1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the fiscal quarter ended: September 30, 1997 or
--- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-25012
CENSTOR CORP.
(Exact name of registrant as specified in its charter)
California 94-2775712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
540 N. Santa Cruz Ave., Suite #277
Los Gatos, California 95030
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 [X] No [ ]
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, 1997
Common Stock - no par value 8,523,751
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CENSTOR CORP.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1997 and September 30, 1997 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
three months ended September 30, 1996 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
three months ended September 30, 1996 and 1997 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
ASSETS 1997 1997
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 799,928 $ 1,753,148
Receivables and prepaid expenses 44,538 38,280
------------- -------------
Total current assets 844,466 1,791,428
Deposits and other assets 10,516 8,394
------------- -------------
Total assets $ 854,982 $ 1,799,822
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 66,372 $ 261,998
Deferred revenue 1,583,333 1,333,333
Other current liabilities 139,076 56,842
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Total current liabilities 1,788,781 1,652,173
Long-term obligations:
Deferred revenue 5,333,335 5,000,002
Restructured debt obligation 12,679,377 12,679,377
Net capital deficiency:
Preferred stock 32,509,031 32,509,031
Common stock 50,241,660 50,230,850
Warrants to purchase shares of 253,050 253,050
preferred stock
Capital surplus 2,263,708 2,263,708
Accumulated deficit (104,203,150) (102,788,369)
------------- -------------
(18,935,701) (17,531,730)
Notes receivable from shareholders (10,810) --
------------- -------------
Net capital deficiency (18,946,511) (17,531,730)
------------- -------------
Total liabilities and net capital deficiency $ 854,982 $ 1,799,822
============= =============
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,
---------------------------
1996 1997
----------- ------------
Revenues - license fees $ 838,333 $ 2,083,333
Costs and expenses:
Selling, general, and administrative 550,128 519,791
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Total expenses 550,128 519,791
----------- -----------
Operating income 288,205 1,563,542
Interest and other income, net 1,497,358 1,239
----------- -----------
Income before income tax expense 1,785,563 1,564,781
Income tax expense 600,000 150,000
----------- -----------
Net income $ 1,185,563 $ 1,414,781
=========== ===========
Net income per share $ 0.05 $ 0.06
=========== ===========
Weighted average number of shares used in
computing per share amounts (in thousands) 24,291 23,512
=========== ===========
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: 1996 1997
----------- ------------
Net income $ 1,185,563 $ 1,414,781
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,878 2,122
Gain on transfer of research and development (1,596,706) --
operation
Interest on subordinated debentures 191,066 --
Changes in assets and liabilities:
Receivables and prepaid expenses (2,447,145) 6,258
Accounts payable (694,983) 195,626
Deferred revenue 7,166,667 (583,333)
Other current liabilities 121,792 (82,234)
----------- -----------
2,754,569 (461,561)
----------- -----------
Net cash provided by operating activities 3,940,132 953,220
Investing activities:
Deposits and other assets 122,220 --
Proceeds from sale of fixed assets and transfer of
assembled workforce 1,025,000 --
----------- -----------
Net cash provided by investing activities 1,147,220 --
----------- -----------
Financing activities:
Proceeds from issuance of short-term debt 350,000 --
Principal payments of short- and long-term debt (5,447,920) --
Principal payments under capital leases (23,825) --
----------- -----------
Net cash used in financing activities (5,121,745) --
----------- -----------
Net increase (decrease) in cash and cash
equivalents (34,393) 953,220
Cash and cash equivalents at beginning of period 199,998 799,928
----------- -----------
Cash and cash equivalents at end of period $ 165,605 $ 1,753,148
=========== ===========
Supplemental disclosure of noncash financing
activities:
Conversion of note payable to license $ 3,000,000 $ --
Assignment of leases in connection with
sale of assets $ 584,018 $ --
Cancellation of shareholder notes
receivable $ -- $ 10,810
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 -- BASIS OF PRESENTATION AND BUSINESS ACTIVITIES:
The accompanying unaudited condensed consolidated financial statements
have been prepared by Censtor Corp. ("Censtor" or the "Company") in accordance
with generally accepted accounting principles for interim financial information,
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the full year
ended June 30, 1998. 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, 1997 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
During this fiscal quarter, the employment of four of the remaining five
employees of the Company was terminated. The one remaining employee is
responsible for the finance and administrative duties for the company while
outside sources will be utilized for the Company's intellectual property
management duties. Two of these companies are Teklicon, Inc. ("Teklicon") and I.
P. Managers, Inc. ("IPM"). IPM has relationships with intellectual property law
firms and has an exclusive contract with Teklicon, a high technology consulting
firm specializing in consulting and expert witness services to the legal
profession. Teklicon will perform marketing and technology due diligence and IPM
will provide the legal services.
NOTE 2 -- NET INCOME 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 three month periods ended September
30, 1996 and 1997, and accordingly, were not included in the weighted average
number of shares.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute income per share and to restate all prior
periods. Under the new requirements for calculating primary income per share,
the dilutive effect of convertible preferred stock will be excluded. The impact
is expected to result in an increase in primary income per share for the three
month period ended September 30, 1996 of $0.08 per share and an increase of
$0.11 per share for the three month period ended September 30, 1997. Diluted
earnings per share are not materially different from net income per share
amounts reported for the quarters ended September 30, 1996 and 1997.
NOTE 3 -- INCOME TAXES:
The Company has recorded an income tax expense of $150,000 for the
quarter ended September 30, 1997, relating to the 10% Japanese withholding tax
on the sale of a license. The Company recorded an income tax provision of
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$600,000 for the quarter ended September 30, 1996. The provision relates to the
Company's estimated alternative minimum tax liability on earnings for the three
months ended September 30, 1996.
NOTE 4 -- LICENSE ARRANGEMENTS:
On September 25, 1997, the Company entered into a licensing arrangement
with TDK Corporation, a Japanese component manufacturer, to license its
technology. The Company received a nonrefundable payment of $1.5 million on
September 26, 1997. This payment is subject to a 10% withholding tax by the
Japanese authorities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following contains projections or other forward-looking statements
regarding future events or the future financial performance of Censtor Corp.
("Censtor" or the "Company"), including statements related to Censtor's 1998
operating plans, sale of licenses by the Company and future Censtor operating
expenses and cash flows. Actual events or results may differ materially as a
result of risks and uncertainties, including those set forth in documents the
Company files from time to time with the Securities and Exchange Commission,
including the Company's last filed Form 10-K.
In the following discussion and analysis, forward-looking statements are
made in the Overview, Liquidity and Capital Resources, and Results of Operations
sections.
OVERVIEW
The Company was formed in 1981 to develop perpendicular recording
technology and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. Until the first quarter of fiscal 1997,
the Company had not been profitable in any fiscal period since inception, and,
as of September 30, 1997, had an accumulated deficit of $102.8 million. There
can be no assurance that the Company will be able to sustain its recent
profitability or achieve or sustain significant revenues or profitability in the
future.
Censtor's operating plans for fiscal 1998 focus on the perfection of the
Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through sales of additional licenses such as the one
entered into between the Company and TDK Corporation ("TDK") in September 1997.
There can be no assurance that the Company will be able to sustain its
operations beyond 1998 without the sale of such additional licenses.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and research and development agreements.
During the quarter ended September 30, 1997, the Company did not engage
in any financing or investing activities. In comparison, in 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. The
Company generated cash from investing activities of $1.1 million in the quarter
ended September 30, 1996 from the transaction with Read-Rite Corporation
("Read-Rite"). During the quarter ended September 30, 1997, the Company
generated cash in its operations of $953,000, primarily from the sale of a
license. The Company generated cash in its operations of $3.9 million in the
quarter ended September 30, 1996, 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. As of September 30, 1997, the Company had working capital of
approximately $139,000.
The Company's ability to fund its cash requirements and assert its
intellectual property rights in the future depends largely upon its success in
seeking new licensees. The Company believes the cash received from the license
agreement with TDK will enable it to fund its planned operations through fiscal
1998. The Company's commitments for
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cash payments in fiscal year 1998 are primarily for operating expenses, which,
going forward, may include significant litigation expense.
RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from the sale of
license agreements with disk drive manufacturers. Revenue for the quarter ended
September 30, 1997 was $2.1 million, relating to the recognition of deferred
revenue associated with certain licenses to Read-Rite and to Western Digital
Corp. ("WD") entered into during the first quarter of fiscal 1997 and the new
license with TDK entered into this quarter. Revenues of $838,000 for the quarter
ended September 30, 1996, related to the recognition of deferred revenues
associated with the licenses sold to Read-Rite and WD.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $550,000 for
the quarter ended September 30, 1996 to $520,000 in the quarter ended September
30, 1997. This decrease was largely the result of lower headcount.
Interest and Other Income, Net
Interest and other income, net, for the quarter ended September 30, 1997
was $1,200 as compared to $1.5 million for the quarter ended September 30, 1996
which included a gain of $1.6 million relating to the transaction with
Read-Rite. Of this $1.6 million gain, $899,000 related to the forgiveness of
certain promissory notes and $698,000 related to the gain on sale of fixed
assets and the transfer of the Company's workforce, and the recognition of a
deferred gain of $250,000 related to the sale of fixed assets not connected with
Read-Rite.
Income Taxes
The Company has recorded an income tax expense of $150,000 for the
quarter ended September 30, 1997, relating to the 10% Japanese withholding tax
on the sale of a license in September 1997. In the quarter ended September 30,
1996, the Company recorded an income tax provision of $600,000 relating to the
Company's estimated alternative minimum tax liability on earnings for the three
months ended September 30, 1996.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
3.1(5) Restated Articles of Incorporation of Registrant.
3.2(1) Amended and Restated Bylaws of Registrant.
10.1(1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2(1) Form of Indemnification Agreement entered into between the Company and each of its
directors and officers.
10.3(1) Lease Agreement, dated November 28, 1983, between the Company and The Sobrato
Group, together with amendments thereto.
10.4(1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
10.5(1)(2) License Agreement, dated February 28, 1991, between the Company and Fujitsu
Limited, as amended.
10.6(1)(2) Manufacturing License Agreement, dated August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as amended.
10.7(1)(2) License Agreement, dated June 1, 1993, between the Company and International
Business Machines Corporation.
10.8(1) Denka Promissory Note.
10.9(3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the Company.
10.10(5) License Agreement, dated June 19, 1995, between Contact Recording
Technology, Inc. and the Company.
10.11(2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
10.12(6) Agreement for Purchase and Sale of Assets by and between Read-Rite
Corporation and the Company.
10.13(2) License Agreement, dated August 12, 1996, between Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to Assignment, dated July 2, 1996, between The
Sobrato Group, Censtor Corp. and Read-Rite Corp.
10.15(7) Fifth Amendment to Manufacturing License Agreement, dated February 22, 1996, with
Denki Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated February 22, 1996, with Denki Kagaku
Kogyo Kabushiki Kaisha.
10.17(7) License Agreement, dated July 18, 1996, between Read-Rite Corporation and the
Company.
10.18(8) Agreement between I.P. Managers, Inc. and the Company dated July 31, 1997.
10.19(8) Incentive Compensation Agreement between the Company and Sabine Austin, dated July
29, 1997.
10.20 License Agreement, dated September 25, 1997 between TDK Corporation and the
Company.
27.1 Financial Data Schedule
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(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10 which
became effective December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1995.
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(6) Incorporated by reference to exhibit filed with
Registrant's Proxy Statement relating to the Registrant's
1996 Annual Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1996.
(8) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1997.
(b) Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENSTOR CORP.
Registrant
BY: /s/ Sabine Austin
-------------------------------
Sabine Austin
President
Chief Executive Officer
Dated: November 7, 1997
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EXHIBIT INDEX
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Exhibit
Number Description
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3.1(5) Restated Articles of Incorporation of Registrant.
3.2(1) Amended and Restated Bylaws of Registrant.
10.1(1)(4) 1990 Stock Plan and Form of Option Agreement.
10.2(1) Form of Indemnification Agreement entered into between the Company and each of its
directors and officers.
10.3(1) Lease Agreement, dated November 28, 1983, between the Company and The Sobrato
Group, together with amendments thereto.
10.4(1)(2) License Agreement, dated September 23, 1991, between the Company and Maxtor
Corporation, as amended.
10.5(1)(2) License Agreement, dated February 28, 1991, between the Company and Fujitsu
Limited, as amended.
10.6(1)(2) Manufacturing License Agreement, dated August 26, 1988, between the Company and
Denki Kagaku Kogyo Kabushiki Kaisha, as amended.
10.7(1)(2) License Agreement, dated June 1, 1993, between the Company and International
Business Machines Corporation.
10.8(1) Denka Promissory Note.
10.9(3) License Agreement, dated December 19, 1994, between Hitachi, Ltd. and the Company.
10.10(5) License Agreement, dated June 19, 1995, between Contact Recording
Technology, Inc. and the Company.
10.11(2) License Agreement, dated August 7, 1995, between NEC Corporation and the Company.
10.12(6) Agreement for Purchase and Sale of Assets by and between Read-Rite
Corporation and the Company.
10.13(2) License Agreement, dated August 12, 1996, between Western Digital and the Company.
10.14(7) Assignment of Lease and Consent to Assignment, dated July 2, 1996, between The
Sobrato Group, Censtor Corp. and Read-Rite Corp.
10.15(7) Fifth Amendment to Manufacturing License Agreement, dated February 22, 1996, with
Denki Kagaku Kogyo Kabushiki Kaisha.
10.16(7) Amendment to Terms of Debentures, dated February 22, 1996, with Denki Kagaku
Kogyo Kabushiki Kaisha.
10.17(7) License Agreement, dated July 18, 1996, between Read-Rite Corporation and the
Company.
10.18(8) Agreement between I.P. Managers, Inc. and the Company dated July 31, 1997
10.19(8) Incentive Compensation Agreement between the Company and Sabine Austin, dated July
29, 1997.
10.20 License Agreement, dated September 25, 1997 between TDK Corporation and the
Company.
27.1 Financial Data Schedule
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(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10 which
became effective December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
(4) Document indicated is a compensatory plan.
(5) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1995.
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(6) Incorporated by reference to exhibit filed with
Registrant's Proxy Statement relating to the Registrant's
1996 Annual Meeting of Shareholders.
(7) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year
ended June 30, 1996.
(8) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year
ended June 30, 1997.
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