1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended: September 30, 1996 or
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2105 Hamilton Ave., #270
San Jose, California 95125
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 298-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1996
Common Stock - no par value 9,303,344
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CENSTOR CORP.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1996 and September 30, 1996 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
three months ended September 30, 1995 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited)
three months ended September 30, 1995 and 1996 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
ASSETS 1996 1996
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 199,998 $ 165,605
Receivables 14,336 2,513,170
Prepaid expenses and other current assets 111,135 59,446
Property and equipment held for sale 911,055 --
------------- -------------
Total current assets 1,236,524 2,738,221
Property and equipment, net 11,823 10,433
Restricted cash 94,450 94,450
Deposits and other assets 138,970 4,250
------------- -------------
Total assets $ 1,481,767 $ 2,847,354
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Notes payable $ 6,450,000 $ --
Accounts payable 974,889 279,906
Notes payable to related parties 1,000,000 453,325
Accrued payroll and related expenses 232,278 111,927
Income taxes payable -- 600,000
Deferred revenue -- 3,833,333
Other current liabilities 378,257 20,400
Obligations under capital leases 607,843 --
------------- -------------
Total current liabilities 9,643,267 5,298,891
Long-term obligations:
Deferred revenue -- 6,333,334
Subordinated debentures 14,488,311 --
Restructured debt obligation -- 12,679,377
Net capital deficiency:
Preferred stock 32,509,031 32,509,031
Common stock 50,508,593 50,508,593
Warrants to purchase shares of preferred stock 253,050 253,050
Capital surplus 2,263,708 2,263,708
Accumulated deficit (107,906,450) (106,720,887)
------------- -------------
(22,372,068) (21,186,505)
Notes receivable from shareholders (277,743) (277,743)
------------- -------------
Net capital deficiency (22,649,811) (21,464,248)
------------- -------------
Total liabilities and net capital deficiency $ 1,481,767 $ 2,847,354
============= =============
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1995 1996
------------ ------------
Revenues - license fees $ 1,339,582 $ 838,333
Costs and expenses:
Research and development 2,760,821 --
Selling, general, and administrative 590,168 550,128
------------ ------------
Total expenses 3,350,989 550,128
------------ ------------
Operating income (loss) (2,011,407) 288,205
Interest and other expenses, net 94,468 (1,497,358)
Minority interest in loss of subsidiary (177,030) --
------------ ------------
Income (loss) before income tax expense (1,928,845) 1,785,563
Income tax expense 136,117 600,000
------------ ------------
Net income (loss) $ (2,064,962) $ 1,185,563
------------ ------------
Net income (loss) per share $ (0.22) $ 0.05
============ ============
Weighted average number of shares used in
computing per share amounts (in thousands) 9,300 24,291
============ ============
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
Operating activities: 1995 1996
------------ ------------
Net income (loss) $ (2,064,962) $1,185,563
Adjustments to reconcile net income (loss) to net
cash
used in operating activities:
Depreciation and amortization 375,460 13,878
Gain on sale of fixed assets (169,773) --
Gain on transfer of research and development operations -- (1,596,706)
Interest on subordinated debentures 190,215 191,066
Loss applicable to minority interest (177,030) --
Changes in assets and liabilities:
Receivables (313,450) (2,498,834)
Prepaid expenses and other current assets 7,521 51,689
Accounts payable 159,139 (694,983)
Accrued payroll and related expenses (33,253) (120,351)
Deferred revenue (229,166) 7,166,667
Income taxes payable and other current liabilities (20,479) 242,143
------------ ------------
(210,816) 2,754,569
------------ ------------
Net cash provided by (used in) operating activities (2,275,778) 3,940,132
Investing activities:
Additions to property and equipment (93,947) --
Deposits and other assets -- 122,220
Proceeds from sale of fixed assets and transfer of assembled 550,000 1,025,000
workforce
------------ ------------
Net cash provided by investing activities 456,053 1,147,220
------------ ------------
Financing activities:
Proceeds from issuance of short-term debt 1,500,000 350,000
Principal payments of short- and long-term debt -- (5,447,920)
Principal payments under capital leases (417,054) (23,825)
Sale of preferred stock of subsidiary 230,000 --
------------ ------------
Net cash provided by (used in) financing activities 1,312,946 (5,121,745)
------------ ------------
Net decrease in cash and cash equivalents (506,779) (34,393)
Cash and cash equivalents at beginning of period 1,368,891 199,998
------------ ------------
Cash and cash equivalents at end of period $ 862,112 $ 165,605
============ ============
Supplemental disclosure of noncash financing activities:
Equipment purchased under capital leases $ 24,851 $ --
Conversion of note payable to license -- $ 3,000,000
Assignment of leases in connection with sale of assets -- $ 584,018
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information, and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for annual consolidated financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ended June 30, 1997. The financial information presented herein should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended June 30, 1996 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
NOTE 2 -- NET INCOME (LOSS) PER SHARE:
Net income per share is computed based upon the weighted average number
of shares outstanding of the Company's common stock and convertible preferred
stock on an if-converted basis, and dilutive common stock equivalents from the
exercise of stock options and warrants (using the treasury stock method). Common
stock equivalents from stock options and warrants are excluded from the
computation if their effect is antidilutive. The Company's common stock
equivalent shares were antidilutive for the quarter ended September 30, 1996
and, accordingly, were not included in the weighted average number of shares.
Net loss per share is computed based on the weighted average number of
shares of the Company's common stock. The Company's common stock equivalent
shares from convertible preferred stock and from stock options and warrants were
antidilutive for the quarter ended September 30, 1995 and, accordingly, were not
included in the weighted average number of shares.
NOTE 3 -- INCOME TAXES
The Company has recorded an income tax provision of $600,000 for the
quarter ended September 30, 1996. The provision relates to the Company's
alternative minimum tax liability on earnings for the three months ended
September 30, 1996. In the quarter ended September 30, 1995, the Company
recorded a tax provision of $136,000 relating to the 10% Japanese withholding
tax on the sale of a license.
NOTE 4 -- THE READ-RITE TRANSACTION:
On March 29, 1996, the Company entered into an agreement with Read-Rite
Corporation ("Read-Rite"), a large manufacturer of components
for disk drives, that provided for the transfer of the Company's research and
development operations, including the hiring of 84 of its employees, the sale of
certain of the Company's physical assets and rights and obligations under
contracts related thereto (the "Read-Rite Transaction"). The agreement was
approved by Censtor's shareholders on July 11, 1996 and closed on July 18, 1996
(the "Closing").
Additionally, on the Closing of the Read-Rite Transaction, the Company
granted a non-exclusive irrevocable world-wide license to Read-Rite covering the
Company's intellectual property, including the Company's rights in patents,
technology and software.
Gross proceeds to the Company in connection with the Read-Rite
Transaction are approximately $9.0 million subject to certain adjustments under
the agreement, $6.5 million of which was received on the Closing, with the
balance receivable in installments from
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November 15, 1996 through April 18, 1997, subject to certain conditions. The
gross proceeds were reduced by approximately $1.9 million, related to partial
repayment of the outstanding balance on notes payable to Read-Rite. The
remaining balance on the notes payable of approximately $900,000 was forgiven
(see Note 6).
Of the total proceeds, $8.0 million was in consideration for the grant
of the license and $1.0 million for the sale of assets and transfer of the
assembled workforce. The Company recognized a gain of approximately $700,000 in
connection with the sale of assets and the transfer of the assembled workforce.
Of the net proceeds from the Read-Rite Transaction, the Company used
approximately $3.6 million to pay down obligations that were due as of the
Closing, including a $2.0 million payment to partially repay outstanding accrued
interest on the subordinated debentures (see Note 7), $1.0 million to repay the
Company's line of credit, and $598,000, including accrued interest, to partially
repay the convertible promissory notes (see Note 6) from investors. The
remainder of the proceeds will be used for general working capital
purposes with respect to the Company's ongoing licensing operations.
The Company has granted to Read-Rite a security interest in its
intellectual property to secure certain obligations and warranties with respect
to the intellectual property for a period of six years following the effective
date of the Agreement. After the third year following the effective date of the
Agreement, 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 two succeeding years, and the escrow terminates the following year.
The Company believes that all of the license fee may not be realized
due to amounts that will have to be paid out of the escrow fund or amounts that
will have to be paid prior to the establishment of the escrow. Accordingly, the
Company is recognizing $4.0 million of the license fee ratably over the first
three years following the closing of the Agreement, which approximates the time
period during which the Company expects to be incurring costs to maintain its
patents in support of the license agreement. Subsequently, amounts will be
recognized as the escrow fund described above is reduced.
NOTE 5 -- LICENSE ARRANGEMENTS:
In August 1996, a promissory note issued to a potential licensee by a
subsidiary of the Company was assigned to Censtor and converted to a world-wide,
non-exclusive license.
NOTE 6 -- BRIDGE LOANS:
In January 1996, several of the existing investors of Censtor loaned
the Company $1.0 million in exchange for promissory notes convertible into
shares of the next security issued by the Company. The Company repaid
approximately $598,000, including accrued interest of $51,000 out of the
proceeds from the Closing of the Read-Rite Transaction, and the due date of the
balance of the notes was extended until nine months after the Closing.
Between February and July 1996, the Company obtained bridge loans
totalling $2.8 million from Read-Rite as part of negotiations for Read-Rite to
purchase fixed assets from Censtor and acquire a patent and know-how license.
The Bridge Loans were used to pay the operating expenses of the Company until
the Closing, at which time all the contracts and associated liabilities were to
be assumed by Read-Rite and subsequent to which all related expenses would be
paid by Read-Rite. Accordingly, on the Closing, the Company received a net
amount of $4.6 million from Read-Rite out of the $6.5 million first installment.
NOTE 7 -- SUBORDINATED DEBENTURES:
On February 22, 1996, the subordinated debentures were modified such
that the Company was obligated to pay $2.0 million against the outstanding
accrued interest by July 31, 1996. This amount was paid upon the Closing of the
Read-Rite Transaction. Furthermore, if certain financial conditions were not
met, the debenture holder agreed to forgive the remaining outstanding principal
and accrued interest on
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September 30, 1996 in return for 5% of any royalties Censtor receives from its
present and future licenses through the year 2001. The Company did not meet the
financial conditions and consequently, the outstanding interest and principal
of $12.7 million was forgiven. The future cash payments related to the increase
in the share of royalties are currently indeterminate and may exceed the
carrying value of the debentures prior to the debt being forgiven. Therefore,
the Company has deferred recognition of any gain as a result of the debt being
forgiven until such time as the future cash payments become estimable.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the course of the following discussion and analysis, we may make
projections or other forward-looking statements regarding future events or the
future financial performance of the Company. We wish to caution you that such
statements are just predictions and that actual events or results may differ
materially. We refer you to the documents the Company files from time to time
with the Securities and Exchange Commission, specifically the Company's last
filed Form 10-K. These documents contain and identify important factors that
could cause the actual results to differ materially from those contained in our
projections or forward-looking statements.
In the following discussion and analysis, forward-looking statements
are made in the Overview, Liquidity and Capital Resources, and Results of
Operations sections.
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. Until the current fiscal quarter, the
Company had not been profitable in any fiscal period since inception and as of
September 30, 1996 had an accumulated deficit of $106.7 million. There can be no
assurance that the Company will achieve or sustain significant revenues or
profitability in the future.
On March 29, 1996, the Company entered into an agreement with Read-Rite
Corporation, a large manufacturer of components for disk drives ("Read-Rite"),
that provided for the transfer of the Company's research and development
operations, including the hiring of 84 of its employees, the sale of certain of
the Company's physical assets and rights and obligations under contracts related
thereto (the "Read-Rite Transaction"). The agreement was approved by Censtor's
shareholders on July 11, 1996 and closed on July 18, 1996 (the "Closing").
Censtor's operating plans for fiscal 1997 focus on the perfection of
the Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through payments from Read-Rite in connection with
the Read-Rite Transaction and possibly through sales of additional licenses.
The Company will not be able to sustain its operations beyond 1997 without the
sale of such additional licenses or other cash-generating activity.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and research and development agreements.
During the quarter ended September 30, 1996, the Company used net cash
from financing activities of $5.1 million, primarily from the repayment of $5.4
million on notes payable. In comparison, in the quarter ended September 30,
1995, Censtor generated net cash from financing activities of $1.3 million,
primarily through the receipt of $1.5 million on a note payable and the sale of
stock in a subsidiary of the Company for $230,000, offset by payments on capital
leases. During the quarter ended September 30, 1996, the Company generated cash
in its operations of $3.9 million primarily from the receipt of $5.5 million of
the license fee from Read-Rite, a significant portion of which was recorded as
deferred revenue offset by operating expenses and changes in operating net
assets. The Company used cash of $2.3 million in operations in the quarter ended
September 30, 1995. The cash usage during the period in fiscal 1995 is primarily
due to operating expenses offset by the receipt of license fees in the amount of
$1.1 million, a significant portion of which was recorded as deferred revenue.
The Company generated cash from investing activities of $456,000 for the three
months ended September 30, 1995 primarily from the sale of fixed assets and
generated $1.1 million for the three months ended September 30, 1996 from the
Read-Rite Transaction.
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As of September 30, 1996, the Company had negative working capital of
approximately $2.6 million. The Company expects to maintain its current expense
rate for the foreseeable future as a result of the Read-Rite Transaction as
Read-Rite has acquired the majority of Censtor's tangible assets and related
lease liabilities and hired all but five of Censtor's employees effective
February 5, 1996, substantially reducing Censtor's monthly spending to its
current level.
On February 22, 1996, the subordinated debentures were modified such
that the Company was obligated to pay $2.0 million against the outstanding
accrued interest by July 31, 1996. This amount was paid upon the Closing of the
Read-Rite Transaction. Furthermore, if certain financial conditions were not
met, the debenture holder agreed to forgive the remaining outstanding principal
and accrued interest on September 30, 1996 in return for 5% of any royalties
Censtor receives from its present and future licenses through the year 2001. The
Company did not meet the financial conditions and consequently the outstanding
interest and principal of $12.7 million was forgiven. The future cash payments
related to the increase in the royalty rate are currently indeterminate and may
exceed the carrying value of the debentures prior to the debt being forgiven.
Therefore, the Company has deferred recognition of any gain as a result of the
debt being forgiven until such time as the future cash payments become
estimable.
The Company's ability to fund its cash requirements through fiscal 1997
depends largely upon its success in collecting $2.5 million from Read-Rite. This
hold-back amount is subject to certain conditions, and is subject to reduction
for any claims by Read-Rite for damages in the event the Company breaches or has
breached the Asset Sale Agreement or License Agreement entered into by the
Company in connection with the Read-Rite Transaction. The Company is not aware
of any such claims at the present time. The Company also continues to seek new
licensees. However, there can be no assurance that the Company can enter into a
new license agreement in fiscal 1997 or at any subsequent time. Any such failure
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's commitments for cash payments
in fiscal year 1997 are primarily for operating expenses, which are currently
expected to decrease, in the aggregate, as compared to operating expenses
incurred during fiscal 1996, due to the Company's reduction in size and scope of
operations.
If the Company is successful in collecting a significant portion of the
remaining fee due from Read-Rite, which it anticipates doing, it believes that
it will be able to finance its operations through the first quarter of fiscal
1998. There can be no assurance, however, that the Company will be
successful in this endeavor or that the amount actually collected will be
adequate to fund the Company's operations.
As a result of certain transactions described elsewhere, the Company
may owe alternative minimum tax for such periods of up to $600,000, payable in
September 1997, although the amount, if any, of such liability is presently
uncertain. The Company anticipates that, unless such liability is significantly
less than $600,000 or the Company enters into a new license, the Company's cash
reserves may be insufficient to satisfy such liability. Accordingly, the payment
obligation of such tax could have a material adverse effect on the Company's
business, financial condition and results of operations.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from the sale of
license agreements with disk drive manufacturers. License fees are generally
recognized over the estimated period in which the Company expects to provide
support in connection with the license. All deferred revenue pertaining to
existing licenses sold to disk drive manufacturers has been recognized as
revenue in fiscal 1996 since the Company can no longer provide technical support
to its licensees as a result of the Read-Rite Transaction.
Accordingly, revenues of $838,000 for the quarter ended September 30,
1996, relate to the recognition of deferred revenues associated with the
licenses to Read-Rite and to Western Digital Corp. entered into during the
quarter. The Company plans to recognize $4.0 million of the Read-Rite license
fee ratably over the first three years following the closing of the Transaction,
which approximates the time period during which the Company expects to be
incurring costs to maintain its patents in support of the license agreement.
Subsequently, the remaining $4.0 million will be recognized over three years, in
line with the reduction of the amount the Company may deposit in an escrow
account to terminate the security interest granted in connection with the
Read-Rite Transaction. The Company plans to recognize the Western Digital
license fee over 12 months as the Company is contractually obligated to maintain
until July 31, 1997, a patent prosecution effort sufficient to maximize the
value of Censtor's patent portfolio. The $1.3 million in recognized revenue for
the quarter ended September 30, 1995 was derived primarily from a license
agreement with Hitachi, Ltd. which was entered into in December 1994 and a
license with NEC that was entered into in August 1995.
Research and Development
There were no research and development expenditures for the quarter
ended September 30, 1996, due to Read-Rite's hiring of all the Company's
engineering personnel on February 5, 1996 and subsequent acquisition of the
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Company's research and development operations. In the future, as a result of the
Read-Rite Transaction, the Company expects no material research and development
expense. Research and development expense for the three month period ending
September 30, 1995 was $2.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $590,000
for the quarter ended September 30, 1995 to $550,000 in the quarter ended
September 30, 1996. This decrease was largely the result of lower headcount and
reduced expenses associated with the smaller scope of operations due to the
Read-Rite Transaction.
Interest and Other Expenses, Net
Interest and other expense, net, for the quarter ended September 30,
1996 includes a gain of $1.6 million relating to the Read-Rite Transaction, of
which $899,000 relates to the forgiveness of certain promissory notes and
$698,000 relates to the gain on sale of fixed assets and the transfer of the
Company's workforce, and the recognition of a deferred gain of $250,000 related
to the sale of fixed assets not connected with the Read-Rite Transaction.
Interest and other expenses net for the quarter ended September 30, 1995
includes a gain of $170,000 on the sale of fixed assets. Excluding these gains,
interest expense remained fairly constant between the two periods.
Income Taxes
The Company has recorded an income tax provision of $600,000 for the
quarter ended September 30, 1996. The provision relates to the Company's
alternative minimum tax liability on earnings for the three months ended
September 30, 1996. In the quarter ended September 30, 1995, the Company
recorded a tax provision of $136,000 relating to the 10% Japanese withholding
tax on the sale of the Hitachi license in December 1994 and the NEC license in
August 1995.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on August 1, 1996 in connection with the Closing of the
Read-Rite Transaction.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENSTOR CORP.
Registrant
BY: /s/ Russell M. Krapf
-----------------------
Russell M. Krapf
President
Chief Executive Officer
Dated: November 14, 1996
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EXHIBIT INDEX
Exhibit Description
27.1 Financial Data Schedule