<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------------- THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarterly Period Ended June 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 O-21085
JTS CORPORATION
(Exact name as specified in its charter)
DELAWARE 77-0364572
- ---------------------------- -------------------
(State or other jurisdiction (IRS
Employer
incorporation or organization) Identification No.)
166 Baypointe Parkway, San Jose, CA 95134
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 468-1800
-------------
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports 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 SHARES OUTSTANDING AT AUGUST 19, 1996
- ------------ ----------
Common Stock 104,187,326
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JTS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. EXPLANATORY NOTE REGARDING FINANCIAL RESULTS
INCLUDED HEREIN 3
ITEM 2. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995 4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
QUARTERS ENDED June 30, 1996 and June 30, 1995 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED
June 30, 1996 and June 30, 1995 6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 7
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 13
</TABLE>
2
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Explanatory note regarding financial results included herein
On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS
Corporation ("JTS") and the separate existence of Atari ceased. Although the
business combination resulted in Atari merging into the JTS legal entity, the
substance of the transaction was that Atari, as a public company with
substantially greater operating history and net worth owns approximately 62% of
the equity of the merged company. At July 30, 1996 the acquisition was accounted
for as a purchase of JTS by Atari and accordingly, the operating results of JTS
for the periods subsequent to July 30, 1996 will be combined with the operating
results of Atari and reported as JTS. While the financial reports included
herein are those of JTS, the financial results represent those of Atari, the
predecessor entity, as of June 30, 1996 and 1995 and for the three and six
months periods ended June 30, 1996 and 1995. See Note 4.
3
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JTS CORPORATION-see Note 4
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
June 30, Dec 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $700 held as restricted
balance at December 31, 1995) $ 21,195 $ 28,941
Marketable securities -- 21,649
Accounts receivable (less allowances for returns and doubtful accounts:
June 30, 1996 $3,995; December 31, 1995 $4,221) 648 2,468
Inventories (See Note 2) 4,598 10,934
Other current assets 1,221 1,134
--------- ---------
Total current assets 27,662 65,126
GAME SOFTWARE DEVELOPMENT COSTS - Net 901 758
EQUIPMENT AND TOOLING - Net 406 671
SUBORDINATED SECURED CONVERTIBLE NOTE WITH JT CORP. (SEE NOTE 4) 25,000 --
REAL ESTATE HELD FOR SALE 10,445 10,468
OTHER ASSETS 501 546
--------- ---------
TOTAL $ 64,915 $ 77,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,623 $ 4,954
Accrued Liabilities 3,180 5,088
--------- ---------
TOTAL CURRENT LIABILITIES 5,803 10,042
--------- ---------
LONG-TERM OBLIGATIONS 42,354 42,354
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value - authorized, 10,000,000 shares; none
outstanding
Common stock, $.01 par value - authorized, 100,000,000 shares;
(outstanding : June 1996, 63,854,718; December 1995, 63,687,118) 639 637
Additional paid-in capital 196,704 196,209
Unrealized gain on marketable securities -- 7,088
Accumulated translation adjustments (770) (663)
Accumulated deficit (179,815) (178,098)
--------- ---------
Total shareholders' equity 16,758 25,173
--------- ---------
TOTAL $ 64,915 $ 77,569
========= =========
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
4
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JTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 1996 AND JUNE 30, 1995 (Amounts in Thousands, Except Per Share
Amounts) Quarter Ended Six Months Ended
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES $ 1,040 $ 3,015 $ 2,312 $ 7,762
========= ========= ======== =======
COST AND EXPENSES:
Cost of sales 931 1,971 7,142 5,689
Research and development 106 1,758 307 3,574
Marketing and distribution 218 2,581 976 5,157
General and administrative 661 1,595 1,912 3,390
------- --------- -------- --------
Total operating expenses 1,916 7,905 10,337 17,810
------- ------- -------- ---------
OPERATING LOSS $ (876) $ (4,890) $ (8,025) (10,048)
Exchange gain 68 (8) 8 (3)
Other income(expense), net 135 648 6,775 1,003
Interest income 331 853 663 1,806
Interest expense (569) (590) (1,138) (1,171)
-------- ---------- ---------- --------
NET LOSS $ (911) $ (3,987) $ (1,717) (8,413)
======== ========= ========== =========
LOSS PER COMMON SHARE: $ (0.01) $ (0.06) $ (0.03) $ (0.13)
========= ========== ========= ===========
Number of shares used in computations 63,770 63,643 63,770 63,643
</TABLE>
(See Condensed notes to Consolidated Financial Statements)
5
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JTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) by operations $ (4,027) $(20,171)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 20,908 51,916
Proceeds from property sales 33 --
Property purchases -- (204)
Borrowing by JTS (25,000) --
Stock dividend received on investment -- 82
Decrease in other assets 68 189
Increase in software development costs (143) (4,298)
-------- --------
Net cash (used) provided by investing activities (4,134) 47,685
CASH FLOWS FROM FINANCING ACTIVITIES:
Extinguishment of debt (75) (53)
Issuance of common stock 497 46
-------- --------
Net cash provided (used) by financing activities 422 (7)
--------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
& EQUIVALENTS (7) 58
-------- --------
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS (7,746) 27,565
CASH & EQUIVALENTS:
Beginning of period 28,941 22,592
-------- --------
End of period $ 21,195 $ 50,157
======== ========
OTHER CASH FLOW INFORMATION FROM
CONTINUING OPERATIONS:
Interest paid 2,290 2,306
NON CASH INVESTING ACTIVITIES:
Unrealized gain on marketable securities $ -- $ 2,294
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
6
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JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1995 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
The Company operates with a 52/53 week fiscal calendar. Both quarters covered by
this report have 13 weeks and for simplicity of presentation, the calendar
quarter date is used to represent the quarter end. The actual fiscal closing
date for the second quarter of 1996 and 1995 was June 29, and July 1,
respectively.
NOTE 2. INVENTORIES
Inventories consist of the following (in thousands):
June 30, December 31,
1996 1995
-------- ------------
Finished goods $ 4,300 $ 9,927
Raw materials and work-in-process 298 1,007
--------- ----------
Total $ 4,598 $ 10,934
======= =========
NOTE 3. REPURCHASE OF 5 1/4% SUBORDINATED CONVERTIBLE DEBENTURES
In the first quarter of 1995, the Company repurchased a portion of its 5 1/4%
subordinated convertible debentures. The Company repurchased 100 bonds at face
value of $1,000 each, and recorded an extraordinary credit of $47,250.
7
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NOTE 4. MERGER WITH JTS CORPORATION ("JTS")
On July 30, 1996, Atari was merged with and into JTS and the separate existence
of Atari ceased. Although the business combination will result in Atari merging
into the JTS legal entity, the substance of the transaction is that Atari, as a
public company with substantially greater operating history and net worth owns
approximately 62% of the equity of the merged company. The $25 million loan
Atari had made to JTS in February was increased to $30 million in early July,
and upon consummation of the merger the loan was cancelled. The acquisition will
be accounted for as a purchase of JTS by Atari and accordingly, the operating
results of JTS from July 30, 1996, the date of the merger forward will be
combined with Atari's operating results and reported as JTS. The aggregate
purchase price of $112.3 million has been preliminarily allocated to the
acquired assets and liabilities of JTS. The fair value of the JTS assets and
liabilities will be revised when complete and final information becomes
available regarding liabilities assumed and direct transaction costs and the
receipt of a final allocation report. Management believes the final allocation
of the purchase price will not be materially different from the preliminary
allocation. The preliminary allocation resulted in $151 million allocated to
purchased technology, $112 million of which represented in-process research and
development. The $112 million will be expensed in Atari's July operations as the
technology had not yet reached technological feasibility and does not have
alternative future uses.
The net assets acquired were preliminarily allocated as follows:
(in thousands)
<TABLE>
<S> <C>
Inventory, trade accounts receivables and other current assets $ 24,989
Equipment and tooling 19,469
In-process technology 112,357
Existing technology 25,812
Goodwill 13,666
Liabilities assumed (84,000)
--------
Net assets acquired $112,293
</TABLE>
The following unaudited profoma information shows the results of operations for
the six months ended June 30, 1996 and 1995 as if the JTS acquisition had
occurred at the beginning of each period presented and at the purchase price
established on July 30, 1996. The results are not necessarily indicative of what
would have occurred had the acquisition actually been made at the beginning of
each of the respective periods presented or of future operations of the combined
companies. The proforma results for 1996 combine Atari's results for the six
month period ended June 30, 1996 with the results of JTS for the six month
period ended July 28, 1996. The proforma results for 1995 combine Atari's
results for the six month period ended June 30, 1995 with JTS' six month fiscal
period (26 weeks) ended July 30, 1995. The following unaudited proforma results
include the straight-line amortization of intangibles over periods ranging from
three years to seven years.
<TABLE>
<CAPTION>
<S> <C> <C>
(in thousands) 1996 1995
---- ----
Revenue $36,076 $13,294
Net (loss) (47,477) (20,805)
Net (loss) per share $ (0.26) $ (0.25)
Weighted average common and common 103,305 83,286
equivalent shares outstanding
</TABLE>
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE SECOND QUARTER OF 1996
COMPARED TO THE SECOND QUARTER OF 1995
This Quarterly Report on Form 10Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk related factors set forth herein, and in the JTS
Registation Statement on Form S-4 declaring effective by the Securities Exchange
Commisson on July 12, 1996.
On July 30, 1996, Atari was merged with and into JTS, and each outstanding share
of Atari Common Stock was exchanged and converted into one share of JTS Common
Stock. JTS was incorporated in February 1994 to develop, market and manufacture
hard disk drives. The Merger was approved by the stockholders of Atari and JTS
and finalized in Shareholder Meetings on July 30, 1996.
In 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that the Jaguar would ever become a broadly accepted video game console
or that Jaguar technology would be broadly adopted by software title developers.
As a result, Atari decided to significantly downsize its Jaguar operations. This
downsizing resulted in significant reductions in Atari's work force, and
significant curtailment of research and development and sales and marketing
activities for the Jaguar and related products. Accordingly, Atari decided to
focus its efforts on selling its inventory of Jaguar and related products and to
emphasize its existing licensing and development activities related to
multimedia entertainment software for various platforms.
Net sales for the second quarter 1996 were $1.0 million compared to $3.0 million
for the second quarter 1995, a reduction of $2.0 million. Sales of Jaguar and
related products represented 65% and 70% of total revenues for 1996 and 1995,
respectively, and sales of other products and royalties represented the balance
of revenues in each such year. The reduction in revenues was primarily the
result of lower unit volumes of Jaguar products and lower average selling prices
of Jaguar and certain of its software titles. As a result of the Jaguar price
reductions and the substantial curtailment of sales and marketing activities for
Jaguar, Atari expects sales of Jaguar and related products to decline
substantially in 1996 and thereafter.
Cost of sales revenues for the second quarter of 1996 were $.9 million compared
to $2.0 million for 1995. The substantial decline was due to the reduction of
revenues.
Despite the introduction of four additional game titles in the first quarter of
1996, interactive multimedia entertainment market sales have not rebounded due
to uncertainty about Atari's commitment to the Jaguar platform, increased price
competition and pending competitive product introductions. The Company is
pursuing alternative sales channels and licensing opportunities. Atari expects
the market to remain highly competitive throughout the year.
Research and development expenses were $.1 million for the second quarter of
1996 compared to $1.8 million for the second quarter of 1995. The substantial
decline is due to the elimination of the Company's internal Jaguar development
team and other development staff in the fourth quarter 1995. As of June 30,
1996, the Company had capitalized $.9 million of development cost associated
with certain CD titles.
9
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Marketing and distribution expenses were $0.2 million for the second quarter
1996 as compared to $2.6 million for the second quarter of 1995. The reduction
was due to the curtailment of marketing activities for the Jaguar.
General and administrative expenses for the second quarter of 1996, were $0.7
million compared to $1.6 million for the same period in 1995. The decrease in
such expenses was primarily the result of staff reductions, reduced rent, and
other reductions in operating costs.
Other Income (Expense), net for the second quarter of 1996 was $0.1 compared to
$0.6 million for the second quarter of 1995. In the second quarter of 1995, the
company sold a portion of its common stock holdings in Dixon PLC, a United
Kingdom retailer, and realized a gain of approximately $0.5 million.
Interest income for the second quarter of 1996 was $0.3 million compared to $0.9
million for the second quarter of 1995, reflecting the Company's significantly
lower cash balances during the second quarter of 1996. Interest expenses for the
1996 and 1995 quarters were $0.6 million which represents interest due on the
Company's 5 1/4% Convertible Subordinated Debentures. In April 1996, the Company
made an annual payment of interest on its bonds that totaled $2.2 million.
10
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MANAGEMENT DISCUSSION ANALYSIS FOR THE FIRST SIX MONTHS 1996 AS COMPARED TO THE
FIRST SIX MONTHS FOR 1995
Net sales for the first six months ended 1996 were $2.3 million as compared to
$7.8 million for the same period of 1995. Sales of Jaguar and related products
represented 52% of sales for 1996 and 72% for 1995, and sales of other products
and royalties represented the balance of revenues in each such year. The
reduction in revenues was primarily the result of lower unit volumes of Jaguar
products and lower average selling prices of Jaguar and certain of its software
titles. As a result of the Jaguar price reductions and substantial curtailment
of sales and marketing activities for Jaguar. Atari expects sales of Jaguar and
related products to decline substantially in 1996 and thereafter.
Cost of sales for the first six months of 1996 were $7.1 million. Included in
cost of sales in 1996 were inventory write-downs of $5.0 million relating to
Jaguar products. These write-downs resulted from management's revised estimates
of sales resulting from continued disappointing sales of Jaguar.
Research and development expenses for the first six months were $0.3 million as
compared to $3.6 million for the 1995 period. The substantial decline is due to
the elimination of the Company's internal Jaguar development team and other
development staff in the fourth quarter 1995. As of June 30, 1996 the Company
had capitalized $0.9 million of development costs associated with certain CD
titles.
Marketing and distribution expenses were $1.0 million for the first six months
of 1996 as compared to $5.2 million for the 1995 period. The reduction was due
to the curtailment of marketing activities for the Jaguar.
General and administrative expenses for the first six months of 1996 were $2.0
million as compared to $3.4 million for 1995. The decrease in such expenses was
primarily the result of staff reductions, reduced rent, and other reductions in
operating costs. The Company maintains operations in Sunnyvale, California and
Slough in the United Kingdom.
Other Income (Expense), net for the six months ended 1996 was $6.8 million as
compared to $1.0 million in 1995. For 1996, the company sold the remaining
portion of its holdings in Dixon PLC., a retailer in England and realized a gain
of $6.3 million.
Interest income for 1996 was $0.7 million as compared to $1.8 million for 1995.
The decrease in interest income is attributable to significantly lower cash
balances during the first half of 1996 as compared to 1995.
Interest expense for the first six months of both periods was $1.2 million and
is a result of the Company's 5 1/4% Convertible Subordinated Debentures.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 , the Company had cash and marketable securities balances
totaling $21.2 million compared to $50.6 million as of December 31, 1995 for a
reduction of $29.4 million.
In February 1996, Atari loaned $25.0 million to JTS in connection with the
Merger and in July the loaned amount was increased to $30.0 million. Upon
comsummation of the merger the loan was cancelled.
For the first six months of 1996, the Company used $4.0 million in operating
activities.
11
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PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not aware of any other pending legal proceedings against
the Company and its consolidated subsidiaries other than routine litigation
incidental to their normal business.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex-27 Financial Data Schedule
(b) Reports on Form 8-K - None
12
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SIGNATURES
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.
ATARI CORPORATION
-----------------------------------
(Registrant)
DATE: Auugust 19, 1996
By W. VIRGINIA WALKER
---------------------------------
W. Virginia Walker
Chief Financial Officer
13
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EXHIBIT INDEX
Exhibits
Ex-27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APRIL-01-1996
<PERIOD-END> JUN-29-1996
<CASH> 21195
<SECURITIES> 0
<RECEIVABLES> 648
<ALLOWANCES> 0
<INVENTORY> 4598
<CURRENT-ASSETS> 52662
<PP&E> 406
<DEPRECIATION> 0
<TOTAL-ASSETS> 64915
<CURRENT-LIABILITIES> 5803
<BONDS> 42354
<COMMON> 639
0
0
<OTHER-SE> 16119
<TOTAL-LIABILITY-AND-EQUITY> 64915
<SALES> 1040
<TOTAL-REVENUES> 1040
<CGS> 931
<TOTAL-COSTS> 985
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 569
<INCOME-PRETAX> (911)
<INCOME-TAX> 0
<INCOME-CONTINUING> (911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (911)
<EPS-PRIMARY> (0.1)
<EPS-DILUTED> (0.1)
</TABLE>
