption of the outstanding lease obligations
of approximately $1,300,000 in exchange for all of the "hard" assets (machinery,
equipment, etc.) of the Company (subject to non material defined exclusions) and
a fully paid up non exclusive license to Censtor's intellectual property, as set
forth in the Agreements, is fair, from a financial point of view, to Censtor
shareholders.
Sincerely Yours,
/s/ VON GEHR INTERNATIONAL
- -------------------------------
Von Gehr International
63
APPENDIX C
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed balance sheet at March 31,
1996, and unaudited pro forma condensed statements of operations for the year
ended June 30, 1995 and the nine months ended March 31, 1996 give pro forma
effect to the estimated financial effects of the Asset Sale Agreement (the
"Agreement") with Read-Rite. The pro forma condensed balance sheet as of March
31, 1996 gives pro forma effect to the Agreement as if such transactions were
consummated on that date. The pro forma condensed statements of operations for
the year ended June 30, 1995 and the nine months ended March 31, 1996, present
the results of operations of Censtor as if the Agreement occurred on July 1,
1994. The pro forma information is based on the historical financial statements
of Censtor giving effect to the assumptions and adjustments set forth in the
accompanying notes.
The unaudited pro forma condensed financial data have been prepared by
Censtor management and are not necessarily indicative of how the Company's
balance sheet and results of operations would have been presented had the
transaction with Read-Rite actually been consummated at the assumed dates, nor
are they necessarily indicative of the presentation of the Company's balance
sheet and results of operations for any future period. The unaudited pro forma
condensed financial data should be read in conjunction with the financial
statements and related notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations incorporated herein by reference.
Fiscal Year Ended June 30, 1995
-----------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
------------ ------------ ----------
Statement of Operations Data:
Revenues - license fees $ 3,515,472 $ (2,182,139) A, F $1,333,333
Costs and expenses:
Research and development 11,448,501 (11,448,501) A --
Selling, general and administrative 2,846,235 (1,046,235) A 1,800,000
------------ ------------ ----------
Total expenses 14,294,736 (12,494,736) 1,800,000
------------ ------------ ----------
Operating loss (10,779,264) 10,312,597 (466,667)
Interest and other income 173,379 -- B 173,379
Interest and other expense (1,132,525) 402,484 C (730,041)
Minority interest in loss of subsidiary 81,650 -- 81,650
------------ ------------ ----------
Loss before income tax expense (11,656,760) 10,715,081 (941,679)
Income tax expense (290,350) 290,350 A --
------------ ------------ ----------
Net loss $(11,947,110) $ 11,005,431 $ (941,679)
============ ============ ==========
Net loss per share $ (1.29) $ (0.10)
============ ==========
Weighted average number of shares
used in computing per share amount 9,255,000 9,255,000
64
Nine Months Ended March 31, 1996
--------------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
----------- ------------ ----------
Statement of Operations Data:
Revenues - license fees $ 3,202,706 $(2,202,706) A, F $1,000,000
Costs and expenses:
Research and development 7,399,095 (7,399,095) A --
Selling, general & administrative 1,754,855 (404,855) A 1,350,000
----------- ----------- ----------
Total expenses 9,153,950 (7,803,950) 1,350,000
----------- ----------- ----------
Operating loss (5,951,244) 5,601,244 (350,000)
Interest and other income -- -- B --
Interest and other expense (693,701) 225,662 C (468,039)
Minority interest in loss of subsidiary 194,642 -- 194,642
----------- ----------- ----------
Loss before income tax expense (6,450,303) 5,826,906 (623,397)
Income tax expense (319,450) 319,450 A --
----------- ----------- ----------
Net loss $(6,769,753) $ 6,146,356 $ (623,397)
=========== ============ ` ==========
Net loss per share $ (0.73) $ (0.07)
=========== =========
Weighted average number of shares
used in computing per share amount 9,301,000 9,301,000
March 31, 1996
--------------------------------------------------
Censtor Pro Forma Censtor
Historical Adjustments Pro Forma
----------- ------------ ----------
BALANCE SHEET DATA:
ASSETS:
Current assets:
Cash and cash equivalents $ 50,703 $ 900,283 E $ 950,986
Receivables 8,846 2,500,000 E 2,508,846
Prepaid expenses & other current assets 121,246 -- 121,246
Property & equipment held for sale 1,260,693 (1,260,693) D --
------------ ------------ ----------
Total current assets 1,441,488 2,139,590 3,581,078
Property & equipment, net 13,311 -- 13,311
Restricted cash 94,450 (94,450) E --
Deposits & other assets 147,221 -- 147,221
------------ ----------- ----------
Total assets $ 1,696,470 $ 2,045,140 $3,741,610
============ =========== ==========
LIABILITIES & NET CAPITAL DEFICIENCY:
Current liabilities:
Notes payable $ 5,900,000 $ (2,900,000) E $3,000,000
Accounts payable 1,005,557 (800,000) E 205,557
Deferred Revenue -- 8,000,000 F 8,000,000
Accruals & other liabilities 385,472 (19,167) E 366,305
Obligations under capital leases 806,887 (806,887) D --
------------ ------------ -----------
Total current liabilities 8,097,916 3,473,946 11,571,862
Long-term obligations:
Obligations under capital leases 127,080 (127,080) D --
Subordinated debentures 14,282,547 (2,000,000) E 12,282,547
Net capital deficiency (20,811,073) 698,274 D (20,112,799)
------------ ------------ ------------
Total liabilities and net capital deficiency $ 1,696,470 $ 2,045,140 $ 3,741,610
============= ============ ============
65
NOTES TO UNAUDITED PRO-FORMA CONDENSED FINANCIAL DATA
(A) Prior to the consummation of the Agreement, the Company was primarily
engaged in research and development activities and providing technological
assistance and support to its licensees. In conjunction with the Agreement,
substantially all of the Company's employees, including all of its research
and development employees, were transferred to Read-Rite. Accordingly,
research and development expenses and a significant portion of selling,
general and administrative expenses would not have been incurred. Without a
research and development department to provide ongoing technological
assistance and support to its licensees, the non-refundable license fees
(and any related withholding tax) would have been recognized when the
license fees were received.
(B) No interest income is reflected on the cash transferred to the Company by
Read-Rite.
(C) The Company expects a reduction in interest expense following the
assumption of the capital leases by Read-Rite as part of the Agreement and
due to the use of $2,000,000 of the sale proceeds to repay a portion of the
subordinated debentures.
(D) Reflects the transfer of the majority of the Company's tangible fixed
assets to Read-Rite and the assumption by Read-Rite of the associated
capital leases in accordance with the agreement. A gain of $698,274 arises
on the sale of the equipment and transfer of the assembled workforce.
(E) The Company will receive gross consideration of $9,025,000 in connection
with the Agreement. The gross consideration will be reduced by
approximately $1,600,000 of the $2,450,000 total expected to be outstanding
at the Closing with respect to an existing note payable of $900,000 to
Read-Rite and an additional $1,550,000 bridge loan from Read-Rite received
or to be received under terms of the Agreement. The remaining amounts
received under the notes, (about $850,000), will be used to pay certain
expenses incurred up to the Closing relating to the employees transferred
and the physical assets to be sold to Read-Rite and these amounts will be
forgiven. The Company estimates that it will receive net consideration of
$8,125,000 of which $5,625,000 will be received at the Closing. The net
consideration will be used as follows:
Payment of certain accounts
payable balances $ 800,000
Repayment of Silicon Valley
Bank note 1,000,000
Repayment of investors
notes (of which $453,000 1,000,000
will be paid nine months after
Closing)
Payment of investors accrued
interest 19,167
Repayment of a portion of the
subordinated debentures 2,000,000
----------
$4,819,167
==========
66
An additional $2,500,000 will be received by the Company provided that
certain representations and warranties included in the Agreement are not
violated. This amount is receivable in the following installments:
November 15, 1996 $ 250,000
December 13, 1996 250,000
Nine months from the closing
date 2,000,000
----------
$2,500,000
==========
Further, following the assumption by Read-Rite of the capital leases, the
restrictions over $94,450 of the Company's cash will be released.
(F) Deferred revenue relates to the license fee received or due from Read-Rite.
Under the terms of the Agreement, Censtor shall continue to file patent
applications and maintain and defend the patents during the term of the
Agreement.
Censtor has granted Read-Rite a security interest in its intellectual
property to secure certain obligations and warranties with respect to the
intellectual property for a period of six years following the effective
date of the Agreement. After the third year after the effective date of the
Agreement, Censtor may terminate the security interest by depositing $4.0
million in an escrow account. Such amount is reduced by $1.0 million in
each of the succeeding two years, and the escrow terminates the following
year.
Management believes that all of the license fee may not be realized due to
amounts which will have to be paid out of the escrow fund or amounts which
will have to be paid prior to the establishment of the escrow. Accordingly,
$4.0 million of the license fee will be recognized ratably over the first
three years following the effective date of the agreement, which
approximates the time period during which Censtor expects to be incurring
costs to maintain its patents and which also reflects management estimate
of the reduction in potential exposure from the effective date of the
Agreement until the establishment of the escrow fund. Subsequent amounts
will be recognized as the escrow fund is reduced. Therefore, the pro forma
statement of operations include revenue recognized on the license of
$1,333,333 and $1,000,000 for the year ended June 30, 1995 and the nine
months ended March 31, 1996, respectively.