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: March 31, 1999 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 MARCH 31, 1999
Common Stock - no par value 8,523,751
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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 at
June 30, 1998 and March 31, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended March 31, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 9
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENSTOR CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
ASSETS 1998 1999
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 915,690 $ 154,884
Prepaid expenses 19,266 11,711
------------- -------------
Total current assets 934,956 166,595
Total assets $ 934,956 $ 166,595
============= =============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 40,553 $ 53,435
Deferred revenue 1,333,333 1,083,334
Other current liabilities 101,570 81,570
------------- -------------
Total current liabilities 1,475,456 1,218,339
Long-term obligations:
Deferred revenue 4,000,000 3,250,000
Restructured debt obligation 12,679,377 12,679,377
Net capital deficiency:
Preferred stock 32,612,081 32,612,081
Common stock 50,230,850 50,230,850
Warrants to purchase shares of preferred stock 150,000 150,000
Capital surplus 2,263,708 2,263,708
Accumulated deficit (102,476,516) (102,237,760)
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Net capital deficiency (17,219,877) (16,981,121)
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Total liabilities and net capital deficiency $ 934,956 $ 166,595
============= =============
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Revenues - license fees $ 333,333 $ 333,333 $2,749,999 $ 999,999
Costs and expenses:
Selling, general, and administrative 277,085 287,958 1,042,159 773,251
---------- ---------- ---------- ----------
Total expenses 277,085 287,958 1,042,159 773,251
---------- ---------- ---------- ----------
Operating income 56,248 45,375 1,707,840 226,748
Interest and other income, net 5,112 1,819 17,395 12,008
---------- ---------- ---------- ----------
Income before income tax expense 61,360 47,194 1,725,236 238,756
Income tax expense -- -- 150,000 --
---------- ---------- ---------- ----------
Net income $ 61,360 $ 47,194 $1,575,235 $ 238,756
========== ========== ========== ==========
Basic net income per share $ 0.01 $ 0.01 $ 0.18 $ 0.03
========== ========== ========== ==========
Diluted net income per share $ 0.00 $ 0.00 $ 0.07 $ 0.01
========== ========== ========== ==========
Shares used in basic calculation (in thousands): 8,524 8,524 8,526 8,524
========== ========== ========== ==========
Shares used in diluted calculation (in thousands): 23,512 23,512 23,513 23,512
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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CENSTOR CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
-----------------------------
Operating activities: 1998 1999
----------- -----------
Net income $ 1,575,235 $ 238,756
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,035 --
Changes in assets and liabilities:
Receivables and prepaid expenses 25,271 7,555
Accounts payable (5,520) 12,882
Deferred revenue (1,249,999) (999,999)
Other current liabilities (50,404) (20,000)
----------- -----------
(1,274,617) (999,562)
----------- -----------
Net cash provided by (used in) operating activities 300,618 (760,806)
Net increase (decrease) in cash and cash equivalents 300,618 (760,806)
Cash and cash equivalents at beginning of period 799,928 915,690
----------- -----------
Cash and cash equivalents at end of period $ 1,100,546 $ 154,884
=========== ===========
Supplemental disclosure of noncash financing activities:
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)
MARCH 31, 1999
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 nine months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year
ended June 30, 1999. The financial information presented herein should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended June 30, 1998 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
The Company's cash flow needs through the end of fiscal 1999 and beyond
are primarily for operating expenses. However, the Company's existing cash
resources are not sufficient to fund its planned operations through calendar
1999 without the sale of additional licenses or a reduction in operating
expenses. Effective March 1, 1999, I.P. Managers, Inc. ("IPM"), the Company's
licensing agent, agreed to assume financial responsibility for costs and
expenses related to the continuation of patent enforcement activities under the
Exclusive Representation Agreement. In exchange, IPM's commission increased
from twenty five percent (25%) to forty five percent (45%) of the amounts, as
defined in the agreement, received as enforcement proceeds. The president of
IPM is a director of Censtor.
NOTE 2 -- NET INCOME PER SHARE:
The following table sets forth the computation of the denominator for
the basic and diluted earnings per share calculations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1998 1999 1998 1999
------ ------ ------ ------
Denominator for basic earnings per share
- - weighted average shares 8,524 8,524 8,525 8,524
Effect of dilutive securities:
Convertible preferred stock 14,988 14,988 14,988 14,988
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 23,512 23,512 23,513 23,512
====== ====== ====== ======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following contains projections or other forward-looking statements
regarding future events or the future financial performance of Censtor Corp.
("Censtor" or the "Company"), including statements related to Censtor's 1999
operating plans, sale of licenses by the Company and future Censtor operating
expenses and cash flows. Actual events or results may differ materially as a
result of risks and uncertainties, including those set forth in documents the
Company files from time to time with the Securities and Exchange Commission,
including the Company's last filed Form 10-K. In the following discussion and
analysis, forward-looking statements are made in the Overview, Liquidity and
Capital Resources, and Results of Operations sections.
OVERVIEW
The Company was formed in 1981 to develop hard disk drive recording
technology and to manufacture head and disk components for disk drives. To date,
the Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. Until the first quarter of fiscal 1997,
the Company had not been profitable in any fiscal period since inception, and,
as of March 31, 1999, had an accumulated deficit of $102.2 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 the remainder of fiscal 1999 and beyond
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. However, the Company hopes to finance these operations through sales
of additional licenses. The Company will not be able to sustain its operations
beyond fiscal 1999 without the sale of such additional licenses or a reduction
in operating expenses. Effective March 1, 1999, I.P. Managers, Inc. ("IPM"), the
Company's licensing agent, agreed to assume financial responsibility for costs
and expenses related to the continuation of patent enforcement activities under
the Exclusive Representation Agreement. In exchange, IPM's commission increased
from twenty five percent (25%) to forty five percent (45%) of the amounts, as
defined in the agreement, received as enforcement proceeds. The president of IPM
is a director of Censtor.
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 nine month periods ended March 31, 1999 and 1998, the Company
did not engage in any financing or investing activities. The Company used cash
in its operations of $761,000 for the nine months ended March 31, 1999. During
the nine months ended March 31, 1998, the Company generated cash in its
operations of $301,000, primarily from the sale of a license. As of March 31,
1999, the Company had a working capital deficit of approximately $1.1 million.
The Company's commitments for cash payments through the end of fiscal
year 1999 and beyond are primarily for operating expenses. The Company's ability
to fund its cash requirements and assert its intellectual property rights in the
future depends largely upon its success in seeking new licensees, there can be
no assurance that the Company can enter into a new license agreement in fiscal
1999 or at any subsequent time. Any such failure to enter into licenses or
reduce operating expenses would have material adverse affects on the Company's
business and would result in the Company's cash reserves being inadequate to
fund the Company's operations.
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RESULTS OF OPERATIONS
Revenues
The Company's major revenue source has been fees from the sale of
license agreements with disk drive manufacturers. Revenues of $333,000 and $1.0
million for the quarter and nine months ended March 31, 1999, related to the
recognition of deferred revenues associated with the license sold to Read-Rite.
Revenues for the quarter and nine months ended March 31, 1998 were $333,000 and
$2.7 million, respectively, relating to the recognition of deferred revenue
associated with certain licenses to Read-Rite and to Western Digital Corp.
("WD") entered into during the first quarter of fiscal 1997 and the fees
received from the license with TDK entered into in September 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $277,000 for
the quarter ended March 31, 1998 to $288,000 in the quarter ended March 31,
1999. This increase was largely the result of increases in litigation expenses
related to enforcement of the Company's intellectual property rights during the
quarter. For the nine month periods ending March 31, 1998 and 1999, selling,
general and administrative expenses were $1.0 million and $773,000 respectively.
This decrease was due to lower headcount and lower overhead expense as the
Company reduced its scope of operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
3.1(4) Restated Articles of Incorporation of Registrant.
3.2(1) Amended and Restated Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement entered into
between the Company and each of its directors and
officers.
10.2(1)(2) License Agreement, dated September 23, 1991,
between the Company and Maxtor Corporation, as
amended.
10.3(1)(2) License Agreement, dated February 28, 1991,
between the Company and Fujitsu Limited, as
amended.
10.4(1)(2) Manufacturing License Agreement, dated August 26,
1988, between the Company and Denki Kagaku Kogyo
Kabushiki Kaisha, as amended.
10.5(1)(2) License Agreement, dated June 1, 1993, between the
Company and International Business Machines
Corporation.
10.6(3) License Agreement, dated December 19, 1994,
between Hitachi, Ltd. and the Company.
10.7(4) License Agreement, dated June 19, 1995, between
Contact Recording Technology, Inc. and the
Company.
10.8(2) License Agreement, dated August 7, 1995, between
NEC Corporation and the Company.
10.9(5) Agreement for Purchase and Sale of Assets by and
between Read-Rite Corporation and the Company.
10.10(2) License Agreement, dated August 12, 1996, between
Western Digital and the Company.
10.11(6) Assignment of Lease and Consent to Assignment,
dated July 2, 1996, between The Sobrato Group,
Censtor Corp. and Read-Rite Corp.
10.12(6) Fifth Amendment to Manufacturing License
Agreement, dated February 22, 1996, with Denki
Kagaku Kogyo Kabushiki Kaisha.
10.13(6) Amendment to Terms of Debentures, dated February
22, 1996, with Denki Kagaku Kogyo Kabushiki
Kaisha.
10.14(6) License Agreement, dated July 18, 1996, between
Read-Rite Corporation and the Company.
10.15(7) Agreement between I.P. Managers, Inc. and the
Company dated July 31, 1997.
10.16(7) Incentive Compensation Agreement between the
Company and Sabine Austin, dated July 29, 1997.
10.17(8) License Agreement, dated September 25, 1997
between TDK Corporation and the Company.
27.1 Financial Data Schedule
--------------
(1) Incorporated by reference to exhibits filed with
Registrant's Registration Statement on Form 10 which became
effective December 25, 1994.
(2) Confidential Treatment requested for portions of Exhibit.
(3) Incorporated by reference to exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
(4) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1995.
(5) Incorporated by reference to exhibit filed with Registrant's
Proxy Statement relating to the Registrant's 1996 Annual
Meeting of Shareholders.
(6) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1996.
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(7) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1997.
(8) Incorporated by reference to exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
(b) Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENSTOR CORP.
Registrant
BY: /s/ Sabine Austin
------------------------------------------
Sabine Austin
President and Principal Accounting Officer
Dated: May 14, 1999
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EXHIBIT INDEX
Exhibit
Number Description
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27.1 Financial Data Schedule